 In this presentation, we will discuss audit evidence, types of audit evidence, and management assertions. As we go through the audit, what we call that the objective is to give an opinion on the financial statements and whether or not they are in compliance with some set of standards such as generally accepted accounting principles to do that. First, a word from our sponsor. Well, actually, these are just items that we picked from the YouTube shopping affiliate program, but that's actually good for you because these aren't things that were just given to us from some large corporation which we don't even use in exchange for us selling them to you. These are things that we actually researched, purchased, and used ourselves. Acer 27 inch monitor. I've been using an Acer monitor as my primary monitor for a few years now. This is the first Acer monitor that I have used after having used a series of different brands of monitors in the past. The Acer monitor has been performing well and I'm trusting the Acer brand more and more as I use the monitor. I have a 27 inch monitor, which I think is ideal for what I do, which is of course the screen recording and the editing. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com where we have many different courses. You can purchase one at a time or have a subscription model, giving you access to all the courses, courses which are well organized, have other resources like Excel files and PDF files to download and no commercials. We're going to pick up audit evidence and we're going to document that audit evidence. It will become more clear what types of audit evidence will be applicable to a specific type of assertion when we start to consider specific assertions, specific accounts, specific account types. For example, when we start to think about cash and we think about the types of tests and audit evidence and assertions related to it, that becomes more concrete and easy to think about. We'll do that in the future. However, at this point in time, we want to get a broader concept of what type of audit evidence we're looking for. This is going to be very important in the planning stage and it helps us to go all the way through as we start to audit, think about different types of accounts that we will be auditing in the future. Once we go through the actual auditing and testing of these items, you may want to then take a step back to something like this and get a more general view of it once again. We'll go through this general view, audit evidence, then we'll go through the actual audits and we'll be applying different types of procedures, gathering different types of audit evidence related to specific accounts, specific assertions. At that point, you want to take a step back again because your goal is to have a broader idea of why we're doing that so that you can really put together an audit plan rather than just go through some specific type of procedures in accordance with a checklist. Here's the audit evidence and audit report. We're looking first at the relationship between the financial statements and the audit report. You'll recall that the financial statements are what we are going to be issuing, of course, our opinion on the fairness of them. Management assertions about components of the financial statements are one way that we're going to break down those financial statements. We're going to say, how are we going to put together our report? We're going to say, these reports are in conformity with some type of process such as generally accepted accountant principles. According to management, management then is asserting that that is indeed the case. We will list out and break out what those assertions are. Then we're going to basically test those assertions. We're going to go through audit procedures in order to do that testing of those assertions. We'll provide evidence on the fairness of the financial statements. We're going to put together, we're going to document the evidence that we have found on the fairness of the financial statements. Then the auditor is going to reach a conclusion based on the evidence. We're going to take the evidence that we put together of the fairness of the financial statements. Hopefully the hope is that the financial statements are reported fairly in accordance with the standard such as generally accepted accounting principles. Then we issue the audit report. The audit report, again, issuing an opinion on whether or not the financial statements have been reported fairly in accordance with generally accepted accounting standards or generally accepted accounting principles. If that's the standard on which we are auditing. To do this, we're going to take the financial statements and we're going to break them down into management types of assertions. I was going to be two categories of management assertions. We've taken a look at these in the past. I'm not going to go through them in a lot of detail. You can look at a prior presentation, but just note that we're going to break these down into the assertion levels to help us to come up with different types of audit procedures. Management assertions about classes of transactions and events and related disclosures. They include occurrence, things actually occurred, completeness. Do we have everything involved in this process? And again, you're imagining the audit procedures we might put together in order to test for these things. Did something actually happen? In other words, is something on the financial statements? How could we test for something on the financial statements that might not be there? A completeness, how can we test for something that should be on the financial statements, but is not? We have authorization. Is there proper authorization, accuracy of the financial statements, the cutoffs, and that has to do with the year end and the beginning. So timing differences, and you can think that we're typically on an accrual basis, accrual as opposed to a cash basis, some other timing difference. So those cutoff dates, the end of the year, the beginning of the year, important classification and presentation. Then we have assertions and another group of assertions, management assertions about account balances and related disclosures at period end. So now we're looking at the account balances and the related disclosures. We have the existence. We have the rights and obligations. So do they exist? And you can apply this, the easiest thing to apply this to would be some type of asset, such as property, plants and equipment. Does it exist? Right? You could think, you know, is what's on the books actually there? Do you have rights and obligations to it? Is that actually your stuff? Or is it basically on consignment or some other stuff? If it's the inventory that's on the books actually owned by the company? Or is it owned by somebody else? And so we want to know who has the rights and obligation completeness? Is everything complete? Is everything there? Accuracy, valuation and allocation, classification and presentation. So these are going to be the different type of assumptions. We're going to test, of course, for these different types of assumptions, audit evidence, information used by auditor in arriving at conclusions on which the audit opinion is based. So if an auditor gives an opinion, and we were to ask the auditor, why did you give that opinion? Then of course, they should be able to provide evidence for the opinion that they have been given. If they don't have the proper evidence, then they didn't do their due diligence in doing the audit and putting the audit together. So we want to make sure that we have the evidence related concepts to audit evidence, nature of the audit audit evidence, sufficiency and appropriateness of audit evidence, as well as evaluation of audit evidence. We'll go through these in a bit more detail one at a time. Nature of audit evidence, form or type of information. So when we're considering what is the nature of the audit evidence, we're thinking about the form or type of information. We have accounting records and then we have other types of information. The accounting records include things such as records of internal and initial entries and support, general ledger, subsidiary ledgers, journal entries and adjustments to financial statements, worksheets and spreadsheets supporting allocations of costs, calculations, reconciliations and disclosures, and any kind of contracts. These are the things that we would consider in basically the accounting records. What about the other information? Other type of information might include things like minutes, meetings, the meetings of the minutes of the board of directors, for example. Those things aren't necessarily in the financial statement, but we often review something like the minutes because they can give us an idea of the mindset of the people involved, the decision makers, and they could give us an idea of some transactions, some large transactions typically that might be financial in nature. So minutes are some other information, third party confirmations. So we might talk to third parties. Again, we're not talking about actual accounting records or the accounting records per se here, but we might be discussing third party type of information to confirm certain things normally related to the financial statement. Analysis reports from an industry. So we might look at the industry and be comparing the books or comparing something from the company we are auditing to industry standards, data about competitors to use as comparison. So we might be picking instead of the industry as a whole, a particular competitor that would be a good comparison to use control manuals information gotten by auditor from inquiry observation and inspection other types of information that is outside just standard accounting record type of information, sufficiency and appropriateness of audit evidence we hear focusing in on sufficiency sufficiency is going to be the major of the quantity of audit evidence. So when we think about is the audit evidence sufficient, we're typically thinking about the quantity of the audit evidence and we're gathering evidence in order to approve our opinion or support our opinion, the greater the risk of misstatement, the higher the quantity of audit evidence needed. So if we look at the at the risk, if we're auditing something that has a higher degree of risk, one of the ways that we will mitigate that and issue our opinion is to have a greater amount of obviously quantity of evidence to support our opinion, the higher the quality of the audit evidence to lower the quantity of audit evidence needed. The other way we're going to support our opinion is try to think about what type of audit evidence is going to be highest in terms of the most valuable type of audit evidence, the most convincing type of audit evidence. And if we can get more convincing higher value type of audit evidence, then we don't need as much of it in order to support our opinion sufficiency and appropriateness now focusing in on appropriateness. Appropriateness is a measure of the quality of the audit evidence. So sufficiency, how much appropriateness now we're focusing in on the type of audit evidence, the quality of it. So relevance and reliability are the key factors when we're thinking about the quality of audit evidence reliability factors include independent source outside the entity. And we'll discuss more of these as we go through the auditing process, but just note that when we're considering the evidence that we're picking up, we want to consider how much how valuable that evidence is how convincing is that evidence. So if we're talking about an independent source outside the entity, that's going to be more valuable evidence because it's going to be cooperated by someone outside the entity and therefore not having an internal basically influence as being part of the company. So we typically give that a higher value just as a detective would giving a third party opinion about somebody or some event or something, a higher value possibly than someone being accused of something or something like that. So we want that third party opinion would be higher value. Effectiveness of internal controls. So better internal controls would obviously be better evidence auditors direct personal knowledge. So if we're talking about something that's part of the auditor's knowledge, then that's going to be something that could be pretty good evidence because again, the auditor is an independent auditor. So if it's part of the auditor's knowledge and not something that's completely dependent on from say management, then it would be more reliable or more convincing. Typically it not being, you know, relied completely on someone internal to the company, which is the entity being audited documentary evidence. So this is going to be evidence that's actually written down that have documentation for so we can actually think of different types of documents, bills, invoices and whatnot bank statements. And then if we have the documents that are original documents, those are typically of a higher value. So if we're talking about not a recreated document, not a copy document, but the original document, that'll typically have fire value because it's it's thought that that's going to be less likely that it will be tampered with or altered if it is the original document as opposed to some type of copy. If we get that original document as a form of confirmation directly from the third party source, an independent third party source giving us say the bank statement as opposed to the original bank statement being given to us by the company, that would be a more reliable source as well because it's going to be the original documentation, but it's from the source or third party as opposed to the company as well.