UL Refresher Course in Accountancy

AUD 1.4 AUDIT OBJECTIVES, PROCEDURES, EVIDENCE & DOCUMENTATION

UNIVERSITY OF LUZON
COLLEGE OF ACCOUNTANCY

1.4 Audit Objectives, Procedures, Evidences and Documentation

1.4.1 Nature and significance
1.4.2 Evidential matters
1.4.3 Audit procedures/techniques, including audit selection
1.4.4 Audit working papers

AUDIT EVIDENCE & DOCUMENTATION

Relationship of Audit Evidence to the Audit Report

Assertions
 Representations, explicit or otherwise, with respect to the recognition, measurement, presentation and
disclosure of information in the financial statements which are inherent in management representing that the
financial statements are prepared in accordance with the applicable financial reporting framework. Assertions
are used by the auditor to consider the different types of potential misstatements that may occur when
identifying, assessing and responding to the risks of material misstatement.

Categories and Types of Assertions

Account Balances Transactions & Events Presentation &
Disclosures
Existence Occurrence Occurrence
Rights and obligations Rights and obligations
Completeness Completeness Completeness
Valuation and allocation Accuracy Accuracy and valuation
Cutoff
Classification Classification and
understandability

(a) Assertions about classes of transactions and events for the period under audit:
i. Occurrence—transactions and events that have been recorded have occurred and pertain to the entity.
ii. Completeness—all transactions and events that should have been recorded have been recorded.

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AUD 1.4 AUDIT OBJECTIVES, PROCEDURES, EVIDENCE & DOCUMENTATION
iii. Accuracy—amounts and other data relating to recorded transactions and events have been recorded
appropriately.
iv. Cutoff—transactions and events have been recorded in the correct accounting period.
v. Classification—transactions and events have been recorded in the proper accounts.
(b) Assertions about account balances at the period end:
i. Existence—assets, liabilities, and equity interests exist.
ii. Rights and obligations—the entity holds or controls the rights to assets, and liabilities are the obligations
of the entity.
iii. Completeness—all assets, liabilities and equity interests that should have been recorded have been
recorded.
iv. Valuation and allocation—assets, liabilities, and equity interests are included in the financial statements
at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
(c) Assertions about presentation and disclosure:
i. Occurrence and rights and obligations—disclosed events, transactions, and other matters have occurred
and pertain to the entity.
ii. Completeness—all disclosures that should have been included in the financial statements have been
included.
iii. Classification and understandability—financial information is appropriately presented and described, and
disclosures are clearly expressed.
iv. Accuracy and valuation—financial and other information are disclosed fairly and at appropriate amounts.

Audit Procedures

Specific acts
performed by the auditor
to gather evidence to determine
if specific assertions are
being met.

Risk assessment
Test of controls Substantive procedures
procedures

A set of audit procedures prepared to test assertions for a component of the financial statements is referred to as an audit
program.

Sample Audit Program for auditing Accounts Receivables

AUDIT PROGRAM FOR ACCOUNTS RECEIVABLES

Management Assertions Audit Procedures
Existence Confirm receivables.
Rights and Obligations Ask if receivables have been sold.
Completeness Agree controlling account with total of subsidiary accounts.
Examine sales invoices immediately before and after year – end for proper cut – off.
Valuation or Allocation Trace accounts from aged trial balance to subsidiary accounts.
Test the adequacy of allowance account.
Presentation and Disclosure Look for amounts due from related parties.
Evaluate receivables for footnote disclosure.

Specific Types of Audit Procedures for obtaining audit evidence.

✓ Inspection of Records or Documents – consists of examining records or documents, whether internal or external,
in paper form, electronic form, or other media.
✓ Inspection of Tangible Assets – Inspection of tangible assets consists of physical examination of the assets.
✓ Observation – consists of looking at a process or procedure being performed by others.
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AUD 1.4 AUDIT OBJECTIVES, PROCEDURES, EVIDENCE & DOCUMENTATION
✓ Inquiry – consists of seeking information of knowledgeable persons, both financial and non-financial, throughout
the entity or outside the entity.
✓ Confirmation – a specific type of inquiry, is the process of obtaining a representation of information or of an existing
condition directly from a third party.
✓ Recalculation – consists of checking the mathematical accuracy of documents or records.
✓ Reperformance – is the auditor’s independent execution of procedures or controls that were originally performed
as part of the entity’s internal control.
✓ Analytical Procedures – consist of evaluations of financial information made by a study of plausible relationships
among both financial and non-financial data.

Audit Evidence
 All the information used by the auditor in arriving at the conclusions on which the audit opinion is based, and
includes the information contained in the accounting records underlying the financial statements and other
information.

The Concepts of Audit Evidence

 Nature of audit evidence
 Sufficiency and appropriateness of audit evidence
 Evaluation of audit evidence

Nature of audit evidence

✓ Records of initial entries and supporting records.
✓ General and subsidiary ledgers
✓ Adjustments to financial statements
✓ Invoices
✓ Worksheets
✓ Contracts
✓ Spreadsheets supporting cost allocations
✓ Other computations, reconciliations, and disclosures

Sufficiency and Appropriateness of Audit Evidence

Sufficiency is the measure of the quantity of audit evidence.

Greater risk of misstatement requires Higher quality audit evidence results

a higher quantity of audit evidence. in a lower quantity of audit evidence.

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AUD 1.4 AUDIT OBJECTIVES, PROCEDURES, EVIDENCE & DOCUMENTATION

Relevance
Appropriateness is a measure
of the quality of audit evidence.
Reliability

Independent source of the evidence

Effectiveness of internal control

Auditor’s direct personal knowledge

Documentary evidence

Original documents

• The reliability of audit evidence is increased when it is obtained from independent sources outside the entity.
• The reliability of audit evidence that is generated internally is increased when the related controls, including
those over its preparation and maintenance, imposed by the entity are effective.
• Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is more
reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the application of a
control).
• Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than evidence
obtained orally (for example, a contemporaneously written record of a meeting is more reliable than a
subsequent oral representation of the matters discussed).
• Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or
facsimiles, or documents that have been filmed, digitized or otherwise transformed into electronic form, the
reliability of which may depend on the controls over their preparation and maintenance.

Selecting Items for Testing to Obtain Audit Evidence

The means available to the auditor for selecting items for testing are:

(a) Selecting all items (100% examination);

✓ 100% examination is unlikely in the case of tests of controls; however, it is more common for tests of
details. 100% examination may be appropriate when, for example:
 The population constitutes a small number of large value items;
 There is a significant risk and other means do not provide sufficient appropriate audit evidence; or
 The repetitive nature of a calculation or other process performed automatically by an information
system makes a 100% examination cost effective.

(b) Selecting specific items; and

✓ The judgmental selection of specific items is subject to non-sampling risk. Specific items selected
may include:
 High value or key items. The auditor may decide to select specific items within a population
because they are of high value, or exhibit some other characteristic, for example, items that are
suspicious, unusual, particularly risk-prone or that have a history of error.

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AUD 1.4 AUDIT OBJECTIVES, PROCEDURES, EVIDENCE & DOCUMENTATION
 All items over a certain amount. The auditor may decide to examine items whose recorded values
exceed a certain amount so as to verify a large proportion of the total amount of a class of
transactions or account balance.
 Items to obtain information. The auditor may examine items to obtain information about matters
such as the nature of the entity, or the nature of transactions.

(c) Audit sampling.

✓ Audit sampling is designed to enable conclusions to be drawn about an entire population on the basis of
testing a sample drawn from it. (PSA 530)

Evaluation of Audit Evidence:

Proper evaluation of evidence

requires an understanding of the

Types of evidence available.

Relative reliability of available evidence.

Audit Documentation
 The auditor’s principal record of the audit procedures performed, evidence obtained, and conclusions reached.
 The objective of the auditor is to prepare documentation that provides:
(a) A sufficient and appropriate record of the basis for the auditor’s report; and
(b) Evidence that the audit was planned and performed in accordance with PSAs and applicable legal and
regulatory requirements.

• Purposes
a. Assisting the audit team to plan and perform the audit;
b. Assisting members of the audit team responsible for supervision to direct and supervise the audit work, and to
discharge their review responsibilities in accordance with PSA 220, “Quality Control for Audits of Historical
Financial Information;”
c. Enabling the audit team to be accountable for its work;
d. Retaining a record of matters of continuing significance to future audits;
e. Enabling an experienced auditor to conduct quality control reviews and inspections;
f. Enabling an experienced auditor to conduct external inspections in accordance with applicable legal, regulatory
or other requirements.

• Nature of Audit Documentation

a. may be recorded on paper or on electronic or other media.
b. Examples:
1. audit programs
2. analyses sheet
3. issues memoranda
4. summaries of significant matters
5. letters of confirmation and representation
6. checklists
7. correspondence (including e-mail) concerning significant matters
8. abstracts or copies of the entity’s records, for example, significant and specific contracts and agreements.
c. Audit documentation is not a substitute for the entity’s accounting records.
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AUD 1.4 AUDIT OBJECTIVES, PROCEDURES, EVIDENCE & DOCUMENTATION
d. The audit documentation for a specific audit engagement is assembled in an audit file.

• Form, Content and Extent of Audit Documentation

Factors affecting form, content, and extent:
a. The nature of the audit procedures to be performed;
b. The identified risks of material misstatement;
c. The extent of judgment required in performing the work and evaluating the results;
d. The significance of the audit evidence obtained;
e. The nature and extent of exceptions identified;
f. The need to document a conclusion or the basis for a conclusion not readily determinable from the
documentation of the work performed or audit evidence obtained; and
g. The audit methodology and tools used.

• Requirements
 The auditor shall prepare the Audit Documentation on a timely basis.
 The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no
previous connection with the audit, to understand:
✓ The nature, timing and extent of the audit procedures performed to comply with the ISAs and applicable
legal and regulatory requirements;
✓ The results of the audit procedures performed, and the audit evidence obtained; and
✓ Significant matters arising during the audit, the conclusions reached thereon, and significant professional
judgments made in reaching those conclusions.
 In documenting the nature, timing and extent of audit procedures performed, the auditor shall record :
✓ The identifying characteristics of the specific items or matters tested;
✓ Who performed the audit work and the date such work was completed; and
✓ Who reviewed the audit work performed and the date and extent of such review.
 The auditor shall document discussions of significant matters with management, those charged with governance
and others on a timely basis.
✓ Discussion of significant matters.
✓ Nature of significant matters.
✓ When and with whom discussed.
 If the auditor has identified information that contradicts or is inconsistent with the auditor’s final conclusion
regarding a significant matter, the auditor should document how the auditor addressed the contradiction or
inconsistency in forming the final conclusion.
 Where, in exceptional circumstances, the auditor judges it necessary to depart from a basic principle or an
essential procedure that is relevant in the circumstances of the audit, the auditor should document how the
alternative audit procedures performed achieve the objective of the audit, and, unless otherwise clear, the
reasons for the departure.
 The auditor shall assemble the audit documentation in an audit file and complete the administrative process of
assembling the final audit file on a timely basis after the date of the auditor’s report.
 After the assembly of the final audit file has been completed, the auditor shall not delete or discard audit
documentation before the end of its retention period.
 When the auditor finds it necessary to modify existing audit documentation or add new audit documentation after
the assembly of the final audit file has been completed, the auditor should, regardless of the nature of the
modifications or additions, document:
✓ When and by whom they were made, and (where applicable) reviewed;
✓ The specific reasons for making them; and
✓ Their effect, if any, on the auditor’s conclusions.
 When exceptional circumstances arise after the date of the auditor’s report that require the auditor to perform
new or additional audit procedures or that lead the auditor to reach new conclusions, the auditor shall document:
✓ The circumstances encountered;
✓ The new or additional audit procedures performed, audit evidence obtained, and conclusions reached; and
✓ When and by whom the resulting changes to audit documentation were made, and (where applicable)
reviewed.

Audit documentation should:

 Demonstrate how the audit complied with auditing and related professional practice standards.
 Support the basis for audit conclusions concerning every material financial statement assertion.

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AUD 1.4 AUDIT OBJECTIVES, PROCEDURES, EVIDENCE & DOCUMENTATION
 Show that the underlying accounting records agreed with the financial statements.
 Include a written audit program detailing auditing procedures necessary to accomplish audit objectives.
 Enable a knowledgeable and experienced reviewer to:
1. The nature, timing and extent of the audit procedures performed to comply with the PSAs and applicable
legal and regulatory requirements;
2. The results of the audit procedures performed, and the audit evidence obtained; and
3. Significant matters arising during the audit, the conclusions reached thereon, and significant professional
judgments made in reaching those conclusions.
 Most public accounting firms maintain audit documentation in two types of files.
1. Permanent files
Corporate charter Important contracts
Chart of accounts Internal control documentation
Organization chart Terms of stock and bond issues
Accounting manual Prior years’ analytical procedures
2. Current Files
Audit plan, audit report Adjusting journal entries
Audit programs Reclassification journal entries
Working trial balance Current financial statements
Minutes of meetings Working papers supporting accounts
 All audit documentation is the property of the auditor, including documents prepared by the client at the
auditor’s request.
 An appropriate time limit (if law, regulation or professional standards have no prescribed time limit) within which
to complete the assembly of the final audit file is ordinarily not more than 60 days after the date of the auditor’s
report.
 Retention of audit documentation (if law, regulation or professional standards have no retention period
prescribed) is ordinarily no shorter than five (5) years from the date of the auditor’s report, or, if later, the date of
the group auditor’s report.
 The Sarbanes-Oxley Act of 2002 requires audit documentation to be retained for seven years from the
completion date of the engagement.

MULTIPLE CHOICE (SET 1)

1. All the information used by the auditor in arriving at the conclusion on which the audit opinion is based. It includes the
information contained in the accounting records underlying the financial statements (underlying accounting data) and
other information (corroborating information).
a. Audit Evidence c. Audit risk
b. Audit opinion d. Audit program

2. All of the following are underlying accounting data, EXCEPT:

a. Records of initial entries and supporting documents
b. General and subsidiary ledgers
c. Worksheets and spreadsheets for cost allocations
d. Minutes of meetings

3. The measure of the quantity of audit evidence is:

a. Sufficiency c. Appropriateness
b. Competence d. Relevance

4. The measure of the quality of audit evidence is:

a. Sufficiency c. Appropriateness
b. Competence d. Relevance

5. An evidence to be considered appropriate must be:

a. relevant c. reliable
b. relevant and reliable d. relevant or reliable

6. The following statements are correct, EXCEPT:

a. The greater the risk of misstatement, the more audit evidence is likely to be required.
b. The higher the quality of audit evidence, the less may be required.
c. The sufficiency and appropriateness of audit evidence are interrelated.
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d. Obtaining more audit evidence will compensate for its poor quality.

7. Which of the following statements regarding reliability of evidence is NOT correct?

a. Audit evidence is more reliable when it is obtained from independent sources outside the entity.
b. Audit evidence that is generated internally is more reliable when the related controls are effective.
c. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly.
d. The condition of internal controls of the entity does not contribute to the reliability of audit evidence.

8. Which of the following is the LEAST reliable evidence?

a. Confirmation from third parties c. Documentary form evidence
b. Observation of the inventory count d. Photocopies and facsimiles

9. 1st : The auditor considers the relationship between the cost of obtaining audit evidence and the
usefulness of the information obtained.
2nd: The difficulty and the expense involved are valid basis for omitting an audit procedure for which there is no
alternative.
3rd: The auditor relies on audit evidence that is persuasive rather than conclusive.
4th: The auditor uses professional judgment and exercise professional skepticism to determine the
sufficiency and appropriateness of evidence.

1st 2nd 3rd 4th

a. True True False False
b. True False True True
c. False False False False
d. False True True True

10. Assertions used by the auditor fall into the following categories, EXCEPT:
a. Assertions about the faithful representations
b. Assertions about classes of transactions and events
c. Assertions about account balances at period end.
d. Assertions about presentation and disclosure.

11. Acts to be performed in order to obtain audit evidence.

a. audit standards c. audit program
b. audit procedure d. audit strategy

12. Audit procedures performed to obtain an understanding of the entity and its environment, including its internal control.
a. risk assessment procedures c. substantive procedures
b. tests of control d. analytical procedures

13. Audit procedures to test the operating effectiveness of controls in preventing or detecting and correcting material
misstatements at the assertion level.
a. risk assessment procedures c. substantive procedures
b. tests of control d. analytical procedures

14. Audit procedures to detect material misstatements at the assertion level.

a. risk assessment procedures c. substantive procedures
b. tests of control d. analytical procedures

15. Which of the following procedures is not always performed by the auditor?
a. risk assessment procedures c. substantive procedures
b. tests of control d. analytical procedures

16. It includes test of details of classes of transactions, account balances, and disclosures and analytical procedures.
a. risk assessment procedures c. substantive procedures
b. tests of control d. analytical procedures

17. Test of controls are necessary to be performed:

a. When auditor’s risk assessment includes an expectation of the operating effectiveness of controls.
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b. When substantive procedures alone do not provide sufficient appropriate audit evidence.
c. Both a and b
d. No circumstance will require tests of controls.

18. Examining records or documents, whether internal or external, in paper form, electronic form, or other media.
a. Inspection of records or documents c. Observation
b. Inspection of tangible assets d. Inquiry

19. Physical examination of the assets.

a. Inspection of records or documents c. Observation
b. Inspection of tangible assets d. Inquiry

20. Consists of looking at a process or procedures being performed by others.

a. Inspection of records or documents c. Observation
b. Inspection of tangible assets d. Inquiry

21. Consists of seeking information from knowledgeable persons, both financial and nonfinancial, within the entity or
outside the entity.
a. Inspection of records or documents c. Observation
b. Inspection of tangible assets d. Inquiry

22. The process of obtaining a representation of information or of an existing condition directly from third party. It is a
specific type of inquiry.
a. Reperformance c. Reconciliation
b. Confirmation d. Recomputation

23. Consists of checking the mathematical accuracy of documents or records.

a. Reperformance c. Reconciliation
b. Recalculation d. Recomputation

24. Auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal
control.
a. Reperformance c. Reconciliation
b. Confirmation d. Recomputation

25. Evaluation of financial information made by a study plausible relationships among both financial and non-financial
data.
a. Reperformance c. Reconciliation
b. Confirmation d. Analytical procedures

MULTIPLE CHOICE (SET 2)

1. Evidential matter consists of both underlying accounting data and corroborating information, which support the
accounting data. Which of the following is considered corroborating information?
a. Data files.
b. Records of electronic fund transfers.
c. Subsidiary ledgers.
d. The general ledger.

2. As the acceptable level of detection risk decreases, an auditor may change the
a. Timing of substantive tests by performing them at an interim date rather than at year-end.
b. Nature of substantive tests from a less effective to a more effective procedure.
c. Timing of tests of controls by performing them at several dates rather than at one time.
d. Assessed level of inherent risk to a higher amount.

3. Which of the following is not an audit procedure?

a. Comparisons. c. Completeness.
b. Documentation. d. Inquiries.

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4. Which of the following is the least persuasive type of audit evidence?
a. Documents mailed by outsiders to the auditor.
b. Correspondence between the auditor and the client’s attorney.
c. Copies of sales invoices inspected by the auditor.
d. Computations made by the auditor.

5. The purpose of analytical procedures performed as substantive tests is to

a. Review the reasonableness of the account balances.
b. Direct attention to likely misstatements.
c. Support or refute the fairness of the account balances.
d. Adhere to PCAOB requirements.

6. Which of the following best describes the primary purpose of audit procedures?
a. To detect fraud.
b. To comply with generally accepted accounting principles.
c. To gather corroborative evidence to support the audit opinion.
d. To verify the accuracy of account balances.

7. Analytical procedures are

a. Substantive tests designed to evaluate a system of internal control.
b. Tests of controls designed to evaluate the validity of management's representation letter.
c. Substantive tests designed to evaluate the reasonableness of financial information.
d. Tests of controls designed to evaluate the reasonableness of financial information.

8. Which of the following is designed to detect possible material dollar misstatements in the financial statements?
a. Tests of controls. c. Computer controls.
b. Analytical procedures. d. Post audit working paper review.

9. In testing for lower-of-cost-or-market, the auditor is gathering evidence to support which of the following assertions?
a. Pricing. c. Valuation.
b. Accuracy. d. Rights and obligations.

10. When performing trend analysis,

a. Profitability ratios are required.
b. Expected values are calculated.
c. Comparison to budget may be performed.
d. Solvency ratios are computed.

11. Confirming proper title to equipment supports which of the following assertions?
a. Existence or occurrence. c. Presentation and disclosure.
b. Insurance coverage. d. Rights and obligations.

12. Which of the following ultimately determines the auditing procedures necessary in an audit engagement?
a. Auditor judgment. c. Relative risk.
b. Materiality. d. Reasonable assurance.

13. The completeness assertion addresses whether

a. All of the assets on the balance sheet exist.
b. All recorded transactions occurred.
c. The entity has property rights to all assets on the balance sheet.
d. All of the transactions, which occurred during the period, were recorded.

14. Audit documentation (working papers) is least likely to include documentation showing how the
a. Client's schedules were prepared.
b. Engagement had been planned.
c. Client's system of internal control was reviewed and evaluated.
d. Unusual auditing matters were resolved.

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15. The auditor notices that a client’s cash-basis financial statements are prepared with accrual basis financial titles.
This situation bears on which financial statement assertion?
a. Valuation or allocation.
b. Presentation and disclosure.
c. Rights and obligations.
d. Completeness.

16. When vouching,

a. The direction of the test is from the recorded item back to the underlying support.
b. A complete examination of the transactions in the account is performed.
c. Recomputations are performed.
d. The auditor selects a transaction and follows it forward to recording in the accounting records.

17. Substantive tests are audit procedures that

a. Are designed to discover significant subsequent events.
b. Include tests of transactions, direct tests of financial balances, and analytical procedures.
c. Are designed to discover control errors.
d. May be eliminated on some audits.

18. Which of the following is the least persuasive type of evidence?

a. Computations made by the auditor.
b. Time cards of factory workers.
c. Canceled checks.
d. Vendor's invoice.

19. The procedures in an audit program are primarily designed to

a. Detect fraud.
b. Gather evidence to support the audit opinion.
c. Test internal controls.
d. Protect the auditor in litigation.

20. Which of the following statements relating to the competence of evidential matter is always true?
a. Evidence gathered by auditors must be both valid and relevant to be considered competent.
b. Properly designed analytical procedures will detect material misstatements.
c. Evidential matter gathered by an auditor from outside a client is reliable.
d. Oral representations made by management are not valid.

21. Recalculations of the client’s computations would not include which of the following types of evidence?
a. cutoff. c. extension.
b. footing. d. cross-footing.

22. The primary assertion that is satisfied by physically observing the client's count of inventory is
a. rights. c. completeness.
b. valuation. d. Existence.

23. The process of vouching helps establish that all recorded transactions
a. have been recorded. c. are valid.
b. are complete. d. are presented properly.

24. The primary source for evidence to corroborate the existence of pending litigation is:
a. vendor confirmations c. management representation letters
b. disclosures in financial statements d. attorney confirmations

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