Audit Evidence and Documentation

1. Audit Evidence and Documentation

2. Overview • Presentation will cover: • The requirements for Audit Evidence • Nature of Audit Evidence • Audit Procedures for Gathering Evidence. • Documentation of Evidence

3. Objectives • Identify the standards for good evidence, the methods for obtaining and presenting the audit evidence.

4. Audit Evidence-What is It? Evidence gathered in the course of an audit that supports the auditor’s opinion and conclusions.

5. Why Audit Evidence? • A professional requirement by auditing standard 2310. • “Auditor should identify, sufficient, reliable, relevant and useful information to provide factual basis for audit opinions”.

6. Types of Evidence • Physical evidence • Third-party representations • Documentary evidence • Computations • Data Interrelationships • Client representations • Accounting records

7. Types of EvidencePhysical Evidence Evidence that can actually be seen by auditors. • This type of evidence is generally effective for supporting testing existence and condition of the asset. Example –inspection of a fixed asset.

8. Types of EvidenceThird Party Representations • Confirmations • Lawyers’ Letters • Reports of Specialists

9. Types of EvidenceDocumentary Evidence Four basic types (helps determine reliability): • Created by outside parties and transmitted directly to auditor • Created by outside parties and held by client • Created and held by client • Electronic documents

10. Types of EvidenceComputations Computations are: • Performed independently by auditor • Used to verify mathematical accuracy of client’s analyses and records

11. Types of Evidence -Analytical Data interrelationships (i.e., analytical procedures) rely on plausible relationships among financial and non-financial data. • Effective for testing “reasonableness” of certain account balances • Can be used as primary or corroborating evidence, depending on the nature of account

12. Types of EvidenceOral and Written Client Representations • Responses to questions and inquiries to clients during an audit constitute audit evidence. • Oral representations are generally not sufficient as primary evidence, but may provide corroboration for other evidence. • Written representations (representation letter) are required, but should not be used as a substitute for other audit procedures.

13. Confirmations The receipt of a written or oral response from an independent third party. • Customers – confirm A/C receivable balances • Suppliers – confirm A/C payable balances • Banks – confirm account/loan balances • Lawyers – confirm contingent liabilities

14. Types of EvidenceAccounting Records Clients’ accounting records (e.g. ledgers and journals) may provide worthwhile evidence in themselves. • Depends on the effectiveness of internal controls

15. Audit Procedures • Physical examination • Observation • Confirmation • Tracing • Vouching • Inspection • Reconciliation • Reperformance • Analytical procedures • Inquiry • Comparison Physical Evidence Third-Party Representations Documentary Evidence Computations Analytical Client Representations Accounting Records

16. Document Vouching • Examination of documents that support a recorded transaction or amount. • The direction of testing must be from the recorded item to the supporting documents. • Tests existence or occurrence. • Also tests if transaction was properly authorised.

17. Document Tracing • The primary test for unrecorded items and therefore tests the completeness assertion. • The direction of testing must be from the supporting document to the recorded item. • Also used to test if transactions were recorded in rightful accounts.

18. Observation • Auditor witnesses the physical activities of the client. • Useful in obtaining evidence that controls which leave no documentary evidence of application or existence are in operation. • Differs from physical examination because physical examination counts assets, while observation focuses on client activities e.g. inventory counting.

19. Reperformance • Reperformance involves rechecking a sample of the computations to test mathematical accuracy e.g. reconciliations, interest computations etc.

20. Inspection of Documents & Records • Documents and other records underlying a transaction or balance or on which a control is applied are inspected to obtain substantive evidence or evidence of control. E.g. evidence of proper authorisation.

21. Analytical Procedures • Auditors study relationships among data. • Unusual fluctuations occur when significant difference are not expected but do exist or when significant differences are expected but do not exist. • Required during the planning stage.

22. Analytical Procedures Analytical Procedures are useful in identifying among other things: • Differences that are not expected. • The absence of differences when they are expected. • Potential errors, irregularities or illegal acts. • Other unusual or non recurring transactions or events.

23. Analytical Procedures • If a change in one area would naturally lead to a change in some other area, the absence of the expected change should lead to a further study in search of the cause. • Ex. If commissions paid to sales representatives rise in one quarter, it would be reasonable to expect a correspondence increase in sales revenue.

24. Examples • Relationship of marketing expenditure to sales. • Relationship of interest income to interest earning assets. • Relationship of interest expense to debt balances. • Such relationships are assumed to remain the same unless some unknown condition causes a change.

25. Forms of Analytical Procedures • Comparisons: • Current period information with similar information for prior periods. • Current info with budgets or forecasts. • Info for the audited unit with info for other organisational units. • Information for the audited unit with similar information for the industry in which the organisation operates.

26. Analytical Procedures • Relationships: • Study of relationships of financial info with appropriate non financial info e.g. changes in payroll expense compared to changes in average number of employees. • Study relationships among elements of information.

27. Analytical Procedures • When analysis uncovers unexpected results, auditors should undertake further study e.g. making inquiries to management & applying other audit procedures. The explanation may lie in errors, irregularities or illegal acts. • Further study should continue until the auditor is satisfied that the results have been sufficiently explained.

28. Competence of Audit Evidence • To be competent evidence must be: • Relevant • Reliable • Sufficient • Useful

29. Competence of Evidential Matter • To be competent evidence must be: • Relevant • Must relate to the audit objective. E.g. purchase order not relevant to prove that goods were actually received. • Valid (Reliable) • Independent sources have greater reliability than those within the client organization. • Strong internal control increases reliability of evidence created within the client organization. • Directly obtained evidence is more reliable than evidence obtained second hand.

30. Reliability of Certain Types of Audit Evidence • RELIABILITY TYPE EXAMPLE • High Physical Inventory Observation • Documentary • External Bank Statement • External/Internal Purchase Invoice • Internal Sales Invoice • Low Client Representations Management Representation • Letter

31. Competence of Evidence • Evidence is sufficient if there is sufficient of it to support the auditor’s findings. It must be convincing enough for a prudent person to reach the same decision/conclusion. E.g. interviewing the auditee is not enough to provide sufficient evidence. • It must be factual and adequate to the testing objective. • Verifying the physical condition is most persuasive evidence as to condition of asset.

32. Selection of Audit Procedures • The criteria for selection of the most suitable technique can be based on the following: • Will the technique meet the objectives of the audit stage or phase? • Has the auditor the skills to use the procedure? • Is the material to be audited available and in a condition to be used with the audit procedure.

33. Selection of Audit Procedure • Will the procedure be cost effective? E.g. will the time and effort to perform the procedures far exceed the benefit of using it? • Will the conclusions reached after using the procedure be valid?

34. Compliance Audits • Compliance procedures provide evidence that internal controls exist and that they are being applied effectively and consistently. • Procedures which can be used include: • Enquiry & representation. • Observation • Inspection of supporting documents • Re-performance of controls.

35. Substantive Procedures • Substantive procedures provide direct evidence as to the validity of a transaction or balance in the records. • An example is the checking of an entry from an input voucher to a customer’s account.

36. Substantive Procedures • Substantive Procedures include: • Enquiry and representation. • Analytical procedures. • Detailed tests of transactions and balances by: inspection of documents, physical examination, external confirmation and reperformance.

37. Audit Documentation • Audit Standard: 2330-1 • Working Paper Files • Typical Working Paper Format • Storage of Working Papers • Ownership of Working Papers

38. Audit Documentation • Standard 2330-1: • “Internal auditors must document relevant information to support the conclusions and engagement results”.

39. Audit Documentation • Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor. • Audit Evidence is documented in Audit working papers. • Internal Audit Management Reviews these Working papers to ensure quality is maintained.

40. Working Papers -Objectives • Audit working papers achieve following objectives: • Aid in the planning, performance, and review of audit work. • Provide the principal support for audit report and conclusions. • Facilitate third party/supervisory reviews.

41. Working Paper-Objectives • Provide a basis for evaluating the internal audit activity’s quality control program. • Document whether engagement objectives were achieved. • Support the accuracy and completeness of the work performed.

42. Key X-teristics of Work Papers • Complete • Concise • Accurate • Organised

43. Characteristics • Completeness: • Each Work Paper should be completely self standing and self explanatory. All questions must be answered, all points raised by the reviewer must be cleared and a logical, well thought-out conclusion reached for each audit segment.

44. Characteristics • Accurate: • High quality work papers include statements and computations that are accurate and technically correct.

45. Characteristics • Organisation: • Work papers should have a logical system of numbering and a reader –friendly layout so a technically competent person unfamiliar with the project could understand the purpose, procedures performed, and results.

46. Characteristics • Relevance & Conciseness: • Audit work papers and items included on each work paper should be relevant to meeting the applicable audit objective. • Work papers must be confined to those that serve a useful purpose.

47. Work Paper Elements • Work papers should include the following key elements: • Name of audit area • Source: The name and title of the individual providing the documentation should be recorded to facilitate future follow-up questions or audits. • Scope: The nature, timing, and extent of procedures performed should be included on each work paper for completeness.

48. Elements of W/Papers • Reference: A logical work paper number cross referenced to audit program steps and issues should be included. • Sign off: The preparer’s signature provides evidence of completion and accountability, which is an essential piece of third party quality review.

49. Working Paper-Example

50. Working Paper Example2