

Audit
Evidence
 1. Audit evidence

 Basic principle
 sources
 Basic Principles

 Independence
 Integrity
 Objectivity
 Professional behavior
 Technical standard
 SOURCES


 Nature (oral,written,visual)
 Evaluation
 Direct or indirect
 Internal or External
 2. Sufficient

Factors
 Audit risk
 The nature of internal control
 Reliance on effective controls
 (cake) cumulative audit knowledge and experience
 Materiality
 Audit findings
 Source and reliability of info
 Audit risk

 Derived from understanding the business its
environment and controls
 The nature of internal
control

The nature of control should be applied
Computerised or manual
 Reliance on effective
controls

 It includes preliminary understandings and its
evalutions.
 Materiality

 Immaterial items require little ,if any, evidence (e.g.
“reasonableness test”)
 Audit findings

 Its includes error may require further audit work to
be carry out.
Source and reliability of
info

How persuasive is the evidence ? Does all the evidence
point to the same conclusion ?
 i. Interrelationship
ii. Relevance
iii. Reliability
iv. Direction of testing
 i. Interrelationship

 Appropriateness is interrelated with sufficiency.

Appropriate

Relevance Reliable
 ii. Relevance

 Account balance
 Transactions and events
 Presentation and disclosures
ii. Relevance(assertions)

 Occurrence
 Completeness
 Accuracy
 Cut-off
 Classification
 Understandability
 Existence
 Rights and obligations
 Valuation and allocation
 iii. Reliability

Reliability general assumptions:
 External & internal
 Direct & indirect
 Written & oral
 consistency
 iv. Direction of testing

 Overstatement
 understatement
Procedures for Gathering
Evidence


Types of Audit Evidence

 Types of Audit Evidence

A. Physical examination E. Inquiries of the Client
B. Confirmations F. Reperformance
C. Documentation G. Observation
D. Analytical Procedures
 Physical
Examination(inspection)

Inspection or count by
the auditor of a tangible
asset.
Different from
examining
documentation is that
the asset has inherent
value.
 Confirmations and Information Often
Confirmed

Confirmations may be positive or negative

Positive Confirmations Negative Confirmations

 Asks for response even if  Asks for a response only
balance is correct. is if balance incorrect.
 More reliable than  Uncertainty associated
negative confirmations. with no response.
 Confirmations and Information
Often Confirmed

Information Source
Assets
Bank
 Cash in bank (example)
Customer
 Accounts receivable
Maker
 Notes receivable
Consignee
 Owned inventory out on
consignment
Consignee
 Inventory held in public
warehouses
 Cash surrender value of life Insurance co.
insurance
 Documentation

 Types of Documents

 Document Vouching

 Document Tracing
 Types of Documents


Internal Document External Document
 Prepared and used within  Document has been in
client company. Does not hands of an outside party
go outside the client. to the transaction.
 More reliable than
internal documents.
 Analytical Procedures


Analytical procedures are one of many financial

audit processes which help an auditor understand
the client's business and changes in the business,
and to identify potential risk areas to plan other audit
procedures
 Inquiries

 Auditor obtains information from the
client in response to questions.
 Although much evidence is obtained
through inquiry, it can not be regarded
as conclusive and may be biased in the
client’s favor.
 Financial Statement Assertions(cont.)


Financial statement assertions are management's explanation
about the recognition, measurement, presentation and disclosure of
information in the financial statements.
 Financial Statement
Assertions(cont.)

Existence; an asset or liability exists at a given data . e.g.
1).A computer is recorded on the asset register. Does it really exist?
Occurrence; The transaction or event actually took place during the
period. e.g.
1).Revenue was recorded . Did the organization really make the sale?
2).Expense was recorded. Was the expense actually incurred?
 Financial Statement Assertions

Cutoff; Transactions and events have been recorded in the
correct accounting period.
Classification; The transaction have been recorded in the
proper account.
Completeness; all transaction that should have been
recorded.
Accuracy; The transaction were recorded at the proper
amount or revenue or with out any error.
 5. Substantive
procedures

Substantive procedures are designed to detect
material misstatements at the assertion level.
They comprise tests of details and
substantive analytical procedures.
 Analytical Procedure -
Definition

Procedures consist of the evaluation of financial
information in audit, made by a study of
pausible relationships among both financial
and non-financial data.
 Substantive Procedures
 Aim
 Tests of account balances
 Tests of classes of transactions
 Tests of disclosures
 One may change the scope of audit procedures by
changing the (NTE, or re-ordered as NET):
 Nature (type and form)
 Timing (when performed)
 Extent (quantity of evidence obtained)
 Nature and Timing of Procedures


Holding the extent of procedures constant, one may
increase the scope of procedures (make them more
effective) by either changing the
 Nature-- obtain more reliable evidence
 often externally generated evidence.
 Timing--wait until year-end to obtain evidence from
entire set of transactions as contrasted to performing
interim testing, say two months prior to year-end and
simply updating those procedures.
 Extent of Procedures

Holding other factors such as the nature and timing of
procedures constant:
 The greater the risk of material misstatement, the greater
the needed extent of substantive procedures
 The main way to increase the extent of audit procedures is
to examine more items
 Sample sizes should reduce detection risk so as to restrict
audit risk to a low level
 
The End