Chapter 5 Evidence and Documentation McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Relationship of Audit LO# 1 Evidence to the Audit Report Financial statements Audit report Management assertions about components of financial statements Auditor reaches a conclusion based on the evidence Audit procedures Provide evidence on the fairness of the financial statements 5-2
Management Assertions LO# 2 5-3
The Concepts of Audit LO# 3 Evidence Nature of audit evidence Sufficiency and appropriateness of audit evidence Evaluation of audit evidence 5-4
LO# 4 Audit Procedures Specific acts performed by the auditor to gather evidence about whether specific assertions are being met. Risk assessment procedures Test of controls Substantive procedures 5-5
LO# 4 Audit Procedures A set of audit procedures prepared to test assertions for a component of the financial statements is referred to as an audit program. Management Assertions Existence Rights and obligations Completeness Valuation or allocation Presentation and disclosure Audit Program for Accounts Receivable Examples of Audit Procedures Confirm receivables. Inquire if receivables have been sold or pledged. Agree controlling account with total of subsidiary accounts. Select shipping documents immediatley prior to year end and ensure sales invoices were recorded. Trace accounts from aged trial balance to subsidiary accounts. Test the adequacy of the allowance account. Look for amounts due from related parties. Evaluate receivables for footnote disclosure. 5-6
Audit Procedures for LO# 4 Obtaining Audit Evidence Inspection of records and documents Inquiry Analytical procedures Inspection of tangible assets Confirmation Scanning Observation Recalculation Reperformance 5-7
Reliability of Types LO# 5 of Evidence 5-8
LO# 6 Audit Testing Hierarchy Figure 5-3 Audit Testing Hierarchy: An Evidence Decision Process for Testing Significant Balances or Classes of Transactions 5-9
LO# 7 Audit Documentation The auditor s principal record of the audit procedures performed, evidence obtained, and conclusions reached. Audit documentation (working papers) have two functions: To provide support for the audit report. To aid in the planning, performance, and supervision of the audit. 5-10
Content of Audit LO# 8 Documentation Audit documentation should: Demonstrate how the audit complied with auditing and related professional practice standards. Support the basis for the auditor s conclusions concerning each material financial statement assertion. Demonstrate that the underlying accounting records agreed or reconciled with the financial statements. 5-11
Content of Audit LO# 8 Documentation Audit documentation should: Include a written audit program detailing auditing procedures necessary to accomplish audit objectives. Enable a knowledgeable and experienced reviewer to: Understand the nature, timing, extent, and results of audit procedures, evidence obtained, and conclusions reached. Determine who performed and reviewed the work, as well as the dates of the work and reviews. 5-12
Purposes of Analytical Procedures LO# 9 Preliminary Analytical Procedures Substantive Analytical Procedures Final Analytical Procedures Used to assist the auditor to better understand the business and to plan the nature, timing, and extent of audit procedures. Used to obtain evidential matter about particular assertions related to account balances or classes of transactions. Used as an overall review of the financial information in the final review stage of the audit. 5-13
Substantive Analytical Procedures Decision Process Figure 5-7 Overview of the Auditor s Decision Process for Substantive Analytical Procedures LO# 9 5-14
LO# 10 Financial Ratios Short-term Liquidity Ratios Activity Ratios Profitability Ratios Coverage Ratios 5-15
End of Chapter 5 5-16