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Chapter 5
Evidence and
Documentation
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Where We Are ?
Chapter 5
Examining business processes and
their related accounts allows the auditor
to gather evidence by understanding
the processing of related transactions
through the information system from
their origin to their ultimate disposition
in the accounting journals and ledgers.
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LO# 1
Audit Process in General
Start
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LO# 2
Management Assertions
What is the Management assertions ?
Assertions are expressed or implied representations by
management regarding the recognition, measurement,
presentation, and disclosure of information in the financial
statements and related disclosures.
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LO# 2
Management Assertions
What are the Types of Management assertions ?
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LO# 2
Management Assertions
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The Concepts of Audit
Evidence
LO# 3
What is the relationship between Management
assertion and Audit Evidence ?
The assertions collectively provide a road map for
the auditor in determining what evidence to collect
regarding various transactions, account balances,
and required financial statement disclosures.
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The Concepts of Audit
Evidence
LO# 3
What is the Audit Evidence ?
Audit evidence is the information used by the
auditor in arriving at the conclusions on which the
audit opinion is based, and it includes the
information contained in the accounting records
underlying the financial statements and other
information.
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The Concepts of Audit
Evidence
LO# 3
What is the Audit Evidence ?
The following concepts of audit evidence are
important to understanding the conduct of the
audit:
• The nature of audit evidence.
• The sufficiency and appropriateness of audit
evidence.
• The evaluation of audit evidence.
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The Concepts of Audit
Evidence
LO# 3
What is the Concepts Audit Evidence ?
• The nature of audit evidence.
Refers to the form or type of information,
( Traditional Records – Electronic Records )
• The sufficiency and appropriateness of audit
evidence.
• The evaluation of audit evidence.
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The Concepts of Audit
Evidence
LO# 3
What is the Concepts Audit Evidence ?
• The nature of audit evidence.
• The sufficiency and appropriateness of audit
evidence.
 Sufficiency is the measure of the quantity of
audit evidence. Appropriateness is a measure of
the quality of audit evidence.
 Evidence is considered appropriate when it provides
information that is both relevant and reliable.
• The evaluation of audit evidence.
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The Concepts of Audit
Evidence
LO# 3
What is the Concepts Audit Evidence ?
• The nature of audit evidence.
• The sufficiency and appropriateness of audit
evidence.
• The evaluation of audit evidence.
The auditor must be capable of assessing when
a sufficient amount of appropriate evidence has
been obtained in order to determine the fairness
of management’s assertions.
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Audit Procedures for Obtaining
Audit Evidence
LO# 4
Audit procedures are specific acts performed by
the auditor to gather evidence about whether
specific assertions are being met.
As discussed in Chapter 3, there are three
categories of audit procedures. Each serves the
following purposes:
1- Risk assessment procedures
2- Test of controls
3- Substantive procedures
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LO# 4
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.
Audit Program for
Accounts Receivable
Management Assertions
Example Audit Procedures
Existence
Confirm accounts receivable.
Rights and obligations
Inquire of management whether receivables have
been sold.
Completeness
Agree total of accounts receivable subsidiary
ledger to accounts receivable control account.
Valuation or allocation
Test the adequacy of the allowance for doubtful
accounts.
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Audit Procedures for
Obtaining Audit Evidence
LO# 4
The following types of evidence may be gathered during
the application of risk assessment procedures, tests of
controls, or substantive procedures, depending on the
context in which the auditor applies them.
• Inspection of records or documents.
• Inspection of tangible assets.
• Observation.
• Inquiry.
• Confirmation.
• Recalculation.
• Reperformance.
• Analytical procedures.
• Scanning.
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Reliability of Types
of Evidence
LO# 5
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LO# 6
Audit Testing
Hierarchy
The thought process auditors use in
choosing audit tests and in what
order.
Figure 5-3 Audit Testing Hierarchy: An
Evidence Decision Process for Testing
Significant Balances or Classes of
Transactions
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LO# 7
Audit Documentation
The auditor’s record of the
audit procedures performed, evidence
obtained, and conclusions reached.
Audit documentation (working papers) has three functions:
1 To provide support for the audit report.
2 To aid in the planning, performance, and supervision of
the audit.
3 To provide basis for quality reviews; to provide evidence
supporting the auditor’s significant conclusions.
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Content of Audit
Documentation
LO# 8
Audit documentation should:
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.
Demonstrate that the underlying accounting
records agreed or reconciled with the financial
statements.
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Content of Audit
Documentation
LO# 8
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.
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LO# 9
Purposes of Analytical Procedures
Risk
Assessment
Procedures
Substantive
Analytical
Procedures
Final
Analytical
Procedures
Used to assist the auditor to better
understand the business and to plan the
nature, timing, and extent of audit
procedures.
Used to obtain evidential matter about
particular assertions related to account
balances or classes of transactions.
Used as an overall review of the financial
information in the final review stage of the
audit.
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LO# 9
Substantive Analytical Procedures
Decision Process
Figure 5-7 Overview of the Auditor’s Decision Process for Substantive
Analytical Procedures
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LO# 10
Financial Ratios
 Short-term
Liquidity Ratios
 Activity Ratios
 Profitability Ratios
 Coverage Ratios
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End of Chapter 5
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