Auditing Chapter 5: Audit Evidence

Vocabulary flashcards covering audit assertions, types and persuasiveness of audit evidence, expert usage, evidence-gathering procedures, and working paper documentation.

Assertions

Statements made by management regarding the recognition, measurement, presentation, and disclosure of items included in the financial statements.

Occurrence (Transactions)

A transaction-based assertion that transactions and events that have been recorded or disclosed have occurred and pertain to the entity; most important where there is risk of overstatement.

Completeness (Transactions)

An assertion that all transactions and events that should have been recorded have been recorded, and all related disclosures that should have been included are included; most important where there is risk of understatement.

Accuracy (Transactions)

An assertion that transactions and events have been recorded appropriately and related disclosures have been appropriately measured and described.

Cut-off (Transactions)

An assertion that transactions and events have been recorded in the correct accounting period; most important for transactions near year end.

Classification (Transactions)

An assertion that transactions and events have been recorded in the proper accounts.

Presentation (Transactions)

An assertion that transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable.

Existence (Account Balances)

An account balance assertion that recorded assets, liabilities, and equity interests actually exist; most important where there is risk of overstatement.

Rights and Obligations (Account Balances)

An account balance assertion that the entity holds or controls the rights to assets, and liabilities are the obligations of the entity; most important when items are held but not owned.

Completeness (Account Balances)

An assertion that all assets, liabilities, and equity interests that should have been recorded have been recorded, and all related disclosures that should have been included have been included.

Accuracy, Valuation, and Allocation (Account Balances)

An account balance assertion that assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

Classification (Account Balances)

An assertion that assets, liabilities, and equity interests have been recorded in the proper accounts.

Presentation (Account Balances)

An assertion that assets, liabilities, and equity interests are appropriately aggregated or disaggregated and clearly described, with related disclosures being relevant and understandable.

Audit Evidence

The information that an auditor uses when arriving at their opinion on the fair presentation of their client's financial statements (CAS 500).

Sufficiency of Evidence

The measure of the quantity of audit evidence required, which is a matter of professional judgement determined by audit risk.

Appropriateness of Evidence

The measure of the quality of audit evidence, which refers directly to its relevance and reliability.

Relevance of Evidence

The characteristic of evidence that provides confirmation about an assertion most at risk of material misstatement.

Reliability of Evidence

The characteristic of information that reflects the true state of information, evaluated by source independence, respondent expertise, consistency, and internal control effectiveness.

Types of external confirmations

• Bank confirmation

• Payable confirmation

• Receivable confirmation

Negative Form External Confirmation

A confirmation request where the third party is asked to reply only if the information provided is incorrect (CAS 505).

Positive Form External Confirmation

A confirmation request where the third party is asked to reply in all circumstances (CAS 505).

Documentary Evidence

Information that provides evidence about details recorded in a client’s list of transactions (invoices, bank statements, meeting minutes, legal agreements, etc)

Legal Letter

A letter sent by the client to its lawyers requesting them to complete and return information directly to the auditor concerning legal matters and disagreements (CAS 501).

Management Representation Letter

A written representation containing management's acknowledgement of their responsibilities, undertakings regarding legal compliance, and confirmation of oral discussions (CAS 580).

Verbal Evidence

Documented discussions between the auditor and client management or staff, used to gain an understanding of internal controls and corroborate other evidence.

Computational Evidence

Evidence obtained when an auditor checks mathematical accuracy through re-adding, complex recalculations, or verifying formulas.

Physical Evidence

Evidence gathered by inspecting tangible assets to assess their condition and reconcile them to the client's records. (Such as an inventory count, sheet to floor and floor to sheet)

Electronic Evidence

Data held on a client's computer, emails to the auditor, scans, and faxes that lack a paper trail and depend on internal controls and computer system quality for reliability.

Internally Generated Evidence

Records generated and held by the client, representing the least persuasive form of audit evidence due to risks of manipulation or omission. (Ex: Customer invoices - invoice created by client and billed to customer)

More examples:

• Trial balance

• General ledger

• Client prepared schedules

• Master files (ex: accounts receivable master file holds all customer info)

• Purchase requisition

• Purchase order

• Shipping documents

• Receiving support

• Remittance advice

Externally generated evidence

Information created by a third party (bank statements, supplier statements, supplier invoices, customer orders, etc)

Externally Generated Evidence Sent Directly to Auditor

The most reliable and persuasive type of evidence because it is independent of the client and offers no opportunity for client tampering.

Auditor's Expert

An individual or organization possessing specialized skills and knowledge engaged to assist when the audit team lacks the required capabilities to assess an item (CAS 620).

Group engagement partner

The auditor responsible for signing the audit report

Component Auditor

An auditor who performs audit work on financial information of a component for a group audit, required to adhere to the group engagement partner's standards of objectivity and evidence gathering (CAS 600).

• Audits a piece of the company being audited, such as a subsidiary

• Group auditor is still responsible for the overall audit

Observation

An evidence-gathering procedure involving watching client staff perform a process (e.g., an inventory count), which provides evidence strictly for the date of observation.

Inquiry

An evidence-gathering procedure that involves asking questions verbally or in written form to gain an understanding of various matters throughout the audit

Recalculation

An evidence-gathering procedure that involves checking the mathematical accuracy of client records

Reperformance

An evidence-gathering procedure that involves redoing processes conducted by the client

Analytical Procedures

An evidence-gathering procedure examining plausible relationships between financial and non-financial data.

Audit Data Analytics

The examination of large datasets using computer software to identify exceptions, patterns, and trends.

Permanent File

Working papers that contain client information and documentation that apply to more than one audit, such as key personnel, long-term contracts, and main accounting policies (CAS 230).

Current File

Working papers containing client information, documentation, and evidence gathered specifically for the current period's audit (CAS 230).