CHAPTER THREE

3. Audit Evidence and Its Documentation

3.1. Meaning, Source and Types of Audit Evidence

The term audit evidence refers to information obtained by the auditor in arriving at a
reasonable conclusion on which he bases his opinion on the financial statements.
Audit evidence is the information obtained by the auditor in the documentary form or
oral or in a visible manner from and / or within the business unit or outside. The
correctness, appropriateness, adequacy, and reliability of such audit evidence aid the
auditor to draw reasonable conclusion about the accounting practice and financial
information of the business audited.

Source and types of audit evidence

Source of Audit Evidence: - there are different sources of audit evidence from which
auditors can generate conclusion and prepare audit report. these includes’ accounting
system, documentary evidence, tangible asset management and staff, client’s customer
and third parties who have knowledge of dealing with the client.

a) Documentary Evidence: - these types of audit evidence are also known as primary
evidence. It comprises of evidence obtained from the entity’s own records and
documents and as such forms an internal source of audit evidence in regard to:
i. Accuracy of accounting records
ii. Authority of accounting records
iii. Accuracy of the balances from the ledger

b) Tangible Assets- tangible asset will provide evidence regarding the accuracy of
balance sheet entries, strength of internal control system, ownership, existence and
valuation of the assets.

c) Circumstantial evidence: - this refers to evidence adduced organization. Example

the position of internal control system, organizational structures, etc.

d) Hearsay evidence: - refers to evidence obtained from sources such as interviews,

conversations with mgt/ staff or from questionnaires. Such evidence is not concrete but
can provide links for further investigations / follow – ups
e) Management and employees:- mgt and employee can provide evidence about:
 The strength and weakens of the ICS policy
 The operational efficiency and mgt

Classification of Audit Evidence

Audit evidence may be classified on the following basis:

 Source of evidence: external and internal
 Mode of evidence: oral and documentary
 Nature of evidence visible and non visible
The auditor can gain increased assurance when audit evidence from different sources
and different nature is consistent. The evidence must be both valid and relevant. In
cases of inconsistency further procedures are to be adopted to solve the inconsistency

3..2. Attributes of Audit evidence

We have earlier mentioned the appropriateness of audit evidence (quality of audit

evidence). These attributes refer to certain factors which the auditor may want to
consider while collecting audit evidence. Some of this attributes are:

1. Relevance
Relevance refers to how closely the evidence at hand relates to the particular objective
that the auditor would like to fulfill. Evidence is relevant if it has a logical relationship
with, and importance to, the issue being addressed.
2. Reliability

Reliability refers to how confident the auditor is that the evidence at hand reflects the
facts of the manner being investigated. Reliability of audit evidence depends up on the
particular circumstances; the following presumptions are useful in judging the
reliability of evidence. However, the presumptions are not to be considered sufficient
in themselves to determine reliability. The amount and kind of evidence required to
support auditors conclusion should be based on the auditor’s professional judgment.
a. Evidence obtained from external source is more reliable than that obtained from
the entity. In assessing the reliability of evidence, auditors should consider such
factors as whether the evidence is accurate, authoritative, timely, and authentic.
b. Evidence obtained from the client record is more reliable where the accounting and
internal control system operates effectively. Evidence obtained when internal controls
are effective is more reliable than evidence obtained when controls are weak or
nonexistent. Auditors should be particularly careful incase where controls are weak or
nonexistent and should, therefore, plan alternative audit procedures to corroborate such
evidence.
c. Evidence obtained directly by auditors through physical examination, observation,
computation, and inspection is more persuasive than information obtained indirectly, or
second hand. ”show me not tell me”
d. Documentary evidence is more reliable than oral evidence.
e. The original evidence is more reliable than the photocopy.

3. Availability
This has refers to how readily the auditor can obtain the evidence that he requires

4. Timeliness
This reference to how quickly the desired evidence can be obtained. There is certain
evidence which the auditor may be aware of
5. Cost
The cost of obtaining particular evidence should be weighed against the benefits
derived from such evidence.
Sufficient and Appropriate Audit Evidence

Sufficiency and appropriateness are interrelated and apply to the evidence obtained
from both compliance and substantive procedures. Sufficiency is the measure of the
quantity of audit evidence obtained; the auditor finds it necessary to rely on evidence
that is persuasive rather than conclusive.
The auditor’s judgment as to what is sufficient and appropriate audit evidence is
influence by:
 The degree of risk of misstatement.
 The materiality of the item in relation to the financial information taken as a whole.
 The experience gained during previous audits.
 The results of auditing evidence
 The types of information available
Methods of Obtaining Audit Evidence
Audit evidence is obtained through one or more of the following techniques of audit
testing.
Inspection consists of reviewing or examining records and documents, physical
verification of tangible assets.
Documentary evidence may be classified into the following categories:
1. Documents originating from sources outside the entity but held in the custody
of the client e.g. purchase invoice, insurance policies etc. These documents
are generally reliable as audit evidences for the transactions represented by
them. But there are variations as to the degree of reliability depending upon
the possibility of forgery and alteration.
2. Documents prepared inside the entity under audit; but validated by
independent sources. E.g. checks.
3. Documents created and held by the entity (and used completely within the
entity) under audit. These are considered generally of lesser reliability; but if
subjected to strong internal control they may nevertheless be quite reliable.
Physical inspection of tangible assets provides tangible evidence with respect
to their existence but not necessarily as to their ownership or valuation
expressed in monetary terms.
Observation is looking at an operation or a process or a procedure being performed
by others with a view to determining the manner of its performance. E.g. the auditor
may observe the counting of inventories by client personnel. Observation provides
reliable evidence as to the manner of the performance at the time of observation, but
not at any other time.
Inquire and Confirmation consists of seeking relevant information from
knowledgeable persons inside or outside the entity. Enquiries range from formal
written enquiries addressed to persons outside the entity to informal oral enquiries
addressed to persons within the entity. Responses to enquiries may provide the auditor
with new or corroborative evidence.
Computation consists of checking the arithmetical accuracy of source documents
and accounting records or performing independent calculations. Independent
calculations made by the auditor often provide an important source of audit evidence.
Analytical review this consists of studying significant ratios, trends and
other statistics and investigating unusual or unexpected fluctuations as well as items
and expected fluctuations which fail to occur. Various ratio and trend analysis are
recognized as important audit tools.

3.3. Audit Assertions (financial statement assertion)

Most of the independent auditors work in forming his opinion on financial statements
consists of obtaining and evaluating matters concerning the assertions in such
statement. Assertions are implied or expressed representations about the accounts in the
financial statements and are directly related to generally accept accounting principles.
This assertion includes;
Existence – the assets or liabilities actually exist
Occurrence – the transactions actually took place
Accuracy – the amounts are correct
Cut-off – transactions are accounted for in the correct period
Classification – transactions are recorded in the proper accounts
Rights and obligations – the client owns or has other rights over the
assets and has a genuine obligation to pay liabilities
Valuation – assets or liabilities are included at appropriate amounts
Allocation – account balances are included in appropriate accounts
Classification and understandability – items in the financial
statements are disclosed under appropriate headings and in such a
way that they can be readily understood by readers.
3.4. Documentation of Audit Working Paper

3.4.1. Meaning and Objectives of Audit Working Paper

Meaning of Audit Working Paper

Audit working papers refers to certain written material prepared/ gathered by the
auditor, relating primarily to set of accounts being audit and same basic information’s
affecting the company / the audit. The working papers to be prepared and maintained
by the auditor relates to the circumstance of audit. The term ”working papers”
encompasses the file of analysis, summarizes, comments, and correspondence built up
by him during the course of field work of an audit engagement.

Generally, audit working papers include audit program, queries, and explanations,
given for queries, schedules of important items like depreciations, inventories,
confirmation from third parties, certificate issued by the management, banks, etc.
Working paper provides basic evidences of audit conducted in accordance with
standard of audit practices. They help the auditor in writing the report. The quality of
audit work performed by the auditor can be judged by the character and contents of
working papers prepared and maintained by the auditor.

Audit working papers should be clear, complete and in detail. Even an auditor with no
previous knowledge about the clients business must be capable of ascertaining the facts
needed for his opinion. It may not be practicable for any auditor to check every
document, but he cannot leave any documentary matter incorporated in the audit report.

Working papers are to be retained in the safe custody of an auditor and should there be
no possibility for the client’s staff or third parties to have access to them. The
documents are to be preserved for sufficient length of time to satisfy the need of the
auditor and professional requirements and record retention. The auditor has to maintain
the confidentiality or secrecy of the affairs of the clients. Thus working papers being
matters documented by the auditor are his property.

Objectives of Audit working paper

The objectives of working paper are:
 It shows in detail work done by audit clerk to support the auditors in preparing
report.
 It makes the auditor to show the client the weakness of internal control system in
working.
 Preparation of working paper is a means to give training to the audit clerk to
summarize the work done by them.
 Used as permanent record and in case of any suit against him for negligence he can
defend himself on the basis of this working paper.
 Help the auditor for the succeeding year.
 Guide for future audit work done
 Working papers represent a means for organizing, Cataloging and cross –
referencing documented evidence.

3.4.1 Form and contents of Audit working paper

The auditor’s judgment about the quantity, form and content of working papers should
be guided by the following factors:
 The nature and complexity of the business.
 Accounting practice and procedures used.
 The business internal control system.
 The form in which audit report prepared.
Content: - Working papers normally includes;
 Audit program
 Audit note book: it may not be possible for an auditor to bear in mind all the
difficulties that may arise during the course of an audit or the points which s/he wants
to consult with the concerned people. As a result s/he maintains audit note book.
 Copies of the document which the auditor has taken
 Schedules of debtor and creditor, fixed assets, investments
 The certificate of the stock in trade and its valuation
 Copies of the correspondence concerning the audit work
 Contract latter from the clients
 Particulars of depreciation and investment
 Copies of the previous audit report
 Copies of the resolution passed in the meetings of stockholders and directors
 Certificate from the management that all the outstanding assets and liabilities have
come under the accounts
 Details of the question made during the course of audit and their explanation given
 Other necessary papers required
3.5. Audit File
Record of audit is maintained in files known as audit files. Audit files vary depending
on the circumstances of the audit and personnel preference of the auditor. However,
there are two broads of files
1. Permanent Audit Files
Permanent audit files contain information of continuing importance
for succeeding audits and typically contain the following papers and
documents:
 Extracts or copies of such company documents of continuing
importance as articles and memorandums of association, by
laws, and contracts.
  Analyses, from previous years, of accounts that have continuing
importance to the auditor.
o This includes accounts such as long term debt,
stockholders equity accounts, goodwill, and fixed assets.
 A list of the client’s advisors such as bankers, stock brokers,
lawyers, insurance brokers etc
 Copies of letters where the client gives permanent instructions
to the advisors stated above to supply the auditors with any
information they request
 Copies of documents and minutes of continuing importance and
relevance to the auditor like letter of engagement
 Information related to the evaluation of internal control
 The results of analytical review from previous years’ audits
o Help the auditor decide whether there are unusual
changes in the current year’s account balances that
should be further investigated
Analytical tests and internal control tests are included in the current
period working papers by some audit firms.
2. Current Files
The current files include all working papers applicable to the year
under audit. There is one set of permanent files for the client and a set
of current files for each year’s audit. Such files usually contain:
 Copies of the statements being audited or a working trial
balance which is a listing of general ledger accounts and their
year end balances
 An overall audit plan including an audit program containing:
o A list of work to be carried out by audit assistants
o A list with precise detail of the tests actually carried out
o The results of the tests and the conclusions drawn there
from
o Cross reference from the internal control record and
internal control letters
 A schedule for each item in the balance sheet, each schedule
containing:
o The item at the beginning of the year, changes during the
year, and the balance at the end of the year; and
o Details as to how the existence, ownership, value and
appropriate disclosure have been verified