1. Chapter 7
Audit evidence- all the information used by auditors in arriving at the conclusions on which the
audit opinion is based
The scope of auditing is limited only by the demands for reliable information and an audtitable
information system
Sufficiency- the measure oif the quantity of audit evidence.
Appropriateness
o Relevance
o Reliability
Sources of evidence Assurance is gained through the gathering of evidence related to
o Knowledge of the client, its business and its industry
o Outside information0 gathered by the audit team itself using market data through
independent analysis.
o Accounting systems- gathered through direct tests of account balances and
transactions.
o The quality of internal control- gathered through an evaluation of the design of internal
controls and the operations of those controls.
The primary assertions are embodied in the financial statements
o Existence and occurrence
o Completeness
o Rights and obligations
o Valuation and allocation
o Presentation and disclosure.
Economics of gathering appropriate, sufficient evidence
o Important facots affecting relevance and reliability include management integrity
client’s economic risk, quality of the client’s information system and internal controls
and current market conditions and competitors account
Audit evidence collection process that ill helo ensure the appropriate sufficient evicence is
collected:
o Understand the client and its industry
o Assess the risk of material misstatement by assertions for each significant component of
the client’s financial statement
o Determine the most persuasive evidence to address assertions and the most economical
approach to gather evidence.
o Assess adequacy of evidence and issue a reports
Appropriateness: relevance of audit evidence
o Direct evidence- directly relevant to the assertion
o Indirect evidence- often requires more inference and the logic of conclusion relies on
more complex inferences.

2. More reliable Less reliable
Directly obtained evidence Indirectly obtained evidence
Evidence derived from a well-controlled Evidence derived from a poorly controlled system
information system or easily overridden information system
Evidence from independent outside sources Evidence from within the client’s organizion
Evidence that exists in documentary form Verbal evidence not supported by documentation
Original documents Photocopies
The evidence must stand on its own such that another unbiased professional would reach the
same conclusion.
Nature of audit testing
Direct tests of account balances and transactions are designed by determining the most efficient
manner to substantiate the assertions embodied in the account or transactions.
o Tests of effectiveness of internal control
o Dual purpose test of controls and account balances
o Substantive analytical tests
o Direct tests of account balances
o Direct tests of transactions
Two basic types of evidence
o Underlying accounting records, including evidence of internal control
o Corroborating information that validates the underlying accounting recors.
Traditionally focused audit procedures on the direct tests of asset and liability account balances,
as opposed to examining transactions during this year
o Fewer items
o Reliable evidence
o Focus on changes in assets or liabilities, rather than testing all the details that affected
the accounts
Audit proceudres
o Understand client and industry: preliminary planning and risk analysis
o Assess risk of material misstatement: understand and test internal controls and system
processing
o Gather evidence related to account balances and transactions
o Determine need to engage outside specialists
o Assess the consistency of evicence gathered and document conclustion.
Directional testin- involving testing balances primarily for either over- or understatement (but
not both) and creates audit efficiency by taking advantage of the double entry bookkeepuing
system.
Commonly used audit procedures for direct tests of account balances and transactions
o Observation- includes walkthrough- act differently, generalization, not sufficien
o External confirmations- sending inquiry to outside party
o Inspection of documents- much of the audit process depend on examining documents
o Inspection of physical assets- identify potential but does not provide evicence of
completeness, ownership or valuation

3. o Recalculation of data
 Footing- adding a column of figures to verify the correctness of the client’s
totals
 Cross footing- checking the agreement of the cross-addition of a number of
columns of figures that sum to a grand total
 Tests of extension- recomoutingitmes involving multuuplication
 Recalculating estimated accounts
o Data analysis- a hybrid of recalculation and analytical procedures
o Reperformance of client procedures- execution of contols
o Reprocessing of transactions- selecting a sample of a source document and reprocessing
them to be sure they have all been properly recorded.
o Vouching- complementary to reprocessing- taking sample of already recorded
transaction and tracing them back to their original source.
o Analytical procedures.
Audit documentation is the written record that forms the basis for the auditor’s conclusions.
Evidence used in auditing management’s estimates
o First, auditors must understand the processes used by management in developing
estimates
 Controls over the process
 Reliability of underlying data in developing the estimate
 Use of outside experts
 How management reviews the result of the estimates for reasonableness.
o Understand the process
 Test the process used, including the reliability of the underlying data
 Develop undependentestiamtes and compare thise with that developed by
management.