8/10/2019 5 Audit Evidence & Techniques

1/24

1

Audit Evidence &

Techniques

Prof Dr. Safdar A. Butt

8/10/2019 5 Audit Evidence & Techniques

2/24

2

Audit Evidence

Audit evidence refers to the proof orsupport needed for justifying an entry orreport. If an auditor wants to satisfy himselfabout the validity of an entry in the booksor financial statements, he must examinethe evidence available to support it.

8/10/2019 5 Audit Evidence & Techniques

3/24

3

Qualities of Evidence

SufficiencyRelevance

Reliability

8/10/2019 5 Audit Evidence & Techniques

4/24

4

Audit Techniques

Means used by an auditor:to acquire necessary audit evidence and

to establish the reliability of audit evidenceso gathered.

8/10/2019 5 Audit Evidence & Techniques

5/24

5

Audit Techniques

VouchingInspectionConfirmationRe-computationRe-tracing entriesCorrelationReconciliationRatio analysis

8/10/2019 5 Audit Evidence & Techniques

6/24

6

Inspection

Also known as physical verification.Essentially refers to actual inspection ofassets, e.g. cash, investment, vehicles,furniture, etc.

Also includes presence at a managementactivity to verify its efficiency, e.g. year-end stock-taking.

8/10/2019 5 Audit Evidence & Techniques

7/247

Confirmation

Verification of a fact, balance or conditionfrom a third party, i.e. a party other thanthe client or the auditor.Examples include balance confirmationfrom banks and debtors, valuation reportfrom outside valuers, etc.External auditor must always seekconfirmation through his client.

8/10/2019 5 Audit Evidence & Techniques

8/248

Re-computation

Entries and balances that are based oncertain computation can best be verifiedby carrying out the computation all overagain, e.g. calculation of depreciation,provisions for bad debts, etc.By re-computing, an auditor verifies thearithmetical accuracy as well as the basisfor computation.

8/10/2019 5 Audit Evidence & Techniques

9/249

Re-tracing Procedure

Taking an entry and tracing it rightthrough from original source document upto its final appearance in IncomeStatement or Balance Sheet.It verifies both the reliability of the systemand accuracy of the entries.

8/10/2019 5 Audit Evidence & Techniques

10/24

10

Vouching

Examination of the source document(s)supporting an entry in the books ofaccounts.

Most commonly used audit technique.Check if the documents:

are correctly drawn up

are duly authorizedare properly recordedcorrespond to other records/entries

8/10/2019 5 Audit Evidence & Techniques

11/24

Inquiry

Asking questions from the employees orofficers of the company to clarify asituation.

Asking questions from an outsider, withapproval from the client.

11

8/10/2019 5 Audit Evidence & Techniques

12/24

12

Correlation

This involves checking an entry or documentwith other related documents or entries,e.g. depreciation expense and provisionsfor depreciation accounts are related andshould match each other in terms of yearsentries.

8/10/2019 5 Audit Evidence & Techniques

13/24

Observation

Just keeping eyes open to observe andnotice how things are handled in thecompany.The attitude of workers and managers.Manner of handling papers and files.

13

8/10/2019 5 Audit Evidence & Techniques

14/24

Flow Charting

Drawing up flow charts of procedures toensure full coverage during audit.These may already exist in clientsprocedure manuals.

14

8/10/2019 5 Audit Evidence & Techniques

15/24

15

Reconciliation

A reconciliation statement explains thedifference between a balance as shown in ledgerand as shown by another source.

Examples:Bank Reconciliation StatementStock Reconciliation when physical stock list mayshow a different balance from cost ledger.

Auditor should check or re-compute thesereconciliation statements

8/10/2019 5 Audit Evidence & Techniques

16/24

16

Ratio Analysis

This is a difficult technique and requiresconsiderable experience to make a proper

judgment.

Accounting ratios prepared on the basis offinancial statements of a number of years have arelationship with each other. A careful study ofthese ratios can explain a lot of things. Forexample, if gross profit margin in percentage ishigher but net profit percentage is less thanprevious years, there should be an explanationor else it indicates a cooking of books.

8/10/2019 5 Audit Evidence & Techniques

17/24

17

Audit Check

It is any action taken by an auditor toverify audit evidence or bona fides of anentry or balance.

8/10/2019 5 Audit Evidence & Techniques

18/24

18

Types of Audit Checks

Test CheckComplete Check

Audit in DepthSurprise Check

8/10/2019 5 Audit Evidence & Techniques

19/24

19

Test Check

Checking documents or entries on aselective basis.Necessary when there are large number ofsimilar accounts or entries.Example: If a company has 500 tradedebtors, the auditor may decide to auditonly say 50 accounts.

8/10/2019 5 Audit Evidence & Techniques

20/24

20

Complete Check

Checking all the documents or entries.Possible only in small departments orunits.May be necessary if test checks indicateserious weakness of internal control.

8/10/2019 5 Audit Evidence & Techniques

21/24

21

Audit in Depth

This refers to detailed checking of aparticular account, or group of entries.For example, if a debtors account is to beaudited in depth, each and every entry inhis account will be traced to originalsource, cross-checked to related accounts,and traced to final debtors schedule. Alsoconfirmation of balance will be soughtfrom him.

8/10/2019 5 Audit Evidence & Techniques

22/24

22

Relationship betweenvarious checks.

A company has say 500 trade debtors.If the auditor decides to audit only say 75accounts, it will be a test check.

If the auditor decides to audit all the 500accounts, it will be called a complete check.If only test check is taking place, the auditor will

check 75 accounts in great detail, verifying eachand every entry. This is called audit in depth.

8/10/2019 5 Audit Evidence & Techniques

23/24

23

Surprise Check

This essentially refers to a physicalinspection of an asset without giving priornotice to the custodian of that asset.It is very effective as the custodian ofasset does not get a chance to cook upentries or replace misappropriated items.Useful for petty cash, or smaller stockitems.

8/10/2019 5 Audit Evidence & Techniques

24/24

24

Thank youProf Dr Safdar A Butt