 Any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria. (GAAP)  The information varies greatly in the extent to which it persuades the auditor whether F. S. are fairly stated in accordance with GAAP.

 Evidence includes information that is highly persuasive such as: the auditor’s count of Marketable securities and less persuasive information such as responses to questions of client employees

 a major decision facing every auditor is determining the appropriate type (quality) and amount of evidence (quantity) needed to be satisfied that the client’s F. S. are fairly stated.

 Which audit procedures to use?  What sample size to select for a given procedure?  Which items to select from the population?  When to perform the procedures?

 An audit procedure is the detailed instruction for the collection of a type of audit evidence that is to obtained.

 They are the instructions to be followed in accumulating evidence, they must worded carefully to make sure the instructions are clear.

 Once an audit procedure is selected, auditors can vary the sample size from one to all items in the population being tested.

 After determining the sample size for an audit procedure, the auditor must decide which items in population to test

 An audit of F.S. usually covers a period such as a year normally, an audit is not completed until several weeks or months after the end of period.  The Timing decisions is affected by when the client needs the audit to be completed.

 List of audit procedures for an audit area or an entire audit, the audit program always includes audit procedures and may also include sample size, items to select, and timing of the tests.

 An audit program for AR is a list of audit procedures that will be used to audit accounts receivables for a given client, the audit procedures, sample size, items to select and timing should be included in the audit program.

a.Appropriateness refers to the relevance and reliable of evidence, or the degree to which evidence can be considered believable or worthy trust.related to the audit procedures selected including the timing of when those procedures are performed. b.Sufficiency refers to the quantity of evidence and it is related to sample size and item to select.

 Evidence must pertain to the audit objective if it is to be persuasive, relevance must be considered in terms of specific audit objectives as an evidence may be relevant to one objective and not another.

 The degree to which evidence can be believable or worthy of trust. Like relevance, if evidence is considered reliable it is a great help in persuading the auditor that financial statements are fairly stated.

A.Independence of provider. B.Effectiveness of client’s internal controls. C.Auditor’s direct knowledge. D.Qualifications of individuals providing the information. E.Degree of objectivity. F.Timeliness.

 Evidence obtained from a source outside the entity is more reliable than that obtained from within the company.

 When a client’s internal controls are effective, evidence obtained is more reliable than when they are weak.

 Evidence obtained directly by the auditor through physical examination, observation, recalculation, and inspection is more reliable than information obtained indirectly.

 Evidence obtained directly by the auditor may not be reliable if the auditor lacks the qualifications to evaluate the evidence.

 Objective evidence is more reliable than evidence that requires considerable judgment to determine whether it is correct.

 The timeliness of audit evidence can refer either to when it is accumulated or to the period covered by the audit.

Factor Determining Reliability Examples of reliable evidence 1. Independence provider Confirmation of a bank balance 2. Effectiveness of clients’ ICs Use of sales invoices and shipping documents

3. Auditor’s direct knowledge Physical examination of Inventory by the auditor 4. Qualification of Provider Letter from an attorney dealing with the client’s affairs 5. Degree of objectivity Count of cash on hand by auditor 6. Timeliness Observe inventory on the cost day of the fiscal year

 It is measured primarily by the sample size the auditor selects, for a given audit procedure the evidence obtained from a sample of 100 is ordinarily more sufficient than from a sample of 50, the factors to determine the appropriate sample size in audits are:  The auditor’s expectations of misstatements.  The effectiveness of the client’s internal controls.

 The relationships among evidence decisions and persuasiveness, the persuasiveness of evidence can be evaluated only after considering the combination of appropriateness and sufficiency, including the effects of the factors influencing appropriateness and sufficiency.

Audit Evidence Decisions Qualities affecting persuasiveness of Evidence Audit Procedures and Timing Appropriateness Relevance Reliability Independence of provider Auditor’s direct Knowledge Objectivity of evidence Timeliness: when procedures are performed portion of period being audited. Sample size and Items select Sufficiency: adequate sample size selection of proper population items

 The persuasiveness and cost of all alternatives should be considered before selecting the best type or types of evidence.  The auditor’s goal is to obtain a sufficient amount of appropriate evidence at the lowest possible total cost.

A.Physical examination. B.Confirmation. C.Documentation. D.Analytical procedures. E.Inquiries of the client. F.Recalculation. G.Reperformance. H.Observation.

 The auditor’s inspection or count of a tangible asset. This type of evidence is most often associated with inventory and cash it is a direct means of verifying that an asset actually exists

 The auditor’s receipt of a written or oral response from an independent third party verifying the accuracy information requested.  A confirmation is prepared specifically for the auditor and comes from an external source

 External documentation is in the hands of the client at the time of the audit and was prepared by an External party for the client’s use in the day-to-day operation of the business

 In order of competence, the three common types of confirmations used by auditors are:  Positive confirmation with a request for information to be supplied by the recipient.  Positive confirmation with the information to be confirmed included on the form.  Negative confirmation.

 The positive confirmation with a request for information to be supplied by the recipient must supply the information from his or her records.  The positive confirmation with the information to be confirmed included on the form is not as reliable as the first type because the recipient may sign and return the confirmation without carefully examining the information.  The negative confirmation is the least reliable because a non-response could be due to either the recipient agreeing with the information or the recipient ignoring the confirmation request.

 The principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditors in the engagement.

 is the auditor’s examination of the client’s documents and records to substantive the information that either is included or should be included in the financial statements, documents that the auditor examines may either be classified as external documents or internal documents,external documents are considered more reliable evidence than internal ones

Internal Documentation External Documentation It is prepared and used within the client organization without ever going to an outside party Either originated with an outside party or was an Internal document that went to an outside party and is now either in the hands of the client or is readily accessible

Internal Documentation External Documentation Inventory Receiving reports Payroll time record Adjusting Journal entry Vendor’s invoices Insurance policies Cancelled notes payables

 The primary determinant of the auditor’s willingness to accept a document as reliable evidence is whether it is internal or external and when internal whether it was created and processed under conditions of effective internal control.

 The auditor’s inspection of the client’s documents and records to substantive the information that is or should be included in the financial statements.

 Examples, of relatively reliable documents include vendor’s statements, cancelled notes payable, insurance policies and bank statements, examples of less reliable documents include duplicate sales invoices, employees time reports, inventory receiving reports, and internal memorandum.

1.Receipt directly by auditor 2.Written or electronic response 3.From independent third party 4.Requested by the auditor

 Use of comparisons and relationships to assess whether account balances or other data appear reasonable.

 Analytical procedures are useful for indicating account balances that may be distorted unusual or significant transactions and that should be intensively investigated, they are also useful in reviewing accounts or transactions for reasonableness.  To corroborate tentative conclusions reached on the basis of other evidence the important reasons for performing analytical procedures:

 Understand the client’s industry and business.  Assess the entities’ ability to continue as a going concern.  Indicate the presence of possible misstatements in the financial statements.  Reduce detailed audit tests.

 The obtaining of written or oral information from the client in the response to specific questions during the audit. The auditor usually begins by asking the client how the internal controls operate

 The rechecking of a sample of the computations made by the client, including mathematical accuracy of individual transactions and amounts and the addition of journals and subsidiary records.

 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. For example the auditor normally makes limited tests to ascertain that the information in the sales journal has been included for the proper customer and at the correct amount in the subsidiary accounts receivables records and is accurately in the general ledger.

 The use of the senses to assess client activities. Consists of looking at a process or procedure being performed by others, observation is rarely sufficient by itself because of the risk of client personnel changing their behavior because the auditor presence.

Types of audit evidence Examples 1. Physical examination Count petty cash on hand Examine fixed assets additions 2. Confirmation Confirm accounts receivables (AR) of a sample of client customers Confirm client’s cash balance with bank

3. Inspection Examine copies of monthly bank statements Examine vendor’s invoices supporting a sample of cash disbursement 4. Analytical Procedures Evaluate reasonableness of receivables by calculating and comparing ratios Compare expenses as a percentage of Net Sales with prior year’s percentages.

5. Inquires of the client Inquire of management whether there is obsolete Inventory Inquire of management regarding the collectability of large accounts receivable 6. Recalculation Recompute invoice total by multiplying item prices * Quantity Sold. Foot the sales journal for a (one-month) period and compare all totals to the general Ledger.

7. Reperformance agree sales invoice price to approved price list. Match Quantity on purchase invoice to receiving report. 8. Observation observe client employees in the process of counting inventory observe whether employees are restricted from access to the check signing machine.

 First, the effectiveness of a client’s internal controls has a significant influence on the reliability of most types of evidence. Obviously, internal documentation from a company with effective internal control is more reliable because the documents are more likely to be accurate. Conversely, analytical procedures will not be reliable evidence if the controls that produced the data provide inaccurate information.

 Second, both physical examination and recalculation are likely to be highly reliable if the internal controls are effective, but their use differs considerably. This effectively illustrates that two completely different types of evidence can be equally reliable.  Third, a specific type of evidence is rarely sufficient by itself to provide appropriate evidence to satisfy any audit objective.

High Expensive TypesModerate cost Types 1.Physical examination Because it normally requires the auditor’s presence when the client is counting the asset often on the B.S. date 1.Inspection Inspection usually has a fairly low cost, when auditors must find those documents themselves however inspection can be extremely costly

High Experience TypesModerate cost Types 2. Confirmation Because the auditor must follow careful procedures in the confirmation preparation, mailing or electronic transmittal receipt 2. Analytical procedures Most auditors prefer to replace tests of details with analytical procedures when possible

Moderate cost Types 3. Reperformance The cost of reperformance tests depends on the nature of the procedure being tested.

TermsTypes of Evidence ExamineDocumentation ScanAnalytical procedures ReadDocumentation ComputeAnalytical procedures Re-computeRecalculation FootRecalculation

TermsTypes of Evidence TraceDocumentation / Reperformance CompareDocumentation CountPhysical examination ObserveObservation InquireInquires of client VouchDocumentation