ch06 70 360

Chapter 6: Audit Evidence
Copyright © 2007 Pearson Education

Canada
1
Chapter 6 objectives
 Know the audit four evidence decisions
 Explain the meaning of “sufficient
appropriate audit evidence”
 List and explain the purpose of the seven
general methods of evidence collection
 Consider how evidence choices are made
 Discuss the nature and purpose of
analytical procedures
6-2
Copyright © 2007 Pearson Education Canada
Four evidence decisions
 1. NATURE: Which audit procedures to
use
 2. EXTENT: What sample size to select
for a given procedure
 3. SELECTION: Which particular items to
select from the population
 4. TIMING: When to perform the
procedures
6-3
1. NATURE: Which audit
procedures to use
 First of all, what is an audit procedure?
– The detailed instruction for the collection of a
type of audit evidence, i.e.
– The actual task that you do to obtain evidence
with respect to an audit objective, for example:
– Count inventory, noting quantity, location, tag
number, unit of measure and condition of
inventory
6-4
1. NATURE: Which audit
procedures to use (cont’d)
 What are some other examples of audit
procedures?
 What is the audit objective(s) for the audit
procedure that you identified?
6-5
2. EXTENT: What sample size to
select for a given procedure
 The sample size will vary depending upon
– The sampling method chosen
– The type of test (e.g. test of controls vs. test of
details)
– The amount of assurance to be obtained from
the test
 Professional judgment and firm procedures
help in deciding sample size
6-6
3. SELECTION: Which particular
items to select from the population
 Once the sampling method has been
determined, then the sample size will be
identified (see previous overhead)
 Then, we can actually choose the item.
Method of selection will depend upon
sampling method, e.g. interval sample,
high dollar items, random sample, etc.
6-7
4. TIMING: When to perform the
procedures
 When are we likely to conduct tests of
controls?
 What about tests of details?
 What are some other factors that affect the
timing of the conduct of tests (audit
procedures)?
6-8
A list of audit procedures is called:
 An audit program
 This will summarize what needs to be done

by cycle, including the information about
nature, extent, selection and timing
 There may be several audit programs for a
cycle, depending upon the number of staff
assigned to an engagement
6-9
Sufficient appropriate audit
evidence
 This means that there is enough evidence
of a high enough quality to form a
conclusion with respect to the audit
opinion
 High quality evidence is considered
persuasive
6-10
Persuasive evidence (Table 6-2)
 Persuasive evidence is
 1. Appropriate
– Relevant and reliable
 2. Sufficient
 3. Timely
6-11
Evidence and buying a used car
 If you were assessing
the quality of a used
car that you were
thinking of buying,
what type of evidence
would you gather?
 How is this similar to
the audit process?
6-12
Appropriateness of evidence
 Relevance: pertaining to the audit assertion
being tested
 Reliable: depends upon a number of
factors, including who examined the
evidence, the state of the client’s systems,
and the type of evidence collected.
6-13
Reliability of evidence
 Auditor’s direct knowledge
 Independence of provider
 Effectiveness of client’s internal controls
 Qualifications of individuals providing the
information
 Degree of objectivity
6-14
Reliability: Auditor’s direct
knowledge
 Evidence obtained directly by the auditor
 What is an example of evidence that the
auditor could collect directly with each of
the following techniques?
– Physical examination
– Observation
– Reperformance
– Inspection
6-15
Reliability: Independence of
provider
 Evidence obtained from a source outside
the entity is more reliable than that
obtained from within
 What are some examples of outside
sources of information that are typically
used by the auditor?
6-16
Reliability: Effectiveness of client’s
internal controls
 When a client’s internal controls are
effective, evidence obtained internally is
more reliable than when controls are weak
 What are some of the indicators of strong
internal controls?
 Of weak internal controls?
6-17
Reliability: Qualifications of
individuals providing the
information
 Individuals providing information should
be competent and qualified to do so
 How would you judge the qualifications of
the providers of bank confirmations?
 Of accounts receivable confirmations?
6-18
Reliability: Degree of objectivity
 Evidence that requires the use of a high

level of judgment is less objective
 What is an example of evidence that
requires very little judgment?
 What about evidence that requires a high
level of judgment?
6-19
Practice problem 6-22 (p. 180)
 Deciding on evidence
 Which evidence is
more reliable?
 Why?
6-20
Combined effect
 The auditor needs to consider all of the
evidence factors together, i.e. combined
effects of sufficiency, appropriateness and
timeliness
 Part of the evidence gathering decision is
related to the tradeoff of the cost of
gathering evidence versus its
persuasiveness
6-21
Methods of collecting evidence:
Match the type of evidence to the example
 Example
 Types of evidence  Request details of bank
 Physical examination balances from the bank
 Confirmation  Count inventory
 Note quality of inventory
 Documentation
 Match receiving slip to
 Observation invoice
 Inquiries of the client  Ask about credit granting
 Reperformance processes
 Compare current and prior
 Analytical procedures gross profit
 Recalculate gst paid
6-22
 Learning to identify
the type of evidence
 Also, matching audit
procedures to general
balance-related audit
objectives
6-23
How do we choose evidence types?
 Consider the effectiveness of internal

controls
 Use alternative types of evidence that
together provide high reliability
 Normally more than one type of evidence
is required for each audit assertion
 Consider the cost of the procedure
6-24
Analytical procedures play a crucial
role
6-25
Important reasons for using
analytical procedures
 To help understand the client’s business
 Assessment of the entity’s ability to
continue as a going concern
 To identify the presence of possible
misstatements
 To reduce detailed audit tests (by being a
form of evidence)
6-26
 Let’s look at the advantages of using
analytical review
 What are the reasons why certain account
balances may differ from prior years?
6-27
Analytical review process
 Conducted during all phases of the audit
 Client information can be compared to:
– Industry data
– Prior-period data
– Client-determined expected results
– Auditor-determined expected results
– Non-financial data
6-28
“Quick and easy” analytical review
 Analytical review has expanded as a

technique due to the availability of many
different types of software:
– Statistical
– Audit software (generally available or firm
specific)
– Spreadsheet templates
6-29
 Here, analytical
review has already
been completed for
you
 Practise deciding
whether these results
require follow up or
not …
6-30

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Chapter 6: Audit Evidence

Copyright © 2007 Pearson Education

 This will summarize what needs to be done

 Evidence that requires the use of a high

 Consider the effectiveness of internal

 Analytical review has expanded as a

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