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!

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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