Chapter 18W McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 Evidence and Documentation McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill...
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Transcript of Chapter 5 Evidence and Documentation McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill...
Chapter 5 Chapter 5
Evidence and Evidence and DocumentationDocumentation
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Relationship of AuditRelationship of AuditEvidence to the Audit ReportEvidence to the Audit Report
Management assertionsabout components offinancial statements
Financialstatements
Auditprocedures
Auditreport
Provide evidence on thefairness of the
financial statements
LO# 1
Auditor reaches a conclusion based
on the evidence
5-2
Management AssertionsManagement AssertionsLO# 2
5-3
The Concepts of AuditThe Concepts of AuditEvidenceEvidence
Nature of audit evidence
Sufficiency and appropriateness of audit evidence
Evaluation of audit evidence
LO# 3
5-4
Audit ProceduresAudit Procedures
Specific actsperformed by the auditorto gather evidence about
whether specific assertions are being met.
Risk assessment procedures
Test of controls
Substantiveprocedures
LO# 4
5-5
Audit ProceduresAudit Procedures
A set of audit procedures prepared to testassertions for a component of the financial
statements is referred to as an audit program.
Management Assertions Examples of Audit ProceduresExistence Confirm receivables.Rights and obligations Inquire if receivables have been sold or pledged.Completeness Agree controlling account with total of subsidiary accounts.
Select shipping documents immediatley prior to year end and ensure sales invoices were recorded.
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# 4
5-6
Audit Procedures forAudit Procedures forObtaining Audit EvidenceObtaining Audit Evidence
Inspectionof records and
documents
LO# 4
Inspectionof tangible
assets
Observation
Inquiry
Confirmation
Recalculation Reperformance
Analyticalprocedures
Scanning
5-7
Reliability of TypesReliability of Typesof Evidenceof Evidence
LO# 5
5-8
Audit Testing HierarchyAudit Testing HierarchyFigure 5-3Figure 5-3 Audit Testing Hierarchy: An Evidence Decision Process for Testing Audit Testing Hierarchy: An Evidence Decision Process for Testing
Significant Balances or Classes of TransactionsSignificant Balances or Classes of Transactions
LO# 6
5-9
Audit DocumentationAudit DocumentationThe auditor’s principal record of the
audit 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 planning, performance, and supervision of the audit.
LO# 7
5-10
Content of AuditContent of AuditDocumentationDocumentation
Audit documentation should:
Demonstrate how the audit complied with auditing and related professional practice standards.
Support the basis for the auditor’s conclusions concerning each material financial statement assertion.
Demonstrate that the underlying accountingrecords agreed or reconciled with the financial statements.
LO# 8
5-11
Content of AuditContent of AuditDocumentationDocumentation
Audit documentation should:
Include a written audit program detailing auditingprocedures necessary to accomplish audit objectives.
Enable a knowledgeable and experienced reviewer to:
Understand the nature, timing,extent, and results of audit
procedures, evidence obtained,and conclusions reached.
Determine who performedand reviewed the work,
as well as the datesof the work and reviews.
LO# 8
5-12
Purposes of Analytical ProceduresPurposes of Analytical Procedures
Risk AssessmentProcedures
Used to assist the auditor to better understand the business and to plan the
nature, timing, and extent of audit procedures.
Substantive Analytical
Procedures
Used to obtain evidential matter about particular assertions related to account
balances or classes of transactions.
Final Analytical
Procedures
Used as an overall review of the financial information in the final review stage of the
audit.
LO# 9
5-13
Substantive Analytical Procedures Substantive Analytical Procedures Decision ProcessDecision Process
Figure 5-7Figure 5-7 Overview of the Auditor’s Decision Process for Substantive Overview of the Auditor’s Decision Process for Substantive Analytical ProceduresAnalytical Procedures
LO# 9
5-14
Financial RatiosFinancial Ratios Short-term Liquidity RatiosShort-term Liquidity Ratios Activity RatiosActivity Ratios Profitability RatiosProfitability Ratios Coverage RatiosCoverage Ratios
LO# 10
5-15
End of Chapter 5End of Chapter 5
5-16