Module 3: Audit Objectives, Evidence, Procedures, and Documentation

Course Schedule Course Modules Review and Practice Exam Preparation Resources
Module 3: Audit objectives, evidence, procedures, and

documentation
Overview
Module 3 explains the difference between the objective of an audit (which is to express an opinion on the
financial statements) and specific audit objectives (which are to identify the relevant management assertions
embodied in the financial statements and to ensure that those assertions are not materially misstated). You
learn what is required for evidence to be sufficient and appropriate to afford a reasonable basis for supporting
the content of the auditor’s report, as well as the general audit procedures used to gather evidence. This
module also covers the requirements for the form and content of working papers so that evidence can be
properly documented, as well as pre-engagement activities.
When you have completed this module, you should have a good understanding of both the auditor’s and
management’s responsibilities. Throughout the module, you apply what you have learned about the audit
objectives and evidence to mini-scenarios that outline situations faced by auditors.
Assignment reminder: Assignment 1 in Module 5 is due at the end of Week 5 (see Course Schedule). You
may wish to take a look at the assignment now to familiarize yourself with the requirements and to prepare for
any work that may be required in advance.
Test your knowledge
Begin your work on this module with a set of test-your-knowledge questions designed to help you gauge the
depth of study required.
Learning objectives
3.1 Audit objectives Describe the auditor’s responsibility to consider fraud and error
and the consequences of illegal acts, in order to achieve the
objective of financial statement audits. (Level 2)
3.2 Specific audit objectives Explain the various types of management assertions and their
relationship to specific audit objectives. (Level 1)
3.3 Audit evidence Explain how an auditor determines what and how much evidence
is required. (Level 1)
3.4 Evidence-gathering audit procedures Identify and apply evidence-gathering audit procedures commonly

used to obtain audit evidence, and describe the strengths and
weaknesses of each procedure. (Level 1)
3.5 Documentation Explain the purpose and key elements of audit working papers,
and describe the form and content of documentation required in a
professional engagement. (Level 1)
3.6 Pre-engagement arrangements Identify the main pre-engagement activities and the factors to
consider when deciding whether to accept a new audit
engagement. (Level 1)
3.7 Engagement letters Describe the purpose and main features of an engagement letter.
(Level 2)
Module summary
Print this module
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3.1 Audit objectives
Learning objective
Describe the auditor’s responsibility to consider fraud and error and the consequences of illegal
acts, in order to achieve the objective of financial statement audits. (Level 2)
Required reading
Chapter 9, pages 348–350, Auditor’s Responsibility to Report Internal Control Deficiencies and
Fraud Risks
Chapter 17, pages 682–686, Auditor’s Responsibility to Consider Fraud and Error in an Audit of
Financial Statements and Illegal Acts by Clients
CAS 260.10–.13 (CICA Handbook — Assurance , paragraphs 5751.17–.19)
CAS 200 (CICA Handbook, section 5090)
Reading 3-1: AuG-8, The Auditor’s Responsibility for the Detection of Fraud and Other
Irregularities
Reading 3-2: AuG-9, The Auditor’s Responsibility for the Detection and Reporting of Illegal Acts
LEVEL 2
Overall objective of an audit
The objective of an audit is to express an appropriate opinion as to whether the financial statements present
fairly, in all material respects, the financial position, the results of operations, and the cash flows of the
auditee. To say that the financial statements present fairly, in all material respects, is equivalent to stating that
they are free from material misstatements whether due to error, fraud, or as a consequence of an illegal act by
the client.
Responsibility to detect errors or fraud
Management is responsible for producing the financial statements and for implementing controls that will
prevent and detect errors or fraud. The auditor is responsible for detecting material misstatements from errors
or fraud in order to achieve the objective of the audit.
Professional skepticism requires the auditor to be alert to any factors that could increase the risk of material
misstatements, whether caused by fraud or error (CAS 240.12–.14; CICA Handbook paragraphs 5135.023–.024
and CAS 200.15 and 200.A18–A22; CICA Handbook paragraphs 5090.04–.06). For example, while conducting
an audit, an auditor reviews an original copy of a $5 million sales agreement and it appears that the terms of
the sale may be falsified. The auditor would respond with a heightened level of professional skepticism and
would seek additional evidence to confirm or dispel the concern about falsification. This could be done by
directly confirming the terms of the contract with the customer.
Scenario 3.1-1
Lazlo, CGA and auditor for World Communications Inc., has scheduled a meeting with the CFO during the initial
stages of the audit engagement. In addition to other information, the CFO tells Lazlo that no significant capital
assets were acquired during the year. In accordance with CAS 200 (CICA Handbook section 5090), should Lazlo
believe the CFO and not bother checking the facts himself?
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Solution
Responsibility to detect illegal acts
Management is responsible for identifying and complying with laws and regulations that affect the entity, as
well as preventing and detecting illegal acts.
CAS 250.A7 explains how the auditor can obtain an understanding of the laws and regulations that, if violated,
could result in material misstatement. CAS 250.13 (CICA Handbook, paragraph 5136.09) requires that the
auditor design procedures so as to obtain sufficient evidence regarding compliance with the provisions of those
laws and regulations generally recognized to have a direct effect on the determination of material amounts and
disclosures in the financial statements. The auditor must reduce the risk of not detecting a material
misstatement to an acceptably low level, recognizing that such a misstatement may arise from the
consequences of an illegal act. CAS 250.A9 and 250.A15–.A16 (CICA Handbook, paragraphs 5136.11–.22)
provide guidance on how to reduce this risk to an acceptably low level.
Scenario 3.1-2
Natasha, CGA and auditor for Rose Industries Inc., discovers that a relatively small bribe is paid in a foreign
country to a government official of that country. Even though the bribe is not material, Natasha considers
assessing the impact on the financial statements because of this illegal act. Do you agree with her?
Solution
Responsibility to communicate material misstatements
If the auditor obtains evidence confirming that a misstatement does exist, the auditor should promptly
communicate the misstatement to the appropriate level of management and to the audit committee (or
equivalent). See CAS 240.40–.42 and CAS 260.A20 (CICA Handbook, paragraphs 5135.093–.101 and 5751.17),
if applicable. Discovery of possible illegal acts should be communicated to the audit committee and other
appropriate levels of management. The auditor is also required to advise the audit committee (or equivalent) of
any questions regarding management competence and integrity.

3.2 Specific audit objectives
Learning objective
Explain the various types of management assertions and their relationship to specific audit
objectives. (Level 1)
Required reading
Chapter 6, pages 195–202

CAS 315.A105–.A112 (CICA Handbook, paragraph 5300.21)
LEVEL 1
Auditors usually find it more efficient to audit components — all the related accounts in a cycle — with
coordinated procedures, instead of performing separate audit procedures on each account in isolation.
CAS 315 provides a detailed listing of audit assertions, which may be about
classes of transactions (income statement balances)

balance sheet items
presentation and disclosure
In the conduct of an audit, the auditor will assess the risk of material misstatement at the account balance and
assertion level.
Be sure you understand the difference between the overall objective of an audit and the audit objective itself.
The following exhibit summarizes the relationship between the objective and its place within the audit.
Exhibit 3.2-1: Audit objectives
Objective type What it relates to What it refers to
Objective of an audit Expressing the appropriate opinion The audit as a whole.

on the financial statements.
Audit objectives The definition of auditing, which The financial statements that
states that “auditing is a systematic embody the following management
process of objectively obtaining and assertions:
evaluating evidence regarding
assertions about economic actions existence (occurrence)
and events to ascertain the degree completeness
of correspondence between the ownership (rights and
assertions and [GAAP]” (text, obligations)
page 7). valuation and
allocation (accuracy
and measurement)
cut-off
classification and
understandability
statement presentation
(disclosure)
Specific audit objectives The auditor’s goals in examining Obtaining and evaluating evidence
account balances and transactions about each account balance, class of
in each cycle. transaction, or disclosure at the
assertion level.

In preparing financial statements, management makes assertions about the amounts and disclosures contained
in those statements. For example, when the balance sheet shows accounts receivable at $400,000,
management is asserting that these amounts actually exist, that they reflect appropriate allowances for
uncollectible accounts, and that the company does indeed own the receivables.
Occurrence and existence assertions are closely related. Occurrence relates to authentic transactions
experienced during the period (for example, recorded sales transactions made to actual customers), and
existence relates to an account balance at a point in time (for example, all customer receivable balances at
year end).
Accuracy relates to transactions during the period, and valuation pertains to an account balance at a point in
time (for example, merchandise inventory transactions are measured at actual cost for recording, and the year-
end inventory account balance is valued at net realizable value for reporting). 1
Scenario 3.2-1
Elise, CGA and auditor for More Productions Ltd., makes note of the objective “Obtain evidence to ensure
completeness (ensure liabilities are not understated)” as she prepares the audit working papers for the
accounts payable section. What procedure could Elise use to support this objective?
Solution
1 T. Shasti and R. Chandra,Independent Audit and Review Services: Theory and Practice (University of
Windsor, 1997), pages 111 and 177.

3.3 Audit evidence
Learning objective
Explain how an auditor determines what and how much evidence is required. (Level 1)
Required reading

CAS 500 (CICA Handbook — Assurance , paragraphs 5300.01–.22)
LEVEL 1
What is appropriate evidence?
Audit objectives are achieved by gathering and evaluating evidence about management assertions. Auditors
need to obtain evidence on a cost-effective basis, and consequently, the nature of audit evidence is persuasive
rather than conclusive. Just as it is not possible to eliminate the risk that financial statements contain material
misstatements, it is not feasible to expect to obtain evidence that conclusively supports each assertion. For that
reason, the auditor often uses evidence from different sources to support the same assertion.
Scenario 3.3-1
Mohan, CGA and auditor for Active Building Inc., notes the objective “Obtain evidence to ensure completeness
(ensure liabilities are not understated)” in preparing the audit working papers for the accounts payable section.
One of the procedures Mohan would use is to examine invoices paid after year end to make sure those
invoices related to the year under audit are properly included as accounts payable. What other procedures
could Mohan perform?
Solution
Appropriateness and sufficiency of evidence
The appropriateness and sufficiency of evidence are interrelated and a matter of auditor judgment (CAS 500.6,
CAS 500.A1–.A6, and CAS 500.A27–.A33; CICA Handbook, paragraphs 5300.07–.09).
Appropriateness of audit evidence is related to the nature and timing of audit procedures. Appropriateness
(that is, the quality of evidence) is achieved if the evidence obtained is relevant and reliable.
There are various degrees of reliability that can be achieved; not all evidence is equally strong. Exhibit 8-5 on
Page 290 of the text presents a hierarchy of sources and characteristics of evidence from strongest to weakest.
Timeliness is also an important dimension of appropriateness. Clearly, observing an inventory count three
months after year-end (without additional roll-back auditing procedures) would not provide appropriate
evidence regarding the amounts in inventory at year-end.
Sufficiency of evidence relates to the extent of audit procedures and the quantity of evidence obtained. How
many questions should the auditor ask through enquiry? How many confirmations should be sent? How many
different audit procedures should be used to support the valuation assertion?
The concept of sufficiency arises from the fact that the auditor does not examine all the evidence available. You
should be aware of the reasons for accumulating limited amounts of evidence, which are outlined in
CAS 500.A1–500.A6 (CICA Handbook paragraphs 5300.14–.16). Sufficiency is achieved through an adequate

quantity of evidence obtained by testing specific items and representative items.

3.4 Evidence-gathering audit procedures
Learning objective
Identify and apply evidence-gathering audit procedures commonly used to obtain audit evidence,
and describe the strengths and weaknesses of each procedure. (Level 1)
Required reading

CAS 500.A10–.A25 (CICA Handbook — Assurance, paragraphs 5300.30–.42)
CAS 520 (CICA Handbook, paragraphs 5301.10–.24)
CAS 505.A3–.A7 (CICA Handbook, paragraphs 5303.11–.13)
LEVEL 1
Pages 275–281 of the textbook covers the evidence-gathering audit procedures used to obtain and evaluate
audit evidence. Exhibit 8-1 on page 275 shows the type of evidence obtained and gives an example of a
specific audit procedure.
As you read through the text and CAS 500.A10–A.25 (CICA Handbook, paragraphs 5300.30–.42), you should
understand the nature of each method, its strengths and weaknesses, and the types of assertions supported by
the evidence each method produces. For example,
The nature of observation is to look at the application of procedures and policies at a given
point in time.
Evidence produced by computation mainly supports the assertions of existence and valuation.
One of the weaknesses of enquiry is that it produces evidence that is rarely sufficient to support
an assertion by itself.
The other three techniques are explained below.
Confirmation is a method of obtaining evidence from third parties regarding specific balances, contractual
terms, titles to assets, and pending litigation. The text mentions that the main assertions supported by evidence
from confirmation are existence and ownership, but it also supports completeness when confirmations are used
to obtain evidence about liabilities (for example, accounts payable).
Positive and negative confirmations are described in CAS 505.15, 505.A5, and 505.A23 (CICA Handbook,
paragraphs 5303.11–.13). However, you do not need to read the rest of CAS 505 (CICA Handbook, section
5303) until Module 8, when you learn the details of how confirmations are applied to the audit of cash and
accounts receivable.
Inspection
The three principal means of inspection are vouching, tracing, and scanning. One important concept to note
from the text’s explanation is that of “direction.”
Analysis

In this topic, you focus on analysis used to provide audit evidence. CAS 520.5 and 520.A4–.A10 and
520.A20–.A21 (CICA Handbook, paragraphs 5301.15 and .20) outline what the auditor must do if the analysis
is used as primary evidence. If the analysis is used as primary evidence (the main or only evidence, as opposed
to corroborating evidence), the results must provide higher assurance than if it is used in conjunction with
other procedures.
Consider the situation in the following example.
Example 3.4-1: ABC Company
ABC Company invested $1,000,000 in treasury bills at the beginning of the year and at year end. None of this
money was used by the company during the year; that is, the company made no withdrawals. The average
yield on 90-day treasury bills during the year was 6%.
Based on these facts, the auditor could reasonably assume that the relationship between the average yield rate
and the investment balance at year end could provide reasonable expectations about the interest revenue
earned by ABC during the year.
In this case, the auditor would choose to perform analysis to provide primary evidence regarding the
occurrence of interest revenue ($1,000,000 × 6% = $60,000).
Because there were no fluctuations in investment (that is, $1,000,000 throughout the year), the high level of
assurance provided by the auditor’s expectations on revenue would be consistent with the objective of the
analytical procedure used, which is to provide primary evidence.
CAS 520 (CICA Handbook, paragraph 5301.14) outlines matters that are relevant in making the assessments
described here. In addition to making the assessments regarding expectations and levels of assurance, the
auditor also needs to consider the reliability of the data used to perform the analysis.
Accounting estimates and service organizations
CAS 540 (CICA Handbook, section 5305) provides guidance for auditing management’s estimates, perhaps one
of the more difficult aspects of the audit. Read that section carefully. CAS 402 (CICA Handbook, section 5310)
provides guidance for obtaining evidence when the enterprise uses a service organization, such as using a bank
or trust company to provide custodial services, or using a data centre to provide data-processing services. CAS
402 (CICA Handbook, section 5310) has been revised to expand on the requirements for an auditor who uses a
service auditor’s report when planning the audit, assessing control risk, using audit evidence obtained from
substantive procedures performed by service auditors, and evaluating audit evidence.

3.5 Documentation
Learning objective
Explain the purpose and key elements of working papers in auditing, and describe the form and
content of documentation required in a professional engagement. (Level 1)
Required reading
CAS 230 (CICA Handbook — Assurance, section 5145)
Reading 3-3: AuG-5, Auditor Working Paper Files
LEVEL 1
Under new auditing standards (CAS 230; CICA Handbook, section 5145), auditors are required to document
matters that, in their professional judgment, are important in providing evidence to support the content of the
audit report (CAS 230.5; CICA Handbook — Assurance, paragraph 5145.04). CAS 230.6 (CICA Handbook,
paragraphs 5145.05–.14) describes the purpose of audit working papers (documentation) and outlines matters
affecting the form and content of working papers.
Working papers document the work done during the audit and support the conclusions based on that work.
The auditor’s working papers are an integral part of the audit. Documentation should not be hurried and
incomplete; such practices are inefficient and risky. Problems are caused by incomplete documentation for the
following reasons:
The auditor is forced to rely on memory to support decisions made and conclusions reached
during the audit, and the auditor may make errors in assessing the accumulated evidence, thus
rendering an inappropriate opinion on the financial statements.
It is difficult to defend work done and demonstrate due care or lack of negligence in court
without a record of the work performed.
A meaningful file review becomes almost impossible. The reviewer must rely on the memories of
the staff who conducted the audit and their memories may be faulty; major problems may never
come to the reviewer’s attention.
Planning for the current year’s audit may not lead to the most efficient and effective audit
possible because the current year’s auditors will not be able to take advantage of the experience
gained by last year’s audit team.
If problems discovered during the prior year’s audit were not recorded, the current year’s audit
staff will not be able to take them into account. No matter how well planned and executed the
current year’s audit is, it would be deficient.
Form and content of documentation
The form and content of documentation included in working paper files are covered on pages 296 to 302 of
the text, CAS 230 (CICA Handbook, section 5145), and CGA Auditing Guideline No. 5 (Reading 3-3).
All working papers should be neat, understandable, accurate, concise, and complete. A working paper should
stand on its own — that is, an adequate trail should be provided to find the details supporting the information

on the working paper.
As a minimum, each working paper should contain certain key elements, which are highlighted in Exhibit 8-8
on page 300 of the text.
Computer-generated working papers
Electronic working papers using specialized working paper software can boost audit productivity by automating
many documentation tasks (for example, automatically carrying over adjustments to related working paper
documents and the financial statements). For example, a working paper program can directly import a trial
balance from Sage Accpac ERP and generate leadsheets automatically.
Common working paper software used in public practice includes CaseWare, WISPR, and IDEA. In Public
Practice Audit Case [BC2] , you will learn to use working paper software to prepare your audit file.

3.6 Pre-engagement arrangements
Learning objective
Identify the main pre-engagement activities and the factors to consider when deciding whether to
accept a new audit engagement. (Level 1)
Required reading
LEVEL 1
The auditor needs to determine whether it is feasible to accept a new audit or continue an existing one, then to
formalize the terms of the engagement and gain a preliminary understanding of the client’s business in order to
identify potential obstacles to accepting an engagement.
Accepting or continuing an engagement
The first consideration in accepting a new audit client is to determine why or if a client needs audit services
(notwithstanding statutory requirements). A CICA study entitled The First Audit Engagement states that an
audit may not be called for in the following circumstances:
The owners of the business participate actively in management and exercise effective control
over operations.
It is not required to satisfy creditors and other financing sources.
There is no reason to believe that audited financial statements will be required in the near future
in order to meet requirements, statutory or otherwise.
As a CGA, you are required to act in the best interest of your clients; accordingly, you need to provide
professional advice that is best suited to your client’s needs. In many cases, a less costly review engagement
provides sufficient assurance, depending on the client’s circumstances.
Assuming that the client’s circumstances do warrant an audit, the auditor must then decide whether or not it is
feasible to accept the engagement. Before accepting the engagement, auditors must ensure that they are
independent in fact (mental attitude) and in appearance (avoiding financial and managerial relationships).
Auditors must be able to maintain financial, investigative, and reporting independence as long as a professional
relationship exists. They would also review available financial information primarily to assess the size of the
client and the types of the financial statements users. Finally, auditors would look at prior years’ audit reports
for any reservations resulting from scope limitations or GAAP departures.
One of the most important activities before accepting an audit engagement is the communication with the
predecessor auditor. The rules of professional conduct and the Canada Business Corporations Act require the
successor to enquire about the predecessor auditor’s understanding of the reasons for changing auditors. Also,
an auditor cannot accept an engagement until the client has formally terminated its relationship with the
predecessor. The information obtained from the predecessor auditor is very useful for deciding whether or not
to accept the engagement. This information includes
any scope limitations imposed by the client

significant differences over applicability of accounting principles
difficulties in collecting audit fees from the client
indications of unethical management practices, and
management’s attempt to influence the audit report (such as opinion shopping)
In the majority of cases, a change of auditors arises from legitimate circumstances such as
a change in ownership
concerns over audit fees
company growth beyond the resources available to the current auditors
company requirement to periodically change auditors
A meeting should be arranged between the auditor and the client to determine the complexity of the
company’s organization and business transactions. This knowledge will affect the requirement for specialized
staff on the audit team and help the auditor to consider potential scope limitations, anticipated form of opinion,
and time constraints.
The auditor is not obligated to accept undesirable clients. The most common reasons for rejecting clients
include the following:
business and/or financial relationships between the accounting firm personnel (or their immediate
families) and the client (that is, self-interest or familiarity threat to independence)
lack of client integrity (part of the audit process relies on the belief that the client will act and
provide information in good faith)
high business risk faced by the client
likelihood of significant reservations in the audit report
Activity 3.6-1
“A CGA who is approached by a prospective client to perform an audit engagement can immediately accept the
engagement, provided the CGA has the knowledge and skill necessary to conduct the audit in an effective and
efficient manner.” Is this statement true or false?
Solution

3.7 Engagement letters
Learning objective
Describe the purpose and main features of an engagement letter. (Level 2)
Required reading
CAS 210 and Appendix 1 (Example of an Audit Engagement Letter) (CICA Handbook —
Assurance , section 5110 and Appendix, Example of an engagement letter)
LEVEL 2
An engagement letter defines the terms of the audit engagement that have been agreed to, in principle,
during meetings and conversations with the client. Engagement letters are essential to minimize the risk of
misunderstanding between the auditor and the client. They should be obtained for any new client and also for
existing clients if the nature of the engagement changes over time. For example, a significant change in
management or in the nature, size, or structure of the organization may require a new engagement letter.
Exhibit 6-1 on text page 176 and Appendix 1 in CAS 210 (the Appendix to CICA Handbook
section 5110) provide examples of engagement letters for audit engagements that can be used in practice. As
you read these examples, notice that engagement letters typically refer to
the nature of a financial statement audit and its objective
the fact that management is responsible for the financial statements and for adequate internal
controls
the scope of the audit with reference to the applicable professional standards, which will be GAAS
in most cases
the risk that a material misstatement may not be detected because the audit is conducted on a
test basis, together with the inherent limitations of internal control
details regarding the fee structure for the performance of the audit
confirmation of acceptance of the terms of the engagement from the client
The engagement letter will vary from client to client, but the elements listed above would normally be included.
Details regarding client assistance in the preparation of working papers, arrangements with outside specialists,
communication with the predecessor auditor, and the expected form of the audit report are sometimes included
in the engagement letter.

Module 3 summary
Describe the auditor’s responsibility to consider fraud and error and the
consequences of illegal acts, in order to achieve the objective of financial
statement audits.
Misstatements can arise from error or fraud. (Fraud may be either fraudulent financial reporting
or misappropriation of assets.)
It is the auditor’s responsibility to detect material misstatements, however caused.
If an auditor detects a misstatement (that is, either a misstatement resulting from a non-trivial
error, or one indicating a serious weakness in internal controls), the auditor should immediately
bring it to the attention of the appropriate level of management and the audit committee (or
equivalent).
Any evidence of fraud discovered or suspected should be communicated to the appropriate level
of management and the audit committee (or equivalent).
Any questions regarding management competence and integrity should be communicated to the
audit committee (or equivalent).
The CICA Handbook defines illegal acts as “violations of domestic or foreign statutory law or
government regulation attributable to the entity under audit, or to management or employees
acting on the entity’s behalf.”
Management is responsible for identifying and complying with laws and regulations that affect the
entity, as well as preventing and detecting illegal acts. Management is responsible for establishing
policies and procedures to accomplish this aim.
The auditor should attempt to identify laws and regulations that, if violated, could be expected to
result in a material misstatement in the financial statements.
Discovery of possible illegal acts should be communicated to the audit committee and other
appropriate levels of management.
Explain the various types of management assertions and their relationship

to specific audit objectives.
Assertions about classes of transactions and events for the period under audit include
occurrence
completeness
accuracy
cut-off
classification
Assertions about account balances at the period end include
existence
rights and obligations
completeness
valuation and allocation
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Assertions about presentation and disclosure include
occurrence
rights and obligations
completeness, classification, and understandability
accuracy and valuation
Specific audit objectives are to obtain and evaluate sufficient appropriate evidence about each assertion.
Explain how an auditor determines what and how much evidence is

required.
The appropriateness and sufficiency of evidence are a matter of judgment and are influenced by the following
factors:
materiality
inherent risk and control risk considerations
experience from prior audits
the persuasiveness of the evidence
error or fraud found during the audit
Identify and apply evidence-gathering audit procedures commonly used to

obtain audit evidence, and describe the strengths and weaknesses of each
procedure.
Audit procedures (also called techniques or methods) include computation, observation, confirmation, enquiry,
inspection (including tracing, scanning, and vouching), and analysis.
Computation by the auditor is strong evidence for the valuation assertion but does not provide
evidence of existence or completeness. Computation can be evidence for existence when the
financial statement element is one that is principally a calculation, for example, amortization.
Observation by the auditor is strong evidence for the assertion of existence. Observation,
however, does not provide evidence on any other level. The existence of an asset, for example,
does not prove ownership.
Confirmation from third parties (if the auditor has control over mailing and receipt) constitutes
strong evidence of existence and valuation because of the independent form of the evidence. If,
however, the auditor does not have control over mailing and receipt, then the client’s opportunity
to alter the responses lessens the strength of the evidence obtained by the procedure.
Direct enquiry by the auditor to third parties can be strong evidence, but direct enquiry of
internal parties is considered weaker evidence. An assessment of the source on the basis of
integrity, independence from the entity, and knowledge of the audit entity must always
accompany the use of direct enquiry.
Inspection consists of looking at records and documents or at assets having physical substance.
It encompasses the following procedures:
Vouching is used to examine documents that provide evidence supporting the assertion of
existence.
Tracing provides evidence of completeness. Documents held by third parties (bank loan
documents on file at the bank, for example) are most reliable. Third-party documents held
internally are less reliable, and documents prepared by the entity and held by the entity are

the least reliable as they can be subject to manipulation.
Scanning alerts auditors to unusual items and events in the client’s documentation.
When using analysis, the auditor must ensure that there really is a meaningful relationship
between amounts in the data to allow the development of reasonable expectations. It is also
important to ensure that the level of assurance that the expectations provide is consistent with
the objective of the analytical procedure. Analysis is best used to highlight areas in the financial
statements that require further investigation and is less valuable as hard evidence.
Explain the purpose and key elements of audit working papers, and
describe the form and content of documentation required in a professional
engagement.
Working papers document the work done during the audit and the conclusions based on that work.
They provide evidence that the audit was carried out in accordance with generally accepted auditing standards.
Good working papers should normally include
evidence of adequate audit planning

a description of audit evidence obtained
evidence of adequate supervision and review
evidence that the financial statements agree with the supporting records
evidence of evaluation and disposition of misstatements
copies of correspondence with the client
The form and content of documentation included in working paper files are covered on pages 296 to 301 of
the text, CAS 230 (CICA Handbook, section 5145), and CGA Auditing Guideline No. 5 (Reading 3-3).
The form and content of working papers are affected by such factors as
the terms of the engagement and the type of report required

the nature and complexity of the client’s business
the nature and condition of the client’s control environment and control system
the need for review and supervision of work carried out by assistants
Identify the main pre-engagement activities and the factors to consider

when accepting a new audit engagement.
The main pre-engagement activities performed before accepting an engagement include
1. assessing independence between the firm and client

2. obtaining information such as past financial statements and annual reports
3. communicating with the previous auditor
4. communicating with the client’s bankers, lawyers, and so on
5. considering any special requirements or risks related to the engagement
6. assessing if the firm has the necessary resources to complete the assignment
The factors to consider when deciding to accept a new engagement include
business and/or financial relationships between the firm’s personnel and the client
client integrity
business risk facing the client (that is, risk of business failure), and
the likelihood of significant reservations in the auditor’s report.

Describe the purpose and main features of an engagement letter.
An engagement letter defines the terms of the audit engagement to which the auditor and the client have
agreed. They usually refer to
the nature and objectives of the audit

management’s responsibility for the financial statements
the risk that the audit will not identify all material misstatements
the fee structure
a list of working papers for the client to prepare
a confirmation of the terms of engagement by the client
CAS 210 (CICA Handbook — Assurance, section 5110), Terms of Engagement, provides guidance on

establishing an understanding of, and agreement on, the terms of the engagement for the audit of financial
statements.

Module 3 self-test
Question 1
Evidence-gathering audit procedures, or methods, are used to produce evidence about the principal
management assertions embodied in the financial statements. Some of these procedures are useful for
producing evidence about certain assertions, while others are more useful for producing evidence about other
assertions. Appropriateness of evidence requires the auditor to choose the procedure(s) that will best support
the assertion being audited.
Required
Prepare a two-column table with the general audit procedures listed on the left. (Refer to text, Exhibit 8-1,
page 275.) Opposite each one, write the management assertion(s) most usefully audited by using each
procedure.
Solution
Question 2
You are engaged to audit the financial statements for Great Big Corporation Ltd. (GBC) for the year ending
December 31, 20X0. The unaudited balance sheet shows that, at year end, GBC has $285,950 worth of capital
assets (net of amortization).
Required
a. What is the overall objective for the audit of GBC?
b. Describe the auditor’s specific audit objectives with respect to the capital assets.
Solution
Question 3
Evaluate the statement: “It’s not what you do on an audit; it’s how you document it that’s important.”
Solution
Question 4
Problem EP 7, page 311
Solution
Question 5
Analysis seems to be a cost-effective way of obtaining evidence. When analysis is used to obtain primary
evidence to support financial statement amounts, the level of assurance provided from analysis must be
consistent with that purpose. Describe some difficulties the auditor may encounter when using analysis to gain
a level of assurance consistent with the objective of primary evidence.
Solution
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Question 6
Discussion Case 2, page 211
Solution
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Self-test 3
Solution 1
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Self-test 3
Solution 2
a. The objective for the audit of GBC is to express an opinion about whether GBC’s financial
statements present fairly, in all material respects, the company’s financial position as of
December 31, 20X0, and the results of operations and changes in financial position for the year
then ended. In doing so, the overall objective is to detect material misstatements in the most
effective and efficient manner.
b. The auditor’s specific audit objectives with respect to capital assets are to ensure that all relevant
management assertions are supported by appropriate audit evidence. The relevant assertions are
as follows:
The assets represented by the amount indicated ($285,950) actually exist

(existence).
The amount shown ($285,950) includes all assets acquired (completeness).
The company has clear title to the assets represented by the amount shown
($285,950); any liens or other encumbrances have been disclosed (rights or
ownership).
The assets are accurately valued at $285,950; the cost is correct and accumulated
amortization has been deducted (valuation).
The capital assets and accumulated amortization, including appropriate information
on useful life and amortization rates, have been properly disclosed (presentation
and disclosure).

Self-test 3
Solution 3
The statement is an oversimplification, but it does convey an important point: documentation on an audit is
very important. If a junior does the wrong tests in a particular area but documents what was done, the person
reviewing the file can ascertain that the wrong tests were done and remedy the situation. If the junior did not
properly document what he or she did, the reviewer would not be made aware that there was a problem, and
the situation would not be corrected. In addition, if the audit work done is ever challenged, it is only the
working papers that will provide evidence that adequate work was done in accordance with GAAS.

Self-test 3
Solution 4

Self-test 3
Solution 5
In considering whether analysis provides a level of assurance consistent with the objective of primary evidence,
the auditor must first ensure that meaningful relationships exist and can be properly evaluated. Such a
relationship might not exist, and if it does, its nature may be such that the auditor could not develop
reasonable expectations that provide a level of assurance adequate for primary evidence. For example, the
relationships may exist only in dynamic circumstances, such as unstable sales levels throughout the period,
fluctuating balances in investments, and fluctuating cash flows. Another problem may be that relationships can
only be considered at highly aggregated levels and would not be able to detect offsetting material
misstatements occurring at a more disaggregated level.
For analysis to provide the appropriate level of assurance, the auditor must choose the right analytical
procedure(s). In certain circumstances, this choice may be difficult to make. For example, where an auditor
lacks the experience and appropriate professional judgment, he or she may be unable to select the procedures
consistent with the level of assurance required.
Furthermore, the auditor can only obtain the appropriate level of assurance from analysis when the data used
to develop expectations are reliable. It may be difficult, or even impossible, for the auditor to find sufficiently
reliable data for the purpose of analysis as primary evidence. For example, the data may be available only from
within the entity as opposed to from independent sources; the data may be produced by systems lacking
appropriate internal controls; or the data may never have been subject to audit in either the current or prior
period.
Note: The auditor may use analysis as the only procedure (“primary evidence”) to audit some account balances
because of their nature (low or negligible risk of misstatement) and size (small and immaterial in amount) in
relation to other account balances.

Self-test 3
Solution 6
a. The sources of information and types of enquiries are listed below.
Financial information prepared by the prospective client:
annual reports to shareholders

interim financial statements
securities registration statements
reports to regulatory agencies
Enquiries directed to the prospect’s business associates:
banker
legal counsel
underwriter
other persons, for example, customers and suppliers
Predecessor auditor’s communication, if any, regarding:
integrity of management
disagreements with management
Analysis:
special or unusual risk related to the prospect

need for special skills (such as computer or industry expertise)
Internal search for relationships that would compromise independence.
b. No, but quality control standards require firms to investigate prospective audit clients. The
Auditing Assurance Standards Board (AASB) has issued standards [CAS 220 (section 5030)] that
are relevant to quality control at both firm and assurance engagement level. The standards
provide guidance on the acceptance and continuance of client relationships and specific
assurance engagements.
c. This acceptance question could be decided either way, although the brief facts prejudice the
conclusion toward non-acceptance. Consider that your own firm decided to resign only 10 years
ago, presumably over matters of owner-manager integrity. Yet, Mr. Shine appears to be a
respected member of his new community. Maybe his "fast and loose" accounting past is behind
him, but maybe not.

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Course Schedule Course Modules Review and Practice Exam Preparation Resources

Module 3: Audit objectives, evidence, procedures, and

Test your knowledge

3.4 Evidence-gathering audit procedures Identify and apply evidence-gathering audit procedures commonly

Print this module

file:///F|/Courses/2010-11/CGA/AU1/06course/m03intro.htm[10/19/2010 2:05:24 PM]

Overall objective of an audit

Responsibility to detect errors or fraud

file:///F|/Courses/2010-11/CGA/AU1/06course/m03t01.htm[10/19/2010 2:05:25 PM]

Responsibility to detect illegal acts

Responsibility to communicate material misstatements

file:///F|/Courses/2010-11/CGA/AU1/06course/m03t01.htm[10/19/2010 2:05:25 PM]

3.2 Specific audit objectives

Chapter 6, pages 195–202

classes of transactions (income statement balances)

Exhibit 3.2-1: Audit objectives

Objective type What it relates to What it refers to

Objective of an audit Expressing the appropriate opinion The audit as a whole.

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file:///F|/Courses/2010-11/CGA/AU1/06course/m03t02.htm[10/19/2010 2:05:26 PM]

Chapter 8, pages 288–291

What is appropriate evidence?

Appropriateness and sufficiency of evidence

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file:///F|/Courses/2010-11/CGA/AU1/06course/m03t03.htm[10/19/2010 2:05:27 PM]

3.4 Evidence-gathering audit procedures

Chapter 8, pages 275–281

The other three techniques are explained below.

file:///F|/Courses/2010-11/CGA/AU1/06course/m03t04.htm[10/19/2010 2:05:28 PM]

Consider the situation in the following example.

Example 3.4-1: ABC Company

Accounting estimates and service organizations

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Form and content of documentation

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Computer-generated working papers

file:///F|/Courses/2010-11/CGA/AU1/06course/m03t05.htm[10/19/2010 2:05:29 PM]

Accepting or continuing an engagement

It is not required to satisfy creditors and other financing sources.

any scope limitations imposed by the client

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difficulties in collecting audit fees from the client

indications of unethical management practices, and

management’s attempt to influence the audit report (such as opinion shopping)

concerns over audit fees

company growth beyond the resources available to the current auditors

company requirement to periodically change auditors

high business risk faced by the client

likelihood of significant reservations in the audit report

file:///F|/Courses/2010-11/CGA/AU1/06course/m03t06.htm[10/19/2010 2:05:31 PM]

Describe the purpose and main features of an engagement letter. (Level 2)

the nature of a financial statement audit and its objective

confirmation of acceptance of the terms of the engagement from the client

file:///F|/Courses/2010-11/CGA/AU1/06course/m03t07.htm[10/19/2010 2:05:32 PM]

It is the auditor’s responsibility to detect material misstatements, however caused.

Explain the various types of management assertions and their relationship

Assertions about account balances at the period end include

file:///F|/Courses/2010-11/CGA/AU1/06course/m03summary.htm[10/19/2010 2:05:33 PM]

Explain how an auditor determines what and how much evidence is

Identify and apply evidence-gathering audit procedures commonly used to

file:///F|/Courses/2010-11/CGA/AU1/06course/m03summary.htm[10/19/2010 2:05:33 PM]

Good working papers should normally include