Audit Evidence

Advanced Auditing

Lecture 3

Dr. Mohamed A. Hamada

Learning Objectives

• Audit Evidence Contrasted with Legal and Scientific Evidence,

• 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

Nature of Evidence

The use of evidence is not unique to auditors

Evidence is also used by scientists, lawyers,and historians

Evidence

• The foundation of any audit is the evidence obtained and evaluated by the auditor.

• The auditor must have the knowledge and skill to accumulate sufficient and appropriate evidence on every audit to meet the standards of the profession.

Audit Evidence

• Is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria.

• Evidence includes information that is highly persuasive, and less persuasive information.

Audit Evidence Decisions

1. Which audit procedures to use?

2. What sample size to select for a given procedure?

3. Which items to select from the population?

4. When to perform the procedures (timing)?

A major decision facing every auditor is determining the appropriate types and amounts of evidence needed to be satisfied that the client’s financial statements are fairly stated

Which audit procedures should be used?

An audit procedure is a detailed

instruction for thecollection of a type of

audit evidence.

Which audit procedures should be used?

In general, the auditor will seekthe most appropriate procedures

that are also cost-feasible.

Which audit procedures to use

• Examples , • Verifying the inventory by count the inventory

units.• Verification of cash disbursements:• Examine the cash disbursements journal in

the accounting system and compare the payee, name, amount, and date with online information provided by the bank about checks processed for the account.

Sample Size• Once an audit procedure is selected, auditors

can vary the sample size from one to all the items in the population being tested.

• Example:• In an audit procedure to verify cash

disbursements, suppose 6,600 checks are recorded in the cash disbursements journal.

• The decision of how many items to test must be made by the auditor for each audit procedure.

• The sample size for any given procedure is likely to vary from audit to audit.

Items to SelectAfter determining the sample size for an audit

procedure, the auditor must decide which items in the population to test.

If the auditor decides, for example, to select 50 checks from a population of 6,600 for comparison with the cash disbursements journal,

The auditor can (1) select a week and examine the first 50 checks,

(2) select the 50 checks with the largest amounts, (3) select the checks randomly, or (4) select those checks that the auditor thinks are most

likely to be in error.

The auditor will consider:- random/judgmental selection- materiality- results of prior audits

Which items should be selected for testing?

When should the procedures be performed? Timing

The auditor will consider proceduresthat should be performed before, on,

or after the balance sheet date.

December

when to perform the procedures (timing)An audit of financial statements usually covers a period

such as a year. Normally an audit is not completed until several weeks

or months after the end of the period. The timing of audit procedures can therefore vary from

early in the accounting period to long after it has ended.timing is also influenced by when the auditor believes

the audit evidence will be most effective and when audit staff is available.

For example, auditors often prefer to do counts of inventory as close to the balance sheet date as possible.

When should the procedures be performed?

An auditor must address four decisions regarding evidence accumulation:

Which items should be selected for testing?

What sample size should be selected?

Which audit procedures should be used?

After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.

An audit program is a list of detailed audit

procedures for each component or cycle specifying procedure

timing, sample sizes, and selection methods.

Audit Program

It includes a list of the audit proceduresthe auditor considers necessary.

Most auditors use computers to facilitatethe preparation of audit programs.

Sample sizes Items to select Timing of the tests

Persuasiveness of Audit evidence

Appropriateness

Timeliness and quantity

sufficiency

Relevance and Reliability

Appropriateness

•Appropriateness is a measure of evidence quality, it can’t be enhanced by a larger sample size.

•If evidence is considered highly appropriate, it is a great help in persuading the auditor that financial statements are fairly stated

Appropriateness

Appropriateness is determined by:- Independence of the evidence provider- Effectiveness of client’s internal controls- Auditor’s direct knowledge- qualifications of information provider- Degree of objectivity

relevance

Evidence must pertain (be related) to the specific audit objective.

• Reliability of evidence refers to the degree to which evidence can be believable or worthy of trust.

• For example, if an auditor counts inventory, that evidence is more reliable than if management gives the auditor its own count amounts.

Reliability

Six Characteristics of Reliable Evidence

1. Independence of provider2. Effectiveness of client’s internal controls3. Auditor’s direct knowledge4. Qualification of individuals providing the information5. Degree of objectivity6. Timeliness

sufficiency

Sufficiency is a measure of quantity. In general, the larger the sample size, the more persuasive the evidence.

Less evidence yields

less assurance and

lower auditcosts.

More evidence yields

more assurance and

higher audit costs.

MORE LESS

Auditors must balance the trade-off between

gathering more or less evidence.

An appropriate sample size may be determined by auditor judgment

and/or by statistical sampling.

sufficiency

Sufficiency must be addressed foreach audit test and each component

of the financial statements.

sufficiency

- “Representativeness”- Materiality, large dollar amounts- Items with high probability of misstatement

In determining a sufficient sample

size, an auditor will also consider:

timeliness

When should auditevidence be gathered?

timeliness

- evidence related to balance sheet accounts should be collected as close to the balance sheet date as possible- evidence related to income statement accounts should be collected from throughout the period rather than from only part of the period

RelevanceReliability

timeliness

sufficiency

appropriate-ness

Evidence isconsideredpersuasiveonly if all

four determinants

have been met.

With regard to the adequacy and costs of audit evidence:

requires

requires

absolutecertainty

convincingevidence

high auditcosts

requires

requires

reasonablecertainty

persuasiveevidence

reasonableaudit costs

Very thanks