Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao

Since 1977

AT.3404 SOLIMAN/UY/AGUILA
Audit Evidence and Documentation MAY 2023

LECTURE NOTES
Audit Evidence
Types of Audit Evidence
Audit evidence is all information used by the auditor on
which the audit opinion is based. The gathering and 1. Inquiry—consists of seeking information of
evaluation of audit evidence is a cumulative and iterative knowledgeable persons, both financial and nonfinancial,
process. within the entity or outside the entity.

Types of Audit Evidence 2. Inspection—involves examining records or documents,

whether internal or external, in paper form, electronic
1. Underlying accounting records - The records of initial form, or other media, or a physical examination of an
accounting entries and supporting records, such as asset.
checks and records of electronic fund transfers (EFTs);
invoices; contracts; the general and subsidiary ledgers, 3. Observation—consists of looking at a process or
journal entries and other adjustments to the financial procedure being performed by others, for example, the
statements that are not reflected in journal entries; and auditor’s observation of inventory counting by the
records such as work sheets and spreadsheets entity’s personnel, or of the performance of control
supporting cost allocations, computations, activities.
reconciliations and disclosures.
4. Analytical Procedures—consist of evaluations of
2. Other information – All other evidence obtained by the financial information made by a study of plausible
auditor such as minutes of meetings, confirmation from relationships among both financial and non-financial
third parties and information obtained from such audit data. Analytical procedures also encompass the
procedures as inquiry, observation, and inspection. investigation of identified fluctuations and relationships
that are inconsistent with other relevant information or
Sources of Audit Evidence deviate significantly from predicted amounts.

The following are the list of sources of audit evidence: 5. External Confirmation—a direct written response to the
• Performance of audit procedures. (Primary source) auditor from a third party (the confirming party), in
• Previous audits. paper form, or by electronic or other medium.
• Firm’s quality control procedures for client
acceptance and continuance 6. Recalculation—consists of checking the mathematical
• Work of an expert or specialist. accuracy of documents or records.
• Management representations.
• Other sources inside and outside the entity. 7. Reperformance—involves the auditor’s independent
execution of procedures or controls that were originally
Primary Source of Audit Evidence: Audit Procedures performed as part of the entity’s internal control.

Types of audit procedures Relationship among audit procedures and types of audit
evidence
1. Risk assessment procedures (RAP) – are the audit
procedures performed by the auditor to provide a Audit procedure
‘sufficient and appropriate’ audit evidence as the basis Further audit
for identifying and assessing risks of material Types
RAP procedures
misstatement (PSA 315, Revised 2019).
ToC SP

2. Further audit procedures which comprise: Inquiry ✓ ✓ ✓

Inspection ✓ ✓ ✓
• Tests of controls (ToC) — an audit procedure Observation ✓ ✓ ✓
designed to evaluate the operating effectiveness of Analytical procedures ✓ ✓
controls in preventing, or detecting and correcting,
External confirmation ✓
material misstatements at the assertion level; and
Recalculation ✓
• Substantive audit procedures (SP) – comprising Reperformance ✓
substantive analytical procedures and substantive
test of details — are audit procedures designed to Reliability and Cost of Audit Procedures
detect material misstatements at the assertion
level.; and The most reliable evidence gathering techniques (audit
procedures) should be used whenever they are cost
3. Other planned audit procedures effective. The quality of internal controls has a significant
effect on reliability. Furthermore, a specific substantive

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audit procedure is rarely sufficient by itself to provide circumstances, for example, the risks of material
competent evidence to satisfy the audit objective. However, misstatement related to the assertion being tested, and the
assuming good internal controls and the ability to choose a practicality and efficiency of the different means.
specific method, a list of the most reliable to the least
reliable evidence-gathering techniques are in general: Appropriateness

1. recalculation, (most reliable) Appropriateness is the measure of the quality of audit

2. inspection, evidence; that is, its relevance and its reliability in providing
3. reperformance, support for the conclusions on which the auditor’s opinion is
4. observation, based.
5. confirmation,
6. analytical procedures, When designing and performing audit procedures, the
7. inquiry (least reliable) auditor shall consider the relevance and reliability of the
information to be used as audit evidence. The quality of all
The evidence-gathering procedures in order of cost from audit evidence is affected by the relevance and reliability of
most costly to least costly are in general: the information upon which it is based.

1. confirmation (most costly), Relevance

2. inspection,
3. recalculation, Relevance deals with the logical connection with, or bearing
4. reperformance, upon, the purpose of the audit procedure, direction of
5. observation, testing and, where appropriate, the assertion under
6. analytical procedures, consideration.
7. inquiry (least costly).

Inquiry is the most extensively used audit procedures. Purpose of Audit Procedure
Although inquiry may provide important audit evidence, and
may even produce evidence of a misstatement, inquiry Audit procedures classified according to purpose are risks
alone ordinarily does not provide sufficient audit evidence assessment procedures (RAP), test of controls (ToC) and
of the absence of a material misstatement at the assertion substantive procedures (SP). These three procedures have
level, nor of the operating effectiveness of controls. different purposes such as, to identify and assess risk of
material misstatements, to test the operating effectiveness
Sufficiency and Appropriateness of Audit Evidence of entity’s internal control and to detect material
misstatements in the financial statements, respectively.

The auditor shall design and perform audit procedures to Assertion

enable the auditor to obtain sufficient appropriate audit
evidence (SAAE) to be able to draw reasonable conclusions Audit evidence, to be relevant, must link directly to relevant
on which to base the auditor’s opinion. The sufficiency and assertions. The auditor uses assertions in considering
appropriateness of audit evidence are interrelated. different types of potential misstatements that may occur in
the financial statements. It is the reason why audit
Sufficiency objectives follow and are closely related to assertions. In
other words, assertions guide the auditor in the
Sufficiency is the measure of the quantity of evidence. The performance of auditor procedures as to what appropriate
quantity of audit evidence needed is affected by the audit evidence to obtain.
auditor’s assessment of the risks of misstatement (the
higher the assessed risks, the more audit evidence is likely A given set of audit procedures may provide audit evidence
to be required) and also by the quality of such audit that is relevant to certain assertions, but not others. For
evidence (the higher the quality, the less may be required). example, inspection of documents related to the collection
Obtaining more audit evidence, however, may not of receivables after the period end may provide audit
compensate for its poor quality. evidence regarding existence and valuation, but not
necessarily cutoff.
Extent of Testing to Obtain Sufficient Evidence
Direction of Testing
An effective test provides appropriate audit evidence to an The relevance of information to be used as audit evidence
extent that, taken with other audit evidence obtained or to may be affected by the direction of testing. For example, if
be obtained, will be sufficient for the auditor’s purposes. the purpose of an audit procedure is to test for
overstatement in the existence or valuation of accounts
In selecting items for testing, the auditor determines the payable, testing the recorded accounts payable may be a
relevance and reliability of information to be used as audit relevant audit procedure. On the other hand, when testing
evidence; the other aspect of effectiveness (sufficiency) is for understatement in the existence or valuation of accounts
an important consideration in selecting items to test. The payable, testing the recorded accounts payable would not
means available to the auditor for selecting items for testing be relevant, but testing such information as subsequent
are: disbursements, unpaid invoices, suppliers’ statements, and
• All items (100% examination) unmatched receiving reports may be relevant.
• Specific items
Reliability
• Audit sampling
The reliability of information to be used as audit evidence,
The application of any one or combination of these means
and therefore of the audit evidence itself, is influenced by
may be appropriate depending on the particular
its source and its nature, and the circumstances under

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which it is obtained, including the controls over its Timely Preparation of Audit Documentation
preparation and maintenance where relevant.
Preparing sufficient and appropriate audit documentation on
Evidence is general more reliable when: a timely basis helps to enhance the quality of the audit and
1. Obtained from independent sources; facilitates the effective review and evaluation of the audit
2. The related controls are effective; evidence obtained and conclusions reached before the
3. Obtained directly than indirectly or by inference; auditor’s report is finalized.
4. In documentary form than oral; and
5. In original state than by photocopies or facsimiles.
Form, Content and Extent of Audit Documentation
Inconsistency in, or Doubts over Reliability of, Audit The auditor shall prepare audit documentation that is
Evidence sufficient to enable an experienced auditor, having no
previous connection with the audit, to understand:
Obtaining audit evidence from different sources or of a 1. The nature, timing, and extent of the audit procedures
different nature may indicate that an individual item of audit performed to comply with the PSAs and applicable legal
evidence is not reliable, such as when audit evidence and regulatory requirements;
obtained from one source is inconsistent with that obtained 2. The results of the audit procedures performed, and the
from another. This may be the case when, for example, audit evidence obtained; and
responses to inquiries of management, internal audit, and 3. Significant matters arising during the audit, the
others are inconsistent, or when responses to inquiries of conclusions reached thereon, and significant
those charged with governance made to corroborate the professional judgments made in reaching those
responses to inquiries of management are inconsistent with conclusions.
the response by management. Specific documentation
requirement if the auditor identified information that is In documenting the nature, timing and extent of audit
inconsistent with the auditor’s final conclusion regarding a procedures performed, the auditor shall record:
significant matter. 1. The identifying characteristics of the specific items or
matters tested;
Audit documentation 2. Who performed the audit work and the date such work
was completed; and
3. Who reviewed the audit work performed and the date
Audit documentation (a.k.a. “working papers” or
and extent of such review.
“workpapers”) is the record of audit procedures performed,
relevant audit evidence obtained, and conclusions the
Audit documentation, however, is not a substitute for the
auditor reached.
entity’s accounting records. Oral explanations by the
auditor, on their own, do not represent adequate support
The auditor shall prepare documentation to provide:
for the work the audit.

1. A sufficient and appropriate record of the basis for the

Types of Audit Documentation
auditor’s report; and
2. Evidence that the audit was planned and performed in Auditors generally classify audit documentation into two
accordance with PSAs and applicable legal and types:
regulatory requirements.
1. Current files—Relate specifically to the current period's
Audit documentation serves a number of additional audit. They often include
purposes, including the following: • Reconciliation of accounting records to financial
• Assisting the audit team to plan and perform the statements
audit. • Lead schedules of major components of amounts in
• Assisting members of the audit team responsible for the financial statements and supporting detailed
supervision to direct and supervise the audit work, schedules
and to discharge their review responsibilities. • Documentation of substantive procedures
• Enabling the audit team to be accountable for its performed providing evidence corroborating or
work. contradicting management's assertions
• Retaining a record of matters of continuing • The attorney's letter and management's
significance to future audits. representation letter
• Enabling the conduct of quality control reviews and • Audit programs
inspections.
• Enabling the conduct of external inspections in 2. Permanent (continuing) files—Relate to the company
accordance with applicable legal, regulatory or and contain information with long-term significance.
other requirements. They are of ongoing interest in any period under audit
and often include
Auditor’s documentation is normally stored in an audit file. • Debt agreements and pension contracts
Audit file refers to one or more folders or other storage • Articles of incorporation
media, in physical or electronic form, containing the records • Flowcharts of internal control
that comprise the audit documentation for a specific • Bond indenture agreements and lease agreements
engagement. • Analyses of capital stock & owners’ equity accounts

Departure from a Relevant Requirement

If, in exceptional circumstances, the auditor judges it

necessary to depart from a relevant requirement in a PSA,
the auditor shall document how the alternative audit

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procedures performed achieve the aim of that requirement, not delete or discard audit documentation before the end of
and the reasons for the departure. its retention period, which ordinarily is no shorter than five
years from auditor’s report date in the absence of any
Assembly and Retention of the Final Audit File specific rules or regulation. However, in the Philippines, the
Philippine SEC requires a retention period of seven years
The auditor shall assemble the audit documentation on a
from audit report date under its rules for accreditation of
timely basis, ordinarily not more than 60 days after the date
external auditors.
of the auditor’s report. After the assembly, the auditor shall

DISCUSSION QUESTIONS
1. Which statement is incorrect regarding audit evidence? a. Comparison of financial data with data for
a. Audit evidence is all the information used by the comparable prior periods or anticipated results and
auditor in arriving at the conclusions on which the similar data for the industry in which the entity
audit opinion is based. operates.
b. Audit evidence includes the information contained b. Study of the relationships of elements of financial
in the accounting records underlying the financial data that would be expected to conform to a
statements and other information. predictable pattern based on the entity’s
c. Audit evidence is cumulative in nature. experience.
d. Auditors are expected to address all information c. Study of plausible relationships of financial data
that may exist. with relevant non-financial data.
d. All of the above.
2. Accounting records alone cannot constitute sufficient
evidence. Thus, the auditor should obtain other 8. When must an auditor perform analytical review
information. Which of the following is considered as procedures in a financial statement audit?
other information type of audit evidence? a. Planning the nature, timing and extent of
a. The records of initial entries and supporting records. procedures
b. Checks and electronic fund transfer records. b. Testing controls over financial cycles
c. Work sheets and spreadsheets supporting cost c. Performing tests to substantiate balances
allocations. d. Performing tests to substantiate transactions
d. Confirmation from third parties.
9. Which one of the following types of procedures will aid
3. Underlying accounting records most likely include the auditor in obtaining evidence regarding the
a. Minutes of meetings. mathematical accuracy of accounting records and other
b. Comparable data about competitors information?
(benchmarking) and industry analyses. a. Confirmation
c. Inventory count observation memorandum. b. Inspection
d. The general and subsidiary ledgers. c. Inquiry
d. Recalculation
4. The following are considered substantive procedures
used to detect material misstatement in the financial 10. External confirmation
statements, except a. Is the process of obtaining a representation of
a. Test of details of transactions and balances. information or of an existing condition directly from
b. Test of details of presentation and disclosures. a third party.
c. Analytical procedures. b. Consists of seeking information of knowledgeable
d. Reperformance. persons, both financial and non-financial,
throughout the entity or outside the party.
5. Which of the following audit procedures is used c. Is the auditor’s independent execution of
extensively throughout the audit and is often procedures or controls that were originally
complementary to performing other audit procedures, performed as part of the entity’s internal control.
yet the least reliable? d. Consists of checking the mathematical accuracy of
a. Reperformance c. Inquiry documents or records.
b. Observation d. Recalculation
11. Reperformance may be performed during
6. Which statement is incorrect regarding inspection as an a. Risk assessment procedures
audit procedure? b. Test of controls
a. Inspection consists of examining records or c. Substantive test procedures
documents or physical examination of assets. d. All of the above
b. Inspection of tangible assets may provide reliable
audit evidence with respect to their existence and 12. Which statement is correct regarding the sufficiency and
about the entity’s rights and obligations on the appropriateness of audit evidence?
assets. a. Sufficiency is the measure of the quality of audit
c. Inspection of individual inventory items ordinarily service.
accompanies the observation of inventory counting. b. Appropriateness is the measure of the quantity of
d. Some documents represent direct audit evidence of audit evidence; that is, its relevance and its
the existence of an asset. reliability in providing support for or, detecting
misstatements in, the classes of transactions,
7. Analytical procedures enable the auditor to predict the account balances, and disclosures and related
balance or quantity of an item under audit. Information assertions.
to develop this estimate can be obtained from c. Merely obtaining more audit evidence may
compensate for its poor quality.

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d. The quantity of audit evidence needed is affected by c. Existence deals with overstatements and
the risk of misstatement (the greater the risk, the completeness deals with understatements.
more audit evidence is likely to be required) and d. Existence deals with understatements and
also by the quality of such audit evidence (the completeness deals with overstatements.
higher the quality, the less may be required).
19. In determining whether transactions have been
13. Ultimately, what is sufficient appropriate audit evidence recorded, the direction of the audit testing should begin
depends on from the
a. Auditor’s professional judgment a. General ledger balances.
b. Users’ view b. Original source documents.
c. Management’s judgment c. Adjusted trial balance.
d. All of the above d. General journal entries.

14. The following statements relate to relevance of audit 20. Which of the following generalizations in assessing the
evidence. Which is correct? reliability of audit evidence is incorrect?
a. Relevance deals with the logical connection with, or a. Audit evidence is more reliable when it is obtained
bearing upon, the purpose of the audit procedure, from independent sources outside the entity.
direction of testing and, where appropriate, the b. Audit evidence obtained directly by the auditor is
assertion under consideration. more reliable than audit evidence obtained
b. The auditor shall perform tests of control to obtain indirectly or by inference.
understanding the entity and its environment, c. Audit evidence is more reliable when it exists in
including internal control. documentary form.
c. The auditor shall perform substantive procedures to d. Audit evidence provided by photocopies is more
test the operating effectiveness of entity’s internal reliable than that provided by facsimiles.
control.
d. The auditor shall perform risks assessment 21. Which of the following statements concerning evidence
procedures to detect material misstatements in the is correct?
financial statements. a. Appropriate evidence supporting management’s
assertions should be convincing rather than merely
15. Financial statements implicitly or explicitly include persuasive.
management’s assertions about the fair presentation of b. An effective internal control structure contributes
information, that is, about its recognition, none or little to the reliability of the evidence
measurement, presentation, and disclosure. The auditor created within the entity
uses management’s assertion in which of the following? c. The cost of obtaining evidence is not an important
a. Obtaining and evaluating audit evidence. consideration to an auditor in deciding what
b. Developing audit programs. evidence should be obtained.
c. Identifying and assessing risks of material d. A client’s accounting records cannot be considered
misstatement. sufficient audit evidence to support the financial
d. All of the above. statements

16. Which statement is incorrect regarding the audit 22. Which one of the following would be considered the
evidence relevance and assertion? most persuasive type of audit evidence?
a. A given set of audit procedures may provide audit a. Purchase orders from vendors
evidence that is relevant to certain assertions, but b. Customer accounts receivable files
not to others. c. Computerized general ledger
b. The auditor often obtains audit evidence from d. Confirmations from banks
different sources or of a different nature that is
relevant to the same assertion. 23. Working papers least likely
c. Obtaining audit evidence relating to a particular a. Assist in the planning and performance of the audit.
assertion can be a substitute for obtaining audit b. Assist in the supervision and review of the audit
evidence regarding another assertion. work.
d. None of the above c. Prevent misunderstandings with respect to the
engagement.
17. Which of the following statements regarding the d. Record the evidence that the audit was planned and
relevance of evidence is correct? performed in accordance with PSAs and applicable
a. To be relevant, evidence must pertain to the audit legal and regulatory requirements.
objective of the evidence.
b. To be relevant, evidence must be persuasive. 24. Which of the following is incorrect regarding audit
c. To be relevant, evidence must relate to multiple working papers?
audit objectives. a. They show auditor’s accountability.
d. To be relevant, evidence must be derived from a b. They are a record for reference in future audits.
system including effective internal controls. c. They enable quality control reviews and inspections.
d. They are a part of client’s accounting records used
18. Which of the following statements about the existence to demonstrate that accounting records agreed with
(testing is from accounting records to the supporting the financial statements.
evidence) and completeness (testing is from supporting
evidence to the accounting records) assertions is not 25. A schedule listing account balances for the current and
true? previous years, and columns for adjusting and
a. The existence and completeness assertions reclassifying entries proposed by the auditors to arrive
emphasize different audit concerns. at the final amount that will appear in the financial
b. The completeness assertion deals with unrecorded statement, is referred to as a:
transactions. a. Working trial balance.

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b. Lead schedule. b. More than 60 days after the auditor’s report date.
c. Summarizing schedule. c. Not more than 45 days after the auditor’s report
d. Supporting schedule. date.
d. Not more than 60 days after the auditor’s report
26. A schedule set up to combine similar general ledger date.
accounts, the total of which appears on the working trial
balance as a single amount, is referred to as a: 34. Ignoring any particular legal or regulatory requirement,
a. Supporting schedule. audit documentation should be retained
b. Lead schedule. a. A minimum of five years.
c. Corroborating schedule. b. As long as lead schedules have relevance to
d. Reconciling schedule. forthcoming audits.
c. Until 3 years after the client selects another auditor.
27. In creating lead schedules for an audit engagement, a d. Working papers must be maintained indefinitely.
CPA often uses automated audit documentation
software. What client information is needed to begin this 35. The following statements pertain to audit working
process? papers:
a. Interim financial information, such as third quarter I. Working papers are owned by the auditors; the
sales, net income, and inventory and receivables rights of ownership are subject to ethical limitations
balances. relating to the confidential relationships with the
b. Specialized journal information, such as the invoice client.
and purchase order numbers of the last few sales II. Working papers serve as useful reference source for
and purchases of the year. client and as a substitute for client’s accounting
c. General ledger information, such as account records.
numbers, prior-year account balances, and III. Working papers must be permanently kept or
current-year unadjusted information. retained by the auditors.
d. Adjusting entry information, such as deferrals and The above statements are respectively
accruals and reclassification journal entries. a. True, True, True c. True, False, False
b. True, True, False d. False, False, False
28. The current file of the auditor's working papers
generally should include End of AT.3404
a. A flowchart of the internal controls.
b. Organization charts.
c. Copies of bond and note indentures.
d. A copy of the financial statements.

29. Which of the following workpapers would one normally

expect to find in the permanent file?
a. A copy of a long-term bond indenture.
b. The working trial balance.
c. An analysis of additions and disposals relating to
marketable securities.
d. A workpaper analyzing customer replies to
confirmation requests.

30. The auditor typically includes which of the following in

preparing audit files?
a. A heading that includes client’s name, period
covered, and description of contents.
b. A purpose statement.
c. A conclusion statement.
d. All of the above.

31. Which of the following is least likely to be a factor in the

auditor's decision about the extent of the
documentation of a particular audit area?
a. The size and complexity of the entity.
b. The significance of the audit evidence obtained.
c. The audit methodology and tools used.
d. The medium in which it is recorded and maintained.

32. The PSAs have specified how audit files should be

organized to facilitate timely review of working papers.

Auditors may organize audit files by audit phase, by

financial statements area, or a combination thereof.
a. True, true c. False, true
b. True, false d. False, false

33. In accordance with PSAs, the final assembly of audit

files should take place on a timely basis ordinarily
a. More than 45 days after the auditor’s report date.

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