Seven Forms of Audit Evidence Dr. Donald K. McConnell Jr. 12/6/2018

Audit Evidence Concepts (Au 326) Auditor must obtain sufficient, competent evidential matter through COIN providing reasonable basis for an opinion on financial statements [3d F.W. std.] Auditor must generally rely on evidence which is persuasive rather than convincing Cost/difficulty not a valid basis for omitting an audit test (Au 326.24) 12/6/2018

The Seven Forms of Audit Evidence Physical examination Confirmation Documentation Observation Inquiries of client Reperformance Analytical tests 12/6/2018

Physical Examination Inspection or count of a tangible asset with inherent value Reliable evidence, but of little use in verifying ownership Effective for testing existence or occurrence assertion 12/6/2018

Confirmation Written response from an outside party Reliable, but costly evidence A common example: accounts receivable confirmations Auditor must control mailing and receipt of confirmation responses! 12/6/2018

Documentation Examination of client documents and records supporting transactions Examining such supporting documents is called “vouching” If auditor were to test controls by vouching 25 entries randomly selected from the cash disbursements journal, what would he/she vouch to? Not as costly, but less reliable than confirmation 12/6/2018

Observation Use of the senses (typically sight) to, for example: Note condition of inventories Observe compliance with controls leaving no audit trail, e.g. segregation of duties 12/6/2018

How Does the Term “Observation” from Third FW Std Relate to the Forms of Evidence? Observation from COIN in third standard of fieldwork encompasses two of the forms of audit evidence: Physical examination: auditor count of 10 boxes of widgets agrees with count recorded on client inventory tag [existence or occurrence assertion] Observation: auditor visually notes that the 10 boxes of widgets do not appear damaged or have a layer a dust on them [valuation or allocation assertion] 12/6/2018

Inquiries of Client 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 the question Listen carefully Most importantly, engage brain Client responses must typically be corroborated to supporting audit evidence, unless answer is self-evident 12/6/2018

Reperformance Rechecking of mathematics, extensions [e.g., price x quantity= X] Items properly posted to journals [or entered to the system] Auditor terminology: Footing: verifying that a column of figures is correctly added [vertical orientation] Cross-footing: beginning balance + acquisitions – disposals = ending balance [horizontal orientation] 12/6/2018

Analytical Procedures Used to identify data aberrations: Unexpected fluctuations 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 12/6/2018