Main Types of Audit Evidence

1. Main Types of Audit Evidence Advanced Auditing Chapter 7 Dr. Mohamed A. Hamada

2. Audit evidence are variant of other evidence that used by other professions. Identify the four audit evidence decisions. Explain the persuasive of audit evidence Explain the main types of audit evidence Learning Objectives

3. Types of Audit Evidence 1. Physical examination 2. Confirmation 3. Documentation 4. Analytical procedures 5. Inquiries of the client 6. Re-calculation 7. Re-performance 8. Observation

4. Physical Examination It is the inspection or count by the auditor of a tangible asset. This type of evidence is most often associated with inventory and cash. Physical examination is a direct means of verifying that an asset actually exists

5. Confirmation • Confirmation describes the receipt of a direct written response from a third party verifying the accuracy of information that was requested by the auditor. • Because confirmations come from sources independent of the client, they are a highly regarded and often-used type of evidence

6. Canada 46 • Confirmation - receipt of a written or oral response from an independentthird party at the auditor’s request. • A sample of accounts receivable should be confirmed by the auditor. auditor client’s customer very appropriate evidence!

7. Documentation It is the auditor’s inspection of the client’s documents and records. External documents Internal documents

8. - Documentation (vouching) - auditor examination of client documents and records

9. the difference between internal and external documents? External documents are usually on the client’s premises but were either prepared by a third party or processed by a third party (more persuasive). Internal documents have been prepared by the client and have notleft the client’s premises (lesspersuasive).

10. the difference between physical examination and documentation - Physical examination - inspection or count by the auditor of a tangible asset - Documentation (vouching) - auditor examination of client documents and records

11. Example: the client often retains a customer order, a shipping document, and a duplicate sales invoice for each sales transaction. These documents are useful evidence for the auditor to verify the accuracy of the client’s records for sales transactions.

12. Analytical Procedures Use comparisons and relationships to assess whether account balances or other data appear reasonable compared to the auditor’s expectations • Understand the client’s industry and 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 For example, an auditor may compare the gross margin percent in the current year with the preceding year’s.

13. How do the client’s financial ratios compare with those of the industry? Types of Analytical Procedures - industry comparisons

14. Ace Company 2003 financial statements Ace Company 2004 financial statements Types of Analytical Procedures - comparisons with prior years Conclusions from a 2-year analysis

15. Types of Analytical Procedures - Comparisons with auditor-determined expected results, examples: Accountcan be calculated from Sales commissions sales Depreciation expense fixed assets Interest expense notes/bonds payable

16. Inquiries of the Client It is the obtaining of written or oral information from the client in response to questions from the auditor.

17. Recalculation • It involves rechecking a sample of calculations made by the client. • Rechecking client calculations consists of testing the client’s arithmetical accuracy and includes such procedures as extending sales invoices and inventory • checking the calculation of depreciation expense and prepaid expenses

18. Re-performance Re-performance is the auditor’s independent tests of client accounting procedures or controls that were originally done as part of the entity’s accounting and internal control system. Ex: the cycle of sales recording process, procedures of payrolls calculation

19. Observation It is the use of the senses to assess client activities. The auditor may tour the plant to obtain a general impression of the client’s facilities.

20. Terms and Types of Evidence Terms Type of Evidence Examine Scan Read Compute Re-compute Assess Trace Compare Count Observe Inquire Vouch Documentation Analytical procedures Documentation Analytical procedures Recalculation Recalculation Documentation/Re-performance Documentation/Analytical procedures Physical examination Observation Inquiries of client Documentation

21. Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement.

22. Purposes of audit documentation The overall objective of audit documentation is to aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with auditing standards

23. Describe how technology affects audit evidence and audit documentation. Learning Objective 7

24. Effect of Technology • Audit evidence is increasingly in electronic form • Auditors must evaluate how electronic information • affects their ability to gather evidence • Auditors use computers to read and examine • evidence • Software programs are typically Windows-based

26. End of Chapter 7