Topic 5 audit evidence and auditing procedure

1. TOPIC 5: AUDIT EVIDENCE &
AUDITING PROCEDURE
References: Chapter 7
AUD390 2011

2. AUD390 AUDITING DIA
AUDIT EVIDENCE &
AUDITING PROCEDURE
NATURE OF
EVIDENCE
TYPES OF
AUDIT EVIDENCE
PERSUASIVENESS
OF EVIDENCE

3.  Definition:
any information used by the auditor to
determine whether the information being
audited is stated in accordance with the
established criteria
AUD390 AUDITING DIA

4. AUD390 AUDITING DIA
Financial
Statements
Management
Assertions
Audit
Objectives
Audit
Programs
Audit
Evidence
Audit Reports

5. AUD390 AUDITING DIA
AUDIT PROCEDURES
Detailed instruction for the collection of a type of
audit evidence through out audit process
SAMPLE SIZE
The decision of how many items to test
SAMPLE SIZE
The decision of how many items to test
ITEMS TO SELECT
The decision of which items in the population to test
ITEMS TO SELECT
The decision of which items in the population to test
TIMING
The period of the items to be tested
TIMING
The period of the items to be tested

6.  ISA 500 Audit Evidence requires the auditor to
accumulate sufficient appropriate evidence to
support the opinion issued
 Determinants of the persuasiveness of evidence
are
Appropriateness or Reliability
Sufficiency
AUD390 AUDITING DIA

7.  Definition: the degree to which evidence can be
considered reliable or worthy of trust
 E.g. if an auditor counted the inventory, the
evidence will be more appropriate if the auditor
counted the inventory rather than the
management give the figure
 7 characteristics of appropriate or reliable
evidence:-
AUD390 AUDITING DIA
1. Relevance
2. Independence of provider
7. Timeliness
3. Effectiveness of client’s
internal control
5. Qualifications of individuals
providing the information
6. Degree of objectivity
4. Auditor’s direct knowledge

8.  Definition: Measured primarily by the sample size
the auditor select
 2 factors determine the appropriate sample
size:-
 Auditor’s expectation of misstatements
 Effectiveness of the client’s internal controls
AUD390 AUDITING DIA

9. 1. Physical examination
2. Confirmation
3. Documentation
4. Analytical procedures
5. Inquiries of the client
6. Re-performance
7. observation
AUD390 AUDITING DIA

10.  The inspection or count by the auditor of a
tangible asset
 Objective:
 Verifying that an asset actually exist
(existence obj.)
 Ascertaining both the quantity & the
description of the asset
 Evaluating an asset’s condition or quality
AUD390 AUDITING DIA

11. AUD390 AUDITING DIA
 The receipt of a written or oral response from
an independent third party verifying the
accuracy of information that was requested by
the auditor
 ISA 501…identifies 2 common types of
confirmation requests i.e. positive
confirmation & negative confirmation

12. AUD390 AUDITING DIA
 Positive confirmation
– Ask the recipient to respond in all
circumstances
 Negative confirmation
– The recipient is asked to respond only when
the information is incorrect
 IMPORTANT: Process of getting confirmation must
be controlled by the auditor from the time
they are prepared until they are returned; to
maintain the reliability of the evidence

13. AUD390 AUDITING DIA
 The auditor’s examination of the client’s
documents & records to substantiate the
information that is or should be included in the
financial statements
 Advantage:
– Widely used
– Readily available at a relatively low cost
 Classified into 2; Internal & External

14. AUD390 AUDITING DIA
 Internal Documents
– Docs. that has been prepared & used within
the client’s organisation & retained without
ever going to an outside party
– E.g. duplicate sales invoice, employees’ time
reports & inventory receiving report

15. AUD390 AUDITING DIA
 External Documents
– Docs. that has been in the hands of someone
outside the client’s organisation; who is party
to the transaction, but which is either currently
in the hands of the client or readily accessible
– In some cases, docs originate outside the
client’s organisation & ended up in the hand of
client

16. AUD390 AUDITING DIA
– E.g. vendor’s invoices, cancelled note payable,
insurance policies, cancelled cheque (returned
by supplier/vendor)
 Vouching … the process in which the auditor use
documentation to support recorded transactions
or amounts
– E.g. to vouch recorded acquisition transactions,
the auditor trace transaction from acquisition
journal to support vendor’s invoices & receiving
reports

17. AUD390 AUDITING DIA
 ISA 520 – Analytical procedures use comparisons &
relationships to assess whether account balances
or other data appear reasonable
 It is being used for different purposes on an audit
– Understand the client’s industry & business
– Assess the entity’s ability to continue as a going
concern
– Indicate the presence of possible misstatements
in the financial statements
– Reduce detailed audit tests

18. AUD390 AUDITING DIA
 Obtaining of written or oral information from the
client in response to questions from the auditor
 Disadvantage:
– It is not from an independent source & may be
biased in the client’s favor
 When the auditor choose to obtain evidence
through inquiries, it is normally necessary to
obtain further corroborating evidence through
other method

19. AUD390 AUDITING DIA
 Involves rechecking a sample of the computations
and transfers of information made by the client
during the period under audit
 Also known as testing the client’s arithmetical
accuracy

20. AUD390 AUDITING DIA
 Definition: The use of the sense to assess certain
activities
 Opportunities to exercise sight, hearing, touch &
smell to evaluate a wide range of items

21. 1. List 3 sources of audit evidence with an
example of each of the source.
2. List the 4 determinants for the persuasiveness
of the audit evidence and give a brief
explanation for each.
3. Classify the following evidences as either
internal or external documents
i. Purchase requisition
ii. Original copy of Delivery Note
iii. Cheque butt
iv. Payment vouchers
4. What is a standardized audit program?
5. Explain 3 advantages and disadvantages of
standardized audit program?
AUD390 AUDITING DIA