Dr. Donald K. McConnell Jr. Audit Evidence Dr. Donald K. McConnell Jr. 12/4/2018

Audit Evidence Concepts Auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit [3d F.W. std.] Auditor must generally rely on evidence which is persuasive rather than convincing (SAS 106.13) Cost/difficulty not a valid basis for omitting an audit test (SAS 106.12) 12/4/2018

Audit Evidence Generally More Reliable When (SAS 106.08): Obtained from knowledgeable independent outside sources Entity has effective controls over that evidence Obtained directly by the auditor, e.g. auditor observation versus inquiry It exists in documentary form, versus oral client representations Original documents are obtained, versus photocopies [ZZZZ Best] 12/4/2018

Various Evidence Issues An audit rarely involves authentication of documentation, as we are typically not trained in such matters (SAS 106.09) Where non-financial information or budgeted data from the client’s IT system is used in performing audit procedures, we should obtain evidence about accuracy and completeness of such information (SAS 106.10 and 110.14) 12/4/2018

Forms of Audit Evidence Inspection of tangible assets Confirmation Inspection of records or documents Observation Inquiries of client Recalculation Reperformance Analytical tests 12/4/2018

Inspection of Tangible Assets (SAS 106.29) Inspection or count of a tangible asset with inherent value Reliable evidence for existence assertion, but of little use in verifying ownership (rights and obligations) or valuation Examples: Test counts of inventories Counting a teller’s cash fund Examining stock certificates How would you know that inventories you are counting have been consigned? 12/4/2018

Confirmation (SAS 106.37) Written response from an outside party verifying information [e.g., an account balance] or an existing condition [e.g., existence and status of a legal action] Reliable, but costly evidence A common example: accounts receivable confirmations Auditor must control mailing and receipt of confirmation responses! Can be used to obtain evidence about existence of “side deals,” such as agreements to repurchase sold items Parmalat. Drop off in lobby of large office bldg 12/4/2018

Inspection of Records or Documents (SAS 106.27) Examination of documents, internal or external, and records supporting transactions Examining such supporting documents is called “vouching” If auditor were to test controls by vouching 50 entries randomly selected from the cash disbursements journal, what would he/she vouch to? Reliability a function of nature, source, and effectiveness of controls over their production Vouching is from the Latin term “to prove.” 12/4/2018

Observation (SAS 106.30) Looking at a process or procedure being performed by others, for example: Noting condition of inventories Observation that client inventory count procedures being followed Observing compliance with controls, especially those leaving no audit trail, e.g. segregation of duties Damaged? Requires write-downs; observing segregation of duties 12/4/2018

Inquiries of Client (SAS 106.29) An amazing amount of audit evidence is obtained from client responses to inquiries An example: why has gross profit per cent increased from 25 percent the last two years to 35 percent this year? Inquiries of client- a three stage process: Ask clear questions of knowledgeable, qualified people Listen carefully Most importantly, engage brain Client responses must typically be corroborated to supporting audit evidence, unless answer is self-evident 12/4/2018

Inquiries of Client (con.) Some replies to inquiries should be corroborated through additional items in the management rep letter, e.g. Au 333, Appx. B (SAS 106.33) Where responses to inquiries contradict other information, those inconsistencies must be resolved (SAS 106.34) Inquiry alone does not provide sufficient appropriate evidence (SAS 106.35) to: Detect material misstatements Test operating effectiveness of controls 12/4/2018

Recalculation (SAS 106.38) Rechecking of mathematics, extensions [e.g., price x quantity= X] of documents or records Verifying that a trial balance of accounts receivable “foots” Often done using computer assisted audit techniques (CAATS) Auditor terminology: Footing: verifying that a column of figures is correctly added [vertical orientation] Cross-footing: beginning balance + acquisitions – disposals = ending balance [horizontal orientation] 12/4/2018

Reperformance (SAS 106.39) Auditor’s independent execution of client procedures or controls, e.g.: Items properly posted to journals [or entered to the system] Journal totals properly posted to the general ledger at EOM Reperformance of client aging of accounts receivable 12/4/2018

Analytical Procedures (SAS 106.40) Study of plausible relationships among financial [usually account level] and nonfinancial data Includes scanning of journals and ledgers to identify anomalies [that just doesn’t look right] Used to identify data aberrations: Unexpected fluctuations from expectations Lack of expected fluctuations These would require auditor investigation Required in audit during: Planning phases Final completion phases We will discuss extensively in Au 329 12/4/2018