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SAS 31, Evidential Matter, was issued in August 1980. The pronouncement enumerates the five broad categories of assertions about which the auditor must gather sufficient, competent evidence to support financial statement items. The auditor is encouraged to develop audit objectives for each relevant assertion for each significant account balance or class of transactions. The next step involves the determination of those audit procedures that would provide the evidence to support the objectives. The process is well grounded in logic. Experience has shown that the requirements of SAS 31 need to be reviewed, because some auditors continue to operate without understanding the relationships of procedures found in standard audit programs and financial statement assertions. With increased understanding of the reasons for performing a procedure, the auditor can become more efficient or more effective by reducing or redirecting current effort.
EXISTENCE
SAS 31 states, "Assertions about existence or occurrence deal with whether assets or liabilities of the entity exist at a given date and whether recorded transactions have occurred during a given period." Where does the auditor begin to support this assertion? Answer: The books and the ledger gather evidence that a transaction has occurred because the accounting system "captured" the transaction by recording it.
In testing for existence, the auditor should seek evidence outside the books for that which has been recorded. The effort cannot stop with finding supporting debits and credits in a book of original entry. The effort must extend beyond the confines of the accounting records to persuasive evidence of the existence of the tangible or intangible asset or liability.
Substantive testing for the assertion of existence frequently involves some type of confirmation with an outside third party. For example, a long-standing auditing procedure to be used where practicable is the confirmation of receivables. Although the client may be involved in the generation of the confirmations, especially in the computer environment, the auditor is cautioned to retain control over the confirmation process and not to be influenced by a client's comments as to why a receivable should or should not be confirmed. The auditor should exercise due care to determine the legitimacy of the address of the person to whom receivable confirmation is being sent.
Confirmation of cash account balances is another example...