Presentation on theme: "Main Types of Audit Evidence Advanced Auditing Chapter 7 Dr. Mohamed A. Hamada."— Presentation transcript:
Main Types of Audit Evidence Advanced Auditing Chapter 7 Dr. Mohamed A. Hamada
Learning Objectives Audit evidence are variant of other evidence that used by other professions. Identify the four audit evidence decisions. Explain the persuasive of audit evidence Explain the main types of audit evidence
Types of Audit Evidence 1. Physical examination 2. Confirmation 3. Documentation 4. Analytical procedures 5. Inquiries of the client 6. Re-calculation 7. Re-performance 8. Observation
Physical Examination It is the inspection or count by the auditor of a tangible asset. This type of evidence is most often associated with inventory and cash. Physical examination is a direct means of verifying that an asset actually exists
Confirmation Confirmation describes the receipt of a direct written response from a third party verifying the accuracy of information that was requested by the auditor. Because confirmations come from sources independent of the client, they are a highly regarded and often-used type of evidence
auditor client’s customer Confirmation - receipt of a written or oral response from an independent third party at the auditor’s request. A sample of accounts receivable should be confirmed by the auditor. very appropriate evidence! Canada 46
Documentation It is the auditor’s inspection of the client’s documents and records. Internal documents External documents
- Documentation (vouching) - auditor examination of client documents and records
External documents are usually on the client’s premises but were either prepared by a third party or processed by a third party (more persuasive). Internal documents have been prepared by the client and have not left the client’s premises (less persuasive). the difference between internal and external documents?
- Documentation (vouching) - auditor examination of client documents and records - Physical examination - inspection or count by the auditor of a tangible asset the difference between physical examination and documentation
Example: the client often retains a customer order, a shipping document, and a duplicate sales invoice for each sales transaction. These documents are useful evidence for the auditor to verify the accuracy of the client’s records for sales transactions.
Analytical Procedures Understand the client’s industry and business Assess the entity’s ability to continue as a going concern Indicate the presence of possible misstatements in the financial statements Reduce detailed audit tests For example, an auditor may compare the gross margin percent in the current year with the preceding year’s. Use comparisons and relationships to assess whether account balances or other data appear reasonable compared to the auditor’s expectations
- industry comparisons Types of Analytical Procedures How do the client’s financial ratios compare with those of the industry?
- comparisons with prior years Ace Company 2003 financial statements Conclusions from a 2-year analysis Types of Analytical Procedures Ace Company 2004 financial statements
Account can be calculated from Sales commissions sales Depreciation expense fixed assets Interest expense notes/bonds payable Types of Analytical Procedures - Comparisons with auditor-determined expected results, examples:
Inquiries of the Client It is the obtaining of written or oral information from the client in response to questions from the auditor.
Recalculation Rechecking client calculations consists of testing the client’s arithmetical accuracy and includes such procedures as extending sales invoices and inventory checking the calculation of depreciation expense and prepaid expenses It involves rechecking a sample of calculations made by the client.
Re-performance Re-performance is the auditor’s independent tests of client accounting procedures or controls that were originally done as part of the entity’s accounting and internal control system. Ex: the cycle of sales recording process, procedures of payrolls calculation
Observation It is the use of the senses to assess client activities. The auditor may tour the plant to obtain a general impression of the client’s facilities.
Terms and Types of Evidence TermsType of Evidence Examine Scan Read Compute Re-compute Assess Trace Compare Count Observe Inquire Vouch Documentation Analytical procedures Documentation Analytical procedures Recalculation Documentation/Re-performance Documentation/Analytical procedures Physical examination Observation Inquiries of client Documentation
Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement.
Purposes of audit documentation The overall objective of audit documentation is to aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with auditing standards
Learning Objective 7 Describe how technology affects audit evidence and audit documentation.
Effect of Technology Audit evidence is increasingly in electronic form Auditors must evaluate how electronic information affects their ability to gather evidence Auditors use computers to read and examine evidence Software programs are typically Windows-based
Define the following terms commonly used in audit procedures: 1.Examine 2.Scan 3.Compute 4.Foot 5.Compare 6.Count 7.Vouch Answer: 1.Examine – A reasonably detailed study of a specific document or record to determine specific facts about it. 2.Scan – A detailed examination of a document or record to determine whether there is something unusual warranting further investigation. 3.Compute – A calculation done by the auditor independent of the client. 4.Foot – Addition of a column of numbers to determine whether the total is the same as the client’s. 5.Compare – A comparison of information in two different locations. 6.Count – A determination of assets on hand at a given time. This is associated with evidence defined as physical examination. 7.Vouch – The use of documents to verify recorded transactions or amounts.