BASIC AUDITING CONCEPTS: MATERIALITY, RISK ASSESSMENT, AND EVIDENCE Part Two
CHAPTER 4 EVIDENTIAL MATTER, TYPES OF EVIDENCE, AND AUDIT DOCUMENTATION Chapter 4
EVIDENTIAL MATTER Third standard of field work states…. Sufficient, competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination. On a typical audit engagement, most of the auditor's work involves obtaining and evaluating evidence to test the fair presentation of the financial statements.
THE RELATIONSHIP OF EVIDENTIAL MATTER TO THE AUDIT REPORT Financial Statements Audit Report Management Assertions Audit Objectives Audit Procedures Evidence
MANAGEMENT ASSERTIONS Existence or occurrence Completeness Rights and obligations Valuation and allocation Presentation and disclosure
AUDIT OBJECTIVES FOR TESTING AN ACCOUNT BALANCE Validity Completeness Cutoff Ownership Accuracy Valuation Classification Disclosure
AUDIT PROCEDURES Audit procedures are specific acts performed by the auditor to gather evidence to determine if specific audit objectives are being met. A set of audit procedures prepared to test audit objectives for a specific component of the financial statements is referred to as an audit program.
BASIC CONCEPTS OF EVIDENTIAL MATTER The nature of evidential matter The competence of evidential matter The sufficiency of evidential matter The evaluation of evidential matter
THE NATURE OF EVIDENTIAL MATTER Accounting data used to test audit objectives include the books of original entry, related accounting manuals, and records such as worksheets and spreadsheets that support the financial statements. Many times these data are in electronic form. Corroborating evidential matter includes both written and electronic information such as checks, records of electronic funds transfers, invoices, contracts, minutes, confirmations, and written representations.
THE COMPETENCE OF EVIDENTIAL MATTER Evidence is considered competent when it is both Relevant - it refers to whether the evidence relates to the specific audit objective being tested. Reliable - it refers to the diagnosticity of the evidence => does the evidence signal the true state of the assertion or audit objective.
GENERAL FACTORS FOR ASSESSING THE RELIABILITY OF EVIDENCE Independence of the source of the evidence. Effectiveness of internal control. Auditor's direct personal knowledge.
SUFFICIENCY OF EVIDENTIAL MATTER The auditor relies on evidence that is persuasive rather than convincing in forming an opinion on a set of financial statements. This occurs for two reasons: Because of cost considerations, the auditor only examines a sample of the transactions that compose an account balance or class of transactions. Due to the nature of evidence, the auditor must often rely on evidence that is not perfectly reliable.
EVALUATION OF EVIDENTIAL MATTER The auditor should to be thorough in searching for evidence and unbiased in its evaluation.
TYPES OF AUDIT EVIDENCE Physical examination Reperformance Documentation Confirmation Analytical procedures Inquiries of client personnel or management Observation
DOCUMENTATION The reliability of documentary evidence. Internal versus external evidence The relationship of evidence to specific audit objectives. Vouching versus tracing
CONFIRMATION The reliability of evidence obtained through confirmations is directly affected by factors such as The form of the confirmation. Prior experience with the entity. The nature of the information being confirmed. The intended respondent.
RELIABILITY OF THE TYPES OF EVIDENCE
RELATIONSHIP OF TYPES OF EVIDENCE TO AUDIT OBJECTIVES Table 4-6 shows the relationship of the types of evidence to audit objectives
AUDIT DOCUMENTATION (WORKING PAPERS) Working papers have two functions: to provide support for the auditor's report and to aid in the conduct and supervision of the audit.
TYPES OF WORKING PAPER FILES Most CPA firms maintain working papers in two types of files: permanent file current file In many cases, these files are kept in electronic form.
GENERAL CHARACTERISTICS OF AUDIT WORKING PAPERS Heading Indexing and cross-referencing Tick marks
ORGANIZATION OF WORKING PAPERS The auditor's working papers need to be organized in such a way that any member of the audit team (and others) can find the audit evidence that supports each financial statement account. See Figure 4-3.
OWNERSHIP OF THE WORKING PAPERS The working papers are the property of the auditor. This includes not only working papers prepared by the auditor but also working papers prepared by the client at the request of the auditor.
CHAPTER 4 EVIDENTIAL MATTER, TYPES OF EVIDENCE, AND AUDIT DOCUMENTATION Chapter 4