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Studies in Auditing
Lecture 1: Types of Audit Evidence
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Types of Audit Evidence
Physical
Examination
Observation
Reperformance
Audit
Evidence
Confirmation
Documentation
Analytical
procedures
Recalculation
Inquiry
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1. Physical Examination
It is the inspection or count by the
auditor of a tangible asset.
This type of evidence is most often
associated with inventory, cash and fixed assets.
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2. Confirmations
• Confirmation: describes the receipt of a
written or oral response from an independent
third party verifying the accuracy of
information that was requested by the
auditor.
• Confirmations are relatively costly.
• Response:
– Positive confirmation
– Negative confirmation
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Information often Confirmed
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3. Documentation
It is the auditor’s inspection of the
client’s documents and records.
Internal
documents
•
•
External
documents
Internal documents are prepared and used within the client’s organization.
External documents are handled by someone outside the client's
organization who is a party to the transaction being documented but
which are either currently held by the client or readily accessible.
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4. 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 misstatements
in the financial statements
 Reduce detailed audit tests
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5. Inquiries of the Client
It is the obtaining of written or oral
information from the client in response to
questions from the auditor.
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6. Recalculation
It involves rechecking a sample of calculations
made by the client.
• Auditor is merely testing the arithmetical accuracy of
client’s records. This may include the following:
extending sales invoices and inventory, adding
journals and subsidiary records and checking
calculations of depreciation expense.
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7. Reperformance
It is the auditor’s independent tests of client
accounting procedures or controls that
were originally done.
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8. Observation
 Use one’s senses to assess
client activities.
 Tour plant to obtain a general
impression of client’s facilities.
 Observation is rarely sufficient
by itself (client personnel
behavior change).
 Often need to corroborate
with another kind of evidence.
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Notes on audit evidence and reliability
levels
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7-28 The following are examples of audit procedures:
•
Classify each of the preceding items according to the eight types of audit
evidence: (1) physical examination, (2) confirmation, (3) documentation,
(4) analytical procedures, (5) inquiries of the client, (6) recalculation, (7)
reperformance, and (8) observation.
• 1. Review the accounts receivable with the credit manager to
evaluate their collectability.
• 2. Compare a duplicate sales invoice with the sales journal for
customer name and amount.
• 3. Add the sales journal entries to determine whether they were
correctly totalled.
• 4. Count inventory items and record the amount in the audit files.
• Answer: 1. inquiry of client, 2. documentation, 3. recalculation,
4. physical examination.
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7-28 The following are examples of audit procedures cont’d
• 5. Obtain a letter from the client’s attorney addressed to the CPA
firm stating that the attorney is not aware of any existing lawsuits.
• 6. Extend the cost of inventory times the quantity on an inventory
listing to test whether it is accurate.
• 7. Obtain a letter from an insurance company to the CPA firm
stating the amount of the fire insurance coverage on buildings and
equipment.
• 8. Examine an insurance policy stating the amount of the fire
insurance coverage on buildings and equipment.
• 9. Calculate the ratio of cost of goods sold to sales as a test of
overall reasonableness of gross margin relative to the preceding
year.
• Answer: 5. confirmation, 6. recalculation, 7. confirmation, 8.
documentation, 9. analytical procedures.
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7-28 The following are examples of audit procedures cont’d
• 10. Obtain information about internal control by requesting
the client to fill out a questionnaire.
• 11. Trace the total in the cash disbursements journal to the
general ledger.
• 12. Watch employees count inventory to determine whether
company procedures are being followed.
• 13. Examine a piece of equipment to make sure that a major
acquisition was actually received and is in operation.
• 14. Calculate the ratio of sales commission expense to sales as
a test of sales commissions.
•
Answer: 10. inquiry of client, 11. reperformance, 12. observation, 13.
physical examination, 14. analytical procedures.
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7-28 The following are examples of audit procedures cont’d
• 15. Examine corporate minutes to determine the
authorization of the issue of bonds.
• 16. Obtain a letter from management stating that there are no
unrecorded liabilities.
• 17. Review the total of repairs and maintenance for each
month to determine whether any month’s total was unusually
large.
• 18. Obtain a written statement from a bank stating that the
client has $15,671 on deposit and liabilities of $500,000 on a
demand note.
• Answer: 15. documentation, 16. inquiry of client, 17.
analytical procedures, 18. confirmation.
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End of Lecture
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