VALIDITY AND RELIABILITYddddddddddd.docx
- 1. AUDIT ASSIGMENT ANSWERS 1: Provide a brief definition of audit evidence and its importance in the context of auditing Audit evidence is all of the information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence is important in auditing because audit evidence includes the information contained in the accounting records underlying the financial statements, and other information gathered by the auditors, such as confirmations from third parties. 2: Explain how audit evidence contributes to the auditor's ability to form an opinion on the financial statement Audit evidence obtained directly by the auditor, (e.g., observation, re-performance) is more reliable than audit evidence obtained indirectly or by inference. Audit evidence is more reliable when it exists in documentary form, whether paper, electronic, or other medium. Audit evidence is more reliable when it is obtained from independent sources outside the entity. Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles. 3: Identify and describe at least four types of audit evidence External audit evidence, the types of evidence obtained from the third party. Evidence obtained directly from the auditor, this is the evidence from the auditor directly. Evidence from Original document, this is the types of document which is not photocopy. 4: Provide examples for each type to illustrate their significance in the audit process. i. External evidence, example the evidence from the outside party ii. Evidence from the auditor, example independent evidence iii. Evidence from original document, example receipts, vouchers etc. iv. Documentary evidence, example hand written evidence or printed evidence.
- 2. 5: Explain why both relevance and reliability are crucial factors when evaluating audit evidence. Relevance and reliability are crucial in evaluating audit evidence because relevance deals with the logical connection with the purpose of the audit procedure and the assertion under consideration. Reliability is influenced by the source and nature of the information, including the controls over its preparation and maintenance. 6: Provide examples of evidence that may be relevant but less reliable, and vice versa. 7: Discuss different audit procedures used to gather evidence, including inspection, observation, inquiry, and analytical procedures. i. Observation, is the physical process of observing activities. It is most often used to gain an understanding of a client’s processing system, including a “walkthrough” of processes. It is very effective in understanding the nature of processing. It is also a common practice to observe the client’s process of taking physical inventory. in generalizing the results. Observation of processing on one day does not necessarily indicate how the transactions were processed on a different day.
- 3. ii. Physical Examination, is useful in verifying the existence of tangible assets and in identifying potential obsolescence or signs of wear and tear. Although examining inventory establishes existence, it does not provide evidence on completeness, ownership, or proper valuation. iii. Inquiries of Client Personnel, is used extensively to gain an understanding of the following: The accounting system. Management’s plans for such things as marketable investments, new products, disposal of lines of business, and new investments, Pending or actual litigation against the organization and also inquiry is all about asking questions to the to the people in the management. 8: Explain when auditors might use substantive procedures and when they might employ tests of controls. • The auditor must use test of control when is need to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. • The auditor must use substantive procedure when is need to measure the detect material misstatements at the assertion level. 9: Differentiate between substantive procedures and tests of controls. Substantive procedure means the test of the material classes transaction, account balance and disclosure. WHILE test of control means the test of material of the operating effectiveness of controls in preventing or detecting or collating material misstatement at the assertion. 10: Provide examples of situations where each type of procedure is appropriate. • Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level (tests of controls) • Detect material misstatements at the assertion level (substantive procedures) 11: Emphasize the importance of documenting audit evidence. Importance of documenting the audit evidence helps Auditors to examine invoices from suppliers, for example, to establish the cost and ownership of inventory or various expenses. They also read contracts to help establish the potential existence of liabilities.
- 4. 12: Discuss key elements of audit documentation, including the nature, timing, and extent of procedures performed. Documentation of audit evidence, means the auditor is examining the document from the client either in a paper or electronic form that help to establish the potential existence of liabilities. This includes number of elements such as; i. Nature, documentation of audit evidence should state the nature of the business, and kind of the business. ii. Time, documentation of the audit evidence should state the time at which the evidence done. iii. Extent of the procedure performed, this means that an auditor should states the procedure used to obtain the audit evidence such as observation, physical examination, enquiry etc. iv. Place or area, the audit evidence should state the location of the area where the audit evidence obtained whether internal or external. 13: Identify and explain common challenges faced by auditors in gathering sufficient and appropriate audit evidence. i. Level of risk in the area being audited is a challenge to auditor when gathering sufficient and appropriate audit evidence. ii. Quality of evidence obtained, also is a challenge that facing an auditor when gathering the sufficient and appropriate audit evidence 14: Discuss challenges related to the availability, reliability, and completeness of evidence. 15: Highlight the role of professional judgment in evaluating the sufficiency and appropriateness of audit evidence. The auditor must evaluate the competence, capabilities and objectivity of the expert, obtain an understanding of the work done, and evaluate the appropriateness of the work done as audit evidence.
- 5. 16: Discuss factors auditors should consider when exercising professional judgment. The auditor should consider Relevance and Reliability of information as the factors when exercising the professional judgment of the information to be used as audit evidence when designing and performing audit procedures. Relevance deals with the logical connection with the purpose of the audit procedure and the assertion under consideration. The relevance of information may be affected by the direction of testing. 17: Explore how emerging technologies, such as data analytics and artificial intelligence, are impacting the gathering and evaluation of audit evidence. The emerging technologies such as data and artificial intelligence are impacting audit evidence because it increases laziness and kills creativity of the auditor evidence 18: Discuss potential benefits and challenges associated with the adoption of these technologies. The potential benefits of the artificial intelligence in gathering and evaluation of the audit evidence is ………………………………..