9.401 Auditing
Chapter 6
Audit Evidence
What is Audit Evidence?
=Any information
used by the auditor
to draw conclusions regarding
whether the information being audited is
stated in accordance with the established
criterion
• Must be sufficient and appropriate at lowest
possible cost
Audit evidence decisions
Nature
What type of procedure to use and what
evidence to gather
Timing
When evidence is gathered and covering
what time period
Extent
How many items to test and which items to
select
Sufficient and Appropriate Evidence
Sufficiency: Appropriateness
• Refers to quantity • Refers to quality
• “Nature” and
• “Extent” evidence
decision “Timing” evidence
decisions
• Depends on
• Depends on level of
expectations of assurance needed
errors, quality of • If evidence is not
controls, size of appropriate,
popn, materiality, sufficiency won’t
level of assurance, help.
etc.
To be appropriate…
Relevance
= addresses the objective or assertion
Eg. Existence vs. completeness
Auditor’s direct knowledge vs. otherwise
Examination, observation, inspection or
computation by auditor > someone else
Independence of provider
Provider external to org > external to
acctg dept > acctg dept
Documents external to org > external
docs held by org > internal docs
To be appropriate…
Effectiveness of Internal controls
Evidence from system of good I.C. >
evidence from system of poor I.C.
Qualifications of individuals providing the
information
Degree of objectivity of evidence (vs.
subjectivity)
Timing
Auditor must express conclusion on information at
balance sheet date.
However, may gather information as at non-
balance sheet date and “roll forward” the
conclusion by:
Substantive tests
Relying on internal controls
Other procedures
To do this, consider
quality of internal controls,
materiality of item and
level of risk associated with item
Types of Evidence
1) Physical Examination
• = inspection or count of tangible assets
• Good evidence of existence, but not at all of
ownership and not really of valuation
2) Confirmation
• = receipt of response from 3rd party verifying
accuracy of info requested by auditor
• Costly, but reliable evidence of existence
• Usually required for A/R except in certain
circumstances
• Used for many other accounts as well
• Must be kept under control of auditor
Types of Evidence
3) Documentation
• = inspection of documents and records
• Quality depends on quality of document
(external vs. internal, internal control)
• If electronic, auditors must assess controls
over changes to documents
4) Observation
• = watching certain activities
• Generally needs corroboration for assurance
that conditions persist
Types of Evidence
5) Inquiries of Client
• = written or oral representations of client in
response to auditor’s request for information
• Generally not conclusive, should be
corroborated when possible
• Underlines importance of mgmt good faith,
care must be taken in choosing clients
6) Reperformance
• = auditor rechecking computations or other
operations done by client
• Particularly often used when testing controls
7. Analytical Procedures
= using financial and non financial data in
meaningful comparisons and relationships
to determine whether account balance is
reasonable
Can be quite effective at low cost
Reliability depends on quality of data,
nature of analysis, skill of auditor, level of
detail
Purposes of Analytical Tests
As audit evidence which enables the
reduction of audit testing of details.
Indication of errors in the statements
requiring follow-up.
Indication of financial difficulty.
Understanding the client’s business and
industry.
An aid to management.
When Analytical procedures are
used:
MUST be used in:
planning
final review
MAY be used as a substantive test
Analytical Procedures
Comparison of Current year balances to:
balances for one or more comparable periods.
company’s budgets and forecasts.
other current-year balances for conformity with
predictable patterns based on the company’s
experience.
similar information for the industry in which the
company operates.
relevant non-financial information.
Analysis of Un-audited Financial
Statements
Horizontal analysis examines changes of FS numbers
and ratios across two or more years
Vertical analysis examines FS amounts expressed each
year as proportions of a base.
Auditors look for relationships in accounts as indicators
of problems and to plan further audit work
Problems discovered by
analytical procedures
Account balances that seem high could indicate
problems with:
existence
valuation
ownership
Account balances that seem low could indicate
problems with:
completeness
valuation
Conclusions from analytical
procedures
Don’t indicate definitively that there is an
error. Unexpected fluctuations may be from
error or non-error causes.
Client explanations should be corroborated
if they relate to a material item.