Chapter 5 Evidence and Documentation McGraw-Hill/IrwinCopyright © 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 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 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. LO# 4 5-6

Audit Procedures for Obtaining Audit Evidence Inspection of records and documents 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. 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#

Content of Audit Documentation Audit documentation should: Demonstrate how the audit complied with auditing and related professional practice standards. 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. 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. Demonstrate that the underlying accounting records agreed or reconciled with the financial statements. LO#

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#

Purposes of Analytical Procedures Risk Assessment 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#

Substantive Analytical Procedures Decision Process Figure 5-7 Overview of the Auditor’s Decision Process for Substantive Analytical Procedures LO#

Financial Ratios  Short-term Liquidity Ratios  Activity Ratios  Profitability Ratios  Coverage Ratios LO#

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