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Audit Evidence and Documentation. The Third Standard of Field Work. Sufficient appropriate evidential matter is to obtained by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

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Audit Evidence and Documentation

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the third standard of field work
The Third Standard of Field Work

Sufficient appropriateevidential matter is to obtained by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

management assertions embodied in the financial statements
Management Assertions Embodied in the Financial Statements
  • Existence or Occurrence--Assets, liabilities, and owners’ equity accounts reflected in the financial statements exist; the recorded transactions have occurred.
  • Completeness--All transactions, assets, liabilities, and elements of owners’ equity that should be presented in the financial statements are included.
  • Rights and Obligations--The client has rights to assets and obligations to pay liabilities that are included in the financial statements.
  • Valuation or Allocation--Assets, liabilities, owners’ equity, revenues, and expenses are presented at amounts that are determined in accordance with generally accepted accounting principles.
  • Presentation and Disclosure--Accounts are described and classified in the financial statements in accordance with generally accepted accounting principles, and all material disclosures are provided.
  • Accuracy – Amounts and other data relating to recorded transactions have been recorded properly.
  • Cutoff – Transactions have been recorded in the proper accounting period.
relationship of financial statement assertions and the audit

Financial Statements (GAAP)

Management Assertions

Audit Objectives

Audit Evidence

Audit Report on Financial Statements

Audit Procedures

Relationship of Financial Statement Assertions and the Audit
audit risk
Audit Risk

Risk of Material Risk that the Auditors

Audit Risk = Misstatement * Fail to Detect

the Misstatement

= Inherent Control Detection

Risk * Risk * Risk

inherent risk
Inherent Risk

The risk of a material misstatement occurring in an assertion assuming no related internal controls.

Related to:

  • Nature of the client or industry
  • Nature of the financial statement account
control risk
Control Risk

Risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the company’s internal control.

detection risk
Detection Risk

Risk that the auditors’ procedures will lead them to conclude that a material misstatement does not exist in an assertion when in fact such misstatement does exist.

Detection risk restricted by performing substantive tests

audit risk formula
Audit Risk Formula

AR = IR x CR x DR

AR = Audit risk

IR = Inherent risk

CR = Control risk

DR = Detection risk

audit risk formula solving for detection risk
Audit Risk FormulaSolving for Detection Risk
  • Implications
    • Assuming constant, sufficiently low AR, detection risk is inversely related to IR and CR

↑ combined IR and CR ↓ allowed DR ↑ substantive evidence

audit evidence
Audit Evidence

Evidential matter:

any information that corroborates or refutes an assertion

types of evidence
Types of Evidence
  • Physical evidence
  • Third-party representations
  • Documentary evidence
  • Computations
  • Data Interrelationships
  • Client representations
  • Accounting records
types of evidence physical evidence
Types of EvidencePhysical Evidence

Evidence that can actually be seen by auditors.

  • This type of evidence is generally effective for supporting the existence assertion.
types of evidence third party representations
Types of EvidenceThird Party Representations
  • Confirmations
  • Lawyers’ Letters
  • Reports of Specialists
types of evidence documentary evidence
Types of EvidenceDocumentary Evidence

Four basic types (helps determine competence):

  • Created by outside parties and transmitted directly to auditor
  • Created by outside parties and held by client
  • Created and held by client
  • Electronic documents
types of evidence computations
Types of EvidenceComputations

Computations are:

  • performed independently by auditor
  • used to verify mathematical accuracy of client’s analyses and records
types of evidence data interrelationships
Types of EvidenceData Interrelationships

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
types of evidence oral and written client representations
Types of EvidenceOral 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.
types of evidence accounting records
Types of EvidenceAccounting Records

Clients’ accounting records (e.g. ledgers and journals) may provide worthwhile evidence in themselves.

  • Depends on the effectiveness of internal controls
audit procedures
Audit Procedures
  • Physical examination
  • Observation
  • Confirmation
  • Tracing
  • Vouching
  • Inspection
  • Reconciliation
  • Reperformance
  • Analytical procedures
  • Inquiry
  • Comparison

Physical Evidence

Third-Party Representations

Documentary Evidence


Data Interrelationships

Client Representations

Accounting Records

competence of evidential matter
Competence of Evidential Matter
  • To be competent evidence must be:
    • Relevant
      • Must relate to the audit objective
    • 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.
reliability of certain types of audit evidence
Reliability of Certain Types of Audit Evidence
    • High Physical Inventory Observation
  • Documentary
  • External Cutoff Bank Statement
  • External/Internal Purchase Invoice
  • Internal Sales Invoice
    • Low Client Representations Management Representation
    • Letter
basic approaches to auditing accounting estimates
Basic Approaches to Auditing Accounting Estimates
  • Review and test management’s process for developing the estimate.
  • Independently develop an estimate to compare to management’s estimate.
  • Review subsequent events or transactions bearing on the estimate.
functions of working papers
Functions of Working Papers
  • Provide support for the auditors’ opinion
  • Document the auditors’ compliance with generally accepted auditing standards, especially the standards of field work
  • Provide a means of assigning and coordinating audit work
  • Aid in supervising and reviewing the audit work
  • Aid in planning and conducting future audits
types of working papers
Types of Working Papers
  • Audit Administrative Working Papers
  • Working Trial Balance
  • Lead Schedules (Grouping Sheets)
  • Adjusting and Reclassification Journal Entries
  • Supporting Schedules
  • Account Analysis
  • Reconciliations
  • Computational Working Papers
  • Corroborating Documents
types of working files
Types of Working Files
  • Current files
    • Typically arranged and indexed around accounts in clients’ financial statement
    • Support current year’s audit report
  • Permanent files
    • Document items of concern over multiple years
    • Provide summary of policies and organization of client
    • To preserve working papers that have little change over time.
sarbox perspective
SARBOX Perspective
  • SARBOX requires the creation and maintenance, for a period of no less than seven years, of audit working papers sufficient to support the audit report.
  • Deliberate destruction of the audit documentation within the seven year period constitutes a criminal offense.
more on analytical procedures
More on Analytical Procedures
  • Required during planning and review stages of an audit
  • Analytical procedure process
    • Develop an expectation (amount or ratio)
      • Vertical analysis (common-size statements)
      • Horizontal (trend) analysis
      • Cross-sectional (industry) analysis
    • Determine acceptable difference
    • Compare actual results with expectation
    • Investigate significant differences