Audit Evidence Advanced Auditing Lecture 3 Dr. Mohamed A. Hamada

Learning Objectives Audit Evidence Contrasted with Legal and Scientific Evidence, 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

Nature of Evidence  The use of evidence is not unique to auditors  Evidence is also used by scientists, lawyers, and historians

Evidence The foundation of any audit is the evidence obtained and evaluated by the auditor. The auditor must have the knowledge and skill to accumulate sufficient and appropriate evidence on every audit to meet the standards of the profession.

Audit Evidence Is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria. Evidence includes information that is highly persuasive, and less persuasive information.

Audit Evidence Decisions 1. Which audit procedures to use? 2. What sample size to select for a given procedure? 3. Which items to select from the population? 4. When to perform the procedures (timing)? A major decision facing every auditor is determining the appropriate types and amounts of evidence needed to be satisfied that the client’s financial statements are fairly stated

Which audit procedures should be used? An audit procedure is a detailed instruction for the collection of a type of audit evidence.

Which audit procedures should be used? In general, the auditor will seek the most appropriate procedures that are also cost-feasible.

Which audit procedures to use Examples, Verifying the inventory by count the inventory units. Verification of cash disbursements: Examine the cash disbursements journal in the accounting system and compare the payee, name, amount, and date with online information provided by the bank about checks processed for the account.

Sample Size Once an audit procedure is selected, auditors can vary the sample size from one to all the items in the population being tested. Example: In an audit procedure to verify cash disbursements, suppose 6,600 checks are recorded in the cash disbursements journal. The decision of how many items to test must be made by the auditor for each audit procedure. The sample size for any given procedure is likely to vary from audit to audit.

Items to Select After determining the sample size for an audit procedure, the auditor must decide which items in the population to test. If the auditor decides, for example, to select 50 checks from a population of 6,600 for comparison with the cash disbursements journal, The auditor can (1) select a week and examine the first 50 checks, (2) select the 50 checks with the largest amounts, (3) select the checks randomly, or (4) select those checks that the auditor thinks are most likely to be in error.

The auditor will consider: - random/judgmental selection - materiality - results of prior audits Which items should be selected for testing?

When should the procedures be performed? Timing The auditor will consider procedures that should be performed before, on, or after the balance sheet date. December

when to perform the procedures (timing) An audit of financial statements usually covers a period such as a year. Normally an audit is not completed until several weeks or months after the end of the period. The timing of audit procedures can therefore vary from early in the accounting period to long after it has ended. timing is also influenced by when the auditor believes the audit evidence will be most effective and when audit staff is available. For example, auditors often prefer to do counts of inventory as close to the balance sheet date as possible.

When should the procedures be performed? An auditor must address four decisions regarding evidence accumulation: Which items should be selected for testing? What sample size should be selected? Which audit procedures should be used?

After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed. An audit program is a list of detailed audit procedures for each component or cycle specifying procedure timing, sample sizes, and selection methods.

Audit Program It includes a list of the audit procedures the auditor considers necessary. Most auditors use computers to facilitate the preparation of audit programs.  Sample sizes  Items to select  Timing of the tests

Persuasiveness of Audit evidence Appropriateness Timeliness and quantity sufficiency Relevance and Reliability

Appropriateness Appropriateness is a measure of evidence quality, it can’t be enhanced by a larger sample size. Appropriateness is a measure of evidence quality, it can’t be enhanced by a larger sample size. If evidence is considered highly appropriate, it is a great help in persuading the auditor that financial statements are fairly stated

Appropriateness Appropriateness is determined by: - Independence of the evidence provider - Effectiveness of client’s internal controls - Auditor’s direct knowledge - qualifications of information provider - Degree of objectivity

relevance Evidence must pertain (be related) to the specific audit objective.

Reliability of evidence refers to the degree to which evidence can be believable or worthy of trust. For example, if an auditor counts inventory, that evidence is more reliable than if management gives the auditor its own count amounts. Reliability

Six Characteristics of Reliable Evidence 1.Independence of provider 2.Effectiveness of client’sinternal controls 3. Auditor’s direct knowledge 4.Qualification of individuals providing the information 5.Degree of objectivity 6.Timeliness

sufficiency Sufficiency is a measure of quantity. In general, the larger the sample size, the more persuasive the evidence. In general, the larger the sample size, the more persuasive the evidence.

Less evidence yields less assurance and lower audit costs. More evidence yields more assurance and higher audit costs. MORE LESS Auditors must balance the trade-off between gathering more or less evidence.

An appropriate sample size may be determined by auditor judgment and/or by statistical sampling. sufficiency Sufficiency must be addressed for each audit test and each component of the financial statements.

sufficiency - “Representativeness” - Materiality, large dollar amounts - Items with high probability of misstatement In determining a sufficient sample size, an auditor will also consider :

timeliness When should audit evidence be gathered?

timeliness - evidence related to balance sheet accounts should be collected as close to the balance sheet date as possible - evidence related to income statement accounts should be collected from throughout the period rather than from only part of the period

Relevance Reliability timeliness sufficiency appropriate- ness Evidence is considered persuasive only if all four determinants have been met.

With regard to the adequacy and costs of audit evidence: requires absolute certainty convincing evidence high audit costs requires reasonable certainty persuasive evidence reasonable audit costs

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