4-1

Part Two
4-2

BASIC AUDITING CONCEPTS:

MATERIALITY, AUDIT RISK, AND
EVIDENCE
 Chapter 4
4-3

CHAPTER 4
AUDIT EVIDENCE : TYPES OF
EVIDENCE, AND WORKING
PAPER DOCUMENTATION
4-4 EVIDENTIAL MATTER

 Third standard of field work states…. Sufficient, competent evidential

matter is to be obtained through inspection, observation, inquiries, and
confirmations to afford a reasonable basis for an opinion regarding the
financial statements under examination.
 On a typical audit engagement, most of the auditor's work involves
obtaining and evaluating evidence to test the fair presentation of the
financial statements.
4-5
THE RELATIONSHIP OF EVIDENTIAL
MATTER TO THE AUDIT REPORT

Financial Audit
Statements Report

Management
Assertions

Audit
Objectives

Audit Evidence
Procedures
4-6 MANAGEMENT ASSERTIONS

 Existence or occurrence
 Completeness
 Rights and obligations
 Valuation and allocation
 Presentation and disclosure
4-7 AUDIT OBJECTIVES

 Validity
 Completeness
 Cutoff
 Ownership
 Accuracy
 Valuation
 Classification
 Disclosure
4-8 AUDIT PROCEDURES

 Audit procedures are specific actions performed by the auditor to gather

evidence to determine if specific audit objectives are being met.
 A set of audit procedures prepared to test audit objectives for a component of
the financial statements is referred to as an audit program.
4-9 BASIC CONCEPTS OF
AUDIT EVIDENCE

 The nature of audit evidence

 The sufficiency of audit evidence
 The appropriateness of audit evidence
 The evaluation of audit evidence
4-
10
THE NATURE OF
AUDIT EVIDENCE
 Accounting data that can be used to test audit objectives include the books of
original entry, related accounting manuals, and records such as worksheets and
spreadsheets that support amounts in the financial statements. Many times these
data are in electronic form.
 Corroborating audit evidence includes both written and electronic information such
as cheques, records of electronic transfers, invoices, contracts, minutes,
confirmations, and written representations.
4-
11
SUFFICIENCY OF
AUDIT EVIDENCE
 The auditor relies on evidence that is persuasive rather than convincing in
forming an opinion on a set of financial statements. This occurs for two reasons:
 Because of cost considerations, the auditor only examines a sample of the transactions
that compose the account balance or class of transactions.
 Due to the nature of evidence, the auditor must often rely on evidence that is not
perfectly reliable.
4-
12
THE APPROPRIATENESS OF
AUDIT EVIDENCE
 Evidence is considered appropriate when it is both relevant and reliable
 Relevance - The evidence must be relevant to the audit objective being
tested.
 Reliability - Reliability refers to whether the type of evidence can be relied
upon to signal the true state of an assertion or audit objective.
4- GENERAL FACTORS FOR ASSESSING
13 THE RELIABILITY OF EVIDENCE

 Independence of the source of the evidence.

 Effectiveness of internal control.
 Auditor's direct personal knowledge.
4-
14
EVALUATION OF
AUDIT EVIDENCE
The auditor should to be thorough in searching for evidence and
unbiased in its evaluation.
4-
15 TYPES OF AUDIT EVIDENCE

 Physical examination
 Reperformance
 Documentation
 Confirmation
 Analysis
 Inquiries of client personnel or management
 Observation
4-
16 DOCUMENTATION

 Reliability of documentary evidence.

 Internal versus external evidence

 Documentary evidence related to audit objectives.

 Vouching versus tracing
4-
17 CONFIRMATION
 The reliability of evidence obtained through confirmations is directly affected by
factors such as
 The form of the confirmation.
 Prior experience with the entity.
 The nature of the information being confirmed.
 The intended respondent.
4-
18
RELIABILITY OF THE
TYPES OF EVIDENCE

Level of Reliability Type of Evidence

High Physical examination

Reperformance
Medium Documentation
Confirmation
Analytical procedures
Low Enquiries of client personnel
or management
Observation
4- RELATIONSHIP OF EVIDENCE TO
19 AUDIT OBJECTIVES AND
ACTIVITIES
 Table 4-6 shows the relationship of the types of evidence to audit
objectives
4-
20
WORKING PAPERS

 Working papers have two functions:

 to provide support for the auditor's report.
 to aid in the conduct and supervision of the audit
4-
21
TYPES OF WORKING PAPERS

 Most CA firms maintain working papers in two types of files:

 permanent files
 current files
4-
22
FORMAT OF WORKING PAPERS

 Heading
 Indexing and cross-referencing
 Tick marks
4- ORGANIZATION OF
23
WORKING PAPERS

 The auditor's working papers need to be organized so that any member of the
audit team (and others) can find the audit evidence that supports each
financial statement account.
 See Figure 4-4.
4-
24
OWNERSHIP OF THE
WORKING PAPERS
 The working papers are the property of the auditor.
 This includes not only working papers prepared by the auditor but also
working papers prepared by the client at the request of the auditor.