CHAPTER-FIVE

AUDIT RESPONSIBILITY, OBJECTIVES, EVIDENCE AND DOCUMENTATION

5.1Audit Responsibility and Objectives
5.1.1 Audit Objectives
Definition of an Audit Objective
The Audit objectives are what the audit is intended to accomplish. They identify the audit subject matter
and performance aspects to be included, and may also include the potential findings and reporting
elements that the auditors expect to develop.
The auditor’s objectives are to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes the auditor’s opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with International Standards on Auditing (UK) (ISAs
(UK)) will always detect a material misstatement when it exists.
As part of an audit in accordance with ISAs (UK), the auditor exercises professional judgment and
maintains professional skepticism throughout the audit. The auditor also:
 Identifies and assesses the risks of material misstatement of the entity’s
 Obtains an understanding of internal control relevant to the audit in order to design audit
procedures
 Evaluates the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by the directors
 Evaluates the overall presentation, structure and content of the financial statements,
To form an opinion on the financial statements the auditor concludes as to whether:
 the financial statements adequately refer to or describe the applicable financial reporting
framework;
 the financial statements appropriately disclose the significant accounting policies selected
and applied;
 the accounting policies selected and applied are consistent with the applicable financial reporting
framework, and are appropriate;
 The accounting estimates made by the directors are reasonable;
 The information presented in the financial statements is relevant, reliable, comparable and
understandable.
In making this evaluation, the auditor considers whether:
the information that should have been included has been included, and
whether such information is appropriately classified, aggregated or disaggregated, and
characterized;
the overall presentation of the financial statements has been undermined by including
information that is not relevant or that obscures a proper understanding of the matter disclosed;
the financial statements provide adequate disclosures to enable the intended users to understand
the effect of material transactions and events on the information conveyed in the financial
statements;

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 the terminology used in the financial statements, including the title of each financial statement
is appropriate.
5.2 Management Assertions
Management assertions are claims made by members of management regarding certain aspects of a
business. The concept is primarily used in regard to the audit of a company's financial statements, where
the auditors rely upon a variety of assertions regarding the business. The auditors test the validity of these
assertions by conducting a number of audit tests. Management assertions fall into the following three
classifications.
a) Transaction-Level Assertions
The following five items are classified as assertions related to transactions, mostly in regard to
the income statement:
Accuracy. The assertion is that the full amounts of all transactions were recorded, without error.
Classification. The assertion is that all transactions have been recorded within the correct
accounts in the general ledger.
Completeness. The assertion is that all business events to which the company was subjected
were recorded.
Cutoff. The assertion is that all transactions were recorded within the correct reporting period.
Occurrence. The assertion is that recorded business transactions actually took place.
b) Account Balance Assertions
The following four items are classified as assertions related to the ending balances in accounts,
and so relate primarily to the balance sheet:
Completeness. The assertion is that all reported asset, liability, and equity balances have been
fully reported.
Existence. The assertion is that all account balances exist for assets, liabilities, and equity.
Rights and obligations. The assertion is that the entity has the rights to the assets it owns and is
obligated under its reported liabilities.
Valuation. The assertion is that all asset, liability, and equity balances have been recorded at
their proper valuations.
c) Presentation and Disclosure Assertions
The following five items are classified as assertions related to the presentation of information
within the financial statements, as well as the accompanying disclosures:
Accuracy. The assertion is that all information disclosed is in the correct amounts, and which
reflect their proper values.
Completeness. The assertion is that all transactions that should be disclosed have been
disclosed.
Occurrence. The assertion is that disclosed transactions have indeed occurred.
Rights and obligations. The assertion is that disclosed rights and obligations actually relate to
the reporting entity.
Understandability. The assertion is that the information included in the financial statements has
been appropriately presented and is clearly understandable.

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There is a fair amount of duplication in the types of assertions across the three categories;
however, each assertion type is intended for a different aspect of the financial statements, with
the first set related to the income statement, the second set to the balance sheet, and the third set
to the accompanying disclosures.
If the auditor is unable to obtain a letter containing management assertions from the senior
management of a client, the auditor is unlikely to proceed with audit activities. One reason for
not proceeding with an audit is that the inability to obtain a management assertions letter could
be an indicator that management has engaged in fraud in producing the financial statements.
5.3 Audit evidence
It is the information obtained by the auditor in arriving at conclusions on which their reports are
based. During financial statement audits, the auditors gather and evaluate evidence to form an
opinion about whether the financial statements follows the appropriate criteria, usually, generally
accepted accounting principles. The auditors must gather sufficient competent evidence to
provide an adequate basis for their opinion on the financial statements. The audit evidence is
intended to assure the users of accounting information that the financial statements are a credible
source of information about the organization. The users may not accept the auditor’s opinion on
the truth and fairness of financial statements unless the auditor has collected sufficient competent
evidence about the material misstatements. Hence, the collection of evidence lies in the heart of
the audit.
Hence, the requirement to obtain sufficient competent evidence is reflected in the third
standard of field work that states:
Sufficient competent evidential matter is to be obtained through inspection, observation,
inquires, and confirmation to afford a reasonable basis for an opinion regarding the financial
statements under audit.
Audit risk which refers to the possibility that the auditors may unknowingly fail to appropriately
modify their opinion on financial statements that are materially misstated, can be greatly reduced
by gathering evidence. One way to gather additional evidence is to increase the extent of the
audit procedures. However, additional evidence may also be obtained by selecting a more
effective audit procedure or by performing the procedures closer to the balance sheet date.
The auditor must gather sufficient evidence to reduce audit risk to a low level in every audit and
this concept is reflected in the third standard of fieldwork. The evidence collected by the auditor
must be sufficient and appropriate.
Assertions for which the evidence is sought-The auditor has to collect appropriate evidence
and evaluate whether it supports the various assertions on which the auditor has to express
his opinion. The nature of assertions for which the auditor collects evidences for an
independent financial audit is the following
1. Existence: the inclusion of an item of asset or liability in the balance sheet implies an
assertion by the preparer that the asset or the liability exists at the date of the balance sheet.
2. Rights and obligations: it is asserted that the assets shown in the balance sheet are the rights
of the organization and liabilities are the obligations on the date of the balance sheet

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3. Occurrence: there is an assertion that the transactions reflected in the financial statements are
occurred during the relevant accounting period and that they pertain to the organization.
4. Completeness: this assertion implies that there are no unrecorded assets, liabilities or
transactions.
5. Valuation: this assertion implies that the assets and liabilities are included in the balance
sheet are at an appropriate value i.e. as per the normally accepted bases of valuation.
6. Measurement: this assertion implies that transactions have been recorded at proper amounts
and that revenues and expenses have been allocated to the proper accounting periods
7. Presentation and disclosure: this assertion implies that the disclosure, classification and
description of various item in the balance sheet and in the income statements are in
accordance with the generally accepted accounting standards and relevant statutory
requirements
5.3.1 Audit Evidence Decisions
Major decision of an auditor involves determining the appropriate type and amount of evidence.
In this judgment the cost factor should be considered.
The auditors' decisions on evidence accumulation can be broken down in to four sub decisions:
Which audit procedure to use (Audit Procedure?)
Which sample size to select for a given procedure (Sample Size?)
Which items to select from population (Items??)
When to perform the procedures (Timing)
1. Audit procedures
It is a detailed instruction for the collection of a type of audit evidence that is to be obtained at
some time during the audit. The instructions should be clearly and specifically stated.
Example: - Obtain cash disbursement journal and compare the payer name, amount, and date on
the cancelled cheque with cash disbursement journal.
2. Sample Size
After selection of audit procedure, the decision of how many items to test must be made by the
auditor for each audit procedures.
Example: - If 60,000 checks are recorded in cash disbursement journal, only 400 may be
selected.
3. Items to Select
Following the sample size selection, it is necessary to decide which items in the population to
test.
Example: - The auditor may see the 400 checks based on random selection, weakly selection,
amount etc.
4. Timing
The timing decision is affected by when the client needs the audit to be completed. Also, it can
be affected by the auditors' belief on effective timing for accumulation and the availability of
audit staff.
Example:- the auditor often prefer to count inventory up close to the balance sheet dates.
The audit procedure often incorporates the other three sub decisions.
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 Example: - obtain the October cash disbursement journal and compare the payee, name,
amount, and date on the cancelled cheque with cash disbursement journal for a randomly
selected sample of 40 cheque numbers.
5.3.2: Nature of Evidential Matter
Evidential matter is any information that corroborates or refutes an assertion. The evidential
matter supporting the assertions in a company’s financial statements consists of the underlying
accounting data and all corroborating information available to the auditors. The third fieldwork
standard states that sufficient competent evidential matter should be obtained to afford a
reasonable basis for an opinion regarding the financial statements under audit. It is unlikely to
say that the auditor will be completely convinced that the opinion is correct because of the nature
of audit evidence and cost limitations. However, he must be persuaded that his/her opinion is
correct with high level of assurance. The two determinants of the persuasiveness of audit
evidence are competence and sufficiency.
a) Competence of evidence
This refers to the extent to which evidence can be believable or worthy of trust; sometimes
reliability is interchanged with competence.
Competence of evidence deals only with the audit procedures selected. It isn't improved by
selecting larger sample size or different population items. It can be improved only by selecting
audit procedures that contain higher quality of characteristics of competent evidence.
Characteristics of competent evidence
Relevance: - Evidence must be relevant to specific audit objective.
For example if the auditor is interested to examine sales transaction, the evidences gathered
must be related to sale.
Independence of provider: - Evidences obtained outside the client company is more reliable than
that obtained from within.
Effectiveness of client's internal control: - Strong internal control systems produce more
reliable evidence than weaker ones.
Auditor's direct knowledge: - Information obtained directly by the auditor through physical
examination, observation and computation are more competent.
Qualifications of individuals providing information
The person who provides information must be qualified to do so. This affects the competence of
the evidence. Examples in clued communications from banks, attorney that have relationship
with business.
Degree of objectivity
Objective evidences are more reliable than subjective. Examples of objective evidence are
physical counts; confirmation from banks on cash balances, adding subsidiaries to check against
related general ledgers etc.
Timeliness
This refers either to when evidence is accumulated or the period covered by the audit. For
balance sheet items it is good if evidence is collected near balance sheet dates. For income

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statement it is timely if the sample is taken from the entire period under audit rather than only
from part of the period.
b) Sufficiency of evidence
This refers to the quantity of evidence. It is primarily measured by the sample size. The selection
of sample size is determined at least by:
 Auditor's expectations of misstatement
 The strength of client's internal control
In addition to sample size, individual items may affect sufficiency. For example,
Items with larger dollar value
Items susceptible to misstatement
Items representative of the population
To sum up, the persuasiveness of evidence is judged by the combined effect of competency and
sufficiency. In answering the question of persuasiveness, cost consideration must also exist. The
objective is to obtain a sufficient amount of competent evidence at the lowest possible cost.
5.3.3 Types of Audit Evidences
The major types of audit evidences gathered by the auditor during audit are the following:
1. Physical evidence: Actual physical examination or observation provides the best evidence of
the existence of certain assets. The existence of the property may be established through
physical examination. For example, the existence of plant assets, inventory, cash etc can be
verified by the physical examination. It might seem that physical examination of an asset
would be conclusive verification of all assertions relating to that asset. It may not be always
true. Physical verification gives evidence of the existence of the asset to the auditor
2. Documentary evidence: The worth of the documentary evidence depends on whether the
documents are created within the company (sales invoices) or it came from outside the
company (vendors invoice). The documentary evidence is classified into three categories
such as:
a. Documents created outside the organization and transmitted directly to the auditor
which is the most reliable documentary evidence. For example, the verification of
accounts receivable
b. Documents created outside the organization and held by the organization-many of the
externally created documents referred to by the auditors will be in the possession of
organization. For example, bank statements, vendor’s invoices and statements, property
tax bills, notes receivables etc.
c. Documents created and held within the organization- most documents created within
the organization represent a lower quality of evidence because they circulate only
within the company and do not receive critical review by an outsider. For example, the
sales invoices, shipping notices, purchase orders etc. The degree of reliance to be
placed on documents created and used only within the organization depends on the
effectiveness of the internal control.
3. Accounting records as evidence: the dependability of ledgers and journals as evidence is
indicated by the extent of internal control covering their preparation. An auditor will attempt
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 to verify an amount in the financial statements by tracing it back through the accounting
records. To some extent, the ledger and journals constitute worthwhile evidence in
themselves to the auditors
4. Evidence from the analytical procedures: analytical procedures involve evaluations of the
financial statements by a study of relationships among financial and nonfinancial data. The
process of analytical procedures consists of four steps.
a. Develop an expectation of an account balance
b. Determine the amount of difference from the expectation that can be accepted without
investigation
c. Compare the account balances with the expected account balance
d. Investigate the significant deviations from the expected account balance
5. Evidence from computations: to prove the arithmetical accuracy of the client’s records, the
auditor make computations independently as another form of audit evidence.
6. Evidence provided by the specialists: since the auditors may not be experts in all the fields
of business of the client, he may get the services of the experts in performing highly technical
tasks such as valuation of inventory, or making the actuarial computations to verify liabilities
for postretirement benefits.
7. Oral evidence: during the examination of records, the auditor may ask many questions to the
officers and the employees of the organization. The answers the auditor receives to the
questions constitute another type of evidence.
8. Evidence from client representation letters: The auditor should get a representation letter
from the client summarizing the most important oral representations made during the
engagement. Most of the representations fall into the following categories:
1. All accounting records, financial data and minutes of the directors meetings have
been made available to the auditors
2. The financial statements are complete and prepared in conformity with the generally
accepted accounting principles
3. All items requiring disclosure have been properly disclosed
5.3.4 Evidence for Related Party Transactions
Related parties refer to the client entity and any other party with which the client may deal where
one party has the ability to influence the other to the extent that one party to the transaction may
not pursue its own separate interests. Examples of related parties are officers, directors, principal
owners, members of the immediate families, affiliated companies, subsidiary companies etc. A
related party transaction is a transaction between the company and these parties. The primary
concern for the auditor is that significant materials of related party transactions are adequately
disclosed in the client’s financial statement or the related notes. Disclosure of related party
transactions should include the nature of the relationship, the description of the transactions etc.
Evidences about accounting estimates -The auditor must be very careful in considering
financial statement accounts that are affected by estimates made by the management, particularly
those for which a wide range of accounting methods are considered acceptable. For example, the
estimates of obsolete inventory, allowances for loan losses, estimates of warranty liabilities etc.
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though the making of estimates are the responsibility of the management, the auditor should
determine that
a. All necessary estimates have been developed
b. The accounting estimates are reasonable and
c. The accounting estimates are properly accounted for and disclose.
5.5 Audit Documentation
5.5.1 Meaning of Audit Programe
It is desirable that in respect of each audit and more particularly for bigger audits an audit
programe should be drawn up. Audit programe is nothing but a list of examination and verification
steps to be applied set out in such a way that the inter-relationship of one step to another is clearly
shown and designed, keeping in view the assertions discernible in the statement of account
produced for audit or on the basis of an appraisal of the accounting records of the client. In other
words, an audit programme is a detailed of the accounting records of applying the audit
procedures in the given circumstances with instructions for the appropriate techniques to be
adopted for accomplishing the audit objectives. Businesses vary in nature, size and composition;
work which is suitable to one business may not be suitable to be rendered by the auditor are the
other factors that vary from assignment to assignment. Because of such variations, evolving one
audit programme applicable to all business under all circumstances is not practicable. However it
becomes a necessity to specify in details in the audit programme the nature of work to be done so
that no time will be wasted on matters not pertinent to the engagement and any special matter or
any specific situation can be taken care of.
An audit programme consists of a series of verification procedures to be applied to the financial
statements and accounts of a given company for the purpose of obtaining sufficient evidence to
enable the auditor to express an informed opinion on such statements. For the purpose of
programme construction, the following points should be kept in view
1. Stay within the scope and limitation of the assignment.
2. Determining the evidence reasonable available and identify the best evidence for deriving
the necessary satisfaction.
3. Apply only these steps and procedures which are useful in accomplishing the verification
purpose in the specific situation.
4. Consider all possibilities of error.
5. Co-ordinate the procedures to be applied to related items.
Amplification is not necessary of the above points except the one under evidence: that is the very
basis for formulation of opinion and an audit programme is designed to provide for that by
prescribing procedures and techniques.
Advantages of Audit Programe
a. It provides the assistant carrying out the audit with total and clear set of instructions of the
work generally to be done.
b. It is essential, particularly for major audits, to provide a total perspective of the work to be
performed.

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 c. Selection of assistants for the jobs on the basis of compatibility becomes easier when the
work is rationally planned, defined and segregated.
d. Without a written and pre-determined programme, work is necessarily to be carried out on
the basis of some ‘mental’ plan. In such a situation there is always a danger of ignoring or
overlooking certain books and records. Under a properly framed programme, the danger is
significantly less and the audit can proceed systematically.
e. The assistance, by putting their signature on programme, accepts the responsibility for the
work carried out by them individually and, if necessary, the work done may be traced back
to the assistant.
f. The principal can control the progress of the various audits in hand by examination of audit
programmes initiated by the assistants deputed to the jobs for completed work.
g. It serves as a guide for audits to be carried out in the succeeding year.
h. A properly drawn up audit programme serves as evidence in the event of any charge of
negligence being brought against the auditor. It may be of considerable value in establishing
that he exercised reasonable skill and care that was expected of professional auditor.
Disadvantages of Audit Programme
a) The work may become mechanical and particular parts of the programme may be carried
out without any understanding of the object of such parts in the whole audit scheme.
b) The programme often tends to becomes rigid and inflexible following set grooves; the
business may change in its operation of conduct, but the old programme may still be
carried on. Changes in staff or internal control may render precaution necessary at points
different from those originally decided upon.
c) Inefficient assistants may take shelter behind the programme i.e., defend deficiencies in
their work on the ground that no instructions in the matter is contained therein.
d) A hard and fast audit programme may kill the initiative of efficient and enterprising
assistants.
All these disadvantages may be eliminated by imaginative supervision of the work carried on by the
assistants; the auditor must have a receptive attitude as regards the assistants; the assistants should be
encouraged to observed matters objectively and bring significant matters to the notice of
supervisor/principal.
5.5 Audit Working Papers
The audit working papers constitute the link between the auditor’s report and the client’s records.
Documentation is one of the basic principles listed in AAS 1. According to AAS 3 (reproduced in
Appendix l), documentation refers to working papers prepared or obtained by the auditor and retained
by him in connections with performance of his audit. The objects of an auditor’s working papers are
to record and demonstrate the audit work from one year to another. Therefore, working papers should
provide for:
a) Means of controlling current audit work;
b) Evidence of audit work performed;
c) Schedules supporting or additional item in the accounts; and
d) Information about the business being audited, including the recent history.
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Working papers are varied in nature but the foundation of all working paper can be traced to:
1) the basic constitutional document like memorandum and Articles of association, partnership
Deed, trust deed, etc.;
2) the contents of the minute books;
3) the contents of the balance sheet and the profit and loss account; and
4) The letter of engagement.
5.5.1 Importance of Audit Working Papers
i. IT provides guidance to the audit staff regard to the manner of checking the schedules.
ii. The auditor is able to fix responsibility on the staff member who signs each schedule
checked by him.
iii. It acts as an evidence in the court in the court of law when a charge of negligence is brought
against the auditor.
iv. It acts as the process of planning for the auditor so that he can estimate the time that may be
required for checking the schedules.
The auditor should adopt reasonable procedures for custody and confidentiality of his working
papers and should retained them for a period of time sufficient to meet the needs of his practice
and satisfy any pertinent legal or professional requirements of record retention.
Factor Determining Form and Contents of Audit Working Papers
Working papers should record the audit plan, nature, timing and extent of auditing procedures
performed, and the conclusions drawn from the evidence obtained. The form and content of
working papers are affected by matters such as:
 Nature of the engagement.
 Form of the auditor’s report.
 Nature and complexity of the client’s business.
 Nature and condition of the client’s records and degree of reliance on internal controls.
 Need in particular circumstances for direction, supervision and review of work performed
by assistants.
The standardization of working papers (for example, checklists, specimen letters, and standard
organization of working papers) improves the efficiency with which they are prepared and
reviewed. It also facilitates the delegation of work while providing a means to control its quality.
A Permanent Audit File
A permanent audit file normally includes
 Information concerning the legal and organizational structure of the entity. In case of a
company, this includes the memorandum and Article of association. In the case of a
statutory corporation, this includes the act and regulations under which the corporation
functions.
 Extracts or copies of important legal documents, agreements and minute relevant to the
audit.
 A record of the study and the evaluation of the internal controls related to the accounting
system. This might be in the form of narrative descriptions, questionnaires or flow charts, or
some combination thereof.
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 Copies of audited financial statements for previous years.
 Analysis of significant ratios and trends.
 Copies of management letters issued by the auditor, if any.
 Record of communication with the retiring auditor, if any, before acceptance of the
appointment as auditor.
 Notes regarding significant accounting policies.
 Significant audit observations of earlier years.
The Current File
The current file normally includes
 Correspondence relating to acceptance of annual reappointment.
 Extracts of important matters in the minutes of board meetings and general meetings as
relevant to audit.
 Evidence of the planning of the audit and audit programme.
 Analysis of transactions and balances.
 A record of the nature, timing and extent of auditing procedures performed, and the results
of such procedures.
 Evidence that the work performed by assistants was supervised and reviewed.
 Copies of communication with other auditors, experts and other third parties.
 Letters of representation or confirmation received from the client.
 Conclusions reached by the auditor concerning significant aspects of the audit, including the
manner in which exceptions and unusual matters, if any, disclosed by the auditor’s
procedures were resolved or treated.
 Copies of the financial information being reported on the related audit reports.
5.5.2 Features of Audit Working Papers
As audit working papers are quite useful they should be prepared properly. They should have the
following essentials:
a) Standard form - they should be prepared in a standard form. The subject matter should be
arranged under various heading and subheadings.
b) Proper layout – there should be proper design and layout of the working papers. This will
bring uniformity into the maintenance of working papers.
c) Space for margins – there should be enough space for margin after each note for noting
down the auditor’s remarks and decisions.
d) Proper organization and arrangement – the working papers should be so organized and
arranged that the auditor will be able to locate any particular matter easily.
e) Completeness – the audit working papers should be complete in all respects. They should
contain detailed information on all essential facts or points.
f) Clarity and Accuracy – the working papers should be quite clear and self-explanatory. The
information contained in the working papers should be accurate.

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g) Good quality paper – paper of good quality should be used for working papers as they are
subject to frequent handling further the paper used should be of uniform and convenient size
so that they can be easily filed.

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