Chapter 4 Audit Evidence and Audit Documentation McGraw-Hill/Irwin Copyright © 2008 by The...
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Transcript of Chapter 4 Audit Evidence and Audit Documentation McGraw-Hill/Irwin Copyright © 2008 by The...
Chapter 4Chapter 4
Audit Evidence and Audit Documentation
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
4-2
Relationship of AuditEvidence to the Audit Report
Management assertionsabout components offinancial statements
Management assertionsabout components offinancial statements
FinancialstatementsFinancial
statements
Auditprocedures
Auditprocedures
AuditreportAuditreport
Evidence on thefairness of the
financial statements
Evidence on thefairness of the
financial statements
LO# 1
4-3
Management Assertions
Assertions aboutclasses of transactions
and events for theperiod under audit
OccurrenceOccurrence
CompletenessCompleteness
AuthorizationAuthorization
AccuracyAccuracyCutoffCutoff
ClassificationClassification
LO# 2
4-4
Management Assertions
Assertions aboutend-of-the-periodaccount balances
Rights andObligationsRights andObligations
Valuationand allocation
Valuationand allocation
CompletenessCompletenessExistenceExistence
LO# 2
4-5
Management Assertions
Assertionsabout presentation
and disclosure
Occurrence andrights and obligations
Occurrence andrights and obligations
Classification and understandabilityClassification and understandability
Accuracy andvaluation
Accuracy andvaluation CompletenessCompleteness
LO# 2
4-6
Financial Statement Assertions(The Assurance Bucket)
Existence or OccurrenceCompletenessRights and ObligationsValuation or AllocationPresentation and Disclosure
4-7
Audit Procedures
Specific actsperformed by the auditor
to gather evidence to determineif specific assertions are
being met.
Risk assessment procedures
Risk assessment procedures
Test of controlsTest of controls
SubstantiveproceduresSubstantiveprocedures
LO# 3
4-8
Audit Procedures
ObservationDocumentationConfirmationComparisonsInquiriesTest of Data
Computation Tracing
4-9
Audit Procedures
A set of audit procedures prepared to testassertions for a component of the financial
statements is referred to as an audit program.
A set of audit procedures prepared to testassertions for a component of the financial
statements is referred to as an audit program.
Management Assertions Audit ProceduresExistence Confirm receivables.Rights and Obligations Ask if receivables have been sold.Completeness Agree controlling account with total of subsidiary accounts.
Examine sales invoices immediately before and after year-endfor proper cutoff.
Valuation or allocation Trace accounts from aged trial balance to subsidiary accounts.Test the adequacy of the allowance account.
Presentation and disclosure Look for amounts due from related parties.Evaluate receivables for footnote disclosure.
Audit Program for Accounts ReceivableManagement Assertions Audit ProceduresExistence Confirm receivables.Rights and Obligations Ask if receivables have been sold.Completeness Agree controlling account with total of subsidiary accounts.
Examine sales invoices immediately before and after year-endfor proper cutoff.
Valuation or allocation Trace accounts from aged trial balance to subsidiary accounts.Test the adequacy of the allowance account.
Presentation and disclosure Look for amounts due from related parties.Evaluate receivables for footnote disclosure.
Audit Program for Accounts Receivable
LO# 3
4-10
Audit Evidence
All the information usedby the auditor in arriving at
the conclusions on which theaudit opinion is based.
All the information usedby the auditor in arriving at
the conclusions on which theaudit opinion is based.
LO# 4
4-11
Understanding the Conduct of an Audit via AuditEvidence
Nature of audit evidenceNature of audit evidence
Sufficiency and appropriateness of audit evidence
Sufficiency and appropriateness of audit evidence
Evaluation of audit evidenceEvaluation of audit evidence
LO# 4
4-12
Nature of Audit Evidence
Records ofinitial entries and
supporting records
Records ofinitial entries and
supporting recordsInvoicesInvoices
ContractsContracts
Generaland subsidiary
ledgers
Generaland subsidiary
ledgers
Adjustmentsto financialstatements
Adjustmentsto financialstatements
WorksheetsWorksheets
Spreadsheetssupporting cost
allocations
Spreadsheetssupporting cost
allocations
Othercomputations,
reconciliations, anddisclosures
Othercomputations,
reconciliations, anddisclosures
LO# 4
4-13
Competence of Audit Evidence
Measures Quality of EvidenceMeasures Quality of Evidence
RelevantRelevant
ReliableReliable
LO# 4
4-14
Sufficiency ofAudit Evidence
Sufficiency is a measure ofthe quantity of audit evidence.Sufficiency is a measure of
the quantity of audit evidence.
Greater risk ofmisstatement requires
a higher quantityof audit evidence.
Greater risk ofmisstatement requires
a higher quantityof audit evidence.
Higher quality audit evidence results
in a lower quantityof audit evidence.
Higher quality audit evidence results
in a lower quantityof audit evidence.
LO# 4
4-15
Appropriateness ofAudit Evidence
RelevanceRelevance
ReliabilityReliability
Independent source of the evidenceIndependent source of the evidence
Effectiveness of internal controlEffectiveness of internal control
Auditor’s direct personal knowledgeAuditor’s direct personal knowledge
Documentary evidenceDocumentary evidence
Original documentsOriginal documents
LO# 4
Appropriateness is a measureof the quality of audit evidence.Appropriateness is a measureof the quality of audit evidence.
4-16
Evaluation ofAudit Evidence
Proper evaluation of evidencerequires an understanding of theProper evaluation of evidence
requires an understanding of the
Types of evidence available. Types of evidence available.
Relative reliability of available evidence.Relative reliability of available evidence.
An auditor should be thorough in searchingfor evidence and unbiased in its evaluation.An auditor should be thorough in searchingfor evidence and unbiased in its evaluation.
LO# 4
4-17
Audit Procedures forObtaining Audit Evidence
Inspectionof records and
documents
Inspectionof records and
documentsRecalculationRecalculation ObservationObservation
InquiryInquiry ScanningScanningInspectionof tangible
assets
Inspectionof tangible
assets
ConfirmationConfirmation ReperformanceReperformance AnalyticalproceduresAnalytical
procedures
LO# 5
4-18
Audit Procedures forObtaining Audit Evidence
Inspectionof records and
documents
Inspectionof records and
documents
Evidence obtained fromexternal documents is more
reliable than evidence obtainedfrom internal documents.
Evidence obtained fromexternal documents is more
reliable than evidence obtainedfrom internal documents.
LedgerSource
Documents
Vouching(Occurrence)
Tracing(Completeness)
LO# 5
Reliability of Records
Internal vs. External
4-20
Audit Procedures forObtaining Audit Evidence
Inspectionof records and
documents
Inspectionof records and
documents
In conducting inquiry, the auditor should:
• Consider the knowledge, objectivity, experience, responsibility, and qualifications of the person to be questioned.
• Ask clear, concise, and relevant questions.
• Use open or closed questions appropriately.
• Listen actively and effectively.
• Consider the reactions and responses, then ask follow-up questions.
• Evaluate the response.
In conducting inquiry, the auditor should:
• Consider the knowledge, objectivity, experience, responsibility, and qualifications of the person to be questioned.
• Ask clear, concise, and relevant questions.
• Use open or closed questions appropriately.
• Listen actively and effectively.
• Consider the reactions and responses, then ask follow-up questions.
• Evaluate the response.
InquiryInquiry
LO# 5
4-21
Audit Procedures forObtaining Audit Evidence
Inspectionof records and
documents
Inspectionof records and
documents
InquiryInquiry
ConfirmationConfirmation
Information FrequentlyConfirmed by Auditors Source of ConfirmationCash balance BankAccounts receivable Individual customersInventory on consignment ConsigneeAccounts payable Individual vendorsBonds payable Bondholders/trusteeCommon stock outstanding Registrar/transfer agentInsurance coverage Insurance companyCollateral for loans Creditors
LO# 5
4-22
Audit Procedures forObtaining Audit Evidence
Recalculation - Determining the mathematical accuracy of documents or records.
Reperformance - The auditor’s independent execution of procedures or controls that were originally performed as part of the internal control system.
4-23
Audit Procedures forObtaining Audit Evidence
Observation - The process of watching a process or procedure being performed by others.
Inspection of Intangible Assets - Physical examination of a tangible asset.
4-24
Audit Procedures forObtaining Audit Evidence
Scanning - Review of accounting data to identify significant or unusual items.
Analytical Procedures - Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data.
4-25
Reliability of Typesof Evidence
Level Of Reliability Type of Evidence
Inspection of tangible assetsHigh Reperformance
RecalculationInspection of records and documents
Medium ScanningConfirmationAnalytical procedures
Low ObservationInquiry
Level Of Reliability Type of Evidence
Inspection of tangible assetsHigh Reperformance
RecalculationInspection of records and documents
Medium ScanningConfirmationAnalytical procedures
Low ObservationInquiry
LO# 6
4-26
Audit Documentation
The auditor’s principal record of theaudit procedures performed, evidence
obtained, and conclusions reached.
The auditor’s principal record of theaudit procedures performed, evidence
obtained, and conclusions reached.
Audit documentation (working papers) have two functions: To provide support for the audit report. To aid in the conduct and supervision of the audit.
Audit documentation (working papers) have two functions: To provide support for the audit report. To aid in the conduct and supervision of the audit.
LO# 7
4-27
Content of AuditDocumentation
Audit documentation should:Audit documentation should:
Demonstrate how the audit complied with auditing and related professional practice standards.Demonstrate how the audit complied with auditing and related professional practice standards.
Support the basis for audit conclusions concerningevery material financial statement assertion.Support the basis for audit conclusions concerningevery material financial statement assertion.
Show that the underlying accounting recordsagreed with the financial statements.Show that the underlying accounting recordsagreed with the financial statements.
LO# 8
4-28
Content of AuditDocumentation
Audit documentation should:Audit documentation should:
Include a written audit program detailing auditingprocedures necessary to accomplish audit objectives.Include a written audit program detailing auditingprocedures necessary to accomplish audit objectives.
Enable a knowledgeable and experienced reviewer to:Enable a knowledgeable and experienced reviewer to:
Understand the nature, timing,extent, and results of audit
procedures, evidence obtainedand conclusions reached.
Understand the nature, timing,extent, and results of audit
procedures, evidence obtainedand conclusions reached.
Determine who performedand reviewed the work,
as well as the datesof the work and reviews.
Determine who performedand reviewed the work,
as well as the datesof the work and reviews.
LO# 8
4-29
Content of AuditDocumentation
Most public accounting firms maintainaudit documentation in two types of filesMost public accounting firms maintain
audit documentation in two types of files
Permanent filesPermanent files Current filesCurrent files
Corporate charter Important contractsChart of accounts Internal control documentationOrganization chart Terms of stock and bond issuesAccounting manual Prior years’ analytical procedures
Corporate charter Important contractsChart of accounts Internal control documentationOrganization chart Terms of stock and bond issuesAccounting manual Prior years’ analytical procedures
LO# 8
4-30
Content of AuditDocumentation
Most public accounting firms maintainaudit documentation in two types of filesMost public accounting firms maintain
audit documentation in two types of files
Permanent filesPermanent files Current filesCurrent files
Audit plan, audit report Adjusting journal entriesAudit programs Reclassification journal entriesWorking trial balance Current financial statementsMinutes of meetings Working papers supporting accounts
Audit plan, audit report Adjusting journal entriesAudit programs Reclassification journal entriesWorking trial balance Current financial statementsMinutes of meetings Working papers supporting accounts
LO# 8
4-31
Format of Audit Documentation
HeadingHeading
Indexing andcross-referencing
Indexing andcross-referencing
Tick marksTick marks
Client nameTitle of the working paper
Client’s year-end date
Client nameTitle of the working paper
Client’s year-end date
Notations that provide a trailfrom financial statements to
audit documents.
Notations that provide a trailfrom financial statements to
audit documents.
Notations made next towork paper items indicating
auditor/reviewer actions.
Notations made next towork paper items indicating
auditor/reviewer actions.
LO# 8
4-32
Audit Documentation
Audit documentation should be organized sothat audit team members and others can find
evidence supporting financial statement accounts.
Audit documentation should be organized sothat audit team members and others can find
evidence supporting financial statement accounts.
All audit documentation is the property of theauditor, including documents preparedby the client at the auditor’s request.
All audit documentation is the property of theauditor, including documents preparedby the client at the auditor’s request.
The Sarbanes-Oxley Act of 2002 requiresaudit documentation to be retained for seven
years from the completion date of the engagement.
The Sarbanes-Oxley Act of 2002 requiresaudit documentation to be retained for seven
years from the completion date of the engagement.
LO# 8
4-33
Audit Documentation
Audit PlanAudit Programs
Working Trial Balance Written memos
Audit PlanAudit Programs
Working Trial Balance Written memos
Account AnalysisLead Sheet
Detail
Account AnalysisLead Sheet
Detail
Adjusting EntriesReclassification Entries
Adjusting EntriesReclassification Entries
LO# 8
4-34
Workpaper Index
4-35
End of Chapter 4