PPAK UGM 2009

AUDIT EVIDENCE,
AUDIT PROCEDURE
& DOCUMENTATION
AUDIT EVIDENCE : INTRODUCTION
Auditors require sufficient, appropriate audit evidence
in order to form their opinion about the financial
statements
The circumstances of the audit determine which
evidence is sufficient and appropriate
Audit evidence can be compared to the evidence
required in a court of law, although the auditor
requires a different standard of evidence to the
prosecution in a criminal case
FINANCIAL REPORT ASSERTIONS
Existence: assets & liabilities exist
Rights and Obligations
Valuation: assets & liabilities are recorded at
appropriate carrying value
Occurence: transactions & other events occured
during relevant period
FINANCIAL REPORT ASSERTIONS
Completeness: no unrecorded assets, liabilities,
transactions or other events
Measurement: transaction recorded at the proper
amount in the proper period
Disclosure: components properly disclosed, classified
& described
SUFFICIENT APPROPRIATE EVIDENCE (1)
Obtain sufficient apropriate evidence to be able to
draw reasonable conclusions on which to base the
audit opinion
Through judgment the auditor must determine what is
sufficient and appropriate
Sufficienncy is the measure of the quantity of evidence
obtained
Appropriateness relates to the relevance and reliability
of audit evidence
Generally the auditor must rely on evidence which is
persuasive rather than conclusive
SUFFICIENT APPROPRIATE EVIDENCE (2)
It depends on
Risk of mistatement (affected by the nature of the item,
adequacy of internal control, type of business, situations
which may exert unusual influence on management and
financial position
The materiality of the item
Previous audit experience
Results of auditing procedures, and
The type of information available
SUFFICIENT APPROPRIATE EVIDENCE (3)
Corroborating information includes:
Analytical evidence
Confirmations
Documentary evidence
Written representations
SUFFICIENT APPROPRIATE EVIDENCE (4)
Mathematical evidence
Oral evidence
Physical evidence
Electronic evidence
AUDIT PROCEDURES
Compliance procedures test to obtain reasonable
assurance that the internal controls which the auditor
will rely on are in place (procedures to obtain an
understanding and test of control)
Substantive procedures tests to obtain evidence as to
completeness, accuracy and validity of accounting
data. Include tests of detail transactions and balances
AUDITING PROCEDURES
Inspecting
Tracing
Vouching
Confirming
Inquiring
Counting
observing
METHODS OF OBTAINING AUDIT EVIDENCE
Procedure Type of Evidence Assertion
Inspection Documentary Existence & Valuation
Observation Physical Existence, completeness
& valuation
Inquiry & Confirmation Oral or Written
representation
Existence & valuation
Computation Mathematical Valuation
Analytical Review Analytical Existence, Completeness
& Valuation
Multiple Choice Question (I)

In considering the relationship between materiality and
audit evidence, the auditor would conclude that:
A. The materiality level has no bearing on the amount
of evidence required
B. For an account balance that is less than the tolerable
error, there is no need for evidence
C. The lower the materiality level, the greater the
amount of evidence required
D. The higher the materiality level, the greater the
amount of evidence required

Multiple Choice Question (II)

Audit evidence supporting the financial statements
consists of the underlying accounting data and all the
corroborating information available to auditor. Which of
the following is an example of corroborating
information:
A. General and Subsidiary Ledgers
B. Minutes of meeting
C. Accounting manuals
D. Worksheets supporting cost allocation

Multiple Choice Question (III)

When the auditor undertakes physical observation of
inventory in a retail jewellery store as apart of the audit
procedure for obtaining corroborating evidence, the
strongest criticism of the reliability of audit evidence is
that:
A. The client may conceal items from the auditor
B. The auditor may not be qualified to evaluate the items being
observed
C. The cost of conducting physical observations is unjustified in
relation to the reliability of the audit evidence obtained
D. Physical observation must occur at a specific time of the year

Example 1 Substantive Procedures,
Accounting Estimates
Your client, Super Auto Accessories Ltd (SAA),
manufactures a car audio systems, with a year end of
30 June 2009. In December 2008, MV changed its
manufacturing process to make its product more
reliable. Due to this increased reliability, the company
decided to increase warranty on its products from 3
years to 5 years in relation to all sales made from 1
January 2009
Example 1 Substantive Procedures,
Accounting Estimates cont
From managements review of warranty claims relating
to the new products. It was noted that claims were
down by about 20% compared with the old product.
Management made an estimate of the provision for
warranty of $ 4,000,000 for 30 June 2009, up from $
3,500,000 for the previous year.
Example 1 Substantive Procedures,
Accounting Estimates-cont
Required
a. What are the main audit assertions you should
consider for this part of the audit for SAA? Describe
the types of substantive procedures you would perform
to cover these assertions.
b. Discuss any special risks in auditing provisions for
warranty (and in auditing SAAs provision for warranty
in particular)!
Example 2 Substantive Procedures,
Accounts Payables
You are the audit senior for the audit of Grand JubileeLtd and have been given
the audit file to review. The balance date is 31 December 2009 and the
materiality for the client has been set at $ 200,000. You obtained the
information listed below from your review of the audit file.
1. The balance noted for accounts payable in the GL at 31 December 2009
is $ 158,000 which compares with a balance as at 31 December 2008 of $
342,000
2. The audit assistant noted in the file: because the a/p balance is
immaterial in the current year, only limited works is necessary.
3. The only work performed by the audit assistant was to select the 3
largest payables from the clients detailed purchases ledger (which had
been compared with the general ledger) and compare the balances with
photocopies of suppliers statement


Example 2 Substantive Procedures,
Accounts Payables-cont
Required
a. Outline any queries you would raise with the audit
assistant.
b. Describe the additional audit procedures you
believe should be performed to ensure that the
accounts payable balance is fairly stated

SUMMARY
The auditor needs sufficient and appropriate audit
evidence in order to form an opinion on the financial
statements
Sufficiency relates to amount and appropriateness
relates to reliability
Compliance testing allows evaluation of internal
control, the results of which influence the substantive
testing to be performed
Different forms of evidence help the auditor to form
opinions on different assertions in the financial
statements.