This chapter focuses on the concept of sufficient competent audit evidence and the manner in which this evidence is documented in the audit working papers. To summarize:
The third standard of fieldwork requires the auditors to obtain sufficient competent audit evidence to support their audit opinion. To be competent, evidence must be both relevant and valid. In general, evidence is considered more valid when it is (a) obtained from independent sources outside the client organization; (b) generated from an accounting system that has effective internal control; or (c) obtained directly by the auditors, rather than from a secondary source. The auditors use professional judgment to determine the amount of evidence that is sufficient to support their opinion.
Evidence is gathered by the auditors to reduce audit risk-the risk of failing to modify their opinion on financial statements that are materially misstated. Since financial statements consist of a series of assertions by management, the auditors must obtain sufficient competent audit evidence about each material financial statement assertion.
At the individual account balance level, audit risk consists of (a) the risk that a material misstatement in an assertion has occurred (composed of inherent risk and control risk), and (b) the risk that the auditors do not detect the misstatement (detection risk). Audit evidence is gathered by the auditors to assess both inherent and control risk, and to restrict detection risk.
Auditors must be especially careful in considering financial statement accounts that are affected by estimates made by management, such as the allowance for doubtful accounts. The inherent risk of these types of accounts is generally much greater than for other financial statement accounts.
Audit documentation is the connecting link between the client's accounting records and the auditors' report. Such documentation is the property of the auditors and is primarily used to illustrate the auditors' compliance with professional standards and to support the auditors' opinion. Other functions of audit documentation include providing assistance in planning and performing the audit; facilitating supervision and review of audit work; providing a record of matters relevant to future audits; enabling other auditors to conduct peer reviews and inspections; and assisting successor auditors.
Explain the relationship between audit evidence and audit risk.
Identify and explain the components of audit risk.
Distinguish between the concepts of competence and sufficiency as they apply to audit evidence.
List and describe types of audit evidence.
Describe the purposes of audit documentation.
Discuss the factors that affect the auditors' judgment as to the nature and extent of audit documentation.
Identify matters that must be included in audit working papers.
Describe the types of working papers and the way they are organized.