AFA518 Chapter 5

Audit Evidence

 Evidence is both information that supports and corroborates management’s assertions, and any information
that contradicts those assertions.
 Evidence is gathered in all phases of the audit process and is used to help the auditor make a variety of
judgments and conclusions.

Audit Evidence Decisions

There are three key decisions about what evidence to gather and how much to accumulate:

 Which audit procedures to use (the “nature”)

 Which items to select for testing (the “extent”)
 When to perform the procedures (the “timing”)

1. Audit Procedures = detailed instruction that explains the audit evidence to be obtained during the audit. The
nature of audit procedures refers to their purpose (risk assessment, test of controls, or substantive procedure)
 Risk Assessment Procedures: include inquiries, analytical procedures, and inspection and observation
 Test of Controls: assess control risk at the assertion level. Auditor selects some processes or procedures
(i.e., controls) carried out by client staff and makes sure they have operated effectively.
 Substantive Procedures: focus on transactions or accounts and are designed to detect monetary
misstatements, include tests of details and analytical procedures.

2. Which Items to Select = The choice depends upon the purpose of the test and the particular circumstances, such
as the extent of automated controls and the risk of material misstatement.
i. Select all items in the population
ii. Select specific items in the population
iii. Use audit sampling
iv. Use some combination

3. Timing = the financial statement audit is completed one to three months after year-end (Public Companies)

Persuasiveness of Evidence

Generally accepted auditing standards (GAAS) require the auditor to obtain sufficient appropriate audit evidence to be
able to draw reasonable conclusions on which to base the audit opinion.

The determinants of persuasiveness of evidence are appropriateness (relevance and reliability), sufficiency (enough
evidence), and timeliness (covering the appropriate period).

1. Appropriateness = refers to the quality of evidence, that is, the degree to which the evidence can be considered
relevant and reliable in meeting audit objectives. It can be improved by selecting audit procedures that are more
relevant or that provide more reliable evidence.

a. Reliability of Evidence = depends upon its source and nature. The reliability of evidence is increased
when it is obtained (1) directly by the auditor, (2) from an independent provider, (3) from qualified
providers such as law firms and banks, or (4) from consistent and multiple sources.
 2. Sufficiency = the quantity of evidence; appropriate sample size; degree of precision. To determine the amount
of evidence, it depends on the auditor’s expectation of errors and the effectiveness of the client’s internal
controls.

3. Timeliness = the timing of audit evidence in relation to the period covered by the audit. It is more persuasive
when it is closer to the year-end date. Includes the portion of period being audited.

Specific Types of Audit Procedures

1. Inspection = the auditor’s physical examination or count of a tangible asset, or inspection of a document.
 Inspection or Physical Examination of Tangible Assets (PPE, Inventory, Cash)
i. Verifying that an asset actually exists (existence assertion)
ii. Inspection is not sufficient evidence to verify that existing assets are owned by the client (rights
and obligations objective)
iii. Proper valuation cannot be determined by inspection
 Inspection of Documents (Sales invoice, Cheque)
i. Internal Document: a document, such as an employee time report, that is prepared and used
within the client’s organization.
ii. External document: a document, such as a vendor’s invoice, that has been used by an outside
party to the transaction being documented and that the client now has or can easily obtain.
iii. Vouching: the use of documentation to support recorded transactions or amounts. (Existence)
F/S  Documents
iv. Tracing: the use of documentation to determine if transactions or amounts are included in the
accounting records. (Completeness) Documents  F/S

2. Observation = looking at a process or procedure performed by others (e.g. tour of facility, observe employee
performing task)

3. External Confirmation = the auditor’s receipt of a written or oral response from an independent third party
verifying the accuracy of information requested.
 May be costly but very reliable
 Auditor must be aware of the external party (e.g. related party)

4. Recalculation = repeating or checking the mathematical accuracy of calculations completed by the client.

5. Reperformance = the redoing of procedures and internal controls (other than mathematical calculations) of the
client by the auditor.
 Reperformance, particularly the process of checking posting and summarization, relies heavily upon the
use of computer-assisted audit tests (CAATs): tests that the auditor conducts using computer software
or using the data or systems of the client.

6. Analytical Procedures = consist of evaluation of financial information through plausible relationships among
financial and nonfinancial data.
 Understand the Client’s Industry and Business
 Assess the Entity’s Ability to Continue as a Going Concern
 Indicate the Presence of Possible Misstatements in the Financial Statements
 Provide Evidence Supporting an Account Balance
 7. Inquiry = obtaining written or oral information from the client in response to questions during the audit.
 Cannot be regarded as conclusive because it is not from an independent source and may be biased in
the client’s favour.
 Corroborate evidence is needed: e.g. performs a walk-through and tests of controls to determine if the
controls function as described.

Reliability of Types of Audit Procedures

Terms Used in Audit Procedures

 Examine = A reasonably detailed study of a document or record to determine specific facts about it.
 Scan = A less detailed examination of a document or record to determine if there is something unusual
warranting further investigation.
 Read = An examination of written information to determine facts pertinent to the audit and the recording of
those facts in a working paper.
 Compute = A calculation done by the auditor independent of the client.
 Recompute = A calculation done to determine whether a client’s calculation is correct.
 Foot = An addition of a column of numbers to determine if the total is the same as the client’s.
 Trace = An instruction normally associated with documentation or reperformance. The instruction should state
what the auditor is tracing and where it is being traced from and to.
 Compare = A comparison of information in two different locations.
 Count = A determination of assets on hand at a given time.
Design Analytical Procedures

When performing analytical procedures, the auditor’s investigation of unusual fluctuations is triggered by relationships
among financial and nonfinancial data that differ from expectations developed by the auditor.

The auditor typically compares the client’s balances and ratios with expected balances and ratios using one or more of
the following types of analytical procedures. Compare client data with:

1. Industry data = an aid to understanding the client’s business and are an indication of the likelihood of financial
failure. Useful to auditors in assessing the relative strength of the client’s capital structure, its borrowing
capacity, and its likelihood of financial failure.

2. Similar prior-period data = auditor should determine why there are significant changes compared to the
previous year and the effect. (Using Financial Ratios and Analysis – Vertical/Horizontal)

3. Client-determined expected results = Budgets: written records of the client’s expectations for the period; a
comparison of budgets with actual results may indicate whether misstatements are likely.
 The absence of differences may indicate that misstatements are unlikely
 The auditor must evaluate whether the budgets were realistic plans and whether it has been altered

4. Auditor-determined expected results = the auditor develops an expectation of what an account balance should
be by (1) relating it to some other balance sheet or income statement account or accounts, or (2) making a
projection based on some historical trend.
CAS 520: Developing Substantive Analytical Procedure

 Develop an independent expectation  Compute the difference

 Define a significant difference  Investigate significant differences.

Precision of the Analytical Procedures

The degree of precision of analytical procedures depends upon the following factors:

 Disaggregation of Data (level of detail)

 Data Reliability
 Plausibility and predictability of relationship (whether it makes sense)
 The type of analytical procedure

Documentation

CAS 230: audit documentation is the written or electronic record of risk assessments, procedures or tests performed,
information obtained, and conclusions reached.

Purpose: to aid auditors in providing reasonable assurance in accordance with GAAS.

 Basis for Planning the Audit = planning information as conclusions on client risk analysis, descriptive information
about internal control, a time budget, and the results of the preceding year’s audit
 Record of the Evidence Accumulated and the Results of the Tests = the auditor must be able to demonstrate to
regulatory agencies such as the provincial securities commissions and to the courts that the audit was well
planned and adequately supervised.
 Support for Determining the Proper Type of Auditor’s Report = useful for evaluating the adequacy of audit scope
and the fairness of the financial statements.
  Basis for Review by Supervisor = used by supervisory personnel to evaluate whether sufficient appropriate
evidence was accumulated to justify the auditor’s report.

Preparation of Working Papers

Working papers should possess certain characteristics:

1. Each working paper should be properly identified with such information as the client’s name, the period
covered, a description of the contents, the name of the preparer, the date of preparation, and an index code.
2. Working papers should be indexed and cross-referenced to aid in organizing and filing.
3. Completed working papers must clearly indicate the audit work performed.
4. Each working paper should include enough information to fulfill the objectives for which it was designed.
5. The conclusions that were reached about the segment of the audit under consideration should be plainly stated.

Ownership of Working Papers = owned by Auditors and can be examined in court as legal evidence

Confidentiality of Working Papers = not to disclose any confidential information obtained in the course of a professional
engagement except with out the consent of the client or, as was noted above, when required by the courts or by the
professional accounting associations.

CAS315: Identify Risk

CAS330: Auditor’s Response to Risk