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Learning Objectives
• Audit Evidence Contrasted with Legal and Scientific Evidence,
• Audit evidence are variant of other evidence that used by other professions.
• Identify the four audit evidence decisions.• Explain the persuasive of audit evidence • Explain the main types of audit evidence
Nature of Evidence
The use of evidence is not unique to auditors
Evidence is also used by scientists, lawyers,and historians
Evidence
• The foundation of any audit is the evidence obtained and evaluated by the auditor.
• The auditor must have the knowledge and skill to accumulate sufficient and appropriate evidence on every audit to meet the standards of the profession.
Audit Evidence
• Is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria.
• Evidence includes information that is highly persuasive, and less persuasive information.
Audit Evidence Decisions
1. Which audit procedures to use?
2. What sample size to select for a given procedure?
3. Which items to select from the population?
4. When to perform the procedures (timing)?
A major decision facing every auditor is determining the appropriate types and amounts of evidence needed to be satisfied that the client’s financial statements are fairly stated
Which audit procedures should be used?
An audit procedure is a detailed
instruction for thecollection of a type of
audit evidence.
Which audit procedures should be used?
In general, the auditor will seekthe most appropriate procedures
that are also cost-feasible.
Which audit procedures to use
• Examples , • Verifying the inventory by count the inventory
units.• Verification of cash disbursements:• Examine the cash disbursements journal in
the accounting system and compare the payee, name, amount, and date with online information provided by the bank about checks processed for the account.
Sample Size• Once an audit procedure is selected, auditors
can vary the sample size from one to all the items in the population being tested.
• Example:• In an audit procedure to verify cash
disbursements, suppose 6,600 checks are recorded in the cash disbursements journal.
• The decision of how many items to test must be made by the auditor for each audit procedure.
• The sample size for any given procedure is likely to vary from audit to audit.
Items to SelectAfter determining the sample size for an audit
procedure, the auditor must decide which items in the population to test.
If the auditor decides, for example, to select 50 checks from a population of 6,600 for comparison with the cash disbursements journal,
The auditor can (1) select a week and examine the first 50 checks,
(2) select the 50 checks with the largest amounts, (3) select the checks randomly, or (4) select those checks that the auditor thinks are most
likely to be in error.
The auditor will consider:- random/judgmental selection- materiality- results of prior audits
Which items should be selected for testing?
When should the procedures be performed? Timing
The auditor will consider proceduresthat should be performed before, on,
or after the balance sheet date.
December
when to perform the procedures (timing)An audit of financial statements usually covers a period
such as a year. Normally an audit is not completed until several weeks
or months after the end of the period. The timing of audit procedures can therefore vary from
early in the accounting period to long after it has ended.timing is also influenced by when the auditor believes
the audit evidence will be most effective and when audit staff is available.
For example, auditors often prefer to do counts of inventory as close to the balance sheet date as possible.
When should the procedures be performed?
An auditor must address four decisions regarding evidence accumulation:
Which items should be selected for testing?
What sample size should be selected?
Which audit procedures should be used?
After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.
An audit program is a list of detailed audit
procedures for each component or cycle specifying procedure
timing, sample sizes, and selection methods.
Audit Program
It includes a list of the audit proceduresthe auditor considers necessary.
Most auditors use computers to facilitatethe preparation of audit programs.
Sample sizes Items to select Timing of the tests
Persuasiveness of Audit evidence
Appropriateness
Timeliness and quantity
sufficiency
Relevance and Reliability
Appropriateness
•Appropriateness is a measure of evidence quality, it can’t be enhanced by a larger sample size.
•If evidence is considered highly appropriate, it is a great help in persuading the auditor that financial statements are fairly stated
Appropriateness
Appropriateness is determined by:- Independence of the evidence provider- Effectiveness of client’s internal controls- Auditor’s direct knowledge- qualifications of information provider- Degree of objectivity
• Reliability of evidence refers to the degree to which evidence can be believable or worthy of trust.
• For example, if an auditor counts inventory, that evidence is more reliable than if management gives the auditor its own count amounts.
Reliability
Six Characteristics of Reliable Evidence
1. Independence of provider2. Effectiveness of client’s internal controls3. Auditor’s direct knowledge4. Qualification of individuals providing the information5. Degree of objectivity6. Timeliness
sufficiency
Sufficiency is a measure of quantity. In general, the larger the sample size, the more persuasive the evidence.
Less evidence yields
less assurance and
lower auditcosts.
More evidence yields
more assurance and
higher audit costs.
MORE LESS
Auditors must balance the trade-off between
gathering more or less evidence.
An appropriate sample size may be determined by auditor judgment
and/or by statistical sampling.
sufficiency
Sufficiency must be addressed foreach audit test and each component
of the financial statements.
sufficiency
- “Representativeness”- Materiality, large dollar amounts- Items with high probability of misstatement
In determining a sufficient sample
size, an auditor will also consider:
timeliness
- evidence related to balance sheet accounts should be collected as close to the balance sheet date as possible- evidence related to income statement accounts should be collected from throughout the period rather than from only part of the period
RelevanceReliability
timeliness
sufficiency
appropriate-ness
Evidence isconsideredpersuasiveonly if all
four determinants
have been met.
With regard to the adequacy and costs of audit evidence:
requires
requires
absolutecertainty
convincingevidence
high auditcosts
requires
requires
reasonablecertainty
persuasiveevidence
reasonableaudit costs