Company

LOGO

CHAPTER 5
Documentation, Evidence and Sampling
Lecturer: Hoai Nguyen
Institute of Accounting and Auditing - TMU
 Contents

5.1. Documentation

5.2. Evidence

5.3. Sampling

5.4. Written representation

 5.1. Documentation

 5.1.1. Purpose of documentation

 5.1.2. Audit file and working papers
 5.1.3. Safe custody and access to documentation
 5.1. Documentation

5.1.1. Purpose of documentation

- Definition: Audit documentation (working papers): The record of
procedures performed, relevant evidence obtained and conclusions the
auditor reached.
- Audit documentation provides:
(a) Evidence for the auditor's basis for a conclusion about the
achievement of the overall objectives of the auditor
(b) Evidence that the audit was planned and performed in accordance
with ISAs and applicable legal and regulatory requirements
 5.1. Documentation

5.1.1. Purpose of documentation

- Assurance providers record their work to:
+ Assist the audit team to plan and perform the audit
+ Assist relevant members of the team to direct and supervise work
+ Enable the audit team to be accountable for its work
+ Retain a record of matters of continuing significance to future
audits
+ Enable an experienced auditor to carry out quality control reviews
+ Enable an experienced auditor to conduct external inspections in
accordance with applicable legal, regulatory or other requirements
 5.1. Documentation

5.1.2. Audit file and working papers

[Link]. Working papers
 5.1. Documentation

5.1.2. Audit file and working papers

[Link]. Working papers
 5.1. Documentation

5.1.2. Audit file and working papers

[Link]. Audit file
- An audit file will normally contain the following working papers:
+ Information obtained in understanding the entity and its environment,
including its internal control
+ Evidence of the planning process including audit plans and any changes
thereto
+ Evidence of the auditor's consideration of the work of the internal audit
function and conclusions reached
+ Analyses of transactions and balances
+ Analyses of significant ratios and trends
+ The identified and assessed risks of material misstatements
+ A record of the nature, timing, extent and results of audit procedures
 5.1. Documentation

5.1.2. Audit file and working papers

[Link]. Audit file
- An audit file will normally contain the following working papers:
+ Evidence that the work performed by assistants was supervised and
reviewed
+ An indication as to who performed the audit procedures and when they
were performed
+ Details of audit procedures applied regarding components whose FSs are
audited by another auditor
+ Copies of communications with other auditors, experts and other third
parties
+ Copies of letters or notes concerning audit matters communicated to or
discussed with management, including the terms of the engagement and
material weaknesses in internal control.
 5.1. Documentation

5.1.2. Audit file and working papers

[Link]. Audit file
- An audit file will normally contain the following working papers:
+ Written representations received from the entity
+ Conclusions reached by the auditor concerning significant aspects of the
audit
+ Copies of the FSs and auditor's reports
+ Notes of discussions about significant matters with management and
others
+ In exceptional circumstances, the reasons for departing from a basic
principle or essential procedure of an ISA and how the alternative
procedure performed achieved the audit objective
 5.1. Documentation

5.1.2. Audit file and working papers

[Link]. Audit file
(1) Permanent audit files (contain any information of continuing importance to
the audit). These may contain:
+ Engagement letters
+ New client questionnaire
+ The memorandum and articles of association
+ Other legal documents such as prospectuses, leases, sales agreements
+ Details of the history of the client's business
+ Board minutes of continuing relevance
+ Previous years' signed accounts and analytical procedures
+ Accounting systems notes, previous years' control questionnaires
 5.1. Documentation

5.1.2. Audit file and working papers

[Link]. Audit file
(2) Current audit files (contain any information of relevance to the current year's
audit). These should be compiled on a timely basis after the completion of the
audit and should contain (amongst other things):
 financial statements
 accounts checklists
 management accounts details
 reconciliations of management accounts and financial statements
 a summary of unadjusted errors
 5.1. Documentation

5.1.2. Audit file and working papers

[Link]. Audit file
(1) Current audit files
 report to partner including details of significant events and errors
 review notes
 audit planning memorandum
 time budgets and summaries
 written representations from management
 notes of board minutes
 communications with third parties such as experts or other auditors
 5.1. Documentation

5.1.3. Safe custody and retention of documentation

- ICAEW requires all firms should have a document retention policy and
Registered Auditors to keep all audit working papers required by auditing
standards for at least 6 years from the end of the accounting period to which they
relate.
- Given that assurance work must be kept confidential, it is important that firms
have good security procedures over their retained working papers. Paper
documents must be kept securely, in locked premises. Electronic documents
should be protected by electronic controls.
 5.1. Documentation

5.1.3. Safe custody and retention of documentation

- ICAEW requires all firms should have a document retention policy and
Registered Auditors to keep all audit working papers required by auditing
standards for at least 6 years from the end of the accounting period to which they
relate.
- Given that assurance work must be kept confidential, it is important that firms
have good security procedures over their retained working papers. Paper
documents must be kept securely, in locked premises. Electronic documents
should be protected by electronic controls.
 5.2. Evidence

5.2.1. Overview about evidence

5.2.2. Procedures to obtain evidence
5.2.3. Computer assisted audit techniques
5.2.4. Analytical procedures
5.2.5. Directional testing
5.2.6. Audit of accounting estimates
 5.2. Evidence

5.2.1. Overview about evidence

- Definition: Information used by the auditor in arriving at the
conclusions on which the auditor's opinion is based.
- The auditors are required to obtain sufficient appropriate audit
evidence to be able to draw reasonable conclusions:
+ Sufficiency is the measure of the quantity of audit evidence
+ Appropriateness is the measure of the quality (includes
relevance and reliability) of the audit evidence.
 5.2. Evidence

5.2.1. Overview about evidence

[Link]. Sufficient evidence
The quantity of audit evidence required is affected by
+ The level of risk in the area being audited.
+ The quality of evidence obtained. (However, obtaining a high
quantity of poor quality evidence will not cancel out its poor
quality.)
 5.2. Evidence

5.2.1. Overview about evidence

[Link]. Appropriate evidence
Quality of evidence
Source + Audit evidence from external sources is more reliable than
that obtained from the entity's records
+ Evidence obtained directly by auditors is more reliable than
that obtained indirectly or by inference
+ Evidence obtained from the entity's records is more reliable
when related control systems operate effectively
Type + Evidence in the form of documents (paper or electronic) or
written representations are more reliable than oral
representations
+ Original documents are more reliable than photocopies, or
facsimiles
 5.2. Evidence

5.2.2. Procedures to obtain evidence

(1) Inspection of tangible assets
(2) Inspection of documentation
(3) Observation
(4) Inquiry
(5) External confirmation
(6) Recalculation
(7) Reperformance
(8) Analytical procedures
 5.2. Evidence

5.2.2. Procedures to obtain evidence

(1) Inspection of tangible assets
(2) Inspection of documentation
(3) Observation
(4) Inquiry
(5) External confirmation
(6) Recalculation
(7) Reperformance
(8) Analytical procedures
 5.2. Evidence

5.2.2. Procedures to obtain evidence

Procedures Explanation Strengths/Weakness

(1) Inspection Confirm the existence - A Good procedure, particularly
of tangible of tangible assets in the case of assets that the
assets/Physical which are recorded entity could not function
examination in the accounting without.
records. - A weak procedure in the case
that assets not used in daily
production
 5.2. Evidence

5.2.2. Procedures to obtain evidence

Procedures Explanation Strengths/Weakness
(2) Inspection of Examine records or - The strength/
documentation document. weakness of this
+ What inspection of procedure depends on
documents achieves depends what is being
on the nature of the inspected to give
document. evidence.
+ It can be used to compare
documents and confirm
authorization
 5.2. Evidence

5.2.2. Procedures to obtain evidence

Procedures Explanation Strengths/Weakness
(3) Observation Watch a procedure being A relative weak
performed procedure.
(4) Inquiry Seek information from The strength/weakness
client management or staff will depend on of whom
or external sources and the inquiry is being
evaluate responses. made
(5) External Seek confirmation from a This can be a very
third party strong procedure but
confirmation
there may be instances
where the third party is
motivated to
misrepresent.
 5.2. Evidence

5.2.2. Procedures to obtain evidence

Procedures Explanation Strengths/Weakness
(6) Check mathematical A strong evidence
accuracy of client’s
Recalculation
records
(7) Independently executing A strong evidence
procedures or controls,
Reperformance
either manually or through
the use of computer
assisted audit techniques
 5.2. Evidence

5.2.2. Procedures to obtain evidence

Procedures Explanation Strengths/Weakness
(8) Analytical Evaluating and comparing Evidence here is limited
financial and/or non- by the strength or
procedures
financial data for plausible weakness of the
relationships and underlying accounting
investigating unexpected system.
fluctuations
 5.2. Evidence

5.2.3. Computer assisted audit techniques (CAATs)

- 3 main types of CAATs that can be used:
(1) Test data
(2) Audit software
(3) Data analytics
 5.2. Evidence

5.2.3. Computer assisted audit techniques (CAATs)

- 3 main types of CAATs that can be used:
(1) Test data:
 Note controls in client's system
 Decide upon test data
 Run the test data
 Compare results with those expected
 Conclude on whether controls are operating properly
 5.2. Evidence

5.2.3. Computer assisted audit techniques (CAATs)

(2) Audit software
 Extract a sample according to specified criteria
 Calculate ratios and select those outside set criteria
 Check calculations and casts performed by the system
 Prepare reports
 Follow items through a system and flag where they are posted
=> The procedures listed above are mostly substantive procedures,
because they are substantiating the figures in the accounts. If the
test does not require judgement, then it can almost certainly be
carried out by audit software.
 5.2. Evidence

5.2.3. Computer assisted audit techniques (CAATs)

(3) Data analytics
 Definition: data analytics is the science and art of discovering
and analysing patterns, deviations and inconsistencies, and
extracting other useful information in the data underlying or
related to the subject matter of an audit through analysis,
modelling and visualisation for the purpose of planning and
performing the audit.
 5.2. Evidence

5.2.3. Computer assisted audit techniques (CAATs)

(3) Data analytics
 Analyse all transactions in a population, stratify that population
and identify outliers for further examination.
 Reperform calculations relevant to the FSs
 Match transactions as they pass through a processing cycle
 Assist in segregation of duties testing
 Compare entity data to externally obtained data
 Manipulate data to assess the impact of different assumptions…
 5.2. Evidence

5.2.4. Analytical procedures

There are a number of factors that the auditors should consider
when using analytical procedures as substantive procedures:
(1) Objective of the analytical procedures
(2) Suitability of analytical procedures
(3) Reliability of the data
 5.2. Evidence

5.2.4. Analytical procedures

Factor Issues to consider

Suitability - Generally analytical procedures are more applicable to
large volumes of transactions that tend to be predictable
- It depends on the purpose of the test (provide
persuasive evidence or provide corroboration of other
tests)
- Other audit tests directed to the same assertions
- The auditor must decide if analytical procedures are
suitable given the nature of the assertion and the
assessment of risk associated with it
 5.2. Evidence

5.2.4. Analytical procedures

Factor Issues to consider

Reliability - The source of the information used
of the data - The comparability of the information
- Nature and relevance of the information used
- Whether there are controls over the production of the
information used to ensure completeness, accuracy,
validity
 5.2. Evidence

5.2.4. Analytical procedures

Factor Issues to consider

Precision - The accuracy with which results in test area can be
predicted
- The extent to which information can be disaggregated
- Availability of required information
Acceptable This is influenced by materiality and the desired level of
difference assurance. As assessed risk rises, the amount of difference
from expected results considered acceptable without
investigation will reduce.
 5.2. Evidence

5.2.4. Analytical procedures

- Analytical procedures should be used at the risk assessment stage.
Possible sources of information about the client include:
+ Interim financial information
+ Budgets
+ Management accounts
+ Non-financial information
+ Bank and cash records
+ Sales tax returns
+ Board minutes
+ Discussions or correspondence with the client at the year end
 5.2. Evidence

5.2.5. Directional testing

The pattern for The pattern for understatement
overstatement testing
 5.2. Evidence

5.2.6. Audit of accounting estimates

Method Example
Test the process that The auditor can test this by:
management used to - Checking the calculation
estimate the figure and the - Considering if anything this year is likely
data on which it is based to have changed the estimate

Use a point estimate The auditors may use an available or

proprietary model, or introduce different
assumptions, or engage a specialist to
develop a model.
 5.2. Evidence

5.2.6. Audit of accounting estimates

Method Example
Review events occurring up If a settlement is reached after the year end
to the date of the auditor's regarding a claim against the company
report which requires a provision, the auditor can
use the evidence of the agreement to
establish the correct figure for the FSs. In
this case there is usually no need to use the
other two methods.
Test the operating If there are strong controls over the
effectiveness of controls estimation, and the estimate is derived from
over how management the routine processing of data by the entity's
made the accounting accounting system.
estimate, with associated
substantive procedures
 5.3. Sampling

5.3.1. The concept of sampling

5.3.2. Design of the sample
5.3.3. Sampling methods
5.3.4. Drawing conclusions from sampling
5.3.5. Evaluation of misstatements
 5.3. Sampling

5.3.1. The concept of sampling

- Audit sampling: The application of audit procedures to less than
100% of items within a population of audit relevance such that all
sampling units have a chance of selection in order to provide the
auditor with a reasonable basis on which to draw conclusions about
the entire population.
- Population: The entire set of data from which a sample is selected
and about which an auditor wishes to draw conclusions.
- Sampling units: The individual items constituting a population.
 5.3. Sampling

5.3.1. The concept of sampling

- Statistical sampling: An approach to sampling that has the
following characteristics:
(a) Random selection of the sample items; and
(b) The use of probability theory to evaluate sample results,
including measurement of sampling risk.
- Non-statistical sampling: A sampling approach that does not have
characteristics (a) and (b) is considered non-statistical sampling
 5.3. Sampling

5.3.1. The concept of sampling

- The auditor may alternatively select certain items from a
population because of specific characteristics they possess.
+ High value or key items. The auditor may select high value items
or items that are suspicious, unusual or prone to error.
+ All items over a certain amount. Selecting items this way may
mean a large proportion of the population can be verified by testing
a few items.
+ Items to obtain information about the client's business, the nature
of transactions, or the client's accounting and control systems.
 5.3. Sampling

5.3.2. Design of the sample

- When designing the sample, the auditor must consider the purpose
of the audit procedure and the characteristics of the population from
which the sample will be drawn, and consider the sampling and
selection methods.
 5.3. Sampling

5.3.2. Design of the sample

* Factors influencing sample sizes in Tests of controls

Factor Effect on
sample size
An increase in the extent to which the auditor's risk Increase
assessment takes into account relevant controls
An increase in the tolerable rate of deviation Decrease
An increase in the expected rate of deviation of the Increase
population to be tested
 5.3. Sampling

5.3.2. Design of the sample

* Factors influencing sample sizes in Tests of controls

Factor Effect on
sample size
An increase in the auditor's desired level of assurance that Increase
the tolerable rate of deviation is not exceeded by the actual
rate of deviation in the population
An increase in the number of sampling units in the Negligible
population effect
 5.3. Sampling

5.3.2. Design of the sample

* Factors influencing sample sizes in Tests of details

Factor Effect on
sample size
An increase in the auditor's assessment of the risk of Increase
material misstatement
An increase in the use of other substantive procedures Decrease
directed at the same assertion
An increase in the use of other substantive procedures Increase
directed at the same assertion
 5.3. Sampling

5.3.2. Design of the sample

* Factors influencing sample sizes in Tests of details

Factor Effect on
sample size
An increase in tolerable misstatement Decrease
An increase in the amount of misstatement the auditor Increase
expects to find in the population
Stratification of the population when appropriate Decrease
The number of sampling units in the population Negligible
effect
 5.3. Sampling

5.3.3. Sampling methods

(1) Random selection ensures that all items in the population have
an equal chance of selection.
(2) Systematic selection involves selecting items using a constant
interval between selections, the first interval having a random start.
(3) Haphazard selection may be an alternative to random selection
provided assurance providers are satisfied that the sample is
representative of the entire population.
 5.3. Sampling

5.3.3. Sampling methods

(4) Sequence or block selection. Sequence sampling may be used
to check whether certain items have particular characteristics.
(5) Monetary Unit Sampling (MUS). This is a selection method
that ensures that every £1 in a population has an equal chance of
being selected for testing.
 5.3. Sampling

5.3.4. Drawing conclusion from sampling

- The auditors must consider whether the items in question are true
misstatements, as they defined them before the test.
- When the expected audit evidence regarding a specific sample item
cannot be found, the auditor shall perform the procedure on a replacement
item. In such cases, the item is not treated as a misstatement.
- Where common features are discovered in misstatements, the auditors
may decide to identify all items in the population that possess the
common feature (eg, location), thereby producing a sub-population. Audit
procedures could then be extended in this area. On some occasions the
auditor may decide that the misstatement is an anomaly
 5.3. Sampling

5.3.5. Evaluation of misstatements

- If management refuses to correct some or all of the misstatements then the
auditor shall:
+ Obtain an understanding of management's reasons for not making the
corrections
+ Determine whether uncorrected misstatements are material individually
or in aggregate
+ Communicate individual uncorrected misstatements to those charged with
governance and request that these be corrected, mentioning any effect on
the opinion in the auditor’s report
+ Request a written representation from management that they believe the
effects of the uncorrected misstatements are immaterial, individually and in
aggregate, to the financial statements as a whole
 5.3. Sampling

5.3.5. Evaluation of misstatements

- In determining whether uncorrected misstatements are material, the
auditor must consider the size and nature of the misstatements, along with
the particular circumstances of their occurrence.
 5.4. Written representation

5.4.1. Written representations as assurance evidence

5.4.2. When other written representations are required
 5.4. Written representation

5.4.1. Written representations as assurance evidence

- Management is the person(s) with executive responsibility for the
conduct of the entity’s operations.
- Written Representations deals with the auditor's responsibility to
obtain written representations from management and, where
appropriate, those charged with governance in an audit of FSs.
- Written confirmation of oral representations avoids confusion and
disagreement. Such matters should be discussed with those
responsible for giving the written confirmation, to ensure that they
understand what they are confirming. Written confirmations are
normally required of senior management.
 5.4. Written representation

5.4.1. Written representations as assurance evidence

- There are a number of elements that requires auditors to confirm in
writing, namely that management has:
+ Fulfilled its responsibility for the preparation of the FSs in
accordance with the applicable financial reporting framework,
including where relevant their fair presentation, as set out in the terms
of the audit engagement
+ Provided the auditor with all relevant information and access as
agreed in the terms of the audit engagement
+ Recorded and reflected all transactions in the FSs
 5.4. Written representation

5.4.1. Written representations as assurance evidence

- In addition to general written representations about management's
responsibilities, the auditors are required to request specific written
representations by other ISAs and also where the auditor determines
they are necessary to support other audit evidence.
- Written representations cannot be used instead of other (better)
evidence which the auditors expect to exist.
 5.4. Written representation

5.4.2. When other written representations are required

- Other written representations may include the following matters.
+ Whether the selection and application of accounting policies are
appropriate
+ Whether matters such as the following, where relevant under the
applicable financial reporting framework, have been recognised,
measured, presented or disclosed in accordance with that framework
+ Whether all deficiencies in internal control of which management is
aware have been communicated to auditors
+ Specific written representations required by other ISAs
+ Support for management's judgement or intent in relation to a specific
assertion
Company
LOGO

[Link]