Audit

Evidence

Basic principle sources

1.Audit evidence

Independence Integrity Objectivity Professional behavior Technical standard

Basic Principles

Nature (oral,written,visual) Evaluation Direct or indirect Internal or External

SOURCES

Factors Audit risk The nature of internal control Reliance on effective controls (cake) cumulative audit knowledge and

experience Materiality Audit findings Source and reliability of info

2.Sufficient

Derived from understanding the business its

environment and controls

Audit risk

The nature of control should be applied Computerised or manual

The nature of internal control

It includes preliminary understandings and its

evalutions.

Reliance on effective controls

Immaterial items require little ,if any, evidence

(e.g. “reasonableness test”)

Materiality

Its includes error may require further audit

work to be carry out.

Audit findings

How persuasive is the evidence ? Does all the evidence point to the same conclusion ?

Source and reliability of info

3.Appropriate

i. Interrelationshipii. Relevanceiii. Reliability

iv. Direction of testing

Appropriateness is interrelated with

sufficiency.

i. Interrelationship

Appropriate

Relevance Reliable

Account balance Transactions and events Presentation and disclosures

ii. Relevance

Occurrence Completeness Accuracy Cut-off Classification Understandability Existence Rights and obligations Valuation and allocation

ii. Relevance(assertions)

Reliability general assumptions: External & internal Direct & indirect Written & oral consistency

iii.Reliability

Overstatement understatement

iv.Direction of testing

4. Obtaining Audit Evidence

Procedures for Gathering

Evidence

Types of Audit Evidence

Types of Audit Evidence

A. Physical examinationB. ConfirmationsC. DocumentationD. Analytical Procedures

E. Inquiries of the ClientF. ReperformanceG. Observation

Physical Examination(inspection)

Inspection or count by the auditor of a tangible asset.

Different from examining documentation is that the asset has inherent value.

Confirmations and Information Often

Confirmed

Confirmations may be positive or negative

Positive Confirmations Asks for response even if

balance is correct. More reliable than

negative confirmations.

Negative Confirmations Asks for a response only

is if balance incorrect. Uncertainty associated

with no response.

Confirmations and Information

Often Confirmed

Information Assets Cash in bank (example) Accounts receivable Notes receivable Owned inventory out on

consignment Inventory held in public

warehouses Cash surrender value of life

insurance

Source Bank Customer Maker Consignee

Consignee

Insurance co.

Documentation

Types of Documents

Document Vouching

Document Tracing

Types of Documents

Internal Document Prepared and used

within client company. Does not go outside the client.

External Document Document has been

in hands of an outside party to the transaction.

More reliable than internal documents.

Analytical procedures are one of many financial audit processes which help an auditor understand the client's business and changes in the business,

and to identify potential risk areas to plan other audit procedures

Analytical Procedures

Auditor obtains information

from the client in response to questions.

Although much evidence is obtained through inquiry, it can not be regarded as conclusive and may be biased in the client’s favor.

Inquiries

Financial statement assertions are management's explanation about the recognition, measurement, presentation and disclosure of information in the financial statements.

Financial Statement Assertions(cont.)

Existence; an asset or liability exists at a given data . e.g. 1).A computer is recorded on the asset register. Does it really exist?Occurrence; The transaction or event actually took place during the period. e.g.1).Revenue was recorded . Did the organization really make the sale?2).Expense was recorded. Was the expense actually incurred?

Financial Statement Assertions(cont.)

Cutoff; Transactions and events have been recorded in the correct accounting period.Classification; The transaction have been recorded in the proper account.Completeness; all transaction that should have been recorded.Accuracy; The transaction were recorded at the proper amount or revenue or with out any error.

Financial Statement Assertions

Substantive procedures are designed to

detect material misstatements at the assertion level. They comprise tests of details and substantive analytical procedures.

5. Substantive procedures

Procedures consist of the evaluation of

financial information in audit, made by a study of pausible relationships among both financial and non-financial data.

Analytical Procedure - Definition

Substantive Procedures Aim

Tests of account balances Tests of classes of transactions Tests of disclosures

One may change the scope of audit procedures by changing the (NTE, or re-ordered as NET): Nature (type and form) Timing (when performed) Extent (quantity of evidence obtained)

Holding the extent of procedures constant, one

may increase the scope of procedures (make them more effective) by either changing the Nature-- obtain more reliable evidence

often externally generated evidence. Timing--wait until year-end to obtain evidence

from entire set of transactions as contrasted to performing interim testing, say two months prior to year-end and simply updating those procedures.

Nature and Timing of Procedures

Holding other factors such as the nature and

timing of procedures constant: The greater the risk of material misstatement, the

greater the needed extent of substantive procedures

The main way to increase the extent of audit procedures is to examine more items

Sample sizes should reduce detection risk so as to restrict audit risk to a low level

Extent of Procedures

The End