Here are the types of evidence gathered for each audit procedure: 1. Sending a written request to the client’s customers requesting that they report the amount owned to the client. - Confirmation 2. Examining large sales invoices for period of two days before and after year- end to determine sales recorded in the proper period - Inspection of documentation 3. Agreeing the total of account receivable subsidiary ledger to account receivable gerneral ledger account - Recalculation 4. Comparing the current year gross profit percentage with the gross profit percentage for the last year. - Analytical procedures 5. Watching the client’s warehouse personel count of the

1. Chapter 4
Techniques in Collecting Audit
evidence

2. Learning objectives
 Understanding basic concepts of Audit
techniques in collecting audit evidence
 Distinguish among the audit
techniques to obtain audit evidence

3. Learning materials
 Alvin, A. Elder and Beasley (2017) Auditing
and Assurance Services - an Integrated
Approach, 16th edition, Pearson, USA,
Chapter 7.

4. Audit evidence
 The auditor should obtain sufficient
appropriate audit evidence to be able to
draw reasonable conclusions on which to
base the audit opinion
 Sufficient audit evidence
 Appropriate audit evidence (Relevance &
Reliablity)

5. Techniques in collecting AE
 The auditor obtains audit evidence by one or
more of the following techiniques:
 Physical examination
 Confirmation
 Documentation
 Observation
 Inquiry
 Recalculation
 Reperformance
 Analytical procedures

6. Physical examination
 Definition: Physical examination is the
inspection or count by the auditor of a
tangible asset.
 Ex: counting cash on hand, tangible fixed
assets sighting. stock count….

7. Physical examination
 Advantages of physical examination:
Assurance on the existence of the asset such
as quantity and description of the asset or
asset’s condition.
 Disadvantages of physical examination:
Providing little or no assurance on the
ownership objectives and accuracy objective.

8. Physical examination of
cash on hand
 Issue the cash count notice
 Stop all cash on hand transactions
• Close the accounting record (write down ending
balance)
• Seal the safety box
 Select commitment of cashier and
accountant
 Count cash
• Classify the types of cash
• Counting cash
=> Issue the cash count minute

9.  Reconcile the valuation in cash count with
the figure in accounting records =>
investigate differences (if any)
 Return the cash to cashier and
accounting record to accountant
Homework:
Describe the process of stock count

10. Confirmation
 Definition: describes the receipt of a written
or oral response from an independent third
party examining the accuracy of information
that was requested by the auditor.
 Confirmation process:
The confirmation sent to independent third
party and response directly to the auditor.

11. Confirmation
 Positive confirmation: the recipient is request to
return the confirmation in all circumstances.
 Open confirmation: confirmation not included the figure to
be confirmed and this will be filled in by the responses of
the third party.
 Close confirmation: confirmation included the figure to be
confirmed and the third party will confirm whether this figure
is correct or not , if not, differences required to be included.
 Negative confirmation: the recipient is request to
response only when the information is incorrect.

12. Confirmation
 Advantage: widely used in every audit and
provide high reliability of AE.
 Disadvantage: relatively costly to obtain, may
cause some inconvenience.
 To considered reliable evidence, the audit
should be take care of some following
factors:
 Forms of the confirmation
 Confirmation Process
 Independence of information obtained

13. Inspection of documentation
 Definition: Inspection 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.
 Documents can be classified as internal and
external documents

14. Inspection of documentation
 Direction of testing:
Vouching refers to selecting an item for testing from accounting
journals or ledgers and then examining the supporting source
document => testing for occurrence
Tracing refers to selecting an accounting transaction and the
following it in the journal and ledger => testing for completeness.
Source
document Ledger and journal
Vouching (Occurrence)
Tracing (completeness)

15. Exercise
 This transaction is violated the completeness
objective.
 Physical examination of stock count => find out
overstatement of inventory volume
 Inspection of supporting documents such as good
receiving notes, vendor’s invoice, shipping
document on 29/12/2009. Selecting some supporting
documents and following it in subsidiary ledger of
inventory => test completeness objective.

16. Inspectation
 AD: Widely used in every audit because
it is usually readily available to the
auditor at a relatively low cost.
 DAD: AE is not independent source.
The information of accounting system
may be cooked by client’s personnel.

17. Observation
 Definition: Auditor observe the
performance of some activity.
Ex1: the auditor observes the separation of
duties such as separation of custody of
assets from accounting, separation of
operation responsibility from record-
keeping responsibility.
Ex2: observe the condition of inventory
whether it is obsolete or slow-moving

18. Observation
 AD: easy to obtain this evidence
and widely used in audit.
 DAD: Observation is rarely sufficient by
itself because there is a risk that the
client personnel involved in in those
activities are aware of the auditor’s
presence.

19. Inquiry
 Inquiry is the obtaining of written or oral
information from client in response to question
from the auditor.
Ex: inquiries of client personnel or management
to understanding client’s business or internal
control.
 AD: easy to obtain this evidence and widely
used in audit.
 DAD: Inquiry is not from independent sources
and may be biased in the client’s favor => is not
considered high reliability => gather additional
corroborative evidence to support the client’s
responses

20. Recalculation
 Definition: Rechecking a sample of
calculations made by the client.
Ex: recalculation of depreciation of fixed
assets or interest rate.
=> testing the client’s arithmetical accuracy

21. Reperformance
 Reperformance involves the auditor’s test
of client accounting procedures or
controls.
 Ex: The auditor may compare the price on
invoice to an approved price list, or may
reperform the aging of accounts receivable.

22. Analytical procedures
 Consist of the analysis of significant ratios and
trends including the resulting investigation of
fluctuation and relationships that are inconsistent
with other information or devise from predicted
amounts
Financial ratios analysis:
 Liquid ratios: current ratio, quick ratio, cash ratio
 Activity ratios: account receivable turnover, inventory turnover
 Profitability ratios: Gross profit margin, net profit margin,..

23. Analytical procedures
 Trends analysis
 Comparison financial items between periods
 Comparison closing balance with opening
balances
 Comparison entity’s figures to auditor’s
figure estimation
 Comparison entity’s data with the industry

24. Analytical procedures
The auditor undertakes analytical procedures
 At the planning stage (compulsory)
 In the audit performance stage (optional)
 In the overall review at the end of the audit
(compulsory)

25. Case study
 For each of seven audit procedures, indicate which type of
evidence is being gathered:
 Sending a written request to the client’s customers
requesting that they report the amount owned to the client.
 Examining large sales invoices for period of two days before
and after year- end to determine sales recorded in the
proper period
 Agreeing the total of account receivable subsidiary ledger
to account receivable gerneral ledger account
 Comparing the current year gross profit percentage with the
gross profit percentage for the last year.
 Watching the client’s warehouse personel count of the raw
material inventory
 Peforming test count of the warehouse personel count the
raw material inventory