Chapter 5
Evidence and Documentation
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Relationship of Audit
Evidence to the Audit Report
Management assertions
about components of
financial statements
Financial
statements
Audit
procedures
Audit
report
Provide evidence on the
fairness of the
financial statements
LO# 1
Auditor reaches
a conclusion based
on the evidence
5-2
Management Assertions LO# 2
5-3
The Concepts of Audit
Evidence
Nature of audit evidence
Sufficiency and appropriateness
of audit evidence
Evaluation of audit evidence
LO# 3
5-4
Audit Procedures
Specific acts
performed by the auditor
to gather evidence about
whether specific assertions
are being met.
Risk assessment
procedures
Test of
controls
Substantive
procedures
LO# 4
5-5
Audit Procedures
A set of audit procedures prepared to test
assertions for a component of the financial
statements is referred to as an audit program.
Management Assertions Examples of Audit Procedures
Existence 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 for
Obtaining Audit Evidence
Inspection
of records and
documents
LO# 4
Inspection
of tangible
assets
Observation
Inquiry
Confirmation
Recalculation Reperformance
Analytical
procedures
Scanning
5-7
Reliability of Types
of Evidence
LO# 5
5-8
Audit Testing Hierarchy Figure 5-3 Audit Testing Hierarchy: An Evidence Decision Process for Testing
Significant Balances or Classes of Transactions
LO# 6
5-9
Audit Documentation
The 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 Audit
Documentation 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 accounting
records agreed or reconciled with the financial
statements.
LO# 8
5-11
Content of Audit
Documentation Audit documentation should:
Include a written audit program detailing auditing
procedures 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 performed
and reviewed the work,
as well as the dates
of the work and reviews.
LO# 8
5-12
Purposes of Analytical Procedures
Preliminary
Analytical
Procedures
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
Decision Process Figure 5-7 Overview of the Auditor’s Decision Process for Substantive
Analytical Procedures
LO# 9
5-14
Financial Ratios
Short-term Liquidity Ratios
Activity Ratios
Profitability Ratios
Coverage Ratios
LO# 10
5-15
End of Chapter 5
5-16