4-1

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BASIC AUDITING CONCEPTS:

MATERIALITY, AUDIT RISK, AND
EVIDENCE

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Part Two

4-2

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CHAPTER 4
AUDIT EVIDENCE : TYPES OF
EVIDENCE, AND WORKING
PAPER DOCUMENTATION

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Chapter 4

4-3

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4-4

EVIDENTIAL MATTER

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Third standard of field work states. 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
examination.
On a typical audit engagement, most of the auditor's
work involves obtaining and evaluating evidence to
test the fair presentation of the financial statements.

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4-5

THE RELATIONSHIP OF
EVIDENTIAL MATTER TO THE
AUDIT REPORT
Financial
Statements

Audit
Report

Management
Assertions
Audit
Objectives
Audit
Procedures

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Evidence

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4-6

MANAGEMENT ASSERTIONS

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Existence or occurrence
Completeness
Rights and obligations
Valuation and allocation
Presentation and disclosure

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4-7

AUDIT OBJECTIVES

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Validity
Completeness
Cutoff
Ownership
Accuracy
Valuation
Classification
Disclosure

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4-8

AUDIT PROCEDURES
Audit procedures are specific actions performed by the
auditor to gather evidence to determine if specific audit
objectives are being met.
A set of audit procedures prepared to test audit
objectives for a component of the financial statements is
referred to as an audit program.

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4-9

BASIC CONCEPTS OF
AUDIT EVIDENCE

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The nature of audit evidence

The sufficiency of audit evidence
The appropriateness of audit evidence
The evaluation of audit evidence

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4-10

THE NATURE OF
AUDIT EVIDENCE

Accounting data that can be used to test audit objectives

include the books of original entry, related accounting
manuals, and records such as worksheets and spreadsheets
that support amounts in the financial statements. Many
times these data are in electronic form.
Corroborating audit evidence includes both written and
electronic information such as cheques, records of
electronic transfers, invoices, contracts, minutes,
confirmations, and written representations.

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4-11

SUFFICIENCY OF
AUDIT EVIDENCE

The auditor relies on evidence that is persuasive rather

than convincing in forming an opinion on a set of
financial statements. This occurs for two reasons:
Because of cost considerations, the auditor only
examines a sample of the transactions that compose
the account balance or class of transactions.
Due to the nature of evidence, the auditor must often
rely on evidence that is not perfectly reliable.

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4-12

THE APPROPRIATENESS OF
AUDIT EVIDENCE

Evidence is considered appropriate when it is both

relevant and reliable
Relevance - The evidence must be relevant to
the audit objective being tested.
Reliability - Reliability refers to whether the
type of evidence can be relied upon to signal the
true state of an assertion or audit objective.

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4-13

GENERAL FACTORS FOR ASSESSING

THE RELIABILITY OF EVIDENCE

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Independence of the source of the evidence.

Effectiveness of internal control.
Auditor's direct personal knowledge.

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4-14

EVALUATION OF
AUDIT EVIDENCE
The auditor should to be thorough in searching for
evidence and unbiased in its evaluation.

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4-15

TYPES OF AUDIT EVIDENCE

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Physical examination
Reperformance
Documentation
Confirmation
Analysis
Inquiries of client personnel or management
Observation

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4-16

DOCUMENTATION

Reliability of documentary evidence.

Internal versus external evidence

Documentary evidence related to audit objectives.

Vouching versus tracing

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4-17

CONFIRMATION

The reliability of evidence obtained through

confirmations is directly affected by factors such as
The form of the confirmation.
Prior experience with the entity.
The nature of the information being confirmed.
The intended respondent.

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4-18

RELIABILITY OF THE
TYPES OF EVIDENCE
Level of Reliability Type of Evidence
High
Medium

Low

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Physical examination
Reperformance
Documentation
Confirmation
Analytical procedures
Enquiries of client personnel
or management
Observation
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4-19

RELATIONSHIP OF EVIDENCE TO
AUDIT OBJECTIVES AND ACTIVITIES

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Table 4-6 shows the relationship of the types of

evidence to audit objectives

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4-20

WORKING PAPERS

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Working papers have two functions:

to provide support for the auditor's report.
to aid in the conduct and supervision of the audit

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4-21

TYPES OF WORKING PAPERS

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Most CA firms maintain working papers in

two types of files:
permanent files
current files

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4-22

FORMAT OF WORKING PAPERS

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Heading
Indexing and cross-referencing
Tick marks

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4-23

ORGANIZATION OF
WORKING PAPERS

The auditor's working papers need to be organized so

that any member of the audit team (and others) can
find the audit evidence that supports each financial
statement account.
See Figure 4-4.

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4-24

OWNERSHIP OF THE
WORKING PAPERS

The working papers are the property of the auditor.

This includes not only working papers prepared by the
auditor but also working papers prepared by the client
at the request of the auditor.

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2002 McGraw-Hill Ryerson

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