🔍Auditing Unit 4 – Audit Evidence and Documentation

What's This Unit About?

• Focuses on the critical role of audit evidence in supporting the auditor's opinion and conclusions
• Explores the various types of audit evidence auditors collect and evaluate during an audit engagement
• Discusses the importance of proper documentation to support the audit process and conclusions reached
• Highlights the auditor's responsibility to obtain sufficient appropriate audit evidence
• Examines the factors that influence the reliability and persuasiveness of audit evidence
  • Includes considerations such as the source, nature, and timing of evidence obtained
• Emphasizes the need for professional skepticism when gathering and evaluating audit evidence
• Covers the methods and techniques used by auditors to obtain audit evidence (inquiry, observation, inspection, etc.)

Key Concepts and Definitions

• Audit Evidence: Information used by the auditor to arrive at conclusions that form the basis for the auditor's opinion
  • Can be obtained from internal or external sources
• Sufficiency: Refers to the measure of the quantity of audit evidence obtained
  • Influenced by factors such as the assessed risks of material misstatement and the quality of evidence
• Appropriateness: Relates to the measure of the quality of audit evidence, including its relevance and reliability
• Professional Skepticism: An attitude that includes a questioning mind and a critical assessment of audit evidence
• Audit Documentation: The record of audit procedures performed, relevant audit evidence obtained, and conclusions reached (also known as working papers)
• Audit Procedures: The specific actions and steps taken by the auditor to gather and evaluate audit evidence
• Substantive Procedures: Audit procedures designed to detect material misstatements at the assertion level
  • Includes tests of details and substantive analytical procedures

Types of Audit Evidence

• Physical Examination: Inspection or count of tangible assets (inventory, cash, property, etc.)
• Confirmation: Obtaining written or electronic verification from a third party (accounts receivable, bank balances, legal confirmations)
• Documentation: Examining records, documents, or other information, whether internal or external, in paper or electronic form (contracts, invoices, meeting minutes)
• Analytical Procedures: Evaluating financial and non-financial data to identify unusual trends, fluctuations, or relationships
• Inquiry: Seeking information from knowledgeable persons within or outside the entity (management, employees, experts)
• Observation: Watching a process or procedure being performed by others (inventory count, internal control activities)
• Recalculation: Checking the mathematical accuracy of documents or records
• Reperformance: Independently executing procedures or controls originally performed by the entity

Gathering Audit Evidence

• Plan and perform audit procedures to obtain sufficient appropriate audit evidence
• Consider the relevance and reliability of information to be used as audit evidence
  • Evaluate the source, nature, and timing of evidence
• Use a combination of audit procedures to gather evidence from various sources
  • Corroborative evidence from multiple sources enhances the persuasiveness of conclusions
• Adapt audit procedures based on the assessed risks of material misstatement and the nature of the assertion being tested
• Exercise professional skepticism when gathering audit evidence
  • Maintain a questioning mind and critically assess the evidence obtained
• Document the audit procedures performed and the evidence gathered in the working papers

Evaluating Audit Evidence

• Assess the sufficiency and appropriateness of audit evidence obtained
  • Consider the quantity and quality of evidence in relation to the assessed risks and assertions
• Evaluate the consistency of audit evidence from different sources
  • Investigate and resolve any inconsistencies or contradictory evidence
• Consider the relevance and reliability of audit evidence
  • Assess factors such as the source, nature, and timing of evidence
• Determine whether the audit evidence supports the assertions and conclusions reached
• Exercise professional judgment in evaluating the persuasiveness of audit evidence
• Document the evaluation process and conclusions in the working papers
  • Clearly link the evidence to the assertions and conclusions

Documentation Requirements

• Prepare audit documentation that provides a clear understanding of the work performed, evidence obtained, and conclusions reached
• Include sufficient detail to enable an experienced auditor with no previous connection to the audit to understand the nature, timing, and extent of procedures performed
• Document significant matters arising during the audit, the conclusions reached, and significant professional judgments made
• Ensure audit documentation is complete, accurate, and finalized on a timely basis
  • Assemble the final audit file within a reasonable period after the date of the auditor's report
• Maintain the confidentiality, safe custody, integrity, accessibility, and retrievability of audit documentation
• Retain audit documentation for a period sufficient to meet the needs of the firm, professional standards, and legal and regulatory requirements

Common Challenges and Pitfalls

• Overreliance on management representations without obtaining corroborative evidence
• Failing to exercise professional skepticism when gathering and evaluating audit evidence
• Not obtaining sufficient appropriate audit evidence to support conclusions
• Inadequate documentation of audit procedures performed and evidence obtained
  • Lack of clear linkage between evidence and conclusions
• Not adapting audit procedures to address identified risks or changes in circumstances
• Overlooking inconsistencies or contradictory evidence
• Inadequate supervision and review of audit work performed by team members
• Not considering the relevance and reliability of audit evidence from external sources

Practical Applications

• When testing the existence of inventory, perform physical examination procedures to obtain direct evidence
  • Observe the client's inventory count process and perform independent test counts
• To verify accounts receivable balances, send confirmation requests to a sample of customers
  • Evaluate the responses and perform alternative procedures for non-responses
• When assessing the valuation of investments, obtain independent confirmations from third parties (brokers, custodians)
  • Examine supporting documentation such as investment statements and market data
• To test the completeness of liabilities, review subsequent cash disbursements and unpaid invoices
  • Inquire with management and legal counsel about potential unrecorded liabilities
• When evaluating the appropriateness of revenue recognition, examine customer contracts and shipping documents
  • Perform cut-off testing to ensure revenue is recognized in the proper period
• To assess the reasonableness of management's estimates, review the assumptions and methodologies used
  • Compare estimates to historical data, industry benchmarks, and subsequent events
• When testing internal controls over financial reporting, observe the performance of control activities
  • Inspect relevant documentation and reperform key controls to assess their operating effectiveness