You are on page 1of 57

Audit Evidence and

Documentation

Slide 5- 1
Overview

Presentation will cover:


The requirements for Audit Evidence
Nature of Audit Evidence
Audit Procedures for Gathering Evidence.
Documentation of Evidence

Slide 5- 2
Objectives

Identify the standards for good


evidence, the methods for obtaining and
presenting the audit evidence.

Slide 5- 3
Audit Evidence-What is It?

Evidence gathered in the course of an audit that


supports the auditors opinion and
conclusions.

Slide 5- 4
Why Audit Evidence?

A professional requirement by auditing


standard 2310.
Auditor should identify, sufficient,
reliable, relevant and useful information
to provide factual basis for audit
opinions.

Slide 5- 5
Types of Evidence

Physical evidence
Third-party representations
Documentary evidence
Computations
Data Interrelationships
Client representations
Accounting records

Slide 5- 6
Types of Evidence
Physical Evidence

Evidence that can actually be seen by


auditors.
This type of evidence is generally effective
for supporting testing existence and
condition of the asset. Example inspection
of a fixed asset.

Slide 5- 7
Types of Evidence
Third Party Representations

Confirmations
Lawyers Letters
Reports of Specialists

Slide 5- 8
Types of Evidence
Documentary Evidence

Four basic types (helps determine reliability):


Created by outside parties and transmitted
directly to auditor
Created by outside parties and held by client
Created and held by client
Electronic documents

Slide 5- 9
Types of Evidence
Computations

Computations are:
Performed independently by auditor
Used to verify mathematical accuracy of
clients analyses and records

Slide 5- 10
Types of Evidence -Analytical

Data interrelationships (i.e., analytical


procedures) rely on plausible
relationships among financial and non-
financial data.
Effective for testing reasonableness of
certain account balances
Can be used as primary or corroborating evidence,
depending on the nature of account

Slide 5- 11
Types of Evidence
Oral and Written Client
Representations

Responses to questions and inquiries to


clients during an audit constitute audit
evidence.
Oral representations are generally not
sufficient as primary evidence, but may
provide corroboration for other evidence.
Written representations (representation
letter) are required, but should not be used
as a substitute for other audit procedures.
Slide 5- 12
Confirmations

The receipt of a written or oral response from an


independent third party.
Customers confirm A/C receivable balances
Suppliers confirm A/C payable balances
Banks confirm account/loan balances
Lawyers confirm contingent liabilities

Slide 5- 13
Types of Evidence
Accounting Records

Clients accounting records (e.g. ledgers


and journals) may provide worthwhile
evidence in themselves.
Depends on the effectiveness of internal
controls

Slide 5- 14
Audit Procedures
Physical examination Physical Evidence
Observation
Confirmation Third-Party Representations
Tracing
Vouching
Documentary Evidence
Inspection
Reconciliation
Reperformance Computations
Analytical procedures Analytical
Inquiry Client Representations

Slide 5- 15
Comparison Accounting Records
Document Vouching

Examination of documents that support a


recorded transaction or amount.
The direction of testing must be from the
recorded item to the supporting
documents.
Tests existence or occurrence.
Also tests if transaction was properly
authorised.

Slide 5- 16
Document Tracing

The primary test for unrecorded items


and therefore tests the completeness
assertion.
The direction of testing must be from the
supporting document to the recorded
item.
Also used to test if transactions were
recorded in rightful accounts.

Slide 5- 17
Observation
Auditor witnesses the physical activities of
the client.
Useful in obtaining evidence that controls
which leave no documentary evidence of
application or existence are in operation.
Differs from physical examination because
physical examination counts assets, while
observation focuses on client activities e.g.
inventory counting.
Slide 5- 18
Reperformance

Reperformance involves rechecking a


sample of the computations to test
mathematical accuracy e.g.
reconciliations, interest computations
etc.

Slide 5- 19
Inspection of Documents &
Records

Documents and other records


underlying a transaction or balance or
on which a control is applied are
inspected to obtain substantive
evidence or evidence of control. E.g.
evidence of proper authorisation.

Slide 5- 20
Analytical Procedures

Auditors study relationships among data.


Unusual fluctuations occur when
significant difference are not expected
but do exist or when significant
differences are expected but do not exist.
Required during the planning stage.

Slide 5- 21
Analytical Procedures
Analytical Procedures are useful in identifying
among other things:
Differences that are not expected.
The absence of differences when they are
expected.
Potential errors, irregularities or illegal acts.
Other unusual or non recurring transactions
or events.
Slide 5- 22
Analytical Procedures
If a change in one area would naturally lead
to a change in some other area, the absence
of the expected change should lead to a
further study in search of the cause.
Ex. If commissions paid to sales
representatives rise in one quarter, it would
be reasonable to expect a correspondence
increase in sales revenue.

Slide 5- 23
Examples

Relationship of marketing expenditure to sales.


Relationship of interest income to interest
earning assets.
Relationship of interest expense to debt
balances.
Such relationships are assumed to remain the
same unless some unknown condition causes
a change.

Slide 5- 24
Forms of Analytical
Procedures
Comparisons:
Current period information with similar
information for prior periods.
Current info with budgets or forecasts.
Info for the audited unit with info for other
organisational units.
Information for the audited unit with similar
information for the industry in which the
organisation operates.

Slide 5- 25
Analytical Procedures

Relationships:
Study of relationships of financial info with
appropriate non financial info e.g. changes
in payroll expense compared to changes in
average number of employees.
Study relationships among elements of
information.

Slide 5- 26
Analytical Procedures
When analysis uncovers unexpected results,
auditors should undertake further study e.g.
making inquiries to management & applying
other audit procedures. The explanation may
lie in errors, irregularities or illegal acts.
Further study should continue until the
auditor is satisfied that the results have been
sufficiently explained.

Slide 5- 27
Competence of Audit
Evidence

To be competent evidence must be:


Relevant
Reliable
Sufficient
Useful

Slide 5- 28
Competence of
Evidential Matter
To be competent evidence must be:
Relevant
Must relate to the audit objective. E.g. purchase order
not relevant to prove that goods were actually received.
Valid (Reliable)
Independent sources have greater reliability than those
within the client organization.
Strong internal control increases reliability of evidence
created within the client organization.
Directly obtained evidence is more reliable than
evidence obtained second hand.

Slide 5- 29
Reliability of Certain Types of
Audit Evidence

RELIABILITY TYPE EXAMPLE


High Physical Inventory Observation

Documentary
External Bank Statement
External/Internal Purchase Invoice
Internal Sales Invoice

Low Client Representations Management Representation


Letter

Slide 5- 30
Competence of Evidence
Evidence is sufficient if there is sufficient of it to
support the auditors findings. It must be convincing
enough for a prudent person to reach the same
decision/conclusion. E.g. interviewing the auditee is
not enough to provide sufficient evidence.
It must be factual and adequate to the testing
objective.
Verifying the physical condition is most persuasive
evidence as to condition of asset.

Slide 5- 31
Selection of Audit
Procedures
The criteria for selection of the most
suitable technique can be based on the
following:
Will the technique meet the objectives of the
audit stage or phase?
Has the auditor the skills to use the procedure?
Is the material to be audited available and in a
condition to be used with the audit procedure.

Slide 5- 32
Selection of Audit
Procedure

Will the procedure be cost effective?


E.g. will the time and effort to perform
the procedures far exceed the benefit of
using it?
Will the conclusions reached after using
the procedure be valid?

Slide 5- 33
Compliance Audits
Compliance procedures provide evidence
that internal controls exist and that they are
being applied effectively and consistently.
Procedures which can be used include:
Enquiry & representation.
Observation
Inspection of supporting documents
Re-performance of controls.

Slide 5- 34
Substantive Procedures

Substantive procedures provide direct


evidence as to the validity of a
transaction or balance in the records.
An example is the checking of an entry
from an input voucher to a customers
account.

Slide 5- 35
Substantive Procedures

Substantive Procedures include:


Enquiry and representation.
Analytical procedures.
Detailed tests of transactions and balances
by: inspection of documents, physical
examination, external confirmation and
reperformance.

Slide 5- 36
Audit Documentation
Audit Standard: 2330-1
Working Paper Files
Typical Working Paper Format
Storage of Working Papers
Ownership of Working Papers

Slide 5- 37
Audit Documentation

Standard 2330-1:
Internal auditors must document relevant
information to support the conclusions and
engagement results.

Slide 5- 38
Audit Documentation

Audit documentation is the principal record


of auditing procedures applied, evidence
obtained, and conclusions reached by the
auditor.
Audit Evidence is documented in Audit
working papers.
Internal Audit Management Reviews these
Working papers to ensure quality is
maintained.
Slide 5- 39
Working Papers
-Objectives

Audit working papers achieve following


objectives:
Aid in the planning, performance, and
review of audit work.
Provide the principal support for audit
report and conclusions.
Facilitate third party/supervisory reviews.

Slide 5- 40
Working Paper-Objectives
Provide a basis for evaluating the internal
audit activitys quality control program.
Document whether engagement
objectives were achieved.
Support the accuracy and completeness
of the work performed.

Slide 5- 41
Key X-teristics of Work
Papers

Complete
Concise
Accurate
Organised

Slide 5- 42
Characteristics

Completeness:
Each Work Paper should be completely self
standing and self explanatory. All questions
must be answered, all points raised by the
reviewer must be cleared and a logical, well
thought-out conclusion reached for each
audit segment.

Slide 5- 43
Characteristics

Accurate:
High quality work papers include
statements and computations that are
accurate and technically correct.

Slide 5- 44
Characteristics

Organisation:
Work papers should have a logical system
of numbering and a reader friendly layout
so a technically competent person
unfamiliar with the project could understand
the purpose, procedures performed, and
results.

Slide 5- 45
Characteristics

Relevance & Conciseness:


Audit work papers and items included on
each work paper should be relevant to
meeting the applicable audit objective.
Work papers must be confined to those that
serve a useful purpose.

Slide 5- 46
Work Paper Elements
Work papers should include the following
key elements:
Name of audit area
Source: The name and title of the individual
providing the documentation should be recorded
to facilitate future follow-up questions or audits.
Scope: The nature, timing, and extent of
procedures performed should be included on
each work paper for completeness.

Slide 5- 47
Elements of W/Papers

Reference: A logical work paper number


cross referenced to audit program steps
and issues should be included.
Sign off: The preparers signature
provides evidence of completion and
accountability, which is an essential
piece of third party quality review.

Slide 5- 48
Working Paper-Example
ABC Pension Audit as of 30/06/2011
Comparison of HRD 20 Forms to Master Files

W/P NO. A-3 Prepared by: MN

Name on HRD 20 Form Located Individual on


Master File
M. Kinyera Y
G. Musoke N
F. Namusisi Y

Source: HRD 20 form files located in Pension Benefits


Area
Y=on master file, N = Name not located on master file

Slide 5- 49
Working Paper Example2
Summary of Audit Findings (RAF)
ABC Ltd Pension Audit as of 30th June 2011
RAF No. C-3 Scope:
W/P Ref: A-3
Audit Objective:
Method of Sample Selection
Results (Condition, effect, cause)
Conclusion
Recommendation:
Risk Grade: Medium
Prepared by: Date:
Reviewed by: Date:
Slide 5- 50
Elements
Tick mark legend. A concise definition of all
tick marks (symbols) should be included on
each audit work paper to clearly describe
the work performed during the engagement.
Exceptions. Audit exceptions should be
documented and explained clearly on each
work paper using logical numbering that
cross reference to other work papers.

Slide 5- 51
Tick Mark -Example

Ricky Corporation Cash Reconciliation

Prepared by: Reviewed by:


Date: Date:
1st Savings 234 @
@ = Traced to bank reconciliation

Slide 5- 52
Storage of Work Papers

Permanent File:
Keeps information that is relevant for
multiple years on recurring engagements.
Current File:
Information relevant for a given audit
project/engagement.

Slide 5- 53
Working Paper Storage

Can be stored in manual or electronic


form.
For electronic files:
Back up frequently.
Include the file name in the footer.
Develop an organisation method.

Slide 5- 54
Working Papers Mgt
Policies
The CAE must control access to engagement
records Std 2330.A1.
The CAE must obtain the approval of senior
management and/or legal counsel prior to
releasing such records to external parties, as
appropriate-Std 2330.A2.
The CAE must develop retention
requirements for audit records consult legal
counsel.
Slide 5- 55
END

QUESTIONS?

Slide 5- 56
END

THANK YOU!

Slide 5- 57