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

2. 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 )
Cost/difficulty not a valid basis for omitting an audit test (SAS )
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3. 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]
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4. Various Evidence Issues
An audit rarely involves authentication of documentation, as we are typically not trained in such matters (SAS )
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 and )
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5. Forms of Audit Evidence
Inspection of tangible assets
Confirmation
Inspection of records or documents
Observation
Inquiries of client
Recalculation
Reperformance
Analytical tests
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6. 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?
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7. Confirmation (SAS )
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
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8. 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.”
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9. Observation (SAS )
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
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10. 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
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11. 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 )
Where responses to inquiries contradict other information, those inconsistencies must be resolved (SAS )
Inquiry alone does not provide sufficient appropriate evidence (SAS ) to:
Detect material misstatements
Test operating effectiveness of controls
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12. Recalculation (SAS )
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]
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13. Reperformance (SAS )
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
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14. 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
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