1. Seven Forms of Audit Evidence
Dr. Donald K. McConnell Jr.
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2. 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 )
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3. The Seven Forms of Audit Evidence
Physical examination
Confirmation
Documentation
Observation
Inquiries of client
Reperformance
Analytical tests
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4. 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
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5. 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!
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6. 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
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7. 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
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8. 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]
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9. 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
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10. 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]
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11. 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
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