CHAPER SIX

Audit Responsibility, Objectives, Evidence and

Recording the Audit

Prepared and presented

by:
Getnet Bekalu– MSc In Accounting and Finance
 Learning objectives:

6.1. Audit Responsibility

6.2. Management Assertions
6.3. Audit Objectives
6.4. Audit Evidence
6.5. Audit Documentation
6.6. Audit working papers
 6.1. Audit Responsibility

• Management’s responsibility in audit is

 To prepare the financial statements

 To choose the basis of accounting

 To decide on the accounting estimates

 To justify and clarify auditor inquiries

 It is the auditor’s responsibility

 To verify whether the financial statements are

true and fair;
 To state the applied accounting standards;

 To issue whether the selected accounting

standards and estimated are applied
consistently;
 To ascertain the adequacy of disclosures and

 To validate management's assertations.

 Audit Responsibility (Cont’d)
• The auditor will identify audit objectives, which
can be regarded as the auditor’s counterpart of
management assertations.
• The auditor will define audit objectives for
existence of sales, completeness of expenses,
presentation and disclosure (based on IFRS) and
valuation and rights and obligations of inventory .
• The auditor will develop these specific audit
objectives for which they must test for evidence
as proof.
 Management assertions
• Management assertions are implied or expressed
representations by management about classes of
transactions and the related accounts and
disclosures in the financial statements.
• Management also asserts that all required
disclosures related to cash are accurate and are
understandable.
• Similar assertions exist for each asset, liability,
owners’ equity, revenue, and expense item in the
financial statements.
 …. management assertions
• These assertions apply to classes of transactions,
account balances, and presentation and disclosures.
• Management assertions are directly related to the
financial reporting framework used by the company
(usually U.S. GAAP or IFRS), as they are part of the
criteria that management uses to record and disclose
accounting information in financial statements.
• International auditing standards and U.S. GAAS classify
assertions into three categories:
 …. management assertions continued.
1)Assertions about classes of transactions
and events for the period under audit;

2) Assertions about account balances at

period end and

3)Assertions about presentation and

disclosure.
 Assertions About Classes of Transactions
and Events
• Occurrence:- recorded transactions
included in the financial statements
actually occurred during the accounting
period.
• Completeness:- all transactions that
should be included in the financial
statements are in fact included.
• Accuracy :- The accuracy assertion
addresses whether transactions have been
recorded at correct amounts.
 …Classes of Transactions and Events
Continued.

• Cutoff: This assertion addresses whether

transactions are recorded in the proper
accounting period or not.
• Classification:- The classification
assertion addresses whether transactions
are recorded in the appropriate accounts.
Assertions about account balances at year-
end
• Existence:- deals with whether assets, liabilities,
and equity interests included in the balance sheet
actually existed on the balance sheet date.
• Rights and Obligations:- This assertion
addresses whether assets are the rights of the
entity and whether liabilities are the obligations
of the entity at a given date.

• Completeness:- This assertion addresses

whether all accounts and amounts that should be
presented in the financial statements are in fact included.
…account balances at year-end continued.

• Valuation and Allocation:- deals

with whether assets, liabilities, and
equity interests have been included in
the financial statements at
appropriate amounts, including any
valuation adjustments to reflect asset
amounts at net realizable value.
 Assertions about presentation and
disclosure
• Occurrence and Rights and
Obligations:- This assertion addresses
whether disclosed events have occurred
and are the rights and obligations of the
entity.
• Completeness:-This assertion deals with
whether all required disclosures have
been included in the financial statements.
 …presentation and disclosure Continued.
• Classification and Understandability:- This
assertion relates to whether amounts are
appropriately classified in the financial
statements and footnotes, and whether the
balance descriptions and related disclosures
are understandable.
• Accuracy and Valuation The accuracy and
valuation assertion deals with whether
financial information is disclosed fairly and at
appropriate amounts.
 AUDIT OBJECTIVES

• After the relevant assertions have

been identified, the auditor can
develop audit objectives for each
category of assertions.
• The auditor’s audit objectives follow
and are closely related to
management assertions.
 …audit objectives continued.

• The reason for using audit objectives,

rather than assertions, is to provide a
framework to help the auditor
accumulate sufficient appropriate
evidence and decide the proper
evidence to accumulate given the
circumstances of the engagement.
 transaction-related audit objectives
• Occurrence—Recorded Transactions Exist:-

This objective deals with whether recorded

transactions have actually occurred.
• Completeness—Existing Transactions Are

Recorded:- This objective deals with

whether all transactions that should be
included in the journals have actually been
included.
 …transaction-related audit objectives
continued.
• Accuracy—Recorded Transactions Are Stated

at the Correct Amounts:-This objective

addresses the accuracy of information for
accounting transactions and is one part of
the accuracy assertion for classes of
transactions.
• It is important to distinguish between
accuracy and occurrence or completeness.
 …transaction-related audit objectives
continued.
• Posting and Summarization—Recorded
Transactions Are Properly Included in the
Master Files and Are Correctly
Summarized:-

• This objective deals with the accuracy of

the transfer of information from recorded
transactions in journals to subsidiary
records and the general ledger.
 …transaction-related audit objectives
continued.
• Classification—Transactions Included in the

Client’s Journals Are Properly Classified:-This

objective addresses whether transactions

are included in the appropriate accounts,
and is the auditor’s counterpart to
management’s classification assertion for
classes of transactions.
• Timing—Transactions Are Recorded on the
Correct Dates:- The timing objective for
transactions is the auditor’s counterpart to
management’s cutoff assertion.
 …transaction-related audit objectives
continued.
• After the general transaction-related audit
objectives are determined, specific
transaction-related audit objectives for
each material class of transactions can be
developed.
• Such classes of transactions typically
include sales, cash receipts, acquisitions
of goods and services, payroll, and so on.
 Balance-related audit objectives
• Balance-related audit objectives are similar to the
transaction-related audit objectives just discussed.
• But, there are two differences between balance-
related and transaction-related audit objectives.
• First, as the terms imply, balance-related audit
objectives are applied to account balances such as
accounts receivable and inventory rather than
classes of trans actions such as sales transactions
and purchases of inventory.
 …Balance-related audit objectives
Continued.
• Second, there are eight balance-related audit
objectives compared to six transaction-related
audit objectives.
• Existence—Amounts Included Exist:- This objective

deals with whether the amounts included in the

financial statements should actually be included.
• Completeness—Existing Amounts Are Included:-

This objective deals with whether all amounts

that should be included have actually been
included.
 …Balance-related audit objectives
Continued.
• Accuracy—Amounts Included Are Stated at

the Correct Amounts:- The accuracy

objective refers to amounts being
included at the correct amount.
• Classification—Amounts Included in the
Client’s Listing are Properly Classified:-

involves determining whether items

included on a client’s listing are included
in the correct general ledger accounts.
 …Balance-related audit objectives
Continued.
Cutoff—Transactions Near the Balance Sheet

Date Are Recorded in the Proper Period:- In

testing for cutoff of account balances, the

auditor’s objective is to determine whether
transactions are recorded and included in
account balances in the proper period.
 presentation and disclosure-related audit
objectives
• The presentation and disclosure-related
audit objectives are identical to the
management assertions for presentation
and disclosure discussed previously.
• The same concepts that apply to
balance-related audit objectives apply
equally to presentation and disclosure
audit objectives.
 6.4. Audit Evidence
• Auditing evidence is the information collected
by an auditor to ascertain the accuracy and
compliance of a company's financial
statements.
• The auditing evidence is meant to support the
company's claims made in the financial
statements and their adherence to the
accounting laws of their legal jurisdiction.
• The foundation of any audit is the evidence
obtained and evaluated by the auditor.
 …Audit Evidence Continued.
• The auditor must have the knowledge and
skill to accumulate sufficient appropriate
evidence on every audit to meet the
standards of the profession.
• The use of evidence is not unique to auditors.

• Evidence is also used extensively by

scientists, lawyers, and historians.
• For example, most people are familiar with
legal dramas on television in which evidence
is collected and used to argue for the guilt or
innocence of a party charged with a crime.
 Accounting records
• Accounting records, the primary basis of
audit evidence, generally include the records
of initial entries and supporting records.
• Initial entries include point of sales
transactions, electronic data interchange
(EDI), electronic fund transfer (EFT),
contracts, invoices, shipping notices,
purchase order, sales order, the general and
subsidiary ledger, journal entries, and other
adjustments to the financial statements.
 …Audit Evidence Continued.
• A major decision facing every auditor is
determining the appropriate types and
amounts of evidence needed to be satisfied
that the client’s financial statements are fairly
stated.
• There are four decisions about what evidence
to gather and how much of it to accumulate:

1)Which audit procedures to use;

2)What sample size to select for a given

procedure;
 …Audit Evidence Continued.
3) Which items to select from the population and

4) When to perform the procedures

• An audit procedure is the detailed instruction
that explains the audit evidence to be obtained
during the audit.
• For example, the following is an audit
procedure for the verification of cash
disbursements:
 Examine the cash disbursements journal in the
accounting system and compare the payee,
name, amount, and date with online information
provided by the bank about checks processed
for the account.
 Persuasiveness of evidence F EVIDENCE

• Persuasive means any evidence that may

cause a person to believe a fact.
• The two determinants of the persuasiveness
of evidence are appropriateness and
sufficiency.
• Appropriateness of evidence is a measure of
the quality of evidence, meaning its relevance
and reliability in meeting audit objectives for
classes of transactions, account balances, and
related disclosures.
 Persuasiveness of evidence (cont’d) F
EVIDENCE

• The sufficiency and appropriateness of audit

evidence are interrelated.
• Sufficiency and appropriateness are integral
factors in evaluating the persuasiveness of the
audit evidence.”
• “Appropriate audit evidence is sufficient (that
is, persuasive) when an experienced auditor
would be persuaded to draw conclusions based
on consideration of the audit evidence.”
 …Persuasiveness of evidence
Continued.
• Relevance of Evidence:- Evidence must
pertain to or be relevant to the audit
objective that the auditor is testing before
it can be appropriate.
• For example, assume that the auditor is
concerned that a client is failing to bill
customers for shipments (completeness
transaction objective).
 Reliability of Evidence
• Reliability of Evidence:- Reliability of
evidence refers to the degree to which
evidence can be believable or worthy of trust.
• Reliability, and therefore appropriateness,
depends on the following six characteristics
of reliable evidence:

1.Independence of provider.:- Evidence

obtained from a source outside the entity is
more reliable than that obtained from within.
 …Reliability of Evidence Continued.
1. Effectiveness of client’s internal
controls:- When a client’s internal controls
are effective, evidence obtained is more
reliable than when they are weak.

2. Auditor’s direct knowledge:- Evidence

obtained directly by the auditor through
physical examination, observation,
recalculation, and inspection is more
reliable than information obtained
indirectly.
 …Reliability of Evidence Continued.
4. Qualifications of individuals providing the

information:- Although the source of

information is independent, the evidence
will not be reliable unless the individual
providing it is qualified to do so.

5. Degree of objectivity:- Objective

evidence is more reliable than evidence
that requires considerable judgment to
determine whether it is correct.
 …Reliability of Evidence Continued.
6. Timeliness:- The timeliness of audit evidence
can refer either to when it is accumulated or to
the period covered by the audit.
• Generally, In making decisions about evidence
for a given audit, both persuasiveness and cost
must be considered.
• In deciding which audit procedures to use, the
auditor can choose from eight broad categories
of evidence, which are called types of evidence.
 TYPES OF AUDIT EVIDENCE
• Every audit procedure obtains one or
more of the following types of evidence:

1.Physical examination

2.Confirmation

3.Documentation
4.Analytical procedures
5.Inquiries of the client
6.Recalculation
7.Reperformance
8.Observation
 …types of audit evidence continued.
1. Physical examination is the inspection or
count by the auditor of a tangible asset.
• This type of evidence is most often associated
with inventory and cash, but it is also
applicable to the verification of securities,
notes receivable, and tangible fixed assets.

2. Confirmation:- describes the receipt of a

direct written response from a third party
verifying the accuracy of information that was
requested by the auditor.
 …types of audit evidence continued.

3. Documentation:- is the auditor’s

inspection of the client’s documents and
records to substantiate the information that
is, or should be, included in the financial
statements.

4. Analytical procedures:- use comparisons

and relationships to assess whether account
balances or other data appear reasonable
compared to the auditor’s expectations.
 …types of audit evidence continued.
• For example, an auditor may compare the gross
margin percent in the current year with the
preceding year’s.

5.Inquiry:- is the obtaining of written or oral

information from the client in response to
questions from the auditor.
• Although considerable evidence is obtained from
the client through inquiry, it usually cannot be
regarded as conclusive because it is not from an
independent source and may be biased in the
client’s favor.
 …types of audit evidence continued.
6.Recalculation:- involves rechecking a
sample of calculations made by the client.
• Rechecking client calculations consists of
testing the client’s arithmetical accuracy
and includes such procedures as extending
sales invoices and inventory, adding
journals and subsidiary records, and
checking the calculation of depreciation
expense and prepaid expenses.
 …types of audit evidence continued.

•A considerable portion of auditors’

recalculation is done by computer
assisted audit software.
• Reperformance:- is the auditor’s
independent tests of client accounting
procedures or controls that were
originally done as part of the entity’s
accounting and internal control system.
 …types of audit evidence continued.

8. Observation:- is the use of the senses to

assess client activities.
• Throughout the engagement with a
client, auditors have many opportunities
to use their senses—sight, hearing,
touch, and smell—to evaluate a wide
range of items.
 6.5. AUDIT DOCUMENTATION
• DOCUMENTATION
 …audit documentation
• The standard on documentation, ISA 230,
provides foundation principles of documentation.
• It advises: “The auditor should document matters
which are important in providing evidence to
support the audit opinion and evidence that the
audit was carried out in accordance with ISAs.”
• Audit documentation is the principal record of
the basis for the auditor’s conclusions and
provides the principal support for the
representations in the auditor’s report.
 …audit documentation continued.
• Audit documentation is the written record of the
basis for the auditor‘s conclusions that provides
the support for the auditor’s representations,
whether those representations are contained in
the auditor’s report or otherwise.
• Audit documentation also facilitates the planning,
performance, and supervision of the engagement and
provides the basis for the review of the quality of the
work by providing the reviewer with written
documentation of the evidence supporting the auditor’s
significant conclusions.
 Purposes of Audit Documentation
• The overall objective of audit documentation
is to aid the auditor in providing reasonable
assurance that an adequate audit was
conducted in accordance with auditing
standards.
• More specifically, audit documentation, as it
pertains to the current year’s audit, provides:
• Audit documentation also may be referred to
as work papers or working papers.
 …Purposes of Audit Documentation
continued.
• It is maintained at 3 stages of audit work:

• Audit Planning

• Audit Implementation

• Audit Reporting
• It includes records of the:

–planning and performance of the work,

–the Audit procedures performed,

–Relevant audit evidence obtained
–conclusions reached
 …Purposes of Audit Documentation
continued.
•The auditor must prepare audit documentation
in connection with each engagement
conducted pursuant to the Auditing standards
•Examples of audit documentation include

– memoranda,

– confirmations,
– correspondence,
– schedules,
– audit programs,
– letters of representation.
 6.5. Audit Working papers
• Are a record of the auditor’s planning; the
nature, timing and extent of the auditing
procedures performed; results of those
procedures; and the conclusions drawn from the
evidence obtained.

• Working papers may be in the form of data

stored on paper, film, electronic media or other
media. The terms working papers, work papers
and documentation are often used inter-
changeably in auditing.
 Working papers:
• Are a direct aid in the planning, performance, and

supervision of the audit: If an auditor is to plan

the audit adequately, the necessary reference

information must be available in the working
papers.

• Record the audit evidence resulting from the

audit work performed to provide support for
the auditor’s opinion including the
representation that the audit was conducted in
accordance with ISAs.
 Working papers:
• Assist in review of the audit work: The
working papers are used not only by
supervisory personnel to evaluate whether
sufficient competent evidence was accumulated,
but also for other auditing and consulting work.

• Provide proof of the adequacy of the audit:

After the opinion has been given, working
papers are the main physical proof that an
adequate audit was conducted.
 Working papers (Cont’d)

• There are two main divisions of audit

working papers:

1.The permanent (or continuing) audit file;

2.The current audit files.
 The permanent (or continuing) audit file
 Permanent File: is intended to contain
data of historical or continuing nature
pertinent to the current audit. This file
provides a convenient source of
information about the audit that is of
continuing interest.
 The permanent file of working papers
ordinarily includes:
 permanent (or continuing) audit file
(Cont’d)
 information concerning the legal and
organizational structure of the entity such as
copies or excerpts of company documents such
as corporate charter or articles of association,
corporate bylaws, plans, job manuals, and the
corporate organizational chart;
 extracts or copies of important legal
documents, agreements and minutes such as
contracts, loan agreements, pension plans,
agreements with parent company and
subsidiaries, minutes of board of directors or
executive committees, and profit-sharing
documents.
 permanent (or continuing) audit file
(Cont’d)
prior year analysis of fixed assets,
long-term debt, terms of stock and
bond issues, intangibles, allowances,
and results of analytical procedures.
 information concerning the
industry, economic environment and
legislative environment within which
the entity operates.
 The current audit files
 Current File: file include all
documentation applicable to the year
under audit. They ordinarily include client
summary information such as a
description of the client, client industry,
client internal controls and the auditor’s
materials.
 Auditor’s materials in the working papers
include:
 current audit files
 evidence of the planning process including the
audit planning memorandum (hereafter
referred to as the audit plan) and the audit
program; and any changes thereto;
 evidence of the auditor’s understanding of the
accounting and internal control systems, for
instance internal control questionnaires,
internal control flow charts, organization
charts, and a listing of controls and control
weakness;
 current audit files
 evidence of inherent and control risk
assessments and any revisions;
 evidence of the auditor’s consideration of
the work of internal auditing or another
auditor and conclusions reached;
 analyses of significant ratios and trends;
 a record of the nature, timing and extent
of audit procedures performed and the
results of such procedures;
Thank You for Your Attention