Main Types of Audit Evidence
Advanced Auditing
Chapter 7
Dr. Mohamed A. Hamada
Learning Objectives
• 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
Types of Audit Evidence
1. Physical examination2. Confirmation3. Documentation4. Analytical procedures5. Inquiries of the client6. Re-calculation7. Re-performance8. Observation
Physical Examination
It is the inspection or count by theauditor of a tangible asset.
This type of evidence is most oftenassociated with inventory and cash.
Physical examination is a direct means of verifying that an asset actually exists
Confirmation
• Confirmation describes the receipt of a direct written response from a third party verifying the accuracy of information that was requested by the auditor.
• Because confirmations come from sources independent of the client, they are a highly regarded and often-used type of evidence
auditor
client’s customer
•Confirmation - receipt of a written or oral response from an independent third party at the auditor’s request.
• A sample of accounts receivable should be confirmed by the auditor.
very appropriate evidence!
Canada 46
Documentation
It is the auditor’s inspection of theclient’s documents and records.
Internaldocuments
Externaldocuments
- Documentation (vouching) - auditor examination of client documents and records
External documents are usually on the client’s premises but were either prepared by a third party or processed by a third party (more persuasive).
Internal documents have been prepared by the client and have not left the client’s premises (less persuasive).
the difference between internal and external documents?
- Documentation (vouching) - auditor examination of client documents and records
- Physical examination - inspection or count by the auditor of a tangible asset
the difference between physicalexamination and documentation
Example:
the client often retains a customer order, a shipping document, and a duplicate sales invoice for each sales transaction.These documents are useful evidence for the auditor to verify the accuracy of the client’s records for sales transactions.
Analytical Procedures
Understand the client’s industry and business
Assess the entity’s ability to continue as a going concern
Indicate the presence of possible misstatementsin the financial statements
Reduce detailed audit tests
For example, an auditor may compare the gross margin percent in the current year with the preceding year’s.
Use comparisons and relationships to assess whether account balances or other data appear reasonable compared to the auditor’s expectations
- industry comparisons
Types of Analytical Procedures
How do theclient’s financial ratios
compare with thoseof the industry?
- comparisons with prior years
AceCompany
2003financial
statements
Conclusions from a 2-year analysis
Types of Analytical Procedures
AceCompany
2004financial
statements
Account can be calculated from Sales commissions sales Depreciation expense fixed assets Interest expense notes/bonds payable
Types of Analytical Procedures- Comparisons with auditor-determined expected results, examples:
Inquiries of the Client
It is the obtaining of written or oral information from the client in response to questions from the auditor.
Recalculation
•Rechecking client calculations consists of testing the client’s arithmetical accuracy and includes such procedures as extending sales invoices and inventory
•checking the calculation of depreciation expense and prepaid expenses
•It involves rechecking a sample of calculations made by the client.
Re-performance
Re-performance is the auditor’s independent tests of client accounting procedures or controls that were originally done as part of the entity’s accounting and internal control system.Ex: the cycle of sales recording process, procedures of payrolls calculation
Observation
It is the use of the senses to assess client activities.
The auditor may tour the plant to obtain a generalimpression of the client’s facilities.
Terms and Types of Evidence
Terms Type of Evidence
ExamineScanReadComputeRe-computeAssessTraceCompareCountObserveInquireVouch
DocumentationAnalytical proceduresDocumentationAnalytical proceduresRecalculationRecalculationDocumentation/Re-performanceDocumentation/Analytical proceduresPhysical examinationObservationInquiries of clientDocumentation
Audit Documentation
Audit documentation is the principal recordof auditing procedures applied, evidenceobtained, and conclusions reached bythe auditor in the engagement.
Purposes of audit documentation
The overall objective of audit documentation is to aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with auditing standards
Learning Objective 7
• Describe how technology affects audit evidence and audit documentation.
Effect of Technology
Audit evidence is increasingly in electronic form
Auditors must evaluate how electronic informationaffects their ability to gather evidence
Auditors use computers to read and examineevidence
Software programs are typically Windows-based
Define the following terms commonly used in audit procedures:1. Examine 2. Scan3. Compute4. Foot5. Compare6. Count7. Vouch
Answer:1. Examine – A reasonably detailed study of a specific document or record to
determine specific facts about it.2. Scan – A detailed examination of a document or record to determine
whether there is something unusual warranting further investigation.3. Compute – A calculation done by the auditor independent of the client.4. Foot – Addition of a column of numbers to determine whether the total is
the same as the client’s.5. Compare – A comparison of information in two different locations.6. Count – A determination of assets on hand at a given time. This is
associated with evidence defined as physical examination.7. Vouch – The use of documents to verify recorded transactions or amounts.
End of Chapter 7