Audit Evidence and

Documentation
Professor Kate Jelinek
 What is audit evidence?
 It’s all the information used by the auditor in arriving at
the conclusion on which the audit opinion is based.

 Includes:
 (1) Accounting records underlying financial statements
 e.g., checks, invoices, contracts, records supporting calculations

 (2) Other information that corroborates the accounting records

 e.g., meeting minutes, third-party confirmations, industry
information, info obtained through inquiry, observation or inspection
of records or documents
 Collection of Audit Evidence
 Procedures to Assess Risk
 Understand organization
 Understand information system
 Preliminary analytical procedures

 Procedures to Test Accounting Information

 Substantive analytical procedures
 Tests of transactions
 Tests of accounts
 Tests of presentation and disclosure
 How do we know what to look at?
 Management’s assertions in the financial
statements guide the auditor in planning the
collection of audit evidence.

 5 management assertions (GAAS)

 Existence or occurrence – e.g., confirm A/R balance
to support existence of receivables
 Completeness
 Rights and obligations
 Valuation or allocation
 Presentation and disclosure
 Why is it important that we think
about this?
 Beasley, Carcello, Hermanson (2001) study – analyzed 45 cases of
fraud-related SEC enforcement actions against auditors from 1987-
1997.

 Top 10 deficiencies:
 1. Gathering insufficient audit evidence (80%)
 Insufficiency related to asset valuation and ownership, mgt. representations

 6. Using inquiry as a form of evidence (40%)

 Overrelying on this method

 7. Obtaining inadequate evidence related to evaluate significant mgt.

estimates (36%)
 Failed to gather corroborating evidence, challenge mgt. assumptions
How do we evaluate evidence?
 GAAS 3rd Standard of fieldwork:
“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
audit.”
 What makes evidence sufficient?
 Sufficiency is a function of:
 Materiality of account
 e.g., for a manufacturing company, inventory will most likely
be the largest asset

 Risk of material misstatement

 e.g., occurrence of sales has a high inherent risk than the
existence of petty cash

 Size and characteristics of population

 e.g., more audit evidence required if inventory is
heterogeneous
What makes evidence competent?
 Competency is a function of:
 Relevance
 Must adequately address one or more management
assertions (Observation of inventory address the issue of
inventory existence; however, it does not relate to rights and
obligations assertion).

 Reliability
 Consider credibility of source evidence (external is better
than internal); conditions under which is was obtained (i.e.,
evidence produced by a client with a strong IC system is
better); manner in which it was obtained (direct observation
is better than inquiry of client personnel).
 Types of audit evidence
 Physical evidence (direct evidence)

 Confirmation (external corroborating evidence)

 Mathematical reconciliations (e.g., use audit software to

recalculate Allowance for Doubtful Accounts)

 Analytical evidence

 Hearsay evidence (i.e., inquiry of client)

 Documentary (internal or external)

Reliability continuum

1 7

Documentary Documentary Hearsay

Physical Confirm Mathematical Analytical
(External) (Internal)
 Procedures used in collecting
evidence
 Examine – detailed look
 Scan – usually long reports or documents. See if anything “jumps
out”
 Read – contracts, BOD meeting minutes
 Compute – create a “new” number independent of client calculation
(e.g., real estate value)
 Recompute – recalculate client-provided number
 Foot – add columns of numers
 Trace – from source to client’s books
 Vouch – from client’s books to source
 Compare – make sure two sources of evidence agree
 Inspect/Count – used with physical evidence. Verify amount
recorded is correct
 Observe – watch client perform procedure
 Inquire – ask client to verify evidence or provide explanation
 Cost/benefit analysis
 Given time and cost constraints, an auditor must
use professional judgment to determine whether
sufficient audit evidence has been obtained.
 e.g., To verify the existence of the client’s 25 petty
cash funds, an auditor could personally count all 25
funds – another alternative is to count 5 and rely on
the client’s recorded amounts for the other 20.

 However, cost alone is never a valid basis for

omitting an audit procedure for which there is
not an alternative!
 Other comments
 The auditor is seldom convinced beyond all
doubt that assertions in FS are presented fairly
in all material respects.

 Usually, auditor must rely on evidence that is

persuasive rather than conclusive.

 However, reasonable assurance is not obtained

when the auditor relies on audit evidence that is
less than persuasive.
 Documentation
 Auditor should prepare an audit program
after considering nature, extent, and
timing of work to be performed (e.g.,
confirm existence of cash by vouching
items from client records to bank
statements).

 Contains audit procedures deemed necessary

to obtain reasonable assurance that FS are
presented fairly.
 Documentation, cont.
 Audit evidence is documented in working
papers.

 Types of wp’s:
 Working trial balance
 Schedules and analyses (support TB amounts; e.g.,
list of customer accounts supports A/R balance)
 Audit memos (e.g., memo summarizes A/R
confirmation process, including conclusion regarding
A/R balance)
 Adjusting and reclassifying entries
 Documentation, cont.
 Working paper files:
 Permanent files – expected to be useful on
future engagements. Examples are:
 Copies of articles of incorporation
 Chart of accounts
 Plant layout
 Copies of long-term contracts

 Current file – contains working papers related

to executing current year’s audit program.
 Documentation, cont.
 Working papers are the custody of the
auditor.

 SOX requires the auditor to retain wp’s for

7 years after that audit engagement.