Auditing

A Practical Approach
Third Canadian Edition
Moroney, Campbell, Hamilton, Warren

Chapter 5

AUDIT EVIDENCE
 LEARNING OBJECTIVES (1 of 2)

1. Explain the audit assertions

2. Identify and describe different types of audit
evidence and define sufficient appropriate
audit evidence
3. Determine the persuasiveness of audit
evidence
4. Explain the issues to consider when using the
work of an expert

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 LEARNING OBJECTIVES (2 of 2)

5. Explain the issues to consider when using the

work of another auditor
6. Describe the evidence-gathering procedures
most often used by auditors
7. Explain how auditors arrive at a conclusion
based upon the evidence gathered
8. Describe how auditors document the details of
evidence gathered in working papers

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 Audit Assertions (1 of 14)
• Those charged with governance of an entity are
responsible for ensuring that the financial
statements provide a fair presentation of the
entity and its operations
• Management make assertions about each
account and the related disclosures
• Assertions are statements regarding the
recognition, measurement, presentation, and
disclosure of items included in the financial
statements
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 Audit Assertions (2 of 14)

• Auditors to use assertions for transactions,

account balances, and related disclosures
when assessing the risk of material
misstatement and designing audit procedures
• Transaction, events and related disclosure
assertions focus on the transactions that took
place during the period as opposed to the
account balances

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Audit Assertions (3 of 14)

Assertions about classes of transactions

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 Audit Assertions (4 of 14)

Transaction assertions
• Occurrence
• Auditor gathers evidence that the transaction
and disclosures recorded by the client actually
took place and relate to the entity
• Most important where there is risk of
overstatement (e.g., revenue)

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 Audit Assertions (5 of 14)

Transaction assertions (continued)

• Completeness
• Auditor gathers evidence that all transactions
and disclosures have been recorded by the
client
• Most important where there is risk of
understatement (e.g., expenses)

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 Audit Assertions (6 of 14)

Transaction assertions (continued)

• Accuracy
• Auditor gathers evidence that transactions and
disclosures are recorded by the client at the
appropriate amounts
• Most important where there is higher risk of
inaccuracy (e.g., complex foreign exchange
transactions)

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 Audit Assertions (7 of 14)

Transaction assertions (continued)

• Cut-off
• Auditor gathers evidence that the transactions
have been recorded by the client in the correct
period
• Most important for transactions near year end
• Classification
• Auditor gathers evidence that transaction is in
correct account

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Audit Assertions (8 of 14)

Assertions about account balances at year end

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 Audit Assertions (9 of 14)

Account balance assertions

• Existence
• Auditor gathers evidence that recorded asset,
liability, and equity items actually exist
• Most important where there is risk of
overstatement (e.g., assets)

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 Audit Assertions (10 of 14)

Account balance assertions (continued)

• Rights and Obligations
• Auditor gathers evidence that recorded assets
are owned by entity and that recorded liabilities
represent commitments of the entity
• Most important where there is risk that items are
held but not owned (e.g., inventory on
consignment)

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 Audit Assertions (11 of 14)

Account balance assertions (continued)

• Completeness
• Auditor gathers evidence that asset, liability,
equity items and disclosures have been
recorded by the client
• Most important where there is risk of
understatement (e.g., unrecorded loans)

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 Audit Assertions (12 of 14)

Account balance assertions (continued)

• Accuracy, valuation and allocation
• Auditor gathers evidence that asset, liability,
equity items and related disclosures have been
recorded at appropriate amounts and allocated
to the correct accounts by the client
• Most important where there is risk of over or
under statement (e.g., inventory at lower of
cost and NRV, adequacy of doubtful accounts or
other provisions)

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 Audit Evidence (1 of 4)
• Evidence is the information that an auditor uses
when arriving at their opinion on the fair
presentation of their client’s financial
statements (CAS 500)
• Auditor must gather sufficient appropriate
evidence
• Sufficiency relates to quantity of evidence
• Appropriateness relates to quality of evidence
• Audit risk determines what evidence is required

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Audit Evidence (2 of 4)

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 Audit Evidence (3 of 4)
• Sufficiency of evidence gathered is a matter of
professional judgment and will vary from
account to account and client to client
• Appropriateness of evidence refers to relevance
and reliability
• Evidence is relevant if it provides confirmation
about an assertion most at risk of material
misstatement

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 Audit Evidence (4 of 4)
• Reliability of evidence refers to information that
reflects the true state of information
• In evaluating reliability of information the
auditor should consider:
• Source of information, specifically,
independence of external third parties
• Expertise of respondent
• Consistency of information
• Source of information internal, specifically, is it
produced in an environment where the internal
controls operate effectively?
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 Types of Audit Evidence (1 of 9)

• External confirmations (CAS 505)

• Auditor requests third party to confirm matter in
confirmation letter, including:
• Banks: confirm cash balances, securities, loans
• Creditors: confirm amount owed, terms, by client
• Debtors: confirm amount owed to client
• Others: confirm description and quantity of assets
held

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 Types of Audit Evidence (2 of 9)

• External confirmations (CAS 505) (continued)

• Negative form: reply if information incorrect
• Hard to interpret non-response
• Positive form: reply in all circumstances
• Cannot know how well other party checked
their records

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 Types of Audit Evidence (3 of 9)

• Documentary evidence, includes:

• Invoices, suppliers’ statements, bank
statements, minutes of meetings,
correspondence, legal agreements
• Can be internally or externally generated

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 Types of Audit Evidence (4 of 9)

• Auditor can
• Verify information in client’s records to
supporting external documents to confirm
existence, rights and obligations, or
• Trace from documents to client’s records to
confirm classification, accuracy, completeness

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 Types of Audit Evidence (5 of 9)

• Auditor can request party to provide written

representation
• Legal letter is sent by client to its lawyers to
complete and return direct to auditor
• Can include opinions on legal matters, details
of disagreements with client etc. (CAS 501)
• Example Figure 5.4

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 Types of Audit Evidence (6 of 9)
• Auditor can request party to provide written
representation (continued)
• Management representation letter contains
acknowledgement of management’s
responsibilities, undertaking about legal
compliance, confirmation of discussions (CAS
580)
• Auditor still needs to gather other evidence
• Example Figure 5.5

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 Types of Audit Evidence (7 of 9)

• Verbal evidence
• Auditor documents discussions with client
management and staff
• Used to gain understanding of internal controls;
corroborate other evidence

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 Types of Audit Evidence (8 of 9)

• Computational evidence
• Auditor checks mathematical accuracy; re-
adding, can include complex re-calculations,
verifying formulae
• Physical evidence
• Gathered by inspecting assets, to assess
condition, to reconcile to client’s records

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 Types of Audit Evidence (9 of 9)

• Electronic evidence
• Includes data held on client’s computer, emails
to auditor, and scans and faxes
• No paper trail
• Auditor needs to consider the internal controls
in place, including the quality of client’s
computer system when assessing reliability of
this evidence

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Persuasiveness of Audit Evidence (1 of 6)

• Auditor is seeking evidence to corroborate

client’s recorded transactions and balances
• Greater corroboration is provided by more
persuasive evidence

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Persuasiveness of Audit Evidence (2 of 6)

• Evidence types vary in persuasiveness

• Least to most persuasive:
• Evidence generated internally by client
• Evidence generated externally, held by client
• Externally generated evidence send direct to
auditor

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Persuasiveness of Audit Evidence (3 of 6)

• Internally generated evidence:

• Includes records of cheques sent, copies of
invoices and statements sent to customers,
purchase orders, company documentation
regarding policies and procedures, contracts,
minutes of meetings, journals, ledgers, trial
balances, spreadsheets, worksheets,
reconciliations, calculations and computations

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Persuasiveness of Audit Evidence (4 of 6)

• Internally generated evidence (continued):

• Could be held in paper or electronic form
• Least persuasive because it is possible that
client could manipulate or omit this type of
evidence

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 Persuasiveness of Audit Evidence (5 of 6)

• Externally generated, held by client:

• Includes supplier invoices and statements,
customer orders, bank statements, contracts,
lease agreements, tax assessments
• Originals are more persuasive than photocopies
• More persuasive than internally generated
evidence because it is produced by third parties
• Still possible that client could omit or tamper
with evidence

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 Persuasiveness of Audit Evidence (6 of 6)

• Externally generated, sent direct to auditor:

• Includes bank confirmations, accounts
receivable confirmations, correspondence with
client’s lawyers, experts valuations
• Most reliable type of evidence because it is
independent of client
• Client has no opportunity to alter evidence
• More reliable when external party is considered
to be more reliable, trustworthy, independent of
client
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 Using Work of an Expert (1 of 5)
• Auditor may engage expert to help in audit
when auditor does not possess required skills
and knowledge to assess item
• Expert could be member of audit team, audit
firm, client, or independent
• CAS 620 provides guidance
• Is expert required?
• Determining scope of work for expert
• Selecting expert – assessing objectivity, capability
of expert
• Assessing work of expert
• Auditor is responsible for drawing conclusions
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 Using Work of an Expert (2 of 5)
• Assessing need to use an expert. Consider:
• Knowledge of audit team
• Significance and complexity of item being
assessed
• Availability of appropriate alternative
corroborating evidence
• The less knowledge held by audit team, the
greater risk of material misstatement and less
corroborating evidence available, the more
likely an expert required

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 Using Work of an Expert (3 of 5)

• Scope of work to be carried out

• Auditor must set nature, timing, and extent of
work
• Use written instructions covering issues expert
will report on, and how work will be used by
auditor

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 Using Work of an Expert (4 of 5)

• Assessing competence and capability of expert

• Consider expert’s qualifications, membership in
professional body, reputation in the field,
experience
• Assessing objectivity of expert
• More objective if not connected to client

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 Using Work of an Expert (5 of 5)

• Assessing the expert’s report

• Report should be understandable to non-expert
• Include process, assumptions, data used by
expert
• Auditor considers consistency with other
information
• Responsibility for the conclusion
• Auditor responsible for quality of evidence of
expert’s work

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 Using Work of Another Auditor
• Group engagement partner responsible
for signing audit report, but may use other
auditors, especially for remote locations
• Consider capacity of component auditors
to undertake the work (CAS 600)
• Component auditor’s work must be to
same standard as group engagement
partner
• Objectivity
• Gathering sufficient, appropriate evidence
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 Evidence Gathering Procedures (1 of 3)

• Evidence gathering occurs throughout audit

• Guidance about primary evidence gathering
techniques contained in CAS 500
• Inspection of records and documents
• For example, for evidence of authorization, to
check amounts
• Inspection of tangible assets
• For example, that they exist, their condition, to
trace to records

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 Evidence Gathering Procedures (2 of 3)

• Guidance about primary evidence gathering

techniques contained in CAS 500 (continued)
• Observation of client staff
• For example, that they conduct inventory count
correctly
• Provides evidence only for date of observation

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 Evidence Gathering Procedures (3 of 3)
• Inquiry
• Useful to for gaining understanding, or to
corroborate other evidence; auditor will
document conversation
• Recalculations
• To check mathematical accuracy
• Re-performance
• Follow the process used by client
• Analytical procedures
• Relationships between data
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 Drawing Conclusions
• Does the auditor have sufficient, appropriate
evidence on which to base conclusions?
• CAS 500
• Does evidence address significant risks faced
by the client?
• CAS 315
• Form an audit opinion and report
• See Chapter 12

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 Working Papers (1 of 3)
• Auditor must document each stage of the audit
in working papers (CAS 230)
• Provides evidence of work completed, details
evidence gathered to support opinion
• Include in a working paper:
• Client name, audit period
• Title describing contents of paper, file reference
• Details identifying preparer/reviewer and work
dates
• Cross references to other documents
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 Working Papers (2 of 3)

Permanent file
• Client information and documentation that
apply to more than one audit
• For example, client address, key personnel, long
term contracts
• Main accounting policies, results of prior audits
• Copies of prior period financial statements

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 Working Papers (3 of 3)

Current file
• Client information and documentation that
apply to current audit
• Evidence gathered for this audit

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