AWP 4

​Let’s consider a hypothetical case study involving “ABC Manufacturing Company” to explain how auditors document each type of audit evidence:

Company Background

ABC Manufacturing Company is a medium-sized entity that specializes in producing electronic components. The company has been operational for over 10 years, with a broad range of products and a significant market presence.

Audit Objective

The objective of the audit is to provide an opinion on whether ABC Manufacturing Company’s financial statements for the fiscal year are free from material misstatement.

Types of Audit Evidence and Documentation

1. Documentation

• Case: Auditors request and review purchase invoices for raw materials to verify the amounts recorded in the cost of goods sold.

• Documentation: They maintain a list of selected invoices, noting the invoice number, amount, and comparison to ledger entries. A memo summarizing findings is added to the audit file.

2. Physical Examination

• Case: To verify the existence and condition of inventory, auditors conduct a physical count at year-end.

• Documentation: They create an inventory observation report that includes count procedures, discrepancies found, and photographs of inventory items.

3. Confirmations

• Case: Auditors send balance confirmation requests to major customers and banks.

• Documentation: They keep copies of the sent confirmation requests, track responses, and document discrepancies or unresolved items in a confirmation summary sheet.

4. Observation

• Case: Observing the year-end inventory counting process to assess the accuracy and completeness of the client’s counting procedures.

• Documentation: Auditors prepare an observation memo detailing the processes observed, the personnel involved, and any deviations from prescribed procedures.

5. Analytical Procedures

• Case: Comparing current year revenue trends with prior years and industry averages to identify any unusual patterns.

• Documentation: Auditors prepare an analysis report with graphs, trends, and variances highlighted, including a discussion of potential reasons and implications for audit focus areas.

6. Inquiries

• Case: Interviewing the CFO about the allowance for doubtful accounts and how it’s calculated.

• Documentation: Summarizing the interview notes, including the CFO’s explanations and any documents provided as support, and assessing the reasonableness of the allowance calculation.

7. Reperformance

• Case: Reperforming the depreciation calculation for fixed assets to verify accuracy.

• Documentation: Preparing a schedule comparing the client’s depreciation expenses with the auditors’ independent calculations, noting any differences and investigating discrepancies.

8. Computer-Assisted Audit Techniques (CAATs)

• Case: Using software to test all transactions above a certain threshold for unusual patterns.

• Documentation: Auditors document the methodology, software used, selection criteria, and a summary of findings, including any items flagged for further investigation.

Conclusion

For each type of audit evidence collected, auditors prepare detailed documentation that includes the nature, timing, and extent of audit procedures performed, along with the findings and conclusions drawn. This comprehensive approach ensures the audit’s integrity and supports the final audit opinion on ABC Manufacturing Company’s financial statements.