Professional Documents
Culture Documents
2 – DQ 2
The third generally accepted standard of audit fieldwork requires that auditors obtain
sufficient, competent audit evidence to afford a reasonable basis for an opinion regarding the
financial statements under examination. In considering what constitutes sufficient, competent
audit evidence, a distinction should be made between underlying accounting data and all
corroborating information available to the auditor. What presumptions can be made about the
following?
The relative competence of evidence obtained from external and internal sources.
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The role of internal control with respect to internal evidence produced by a client’s
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data processing system.
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The relative persuasiveness of auditor observation and recalculation evidence
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compared to external, externalinternal, and internal documentary evidence.
Response #1
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Relative competence of evidence has to do with the measure of evidence’s quality (reliability).
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Evidence must be relevant to the assertion to be considered competent. Put differently, evidence
must have logical precise relevance to management’s assertions in the financial statements. In
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regard to reliability, evidence must be considered worthy of trust. Trustworthiness may be hard
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to determine from external sources if the source is not alert and fully informed. On the other
hand, external sources can be more reliable some times as well, such as in the case of bank
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statements compared to documents provided by management. In the role of internal control with
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respect to internal evidence, such evidence produce by a client’s data processing system would
be considered less reliable evidence if internal control were considered ineffective. On the
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contrary, if internal control operates effectively then the data would be considered more reliable
evidence. In the relative persuasiveness of auditor observation evidence, persuasive evidence is
less reliable...there is a higher risk of material misstatement when persuasive evidence is used,
whereas with conclusive evidence, there is less risk of material misstatement. In regard to
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recalculation evidence, recalculation can consist of using auditing software to match totals,
which I would think strengthens reliability.
Response #2
The presumption that can be made about the relative competence of evidence obtained from
external and internal sources are that if the information were obtained from an internal source
such as a member of management, the evidence would be considered less reliable. If the source
of evidence were obtained from an external source such as a bank, the information would be
considered more reliable.
The presumption that can be made about the role of internal control with respect to internal
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evidence produced by a client’s data processing system. These presumptions can made as
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follows: if the information is obtained from an processing system that the client is using but the
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internal controls of that system is ineffective, the evidence obtained would be less reliable than
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information that were obtained from one that operates effectively.
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The presumption that can be made about the relative persuasiveness of auditor observation and
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recalculation evidence compared to external, externalinternal, and internal documentary
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evidence is that the auditor will rarely be convinced without any doubt about the financial
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statements they are auditing. As per our chapter readings, “Ordinarily, the auditor finds it
necessary to rely on audit evidence that is persuasive rather than conclusive” (Boynton &
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Johnson, 2006, p. 240). This also means that the auditor is not able to give reasonable assurance
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that the information received, if not satisfied by the auditor, is persuasive.
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Reference
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Boynton, W. C., & Johnson, R. N. (2006). Modern auditing: Assurance services and the integrity
of financial reporting. Hoboken, NJ: John Wiley & Sons.
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Response #3
The relative persuasiveness of auditor observation and recalculation evidence compared to
external, externalinternal, and internal documentary evidence. It is clear that external
documentation would normally be considered to be highly reliable, and particularly when the
auditor received it directly, such as confirmations. There is external evidence which the client
receives first but it doesn't have the same level of reliability as the former. Both of those sources
rank higher in competency over internally prepared evidence. In the internal case, evidence
derived from a wellcontrolled information system will be more reliable than that produced by a
poorly controlled system of accounting information. The statement explains why good internal
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controls are so important to auditors. If an auditor tests the system of internal controls and
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concludes that the system can be relied upon, the auditor may be able to limit the testing and
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possibly even limit some confirmation procedures
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There are three types of weaknesses in a poor system of internal control: deficiencies in the
design of the controls, deficiencies in the control environment, and deficiencies in the operation
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of the controls. The order of the items presented in question 3 are exactly the order of
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competence of evidence. Obviously, observation would be the most credible but it can only
work in certain audit areas. An auditor can observe the equipment and the fuel inventory, for
example, but he/she can't observe the cash in the bank. Some current assets other than inventory
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can be observed; for example, stock certificates in the safe are pretty good evidence of
ownership. I once audited a bank vault and even then, the bundled cash was thumbed for
possible fraud. The way to think about the value of evidence is to consider the highest level of
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documentation (among your several choices) and use it. To demonstrate: cash on hand can be
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observed and counted, cash in the bank can be confirmed, accounts receivable can be confirmed,
inventory can be observed and on down the balance sheet.
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Response #4
When conducting an audit, auditors are required to find sufficient evidence to guarantee the
legitimacy of the financial statements at hand. However, this leaves room to interpret what
constitutes “sufficient, competent” audit evidence. To distinguish what qualities and
characteristics legitimize a company’s statements, auditors must distinguish underlying
accountant data from substantive data. As a result, there are several presumptions made
regarding the evidence obtained to support the data, the means by which such evidence was
collected, and the degree to which an auditors measures of recalculation compare to the original
evidence.
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In regards to the relative competence of evidence obtained from external and internal
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sources, auditors have discretion to use their profession judgment to decipher the accuracy of the
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data and the validity of the evidence used to support it. Auditors, consequently, must determine
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the accuracy of the data in question by comparing evidence from both internal and external
sources.
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A sufficient understanding of internal control is to be obtained to plan the audit and
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determine the nature, timing and extent of tests to be performed. Material used as evidence is
obtained through inspection, observation and confirmations to form a basis for an opinion
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regarding the financial statements. Internal control can provide only reasonable assurance
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regarding the capacity to which an entity has met its objectives. Auditors determine deficiencies
in internal control by recognizing whether or not internal evidence produced by the client’s data
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processing system contains any errors. Auditors should obtain sufficient, competent and relevant
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evidence that computerprocessed data are both valid and reliable when the data is significant to
the auditor’s findings. Auditors can test the effectiveness of the entity’s internal controls through
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direct physical computation and inspection to support the conclusion of whether or not the
controls are effective.
Evidence is more persuasive when compiled by an external, independent entity rather than
internal auditing sources. Therefore, auditors must test the systems utilized by internal control to
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determine the degree to which internal data can be relied upon. One can therefore presume that
when an auditor’s independent recalculation coincides with that of internal and external
documented evidence that such findings are indeed both correct and dependable.
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