Audit Evidence and Documentation

Report
Audit Evidence and
Documentation
Slide 5- 1
Overview
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Presentation will cover:
» The requirements for Audit Evidence
» Nature of Audit Evidence
» Audit Procedures for Gathering Evidence.
» Documentation of Evidence
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Objectives
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Slide 5- 3
Identify the standards for good
evidence, the methods for obtaining and
presenting the audit evidence.
Audit Evidence-What is It?
Evidence gathered in the course of an audit that
supports the auditor’s opinion and
conclusions.
Slide 5- 4
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”.
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Slide 5- 5
Types of Evidence
Physical evidence
 Third-party representations
 Documentary evidence
 Computations
 Data Interrelationships
 Client representations
 Accounting records
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Types of Evidence
Physical 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.
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Types of Evidence
Third Party Representations
Confirmations
 Lawyers’ Letters
 Reports of Specialists
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Types of Evidence
Documentary Evidence
Four basic types (helps determine reliability):
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Created by outside parties and transmitted
directly to auditor
Created by outside parties and held by client
Created and held by client
Electronic documents
Types of Evidence
Computations
Computations are:
 Performed independently by auditor
 Used to verify mathematical accuracy of
client’s analyses and records
Slide 5- 10
Types of Evidence -Analytical
Data interrelationships (i.e., analytical
procedures) rely on plausible
relationships among financial and nonfinancial data.

Effective for testing “reasonableness” of
certain account balances
» Can be used as primary or corroborating evidence,
depending on the nature of account
Slide 5- 11
Types of Evidence
Oral 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.
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Confirmations
The receipt of a written or oral response from an
independent third party.

Customers – confirm A/C receivable balances
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Suppliers – confirm A/C payable balances
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Banks – confirm account/loan balances
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Lawyers – confirm contingent liabilities
Types of Evidence
Accounting Records
Clients’ accounting records (e.g. ledgers
and journals) may provide worthwhile
evidence in themselves.
» Depends on the effectiveness of internal
controls
Slide 5- 14
Audit Procedures
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Physical examination Physical Evidence
Observation
Confirmation Third-Party Representations
Tracing
Vouching
Documentary Evidence
Inspection
Reconciliation
Reperformance Computations
Analytical procedures Analytical
Inquiry Client Representations
Comparison Accounting Records
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.
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Slide 5- 16
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.
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Slide 5- 17
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.
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Slide 5- 18
Reperformance
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Reperformance involves rechecking a
sample of the computations to test
mathematical accuracy e.g.
reconciliations, interest computations
etc.
Inspection of Documents &
Records
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Slide 5- 20
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.
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.
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Slide 5- 21
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.
Slide 5- 22
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.
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Slide 5- 23
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.
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Slide 5- 24
Forms of Analytical
Procedures
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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.
Slide 5- 25
Analytical Procedures
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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.
Slide 5- 26
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.
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Slide 5- 27
Competence of Audit
Evidence
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To be competent evidence must be:
» Relevant
» Reliable
» Sufficient
» Useful
Slide 5- 28
Competence of
Evidential Matter
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To be competent evidence must be:
»
Relevant
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»
Valid (Reliable)
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–
Slide 5- 29
Must relate to the audit objective. E.g. purchase
order not relevant to prove that goods were actually
received.
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.
Reliability of Certain Types of
Audit Evidence
RELIABILITY
High
Low
Slide 5- 30
TYPE
Physical
EXAMPLE
Inventory Observation
Documentary
External
External/Internal
Internal
Bank Statement
Purchase Invoice
Sales Invoice
Client Representations
Management Representation
Letter
Competence of Evidence
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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.
Slide 5- 31
Selection of Audit Procedures
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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.
Slide 5- 32
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?
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Slide 5- 33
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:
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» Enquiry & representation.
» Observation
» Inspection of supporting documents
» Re-performance of controls.
Slide 5- 34
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.
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Slide 5- 35
Substantive Procedures
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Substantive Procedures include:
» Enquiry and representation.
» Analytical procedures.
» Detailed tests of transactions and balances
by: inspection of documents, physical
examination, external confirmation and
reperformance.
Slide 5- 36
Audit Documentation
Audit Standard: 2330-1
 Working Paper Files
 Typical Working Paper Format
 Storage of Working Papers
 Ownership of Working Papers
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Slide 5- 37
Audit Documentation
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Standard 2330-1:
» “Internal auditors must document relevant
information to support the conclusions and
engagement results”.
Slide 5- 38
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.
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Slide 5- 39
Working Papers -Objectives
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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.
Slide 5- 40
Working Paper-Objectives
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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.
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Slide 5- 41
Key X-teristics of Work Papers
Complete
 Concise
 Accurate
 Organised
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Characteristics
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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.
Slide 5- 43
Characteristics
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Accurate:
» High quality work papers include
statements and computations that are
accurate and technically correct.
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Characteristics
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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.
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Characteristics
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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.
Slide 5- 46
Work Paper Elements
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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.
Slide 5- 47
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.
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Working Paper-Example
ABC Pension Audit as of 30/06/2011
Comparison of HRD 20 Forms to Master Files
W/P NO. A-3
Prepared by: MN
Name on HRD 20 Form
Located Individual on
Master File
M. Kinyera
Y
G. Musoke
N
F. Namusisi
Y
Source: HRD 20 form files located in Pension Benefits
Area
Y=on master file, N = Name not located on master file
Slide 5- 49
Working Paper Example2
Summary of Audit Findings (RAF)
ABC Ltd – Pension Audit as of 30th June 2011
RAF No. C-3
Scope:
W/P Ref: A-3
Audit Objective:
Method of Sample Selection
Results (Condition, effect, cause)
Conclusion
Recommendation:
Risk Grade:
Medium
Prepared by:
Date:
Reviewed by:
Date:
Slide 5- 50
Elements
Tick mark legend. A concise definition of
all tick marks (symbols) should be included
on each audit work paper to clearly
describe the work performed during the
engagement.
 Exceptions. Audit exceptions should be
documented and explained clearly on each
work paper using logical numbering that
cross reference to other work papers.
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Tick Mark -Example
Ricky Corporation Cash Reconciliation
Prepared by:
Reviewed by:
 Date:
Date:
 1st Savings
234 @
 @ = Traced to bank reconciliation
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Storage of Work Papers
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Permanent File:
» Keeps information that is relevant for
multiple years on recurring engagements.
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Current File:
» Information relevant for a given audit
project/engagement.
Slide 5- 53
Working Paper Storage
Can be stored in manual or electronic
form.
 For electronic files:
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» Back up frequently.
» Include the file name in the footer.
» Develop an organisation method.
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Working Papers Mgt Policies
The CAE must control access to
engagement records – Std 2330.A1.
 The CAE must obtain the approval of senior
management and/or legal counsel prior to
releasing such records to external parties, as
appropriate-Std 2330.A2.
 The CAE must develop retention
requirements for audit records –consult legal
counsel.
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END
QUESTIONS?
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END
THANK YOU!
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