2 What is Audit Evidence? =Any information used by the auditor to draw conclusions regardingwhether the information being audited is stated in accordance with the established criterionMust be sufficient and appropriate at lowest possible cost
3 Audit evidence decisions NatureWhat type of procedure to use and what evidence to gatherTimingWhen evidence is gathered and covering what time periodExtentHow many items to test and which items to select
4 Sufficient and Appropriate Evidence Sufficiency:Refers to quantity“Extent” evidence decisionDepends on expectations of errors, quality of controls, size of popn, materiality, level of assurance, etc.AppropriatenessRefers to quality“Nature” and “Timing” evidence decisionsDepends on level of assurance neededIf evidence is not appropriate, sufficiency won’t help.
5 To be appropriate… Relevance = addresses the objective or assertion Eg. Existence vs. completenessAuditor’s direct knowledge vs. otherwiseExamination, observation, inspection or computation by auditor > someone elseIndependence of providerProvider external to org > external to acctg dept > acctg deptDocuments external to org > external docs held by org > internal docs
6 To be appropriate… Effectiveness of Internal controls Evidence from system of good I.C. > evidence from system of poor I.C.Qualifications of individuals providing the informationDegree of objectivity of evidence (vs. subjectivity)
7 TimingAuditor must express conclusion on information at balance sheet date.However, may gather information as at non-balance sheet date and “roll forward” the conclusion by:Substantive testsRelying on internal controlsOther proceduresTo do this, considerquality of internal controls,materiality of item andlevel of risk associated with item
8 Types of Evidence Physical Examination = inspection or count of tangible assetsGood evidence of existence, but not at all of ownership and not really of valuationConfirmation= receipt of response from 3rd party verifying accuracy of info requested by auditorCostly, but reliable evidence of existenceUsually required for A/R except in certain circumstancesUsed for many other accounts as wellMust be kept under control of auditor
9 Types of Evidence Documentation = inspection of documents and records Quality depends on quality of document (external vs. internal, internal control)If electronic, auditors must assess controls over changes to documentsObservation= watching certain activitiesGenerally needs corroboration for assurance that conditions persist
10 Types of Evidence Inquiries of Client = written or oral representations of client in response to auditor’s request for informationGenerally not conclusive, should be corroborated when possibleUnderlines importance of mgmt good faith, care must be taken in choosing clientsReperformance= auditor rechecking computations or other operations done by clientParticularly often used when testing controls
11 7. Analytical Procedures = using financial and non financial data in meaningful comparisons and relationships to determine whether account balance is reasonableCan be quite effective at low costReliability depends on quality of data, nature of analysis, skill of auditor, level of detail
12 Purposes of Analytical Tests As audit evidence which enables the reduction of audit testing of details.Indication of errors in the statements requiring follow-up.Indication of financial difficulty.Understanding the client’s business and industry.An aid to management.
13 When Analytical procedures are used: MUST be used in:planningfinal reviewMAY be used as a substantive test
14 Analytical Procedures Comparison of Current year balances to:balances for one or more comparable periods.company’s budgets and forecasts.other current-year balances for conformity with predictable patterns based on the company’s experience.similar information for the industry in which the company operates.relevant non-financial information.
15 Analysis of Un-audited Financial Statements Horizontal analysis examines changes of FS numbers and ratios across two or more yearsVertical analysis examines FS amounts expressed each year as proportions of a base.Auditors look for relationships in accounts as indicators of problems and to plan further audit work
16 Problems discovered by analytical procedures Account balances that seem high could indicate problems with:existencevaluationownershipAccount balances that seem low could indicate problems with:completeness
17 Conclusions from analytical procedures Don’t indicate definitively that there is an error. Unexpected fluctuations may be from error or non-error causes.Client explanations should be corroborated if they relate to a material item.