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Audit Evidence ProcessGathering sufficient, reliable, relevant, and useful evidence.AUDIT EVIDENCE PROCEDURESfollowing the audit program

examination and evaluation of information

expression of an opinion on the efficiency, economy, and effectiveness of the activitiesaudit programIt is a systematic plan for each phase of audit work providing a basis for assigning work to the team members. It is a means of controlling and evaluating progress and assisting in training inexperienced staff members. It provides a summary record of work done.It reduces the direct supervision requirement by providing a clear path for subordinates and provides internal audit quality assurance information.3CRITERIA FOR SUCCESSthe objectives of the operation should be stated and agreed to by the auditee up front.programs should be tailor-made where possible and the reasoning behind each work step should be shown.audit program is a series of detailed instructions to be followed and prioritized.All audit programs should be flexible. Supervisory approval must be shown for all audit scheduling and staffing.The audit supervisor must be satisfied with the:

Audit subjectAudit objectiveAudit scopePre-audit planning Selection of audit procedures Procedures for evaluation or testing Procedures for communication Report preparation Follow-up review The audit program provides for the collection of audit evidence of:

StructuresDocumentation standardsSystems documentationThe overall audit approach must be:

SimplePracticalQuickCommon senseBusiness orientedTechnically competentSTATISTICAL SAMPLINGIn many cases the auditor can gain adequate assurance regarding the mitigation of risk without having to examine every single record or transaction. Under such circumstances, the auditor may choose to use a variety of sampling techniques in order to obtain evidence that is satisfactory and competent.WHY SAMPLE?The underlying assumption of sampling is that the results of a sample yield accurate information about the population from which the sample was taken.Cost and time constraints.

Methods of SamplingJudgemental(Non-statistical sampling) involves the auditor making a judgment call as to the number of items to be selected and which items. Statistical sampling process of testing a portion of a group of items to evaluate and draw conclusions about the population as a whole. SAMPLING RISKThe uncertainty that exists in applying the audit procedures is commonly referred to as audit risk.

Sampling risk is the risk that the sample chosen does not appropriately reflect the population as a whole, while non-sampling risk is the risk that, having obtained a representative sample, the auditor still misses a significant error. ASSESSING SAMPLING RISK2 main aspects of sampling riskThe risk of over-reliance on controls (beta risk), which is the risk that the sample leads the auditor to place reliance on the control when it is not justified.The risk of under-reliance on controls (alpha risk) is the risk that the sample leads the auditor to evaluate the population as beyond tolerance levels erroneously.When performing substantive testsThe risk of incorrect acceptance (beta risk) is the risk that the sample supports the auditors conclusion that the amount or quantity is not materially misstated when in fact it is.The risk of incorrect rejection (alpha risk) is the risk that the sample leads the auditor to believe that the amount or quantity is materially misstated when in fact it is not.PLANNING A SAMPLING APPLICATIONAudit ObjectivesThe auditor may focus on the specific objectives to be achieved by the tests to be carried out on the sample selected.

The sampling technique chosen will be dependent on the nature of the opinion the auditor wishes to express. Population CharacteristicsDefine the population about which an opinion will be expressed in terms of the populations characteristics.Any opinions expressed based on a sample can only be in terms of the population that was sampled in the first place.In any population, a common evaluation technique is to determine the average value of the population. Three averages are possible: the mean, the median, and the mode. In statistical sampling, the most commonly used average is the mean.

The mean or arithmetic average value of a data set may be calculated as the sum of all values, divided by the number of data points.

The median represents the middle value in a population range.

The mode represents the most frequently occurring value in a population.

Deviations from the MeanThe amount of variability in the population defines the spread of values. One method of determining the variability of a population is to examine its variability from the mean.

Standard deviations measure dispersion around the mean. The standard deviation can be calculated as the square root of the average of squared deviations of each member of the population from the mean.CALCULATING SAMPLE SIZEAs previously stated, the amount of variability in the population defines the spread of values. This will also affect accuracy and consequently the size of the sample required when estimating a value. The greater the variability, the larger the sample size required.

The population size does not normally affect sample size.QUANTITATIVE METHODSIn addition to statistical analysisTrend AnalysisPractice of collecting information and attempting to spot a pattern, ortrend, in the information.

Used to evaluate the behavior of a variable such as turnover of a period of time.Chi-Square TestsNon-parametric tests capable of analyzing relationships between qualitative data.

Any statistical hypothesis test in which the sampling distribution of the test statistic is a chi-square distribution when the null hypothesis is true. Correlation AnalysisThe measurement of the extent of association of one variable with another.

In statistics, dependence is any statistical relationship between two random variables or two sets of data. Correlation refers to any of a broad class of statistical relationships involving dependence.Graphical AnalysisScatter diagram, which refers to any graph of data points. The more discernible a pattern appears in the graph, the more likely one variable is related to another and therefore can be used to predict the others value.Learning Curves Graphical representation of the increase of learning (vertical axis) with experience (horizontal axis.

Learning curves are evaluated by computing the time required per unit of production each time that the cumulative output is doubled.Ratio and Regression AnalysisRatio analysis assumes a given proportional relationship between two numbers and is normally used for comparisons over time.

Regression analysis is used to estimate the effect that a movement in one variable (the independent variable) causes a movement in the other variable (dependent variable).Linear ProgrammingAn operations research tool used for the allocation of scarce resources or to determine optimal blends of raw materials.

Method to achieve the best outcome (such as maximum profit or lowest cost) in a mathematical model whose requirements are represented by linear relationships.PROJECT-SCHEDULING TECHNIQUES Program Evaluation Review TechniquesUsed to diagrammatically identify dependent and independent activities.

Statistical tool, used in project management, which was designed to analyze and represent the tasks involved in completing a given project.Critical Path MethodScheduling tool that was developed independently of PERT but uses a similar diagram.

GANTT or Bar ChartsIllustrate the start and finish dates of the terminal elements and summary elements of a project.

SIMULATIONSMonte Carlo SimulationsUses the computer to simulate uncertainty via random behavior based on the probabilities entered and then estimates specified models several times to determine average performance.Game TheoryMathematical models of optimal strategies under various incentive schemes. This is used in competitive environments to explore what if solutions. Queuing TheoryFacilitates the use of mathematical models to minimize the total cost for a given rate of arrivals; the minimized cost includes both service costs (facility and operating costs) and waiting costs (the idle resources waiting in line or having service points idle).COMPUTER-ASSISTED AUDIT SOLUTIONSThe use of knowledge-based systems which will permit the distribution of advanced audit techniques to less skilled staff.

Commonly referred to as Computer-Assisted Audit Tools (CAATs), Computer-Assisted Audit Techniques (CAATs), or more correctly Computer-Assisted Audit Tools and Techniques (CAATTs).Computer-Assisted Audit Tools and Techniques (CAATTs)Needed because of the large volumes of data in multiple locations involved in the managing of a complex business environment.

Involves the merging of software into an audit program.Information retrieval and analysis programs and proceduresgeneralized audit softwareapplication and industry-related softwarecustomized audit softwareinformation retrieval softwarestandard utilitieson-line inquiryGENERALIZED AUDIT SOFTWARESoftware designed specifically for auditors in order to provide a user friendly audit tool to carry out a variety of standard tasks required by the auditor such as examining records, testing calculations, and making computations. CUSTOMIZED AUDIT SOFTWARESoftware designed to run in unique circumstances and to perform unique audit tests.INFORMATIONRETRIEVAL SOFTWAREThis category of software includes report writers, program generators, and fourth-generation languages.UTILITIESPrograms written to perform common tasks such as copy, sort, print, merge, select, or edit. These programs are normally parameter driven and may be used in combination with other software.ON-LINE INQUIRYInteractive interrogation can provide comparison data for audit reports, can provide confirmation of corrective action taken, and can be an additional source of audit information. Other alternatives conventional programming languages microcomputer-based software

TEST TRANSACTION TECHNIQUES Test data. Integrated Test Facility (ITF). Source-code review.Embedded audit modules (SCARFs [System Collection Audit Review Files]). Parallel simulation.