Risk Based Audit Approach
Session 7.1
Evidence Gathering Procedures
Handout 7.1.3
The sources from which the auditor is
able to get the evidences are as follows:
Purpose:
To
understand
what
constitutes substantive test of details.
Substantive Test
Substantive tests are those tests of
transactions and balances, and other
procedures such as analytical review,
which seek to gather sufficient
competent evidence as to the
completeness, accuracy and validity of
information generated by the accounting
system or in the financial statements.
Substantive audit procedures include:
1. Analytical review.
2. Substantive test of details.(Test of
details of transactions and Test of
account balance)
The audit objective is to detect monetary
errors in the accounting statements given
that they have occurred (inherent risk)
and have not been detected by the
entity's internal controls (control risk).
Analytical review procedures are
substantive tests of information made by
a study and comparison of relationships
among data. The reliability of individual
recorded transactions and balances is
inferred from evidence of the
reasonableness of the aggregate results.
Substantive test of details consist of
examining samples of transaction or
account balances. The reasonableness of
the aggregate results is inferred from the
evidence of reliability of the individual
details that have been tested.
Handout 7.1.3
Auditor’s calculations
Physical observation, inspection
Statements by independent parties
Statements by client personnel
Documents prepared by independent
parties
6. Documents prepared by the client
7. Data interrelationships
1.
2.
3.
4.
5.
The auditor may choose any one of the 6
procedures listed below to obtain
evidence:
1.
2.
3.
4.
5.
6.
Physical observation
Confirmation
Documentation / inspection
Inquiry
Recalculation
Scanning
The 6 types of audit techniques are
discussed in the subsequent paragraphs.
1. Physical Observation
Physical Observation is the inspection or
count by the auditor of a tangible asset.
It provides evidence of existence and
may provide tentative evidence of
condition and valuation. This type of
evidence is most associated with
inventory and cash, but it is also
applicable to the verification of
securities, notes receivable, and tangible
fixed assets.
2. Confirmation
Confirmation describes the receipt of a
written or oral response from an
independent third party verifying the
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Risk Based Audit Approach
Session 7.1
accuracy of information requested by the
auditor.
The more detailed testing of transactions
and account balance involve further tests
for obtaining evidence such as:
3. Documentation/Inspection






vouching
inspection of assets
observation
recomputation
vouching ledger and journal entries
independent confirmations
In the examination of documents,
vouching and tracing would be
performed.

verification of financial statement
balance.
4. Inquiry
Test of transactions
Inquiry is the obtaining of written or
oral information from the client in
response to questions from auditor.
When the auditor obtains evidence
through inquiry, it is normally necessary
to obtain further corroborating evidence
through other procedures.
Auditor’s
objectives
in
testing
transactions are to obtain an assurance of
the completeness, validity, and accuracy
of the transactions.
Documentation
is
the
auditor's
examination of the client's documents
and records to substantiate the
information that is or should be included
in the financial statements.
5. Recalculation
Recalculation involves rechecking a
sample of the computations of
information made by the client during
the period under audit.
Completeness
In testing for completeness of
transactions, some transactions must
be traced fully from economic events
through source documents to the final
entry in the books of accounts to
provide preliminary evidence of the
completeness of the record of
transactions.
6. Scanning
Validity
Scanning is an approach of looking for
unusual
items
and
events
in
documentation. Scanning can contribute
some evidence related to the existence of
assets and the completeness of
accounting records.
Substantive test of details
Substantive test of details include
 Tests of Transactions
 Tests of account balances
Handout 7.1.3
Tests of validity are designed to cover
situations where, for example, sales
are inappropriately included in the
journals.
Substantive tests of transactions can
be conducted by comparing the actual
price charged for the various products
with the price lists authorized by
management.
Accuracy
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Risk Based Audit Approach
Session 7.1
In the case of accuracy, the tests can
involve vouching and recomputation
of transactions and other information
in the accounting records.
Proper classification of recorded
transactions, recording of transactions
on a timely basis and proper inclusion
of transactions in the subsidiary
records are checked during tests of
accuracy.
Tests of Account Balances
Although the tests of transactions will
provide some evidence of the reliability
of the accounting records, the auditor
must also perform direct test of material
account balances.
Handout 7.1.3
Since the accuracy of the account
balances is essential to overall fair
presentation of financial reports, tests of
balances are designed to detect errors in
them. These tests are applied to balance
sheet accounts and to verify profit and
loss statement accounts.
Documentation of Evidence
The purpose of performing substantive
testing is to gather audit evidence to
detect
material
misstatements
concerning the assertions in the financial
statements. Having gathered the
evidence, it is then essential for the
evidence to be properly documented to
facilitate the drawing of logical
conclusions on which to base the audit
opinions.
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