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:
• Refers to quantity
• “Extent” evidence
decision
• Depends on
expectations of
errors, quality of
controls, size of
popn, materiality,
level of assurance,
etc.
Appropriateness
• Refers to quality
• “Nature” and
“Timing” evidence
decisions
• Depends on level of
assurance needed
• If evidence is not
appropriate,
sufficiency won’t
help.
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 nonbalance 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)
2)
Physical Examination
•
= inspection or count of tangible assets
•
Good evidence of existence, but not at all of
ownership and not really of valuation
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)
4)
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
Observation
•
= watching certain activities
•
Generally needs corroboration for assurance
that conditions persist
Types of Evidence
5)
6)
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
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.
