AUDIT EVIDENCE AND AUDIT DOCUMENTATION c.

External Confirmation- a direct written response to the

Nature and Types Audit Evidence
Audit evidence is all information used by the auditor on which the
audit opinion is based. The gathering and evaluation of audit
evidence is a cumulative and iterative process.
The auditor obtains two types of audit evidence such as:
a. Underlying accounting records- the records of initial
accounting entries and supporting records, such as checks
and records of electronic fund transfers; invoices; contracts;
the general and subsidiary ledgers; journal entries and other
adjustments to the financial statements that are not reflected
in journal entries; and records such as work sheets and
spreadsheets supporting cost allocations, computations,
reconciliations and disclosures.
b. Other information- all other evidence obtained by the
auditor such as minutes of meetings, confirmation from
third parties and information obtained from such audit
procedures as inquiry, observation, and inspection.
The auditor must obtain the two types of audit evidence above, which
must be consistent with each other and not doubtful as to its
reliability. Underlying accounting records alone cannot constitute
sufficient audit evidence.
Sources of Audit Evidence
The following are the list of sources of audit evidence:
auditor from a third party (the confirming party), in paper
form, or by electronic or other medium.
d. Recalculation- consists of checking the mathematical
accuracy of documents or records.
e. Reperformance- involves the auditor’s independent
execution of procedures or controls that were originally
performed as part of the entity’s internal control.
f. Analytical Procedures- consist of evaluations of financial
information made by a study of plausible relationships
among both financial and non-financial data. Analytical
procedures also encompass the investigation of identified
fluctuations and relationships that are inconsistent with
other relevant information or deviate significantly form
predicted amounts.
g. Inquiry- consists of seeking information of knowledgeable
persons, both financial and nonfinancial, within the entity
or outside the entity.
Reliability and Cost of Audit Procedures
The most reliable evidence gathering techniques (audit
procedures) should be used whenever they are cost effective.
The quality of internal controls has a significant effect on
reliability. Furthermore, a specific substantive audit procedure is
rarely sufficiently by itself to provide competent evidence to
satisfy the audit objective. However, assuming good internal
controls and the ability to choose a specific method, a list of the
most reliable to the least reliable evidence-gathering techinques
are in general:

 Performance of audit procedures. (Primary source)  Recalculation

 Previous audits.  Inspection
 Firm’s quality control procedures for client acceptance and  Reperformance
continuance.  Observation
 Work of a management’s expert.  Confirmation
 Management representations.  Analytical procedures
 Other sources inside and outside the entity.  Inquiry

Audit Procedures The evidence-gathering procedures in order of cost form most costly
to least are in general:
Audit procedures as to purpose:
 Confirmation
a. Risk assessment procedures (RAP)- are the audit  Inspection
procedures performed to obtain an understanding of the  Recalculation
entity and its environment, including the entity’s internal  Reperformance
control, to identify and assess the risks of material  Observation
misstatement, whether due to fraud or error, at the financial  Analytical procedures
statement and assertion levels, thereby providing a basis for
 Inquiry (least costly)
designing and implementing responses to the assessed risks
of material misstatement; and Inquiry is the least most extensively used audit procedures. Although
b. Further audit procedures (FAP) which comprise: inquiry may provide important audit evidence, and may even produce
 Tests of controls (ToC)- an audit procedure evidence, and may even produce evidence of a misstatement, inquiry
designed to evaluate the operating effectiveness alone ordinarily does not provide sufficient audit evidence of the
of controls in preventing, or detecting and absence of a material misstatement at the assertion level, nor of the
correcting, material misstatements at the assertion operating effectiveness of controls.
level; and
 Substantive procedures (SP), including tests of Summary of audit procedures
details and substantive analytical procedures- an
audit procedure designed to detect material Purpose
misstatements at the assertion level. FAP
Types
RAP
ToC SP
Audit procedures as to type:
Inspection   
a. Inspection- involves examining records or documents, Observation   
whether internal or external, in paper form, electronic form, External

or other media, or physical examination of and asset. confirmation
b. Observation- consists of looking at a process or procedure Recalculation 
being performed by others , for example, the auditor’s Reperformance 
observation of inventory counting by the entity’s personnel, Analytical
 
procedures
or of the performance of control activities.
Inquiry   

Review: Auditing Theory.2 Page 1

Analytical Procedures
Definition of analytical procedures
Analytical procedures involve evaluations of financial information
through analysis of plausible relationships among both financial and
non-financial data. Analytical procedures also encompass such
investigation as is necessary of identified fluctuations or relationships
that are inconsistent with other relevant information or that differ
from expected values by a significant amount.
Application of analytical procedures
In other words, it involves comparisons between the auditor’s
expectations and the recorded (reported) amounts relating to the
entity’s financial statements. Examples of auditor’s expectations
include:
 Financial information:
 Comparable information for prior periods
 Anticipated results (budgets or forecasts)
 Industry information
 Relationships:
Elements of financial information expected to
have a predictable pattern (gross margin)
Between financial and non-financial information,
(payroll costs to number of employees)
The auditor should apply analytical procedures at the planning and
overall review stages of the audit. Analytical procedures may help
identify the existence of unusual transactions or events, and amounts,
ratios, and trends that might indicate matters that have audit
implications. Unusual or unexpected relationships that are identified
may assist the auditor in identifying risks of material misstatement,
especially risks or material misstatement due to fraud.
However, when such analytical procedures use data aggregated at a
high level (which may be the situation with analytical procedures
performed as risk assessment procedures), the results of those
analytical procedures only provide a broad initial indication about
whether a material misstatement may exist. Accordingly, in such
cases, consideration of other information that has been gathered when
identifying the risks of material misstatement together with the
results of such analytical procedures may assist the auditor in
understanding and evaluating the results of the analytical procedures.
Types of Analytical Procedures
The following are the types of typical analytical procedures applied
in a audit:
a. Trend analysis- this type is based on the assumption that
performance will continue in line with previous
performance or industry trends unless something unusual is
happening in the company.
b. Ratio analysis- this type similar to financial statement
analysis, and is highly effective technique to highlight
account balances that are out of line and may signal the
potential for fraud.
c. Test of reasonableness- this type tests whether a recorded
amount is reasonable with regards to the auditor’s
expectation.
d. Regression analysis- this type involves time-series analysis
by examining trends in relationship with previous results.
Investigating Results of Analytical Procedures
If analytical procedures identified fluctuations or inconsistent
relationships that differ significantly from expected values,
investigate differences by:
 Inquiring of management and obtaining appropriate audit
evidence relevant to management’s responses; and
Review: Auditing Theory.2
 Performing other audit procedures as necessary in the
circumstances.
Objective of the auditor in obtaining audit evidence
The auditor shall design and perform audit procedures to enable the
auditor to obtain sufficient appropriate audit evidence (SAAE) to be
able to draw reasonable conclusions on which to base the auditor’s
opinion. The sufficiency and appropriateness of audit evidence are
interrelated.
Sufficiency is the measure of the quantity of evidence. The quantity
of audit evidence needed is affected by the auditor’s assessment of
the risks of misstatement (the higher the assessed risks, the more
audit evidence is likely to be required) and also by the quality of such
audit evidence (the higher the quality, the less may be required).
Obtaining more audit evidence, however, may not compensate for its
poor quality.
Appropriateness is the measure of the quality of audit evidence; that
is, its relevance and its reliability in providing support for the
conclusions on which the auditor’s opinion is based. The reliability of
evidence is influenced by its source and by its nature, and is
dependent on the individual circumstances under which it is obtained.
Information to Be Used as Audit Evidence
When designing and performing audit procedures, the auditor shall
consider the relevance and reliability of the information to be used as
audit evidence. The quality of all audit evidence is affected by the
relevance and reliability of the information upon which it is based.
Relevance
Relevance deals with the logical connection with, or bearing upon,
the purpose of the audit procedure, direction of testing and, where
appropriate, the assertion under consideration.
Purpose of audit procedure
Audit procedures classified according to purpose are risks assessment
procedures (RAP), test of controls (ToC) and substantive procedures
(SP). These three procedures have different purposes such as, to
obtain understanding entity and its environment, including internal
control and to detect material misstatements in the financial
statements, respectively.
Assertion
Audit evidence, to be relevant, must link directly t relevant
assertions. The auditor uses assertions in considering different types
of potential misstatements that may occur in the financial statements.
It is the reason why audit objectives follow and are closely related
why audit objectives follow and are closely related to assertions. In
other words, assertions guide the auditor in the performance of
auditor procedures as to what appropriate audit evidence to obtain.
A given set of audit procedures may provide audit evidence that is
relevant to certain assertions, but not others. For example, inspection
of documents related to the collection of receivables after the period
end may provide audit evidence regarding existence and valuation,
but not necessarily cutoff.
Directional Testing
The relevance of information to be used a audit evidence may be
affected by the direction of testing. For example, if the purpose of an
audit procedure is to test for overstatement in the existence or
valuation of accounts payable, testing the recorded accounts payable
may be a relevant audit procedure. On the other hand, when testing
for understatement in the existence or valuation of accounts payable,
testing the recorded accounts payable would not be relevant, but
testing such information as subsequent disbursements, unpaid
invoices, suppliers’ statements, and unmatched receiving reports may
be relevant.
Page 2
Reliability
The reliability of information to be used as audit evidence, and
therefore of the audit evidence itself, is influenced by its source and
its nature, and the circumstances under which it is obtained, including
the controls over its preparation and maintenance where relevant.
Evidence is general more reliable when:
a. Obtained from independent sources;
b. The related controls are effective;
c. Obtained directly than indirectly or by inference;
d. In documentary form than oral; and
e. In original state than by photocopies or facsimiles.
Selecting Items for Testing to Obtain Audit Evidence
An effective test provides appropriate audit evidence to an extent
that, taken with other audit evidence obtained or to be obtained, will
be sufficient for the auditor’s purposes.
In selecting items for testing, the auditor determines the relevance
and reliability of information to be used as audit evidence; the other
aspect of effectiveness (sufficiency) is an important consideration in
selecting items for testing are:
 All items (100% examination)
 Specific items
 Audit sampling
The application of any one or combination of these means may be
appropriate depending on the particular circumstances, for example,
the risks of material misstatement related to the assertion being
tested, and the practicality and efficiency of the different means.
Inconsistency in, or Doubts over Reliability of, Audit Evidence
Obtaining audit evidence from different sources or of a different
nature may indicate that an individual item of audit evidence is not
reliable, such as when audit evidence obtained from one source is
inconsistent with that obtained form another. This may be the case
when, for example, responses to inquiries of management, internal
audit, and others are inconsistent, or when responses to inquiries of
those charged with governance made to corroborate the responses t
inquiries of management are inconsistent with the response by
management. Specific documentation requirement if the auditor
identified information that is inconsistent with the auditor’s final
conclusion regarding a significant matter.
Audit documentation
Audit documentation (a.k.a. “working papers” or “workpapers”) is
the record of audit procedures performed, relevant audit evidence
obtained, and conclusions the auditor reached.
The auditor shall prepare documentation to provide:
a. A sufficient and appropriate record of the bases for the
auditor’s report; and
b. Evidence that the audit was planned and performed in
accordance with PSAs and applicable legal and regulatory
requirements.
Audit documentation serves a number of additional purposes
including the following:
 Assisting the audit team to plan and perform the audit.
 Assisting members of the audit team responsible for
supervision to direct and supervise the audit work, and to
discharge their review responsibilities.
 Enabling the audit team to be accountable for its work.
 Retaining a record of matters of continuing significance to
future audits.
Review: Auditing Theory.2
 Enabling the conduct of quality control reviews and
inspections.
 Enabling the conduct of external inspections in accordance
with applicable legal, regulatory or other requirements.
Auditor’s documentation is normally stored in an audit file. Audit file
refers to one or more folders or other storage media, in physical or
electronic form, containing the records that comprise the audit
documentation for a specific engagement.
Timely Preparation of Audit Documentation
Preparing sufficient and appropriate audit documentation on a timely
bases helps to enhance the quality of the audit and facilities the
effective review and evaluation of the audit evidence obtained and
conclusions reached before the auditor’s report is finalized.
Form, Content and Extent of Audit Documentation
The auditor shall prepare audit documentation that is sufficient to
enable an experienced auditor, having no previous connection with
the audit, to understand:
a. The nature, timing, and extent of the audit procedures
performed to comply with the PSAs and applicable legal
and regulatory requirements;
b. The results of the audit procedures performed, and the audit
evidence obtained; and
c. Significant matters arising during the audit, the conclusions
reached thereon, and significant professional judgments
made in reaching those conclusions.
In documenting the nature, timing and extent fo audit procedures
performed, the auditor shall record:
a. The identifying characteristics of the specific items or
matters tested;
b. Who performed the audit work and the date such work was
completed; and
c. Who reviewed the audit work performed and the date and
extent of such review.
Audit documentation, however, is not a substitute for the entity’s
accounting records. Oral explanations by the auditor, on their own,
do not represent adequate support for the work audited.
Types of Audit Documentation
Auditors generally classify audit documentation into two types:
a. Current files- relate specifically to the current period’s
audit. They often include
 Reconciliation of accounting records to FSs
 Lead schedules of major components of amounts
in the FSs and supporting detailed schedules
 Documentation of substantive procedures
performed providing evidence corroborating or
contradicting management’s assertions
 The attorney’s letter and management’s
representation letter
 Audit programs
b. Permanent (continuing) files- relate to the company and
contain information with long-term significance. They are
of ongoing interest in any period under audit and often
include
 Debt agreements and pension contracts
 Articles of incorporation
 Flowcharts of internal control
 Bond indenture agreements and lease agreements
 Analysis of capital stock and owners’ equity
accounts
Page 3
Departure form a Relevant Requirement

If, in exceptional circumstances, the auditor judges it necessary to

depart from a relevant requirement in a PSA, the auditor shall
document how the alternative audit procedures performed achieve the
aim of that requirement, and the reasons for the departure.

Assembly and Retention of the Final Audit File

The auditor shall assemble the audit documentation on a timely basis,

ordinarily not more than 60 days after the date of the auditor’s report.
After the assembly, the auditor shall not delete or discard audit
documentation before the end of its retention period, which ordinarily
is no shorter than seven years from auditors report date.

Planning and Risk Assessment
Preliminary analytical procedures
Procedure (as part of risk assessment
procedure)
To obtain understanding the entity
and its environment in order to
Objective
identify and assess risk of material
misstatement
Attention directing? Yes
STAGES
Testing (Fieldwork)
Substantive analytical procedures
To detect material misstatements
and as part of auditor’s responses
to risk of material misstatement
No
Completion
Concluding (final or overall)
analytical procedures
To form an overall conclusion that the
FS are consistent with the auditor’s
understanding of the entity
Yes

Required? Yes No Yes

Identification and assessment of
Results
risk of material misstatement
Conclusion that FSs are consistent
with the auditor’s understanding or
Obtain reasonable assurance about
the auditor may identify previously
the fairness of an assertion
unrecognized risk of material
misstatement

Review: Auditing Theory.2 Page 4