Chapter 3 -Audit evidence
- 1. FACULTY OF MANAGEMENT SCIENCE BACHELORS’ – PROGRAMME Lecturer: Buyera Saidi Subject: Auditing Chapter 3 – Audit evidence
- 2. Lecture Outline Defining Audit Evidence Types of Audit Evidence Audit Documentation
- 3. ISA 500 Audit Evidence is one of the International Standards on Auditing. -It serves to expect the auditor to obtain audit evidence from an appropriate mix of tests of control systems and substantive tests of transaction and balances. -It requests the auditor to obtain 'sufficient' and 'appropriate' audit evidence in order to draw reasonable conclusions on which to base the audit opinion. -The auditor considers reliability of audit evidence collected. For instance, audit evidence is more reliable when it exists in documentary form rather than subsequent oral representation of the matters. Auditors consider reliability of information but involve little authentication of evidence.
- 4. I. Defining Audit Evidence What ought to be noticed? A. Audit Evidence Decisions B. Persuasiveness of Audit Evidence C. Competence Considerations
- 5. II. Types of Audit Evidence A. Physical examination B. Confirmations C. Documentation D. Analytical Procedures E. Inquiries of the Client F. Reperformance G. Observation
- 6. A. Physical Examination Inspection or count by the auditor of a tangible asset. Different from examining documentation is that the asset has inherent value.
- 7. B. Confirmations Positive Confirmations Negative Confirmations Asks for response even if balance is correct. Asks for a response only if balance is incorrect.More reliable than negative confirmations. Uncertainty associated with no response. The receipt of a written or oral response from an independent third party. Auditor has client request that the third party respond directly to the auditor. Confirmation of accounts receivable is normally required when practical reasonable (SAS 67)
- 8. B. Confirmations (Continued) 1. Customers – Confirm A/R balances 2. Vendors – Confirm A/P balances 3. Banks – Confirm checking account and loan balances 4. Attorneys – Confirm contingent liabilities 5. Inventory Agents – Confirm consignments
- 9. C. Documentation 1. Types of Documents 2. Document Vouching 3. Document Tracing
- 10. 1. Types of Documents Internal Documents External Documents Examine supporting evidence in client files. Prepared and used within client company. Does not go outside the client. Document has been in hands of an outside party to the transaction. More reliable than internal documents.
- 11. 2. Document Vouching Examination of documents that support a recorded transaction or amount. The direction of testing must be from the recorded item to the supporting document. Tests existence or occurrence Recorded Item Supporting Document
- 12. 3. Document Tracing The primary test for unrecorded items and therefore tests the completeness assertion. The direction of testing must be from the supporting document to the recorded item. Supporting Document Recorded Item
- 13. D. Analytical Procedures Audits studies relationships among data. Unusual fluctuations occur when significant difference are not expected but do exist or when significant differences are expected but do not exist. Required during the planning and completion phases on all audits.
- 14. E. Inquiries of the Client Auditor obtains information from the client in response to questions. Although much evidence is obtained through inquiry, it can not be regarded as conclusive and may be biased in the client’s favor.
- 15. F. Reperformance Reperformance involves rechecking a sample of the computations and transfers of information. Rechecking of computations consists of testing mathematical accuracy. Rechecking of transfers of information involves seeing if information is recorded consistently in the accounting records. I don’t think this is what they meant by reperformance!
- 16. H. Observation Auditor witnesses the physical activities of the client. Differs from physical examination because physical examination counts assets, while observation focuses on client activities.
- 17. III. Audit Documentation A. Working Papers Files B. Typical Working Paper Format C. Storage of Working Papers D. Ownership of Working Papers Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor.
- 18. A. Working Papers Files Permanent File Current File Working papers provide the principal record that the audit has conformed to GAAS. Also provide information for deciding on the proper report. Information that is relevant for multiple years on recurring engagements. Information relevant for a given audit client for a particular audit year.
- 19. B. Typical Working Paper Format Headings – audit client name, year under audit, etc. Indexing – arrange papers in some common order. Tick marks – symbols to key a footnote to an item. Sign-off – indicates auditors that prepare and review. Ricky Corporation Cash Prepared by: KM Reviewed by: J.S. A1 1st Savings 234.00 Traced to bank reconciliation.
- 20. C. Storage of Working Papers Working papers of continuing clients are maintained indefinitely. Check with legal counsel before discarding any working papers.
- 21. D. Ownership of Working Papers The working papers are the auditor’s property, not the clients. In most cases, an auditor can not reveal information in the working papers without the client’s permission.
- 22. SummaryI. Audit Evidence and Persuasiveness II. Types of Audit Evidence III. Working Paper Format, Storage, and Ownership