AUDIT EVIDENCE, TESTING

& DOCUMENTATION
 OBJECTIVES
• Nature of audit evidence
• Methods of testing
• External confirmations as audit evidence
• Audit working papers
• Audit files
• Custody of working papers
 AUDIT EVIDENCE
Auditors should obtain sufficient appropriate
audit evidence to be able to draw
reasonable conclusions on which to base
the audit opinion.
(ISA 500)
 AUDIT EVIDENCE
The information used by the auditor in
arriving at the conclusions on which the
audit opinion is based.

Sufficiency Quantity
Appropriate Relevance and reliability
OBTAINING AUDIT EVIDENCE

• Risk assessment procedures

• Tests of control

• Substantive procedures
 SUFFICIENCY
• Degree of risk
• Nature of the accounting systems.
• Materiality
• Auditors experience.
• Findings from other audit work
• Source and reliability of information
available
 RELEVANCE
Transactions
• Occurrence
• Completeness
• Accuracy
• Cutoff
• Classification
 RELEVANCE
Balance sheet
• Existence
• Rights and obligations
• Completeness
• Valuation and allocations
 RELEVANCE
Presentation and disclosure
• Occurrence and rights and obligations
• Completeness
• Classification and understandability
• Accuracy and valuation
 RELIABILITY
MOST RELIABLE LEAST RELIABLE

External source Internal source

Good systems Poor systems

Direct by auditor Via entity

Written Oral

Original documents Copies

Robert Feld, Resort Hotels
“Anyone who has heard
you give evidence will
know you are a man of
quite appalling
dishonesty”

Mr Justice Zucker, at
Robert Feld’s trial,
1997.
 EVALUATION OF EVIDENCE
• If conclusions are contradictory the
reliability of each source remains in doubt
until the inconsistency is resolved.
• When the conclusions from different
sources are consistent the auditor may
obtain a cumulative degree of assurance
higher than that which he obtains from the
individual items.
 EVIDENCE FROM THE
INTERNET

• General and industry specific information

• Company specific documents

How reliable is evidence from the internet?

 METHODS OF TESTING
• Inspection
• Observation
• Enquiry and confirmation
• Computation
• Analytical procedures
 INSPECTION
• Examining records, documents and
physical assets.
• Reliability
– Created and provided to auditors by third
parties.
– Created by third parties and held by the
entity.
– Created and held by the entity.
• If possible inspect original copy
 OBSERVATION
• Looking at a process or procedure being
carried out by others.

• Gives evidence only at time of observation

 ENQUIRY AND CONFIRMATION
• Seeking information from within or outside
the entity

• Written or verbal
 COMPUTATION

• Re-calculation

• Re-performance
 ANALYTICAL REVIEW
The analysis of relationships between items
of financial data or between financial and
non‑financial data.
EXTERNAL CONFIRMATIONS
The process of obtaining and evaluating
audit evidence through a representation
directly from third party in response to a
request for information about a particular
item affecting assertions in the financial
statements or related disclosures.
 PROCEDURES
• Consider aims of the test
• Positive or negative confirmation
– Positive asks for a response every time
– Negative asks for a response in the event of a
disagreement
• Permission from management
• Maintain control over the procedure
• Check replies are valid
• Procedures for non-response
• Conclusion
 WORKING PAPERS
The auditor should prepare, on a timely
basis, audit documentation that provides:
– A sufficient and appropriate record of the basis
for the auditor’s report; and
– Evidence that the audit was performed in
accordance with ISAs (UK and Ireland) and
applicable legal and regulatory requirements.
 TYPES OF WORKING PAPERS
• Completed pre‑printed forms
• Notes of discussions
• Notes and details of work carried out
• Photocopies of client schedules
• Flowcharts & systems notes
• Correspondence with third parties
• Summaries of significant points
 WHY PREPARE WORKING
PAPERS?
• Assurance for partner.
• Evidence of work performed:
– Defence in negligence claim or disciplinary case
– Monitoring visits
– Quality control reviews by the firm
• Encourages methodical approach.
• Reference during audit
• Assists delegation and supervision
• Assists planning and conduct of future audits
• Facilitate discussions with auditees.
 FORM AND CONTENT OF
WORKING PAPERS
• Record planning, nature timing and extent of tests and
conclusions

• Extent is a matter of professional judgement.

• Should allow an experienced auditor with no previous

connection with the client to ascertain the work
completed and support the conclusions drawn.

• Reflect information available at the time

• Do not retain unnecessary working papers

 FACTORS AFFECTING FORM
AND CONTENT
• Nature of the engagement
• Form of the auditor’s report
• Nature and complexity of the business
• The accounting and internal control system
• Need for direction, supervision and review
• Risks of material misstatement
• Extent of judgement required
• Specific audit methodology
• Any difficulties in applying procedures
• Significance of the audit evidence obtained
• Standardisation
 AUDIT PROGRAMMES
A detailed schedule of the tests to be carried
out. Includes:
– Audit instructions
– Sample sizes
– Evidence of work performed
– Reference to working paper
 ADVANTAGES OF AUDIT
PROGRAMMES
• Checklist
• Defines responsibilities
• Avoids duplication of work
• Evidence of performance
• Facilitates review
• Assists in planning future audits
 DISADVANTAGES OF AUDIT
PROGRAMMES
• Loss of initiative
• Client awareness
• Concentration on detail rather than whole
picture
 RECORD OF WORK
PERFORMED
Identification details
– Client name
– Accounting period under review
– Name of auditor who prepared the working paper, and the date of
preparation
– Name of reviewer and date of review.

Record of audit tests

– Purpose of the test
– Data used and source.
– Procedure performed
– Results and conclusions
– Reference to related working papers

If necessary to depart from a relevant ISA document how the alternative audit
procedures achieved the objectives, and the reasons for the departure
 CLIENT SCHEDULES
May be part of working papers but:

• Identify

• Ensure accuracy
 STANDARDISED WORKING
PAPERS
• Examples
– Sample size calculations
– Specimen letters

• Advantages
– Aid preparation and review
– Aid delegation
– Assists quality control

• Disadvantages
– Cannot cover every eventuality
– Encourages mechanical approach
– May result in bare minimum
 AUDIT FILES
Working papers should be properly filed:
• To control audit
• Assess relevance of working paper
• Audit trail for review
• Enable subsequent auditors to follow
approach
 TYPES OF FILE
• Permanent file
• Current audit file
• Systems file
• Correspondence file
• Tax file
 PERMANENT FILE
• Information relevant to audit every year

• Used:
– New auditors to familiarise themselves with client.
– Source of reference in planning
– Source of reference during the audit

• Example of contents
– Description of the business
– Copy of engagement letter
– Organisation structure
– Details of financing
 CURRENT AUDIT FILE
• Relates to the current audit
• Example of contents
– Audit plan
– Audit programmes
– Break down of figures in financial statements
– Details of tests
– Points for partner attention
 SYSTEMS FILE
• Record of internal controls and accounting
systems
• Contents may be included with permanent
or current audit file.
 CORRESPONDENCE FILE

• Correspondence with and about the client.

• Copies may also need to be on current

audit file
 TAX FILE
Information on tax affairs of client and
correspondence with HMCR
 CUSTODY OF WORKING
PAPERS

• Ownership

• Retention period

• Confidentiality