Dr Rihab Khalifa

ACCT315

Theme 05: Evidence and

Documentation
Chapter 5
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 LO# 2

Management Assertions
Completeness

Occurrence Classification
Assertions about
classes of transactions
and events for the
period under audit

Cutoff Accuracy
Authorization
5-2
 LO# 2

Management Assertions

Existence Completeness

Assertions about
end-of-the-period
account balances

Rights and Valuation

Obligations and allocation
5-3
 LO# 2

Management Assertions
Classification and
understandability

Assertions
Accuracy and
about presentation Completeness
valuation
and disclosure

Occurrence
5-4
 LO# 2

Management Assertions

5-5
 LO# 3

Audit Evidence

All the information, from

whatever source, used
by the auditor in arriving at
the conclusions on which the
audit opinion is based.

5-6
 LO# 3

The Concepts of Audit

Evidence
Nature of audit evidence

Sufficiency and appropriateness

of audit evidence

Evaluation of audit evidence

5-7
 LO# 3

Nature of Audit Evidence

Records of Spreadsheets
initial entries and supporting cost
supporting records allocations

General
Invoices and subsidiary Contracts
ledgers

Adjustments Other
to financial computations,
statements Worksheets reconciliations, and
disclosures
5-8
 LO# 3

Sufficiency of
Audit Evidence

Sufficiency is the measure of

the quantity of audit evidence.

Greater risk of Higher quality

misstatement requires audit evidence results
a higher quantity in a lower quantity
of audit evidence. of audit evidence.

5-9
 LO# 3

Appropriateness of
Audit Evidence
Relevance
Appropriateness is a measure
of the quality of audit evidence.
Reliability

Independent source of the evidence

Effectiveness of internal control

Auditor’s direct personal knowledge

Documentary evidence

Original documents
5-10
 LO# 4

Audit Procedures
Specific acts
performed by the auditor
to gather evidence about
whether specific assertions
are being met.

Risk assessment Test of Substantive

procedures controls procedures

5-11
 LO# 4

Audit Procedures
A set of audit procedures prepared to test
assertions for a component of the financial
statements is referred to as an audit program.
Audit Program for Accounts Receivable
Management Assertions Examples of Audit Procedures
Existence Confirm receivables.
Rights and obligations Inquire if receivables have been sold or pledged.
Completeness Agree controlling account with total of subsidiary accounts.
Select shipping documents immediatley prior to year end and
ensure sales invoices were recorded.
Valuation or allocation Trace accounts from aged trial balance to subsidiary accounts.
Test the adequacy of the allowance account.
Presentation and disclosure Look for amounts due from related parties.
Evaluate receivables for footnote disclosure.

5-12
 LO# 5

Reliability of Types
of Evidence

5-13
 LO# 6

Filling the Assurance Bucket

5-14
 LO# 6

Example of Filling the Assurance Buckets

for Each Assertion (Accounts Payable)

5-15
 LO# 7

Audit Documentation
The auditor’s principal record of the:
1. audit procedures performed,
2. evidence obtained, and conclusions reached.

Audit documentation (working papers) have two functions:

 To provide support for the audit report.
 To aid in the planning, performance, and supervision of
the audit.

5-16
 LO# 8

Content of Audit
Documentation
Most public accounting firms maintain
audit documentation in two types of files:

Permanent files Current files

Corporate charter Important contracts

Chart of accounts Internal control documentation
Organization chart Terms of stock and bond issues
Accounting manual Prior years’ analytical procedures
5-17
 LO# 8

Content of Audit
Documentation
Most public accounting firms maintain
audit documentation in two types of files:

Permanent files Current files

Audit plan, audit report Adjusting journal entries

Audit programs Reclassification journal entries
Working trial balance Current financial statements
Minutes of meetings Working papers supporting accounts
5-18
 LO# 9

Types of Analytical Procedures

(See Table 5-10)

Trend Analysis

Ratio
Analysis

Reasonableness
Analysis

5-19
 LO# 10

Short-Term Liquidity Ratios

Current
Ratio

Quick Ratio

Operating
Cash Flow
Ratio
5-20
 LO# 10

Activity Ratios
Days
Receivables Outstanding
Turnover in Accounts
Receivable

Days of
Inventory Inventory on
Turnover Hand
5-21
 LO# 10

Profitability Ratios

Gross Profit
Profit Margin
Percentage

Return on Return on
Assets Equity

5-22
 LO# 10

Coverage Ratios

Debt to
Equity

Times
Interest
Earned

5-23
End of Chapter 5

5-24