Audit Evidence and Reporting
EGAPP, Inc.
Course Exercises
July 21, 2010
Pohnpei, FSM
Learning Objectives
The objectives of this one-day course are to provide Continuing Professional
Education to auditors in several skill and knowledge areas – critical thinking,
auditor judgment, audit evidence and assessment, including reporting, while
connecting these concepts. The course will proceed from the assumption that
creating audit programs, collecting and analyzing evidence, and preparing audit
findings are each bolstered through an understanding of auditor judgment
applied to the audit process. The course begins with a short review of critical
thinking and its relationship to auditor judgment and proceeds to cover audit
evidence generally – then specifically through discussion of audit planning and
fieldwork. The course has no specific prerequisites, but will be of interest to
professional auditors and analysts conducting audit work under generally
accepted government auditing standards. By the end of this course, participants
will learn through lecture, discussion, and exercises how auditor judgment and
evidence are the foundation of the audit process, and how audit evidence
collection, analysis, and documentation can be enhanced. Specifically, upon
completion of the course, participants should be able to:
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Review how critical thinking is the basis for auditor judgment,
appropriate and sufficient audit evidence, and reporting;
Identify types of audit evidence available to meet the defined audit
objectives;
Recognize the linkage between methodologies employed and types
of evidence gathered and analyzed;
Assess audit evidence gathered and use auditor judgment to
interpret results obtained; and
Understand how to apply auditor judgment, appropriate
methodologies, and triangulated evidence to ensure audit objectives
are accomplished.
The course is comprised of four modules:
(1) Module One: Critical Thinking and Auditor Judgment
(2) Module Two: Audit Evidence Definitions, Concepts, and Standards
(3) Module Three: How Evidence Fits the Audit Process
(4) Module Four: Documentation, Findings, and Reporting
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Course Notes / Slide Key
We’ll project a PowerPoint presentation and provide handouts of the PowerPoint
slides. In addition, please use this document to follow along, as we’ve keyed
important concepts – through exercises and specific discussion – to specific slide
numbers.
This document is keyed to the order of the slides, stopping at the slide numbers
noted at the top of each page in this document for an exercise, a discussion, or
both.
Each of the four modules will have an overview slide to discuss the module
learning objectives and to preface the content in each module. Each module
builds on the content that preceded it, so we will “link back” to important concepts
as we work through the material.
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Module One
After Slide 10 –
EXERCISE: Logical Ability and Auditor Judgment
In small groups of 3-4, please identify a recent audit report each person worked
on. Next, discuss which logical ability components (from Slide 10) the audit
report used. Next, describe whether auditor judgment was used (defined on
Slide 10), and, if used, an example of auditor judgment. Then discuss with the
whole group.
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Module One
After Slide 14 -EXERCISE: Inductive vs. Deductive
Are these logic models inductive or deductive?
1. Holmes observed that the hair at Davidson’s murder site matched that of
his pet sheep, Percy. He further deduced that Percy’s absence yesterday
had not coincided with the County Fair, as it was December. He further
recalled that Watson had heard the victim scream “No, Percy!” moments
before the tragic murder. Holmes concluded that Major Bretton had killed
Davidson. Inductive or Deductive?
2. Sheryl Holmes (great-grandniece of Sherlock) was working for the
transportation department’s internal audit office. She compiled audit
evidence to reach conclusions about the department’s paving efficiency,
concluding that the department could pave more miles if it used a different
mixture of asphalt. She concluded this based on U.S. Federal Highway
Administration guidelines, asphalt samples, field observation, and
interviews with other states, cities, and counties using the preferred
mixture. Inductive or Deductive?
3. Sheryl also completed an audit of patient health standards at the State
Hospital. She reviewed patient records, interviewed doctors, found
comparable procedures and outcomes in other states, and concluded that
the Hospital’s patient health standards were consistent and were met by
the Hospital – all consistently with national hospital accrediting standards.
Inductive or Deductive?
Discuss – and consider how audits are conducted, as opposed to how audit
reports are written.
Now, in small groups, select a recent audit report your office released. First
identify a major conclusion or finding from the audit. Next, identify the reasons
the audit reached that conclusion or finding. Was this audit process inductive or
deductive? Was the report written deductively or inductively? Then discuss with
the whole group.
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Module Two
After Slide 32 –
EXERCISE: Appropriateness and Tests of Evidence (Relevant, Valid, Reliable)
In small groups, discuss APPROPRIATENESS, including its three components,
“relevance”, “validity”, and “reliability”. Consider these examples, and describe
one of your own from a current audit by a group member.
Auditors are studying patient outcomes from treating a specific disease. Which
tests of evidence (relevance, validity, or reliability) would each of these
components meet?
* Rodents appear to be the channel that spreads the disease, since infected
patients had recent contact with rodents before their diagnosis.
* State epidemiologists are testing one hypothesis – that the disease spread to
Pohnpei from American rats, lured by inexpensive buffets.
* People with the disease don’t complain much, and it seems to be a minor
inconvenience.
* The Pohnpei Center for Disease Control and Prevention concluded that the
disease cannot be spread among people, just from rats to people.
* Buffet foods are not always kept at proper temperature.
* Some buffet customers use the same utensil to scoop different dishes from the
buffet.
* One buffet manager said he had not seen any American rats at his buffet on the
day he was interviewed.
* The state epidemiologist found conclusively that the disease transmission
ended last weekend, when buffet rates were raised for tourists.
How many of these elements are needed to make a “sufficient” case with
evidence?
Try arranging 3 or 4 elements in an “inductive” order, then in a “deductive” order.
What’s the difference, and let’s discuss with the group.
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Module Three
After Slide 43 –
EXERCISE: Audit Objectives and Testing
Many Yellow Book components discuss the requirements for review and testing
“necessary to achieve the audit objectives”. Will a narrow scope change the
testing needed? In small groups, discuss and reach conclusions on the level of
evidence (high, medium, or low) needed for the following sample audit
objectives:
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Determine the extent to which the citizens of FSM support licensing of
commercial fishing, including enforcement activities to make sure the long
line fishing companies don’t fish within the twelve mile zone.
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Determine which current legal requirements and contracts govern FSM
licensing of commercial fishing.
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Determine whether current legal action is occurring between a specific
commercial fishing company and the States within the FSM (as of
07/21/2010).
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Determine the level and extent to which the States within the FSM are
coordinating to prevent illegal commercial fishing.
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Determine the enforcement levels and current practices for commercial
fishing within the FSM and each of its member States.
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Determine whether current FSM commercial fishing enforcement activities
are consistent with international agreements and law.
Discuss with the whole group – what makes an objective require a high or low
level of evidence? How does the wording of the objective change the level of
audit evidence needed?
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Module Three
After Slide 70 –
EXERCISE AND DISCUSSION: Self-Testing Audit Programs and Priorities
In small groups, select a recent audit that one or more group members worked
on. Take a few minutes to quickly walk through the following questions for your
selected audit.
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Are the audit objectives well-defined and clearly stated?
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Do the audit methodologies and procedures accomplish all of the stated
objectives?
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Can you state the criteria that you are auditing against?
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Is the level of detail in the audit steps appropriate for the auditor who will
be performing them?
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Will the evidence gathered by the procedures be adequate, sufficient,
competent, etc., to satisfy the objective?
Now discuss with the group how you can use this questionnaire as you plan
audits in the future.
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Module Three
After Slide 98 –
DISCUSSION: Assessment of Evidence
Now that we’ve discussed evidence, sources, and the issues of “sufficiency” and
“appropriateness”, discuss in small groups and then with the larger group these
questions:
1. Audits we’ve issued have met our standards for sufficiency and
appropriateness. At what point did we decide that we had “enough”
evidence? What led us to that determination?
2. Think of a time when the audit wasn’t “ready” and needed more fieldwork.
What led us to the determination that the audit needed more work /
evidence to complete?
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Module Three
After Slide 121 –
EXERCISE: Sources of Evidence
Individually, rank the following list of ten evidence sources from “best” (10 points)
to “worst” (1 point) based on your judgment and experience. Then discuss with
your small group and the larger class.
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An old paper memo from a credible person we interviewed. He handed us
the memo and said “I don’t know if this will be useful to you, but I have had
it a long time”.
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A recent e-mail from the same credible person, who said “I don’t know if
this will be useful to you”.
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A spreadsheet provided by a new and inexperienced accounting
technician at management’s request.
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A spreadsheet developed by an audit team member from a variety of
credible and original sources.
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A late-night phone call from an upset person who is an expert staff
member in a unit we are currently auditing. The person says that they
have knowledge of broad and significant problems in the unit and will
provide more evidence if we will meet them off-site tomorrow.
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A wet shoebox full of undated receipts, provided by local unit
management.
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A spreadsheet developed by an inexperienced accounting technician from
a variety of secondary and unfamiliar sources.
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Interview notes from the auditors’ meeting with the upset but expert staff
member.
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A wet shoebox full of original and dated receipts provided by an
experienced and credible person.
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Records “from a dumpster behind the office” provided by a critical staff
member unknown to the auditors and who was recently terminated from
their job.
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Module Four
After Slide 135 –
DISCUSSION: Report Contents
The Yellow Book provides required contents for audit reports, including scope
and methodology, a statement that work followed standards, and reporting audit
findings.
More audit offices are expanding their reporting options to include PowerPoint
presentations, video reports, shorter audits (even 1-2 sheets as a summary or a
full report), and other methods to convey results to decision-makers and the
public.
What are some of the innovative reporting formats you have used or seen used?
How has reporting in your office changed or stayed the same over the past 5 or
10 years?
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Module Four
After Slide 137 –
FINAL EXERCISE: Putting It All Together
In small groups, and reporting back to the entire group as a final presentation,
please prepare a 3-4 minute discussion, considering the following:
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Critical Thinking and Auditor Judgment
Types of Audit Evidence
Innovative Reporting
To make the presentation, please identify one report that any group member is
working on, or a report that any group member has worked on in the past.
Next, consider how the report planning, design, and writing process used Critical
Thinking and Auditor Judgment, Types of Audit Evidence, and Innovative
Reporting.
Select a spokesperson for the group, and, for 3-4 minutes, please address these
issues:
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How critical thinking components and auditor judgment were used in
designing or conducting the audit. (You may not have used our course
terms at the time you did the audit, but which concepts from class were
used as you designed or conducted the audit?)
How evidence was collected and analyzed to reach conclusions in the
audit. (Examples of findings and audit results would be helpful, linked to
how the evidence was “triangulated” to support the results.)
Anything special, unique, or memorable about the findings development
and reporting process. (Did you use more or less evidence than you
originally thought you would? How did evidence impact findings
development and reporting?)
Finally, as a very broad conclusion, please address how the group now
sees the connection between auditor judgment, audit evidence, findings
development, and reporting.
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