1. Audit Evidence and Documentation1

2. Management Assertions
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. 2 2

3. Audit Risk Risk of Material Risk That the
Audit Risk = Misstatement * Auditors Fail to
the Misstatement
= Inherent Control Detection
Risk * Risk * Risk
Inherent Risk--Risk of a material misstatement occurring in an assertion assuming no related internal controls.
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--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. 3 3

4. Audit Risk Formula AR = IR * CR * DR AR = Audit risk
IR = Inherent risk
CR = Control risk
DR = Detection risk 4 4

5. Competence of Evidential Matter
To be competent evidence must be:
Valid
Relevant
Principles
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. 7 7

6. Reliability of Certain Types of Audit Evidence
RELIABILITY TYPE EXAMPLE
High Physical Inventory Observation
Documentary
External Cutoff Bank Statement
External/Internal Purchase Invoice
Internal Sales Invoice
Low Client Representations Management Representation
Letter 8 8

7. Types of Evidence Accounting information system Documentary evidence
Third-party representations
Physical evidence
Computations
Data interrelationships
Client representations 5

8. Audit Procedures Accounting information system Documentary evidence
Tracing
Vouching
Inspection
Reconciliations
Third-party representations--Confirmation
Physical examination
Computations—Reperformance
Data interrelationships—Analytical procedures
Client representations
Inquiries
Letters of representations 6 6

9. 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. 10 10

10. Auditing Fair Values
If the item is traded on an organized market, fair value may be obtained from market prices
If the item does not trade on an organized market determine fair value by:
Analyzing to a similar market is possible
Using a valuation model

11. Sufficiency of Audit Documentation
Audit documentation should be sufficient to enable members of the audit team:
To understand who performed and reviewed the work
To understand what work was performed
To show that the accounting agree or reconcile to the financial statements

12. Functions of Working Papers
Provide a means of assigning and coordinating audit work
Aid in supervising and reviewing the audit work
Provide support for the auditors’ opinion
Document the auditors’ compliance with generally accepted auditing standards, especially the standards of field work
Aid in planning and conducting future audits 11 2 2

13. Types of Working Papers
Audit administrative working papers
Working trial balance
Lead schedules
Adjusting journal entries and reclassification entries
Supporting schedules
Analysis of a ledger account
Reconciliations
Computational working papers
Corroborating documents

14. Types of Working Files
Current files
Permanent files 4 4