AUDIT EVIDENCE

Chapter 5

TOPICS
Topic 1 Topic 2 Topic 3 Nature of Evidence
Audit Evidence Decisions Persuasiveness of evidence Types of Audit Evidence

Topic 4 Topic 5
Topic 6

Analytical Procedure
Types of Analytical Procedure

NATURE OF EVIDENCE
The

use of evidence is not unique to auditors Evidence is also used by scientists, lawyers, and historians Evidence takes many different forms Evidence has great effects on the financial statements Sufficiency and appropriateness

NATURE OF EVIDENCE
Audit

evidence contrasted with Legal and Scientific evidence Persuasiveness of audit evidence The use of evidence is not unique to the auditors Evidence in Legal cases Evidence helps to draw conclusions

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 procedurestiming

PERSUASIVENESS OF EVIDENCE
The auditor must have the knowledge and skill to accumulate sufficient competent evidence to support the opinion issued. The auditor must be persuaded that his or her opinion is correct with a high level of assurance.

DETERMINANTS

1. Competence

Two determinants
2. Sufficiency

SIX CHARACTERISTICS OF COMPETENCE

1.Relavance 2.Independence of provider 3.Effectiveness of clients internal controls 4.Auditors direct knowledge 5.Qualification of individuals providing the information 6.Degree of objectivity 7.Timeliness

SUFFICIENCY
The quality of evidence obtained determines its sufficiency. Primarily by the sample size the auditor selects .the two most important sample sizes in audit
1. Auditors expectation of misstatement 2. Effectiveness of the clients internal controls

COMBINED EFFECT
The persuasiveness of evidence can be evaluated only after considering the combination of competence and sufficiency. A large sample of evidence is also mot persuasive. similarly a small sample of only one or two pieces of highly competent evidence also typically lacks persuasiveness The auditor must evaluate the degree to which both competence and sufficiency.

RELATIONSHIPS AMONG AUDIT EVIDENCE AND PERSUASIVENESS

Audit Evidence Decisions Qualities Affecting Persuasiveness of Evidence

Audit procedures and timing

Appropriateness Relevance Reliability Independence of provider Effectiveness of internal controls Auditor's direct knowledge Qualifications of provider Objectivity of evidence Timeliness Sufficiency Adequate sample size Selection of proper population items

Sample size and items to select

TYPES OF AUDIT EVIDENCE

1. Physical examination

2. Confirmation
3. Documentation 4. Observation 5. Inquiries of the client 6. Re-performance 7. Analytical procedures

RELATIONSHIPS
.
Auditing standards Qualifications and conduct Physical examination Confirmation Documentation Analytical procedures Inquiries of the client Recalculation Reperformance Observation FOUR AUDIT EVIDENCE DECISIONS

Broad guidelines concerning auditor qualifications and conduct, evidence accumulation, and reporting

Evidence accumulation
Reporting Types of evidence

Audit procedures

Broad categories of evidence available for the auditors accumulation Specific instructions for the accumulation of types of evidence Timing of tests

Sample size and items to select

1.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

2.CONFORMATION
Conformation describes the receipt of a written or oral response from an independent third party the auditor

3.DOCUMENTATION
. It is the auditors inspection of the clients documents and records.

Internal documents

External documents

4.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 clients facilities.

5.INQUIRIES OF THE CLIENT

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

6.REPERFORMANCE
It is the auditors independent tests of client accounting procedures or controls that were originally done.

7.ANALYTICAL PROCEDURES
Analytical procedure use comparison and relationships to assess whether account balances or other data appear are reasonable.

ANALYTICAL PROCEDURE
Understand the clients industry . and business Assess the entitys ability to continue as a going concern

Indicate the presence of possible misstatements in the financial statements

Reduce detailed audit tests Timing

TYPES OF ANALYTICAL PROCEDURES

1. Compare client & industry data

5. Compare client data with expected results, using nonfinancial data

2. Compare client data with similar prior period data

4. Compare client data with auditor determined expected results

3. Compare client data with client determined expected results

1.COMPARE CLIENT & INDUSTRY

DATA
Client Industry

2010 2009 2010 2009 Inventory turnover 3.4 3.5 3.9 3.4 Gross margin 26.3% 26.4% 27.3% 26.2%

2.COMPARE CLIENT DATA WITH

SIMILAR PRIOR PERIOD DATA
1.Compare the current years balance with that for the preceding year 2.Compare the detail of a total balance with similar detail for the preceding year 3.Compute ratios and percentage relationships for comparisons with previous years

3. COMPARE CLIENT DATA WITH

CLIENT DETERMINED EXPECTED RESULTS

Two Major Concerns

1. The auditor must evaluate whether the budget were realistic plans

2. The possibility that the current financial information was changed by clients personnel to confirm to the budget

4.COMPARE CLIENT DATA WITH

AUDITOR DETERMINED EXPECTED RESULT
1. By relating balances to other balance sheet or income statement or other accounts

2. By making projection on some historical trend

Two ways to Estimate

5. COMPARE CLIENT DATA WITH

EXPECTED RESULTS USING NONFINANCIAL DATA

Items to calculate Nonfinancial information Factory payroll Worked time& wage rate Cost of materials Unit sold times & material cost per unit Tuition revenue at Average tuition times Universities & enrollment

End of the Presentation

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