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Chapter Four Audit Evidence and Audit Documentation. Audit Evidence. Information used by the auditor in arriving at the conclusions on which the audit opinion is based. Relationship of Audit Evidence to the Audit Report. Financial statements. Audit report.
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Chapter Four Audit Evidence and Audit Documentation
Audit Evidence Information usedby the auditor in arriving atthe conclusions on which theaudit opinion is based.
Relationship of AuditEvidence to the Audit Report Financialstatements Auditreport Management assertionsabout components offinancial statements Auditprocedures Evidence on thefairness of thefinancial statements
Management Assertions Completeness Classification Occurrence Assertions aboutclasses of transactionsand events for theperiod under audit Accuracy Cutoff Authorization
Rights andObligations Valuationand allocation Existence Completeness Management Assertions Assertions aboutend-of-the-periodaccount balances
Classification and understandability Accuracy andvaluation Completeness Occurrence andrights and obligations Management Assertions Assertionsabout presentationand disclosure
Risk assessment procedures Test of controls Substantiveprocedures Audit Procedures Specific actsperformed by the auditorto gather evidence to determineif specific assertions arebeing met.
Audit Procedures A set of audit procedures prepared to testassertions for a component of the financial statements is referred to as an audit plan.
The Concepts of AuditEvidence Nature of audit evidence Appropriateness of audit evidence Sufficiency of audit evidence Evaluation of audit evidence
Nature of Audit Evidence Records ofinitial entries andsupporting records Invoices Spreadsheetssupporting costallocations Generaland subsidiaryledgers Worksheets Othercomputations,reconciliations, anddisclosures Adjustmentsto financialstatements Contracts
Independent source of the evidence Effectiveness of internal control Auditor’s direct personal knowledge Documentary evidence Original documents Appropriateness ofAudit Evidence Relevance Reliability
Sufficiency ofAudit Evidence Sufficiency is a measure ofthe quantity of audit evidence. Greater risk ofmisstatement requiresa higher quantityof audit evidence. Higher quality audit evidence results in a lower quantityof audit evidence.
Types of evidence available. Relative reliability of available evidence. Evaluation ofAudit Evidence Proper evaluation of evidencerequires an understanding of the An auditor should be be thorough in searchingfor evidence and unbiased in its evaluation.
Ledger SourceDocuments Vouching(Occurrence) Tracing(Completeness) Audit Procedures forObtaining Audit Evidence Evidence obtained fromexternal documents is morereliable than evidence obtainedfrom internal documents. Inspectionof records and documents
Audit Procedures forObtaining Audit Evidence • 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. Inspectionof records and documents Inquiry
Audit Procedures forObtaining Audit Evidence Inspectionof records and documents Inquiry Confirmation
Audit Procedures forObtaining Audit Evidence Inspectionof records and documents Recalculation Observation Inquiry Scanning Inspectionof tangibleassets Confirmation Reperformance Analyticalprocedures
Audit Documentation The auditor’s principal record of theaudit procedures performed, evidence obtained,and conclusions reached. Provides the basis for the review and inspection of the quality of the audit work.
Provide a record of the basis for the auditor’s report. Provide evidence that the audit was performed in accordance with auditing standards and applicable regulations. Content of AuditDocumentation Audit documentation should:
Include the overall audit strategy and audit plan. Enable an experienced auditor to understand: Content of AuditDocumentation Audit documentation should: The nature, timing,extent, and results of the auditprocedures performed to comply with ISAs and applicable regulations. The results of audit procedures and evidence obtained,and conclusions reached on significant matters.
Corporate charter Important contracts Chart of accounts Internal control documentation Organization chart Terms of stock and bond issues Accounting manual Prior years’ analytical procedures Content of AuditDocumentation Most audit firms maintainaudit documentation in two types of files Permanent files Current files
Content of AuditDocumentation Most audit firms maintainaudit documentation in two types of files Permanent files Current files Overall audit strategy Adjusting journal entries Audit plan, Audit report Reclassification journal entries Working trial balance Current financial statements Minutes of meetings Working papers supporting accounts
Notations that provide a trailfrom financial statements toaudit documents. Notations made next towork paper items indicatingauditor/reviewer actions. Format of AuditDocumentation Heading Client name Title of the working paper Client’s year-end date Indexing andcross-referencing Tick marks
Audit Documentation Audit documentation should be organized sothat audit team members and others can findevidence supporting financial statement accounts. All audit documentation is the property of theauditor, including documents preparedby the client at the auditor’s request. ISQC1 requiresaudit documentation to be retained for minimum five years from the date of the auditor’s report.
