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AUDIT EVIDENCE

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Audit Process Model

Phase I - Client Acceptance


Phase II - Planning
Phase III - Testing and Evidence
Phase IV - Evaluation and Judgme
nt

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Assertions about account balances at the period end.

Existence:- Assets, liabilities and equity interests ex


ist.
Rights and obligations:- An entity holds or controls t
he rights to assets, and liabilities are the obligations
of the entity.
CompletenessAll assets, liabilities and equity inter
ests that should have been recorded have been rec
orded
Valuation and allocation Assets, liabilities, and equi
ty interests are included in the financial statements
at appropriate amounts and any resulting valuation o
r allocation adjustments are appropriately recorded.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Evidence
Evidence is anything that can
make a person believe that a
fact, proposition, or assertion
is true or false.
Audit evidence is all of the inf
ormation used by the auditor i
n arriving at the conclusions o
n which the audit opinion is b
ased. (ISA 500)
It includes the accounting r
ecords and other informati
on underlying the financial
statements.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Audit evidence is different from the legal eviden


ce.
In a civil lawsuit, evidence must
be strong enough to incline a pe
rson to believe one side or the o
ther.
In a criminal case evidence mu
st establish proof of a crime bey
ond a reasonable doubt.
Audit evidence provides only rea
sonable assurance

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Accounting records generally include the records of


initial entries and supporting records.
Initial entries include: records of initi
al entries such as checks and electr
onic fund transfers; contracts, invoic
es; shipping notices, purchase order
s, sales orders, the general and sub
sidiary ledgers, journal entries and ot
her adjustments to the financial state
ments.
Supporting records examples are co
mputer files, databases, work sheets
, spreadsheets, computer and manu
al logs, computations, reconciliations evidence
, and disclosures.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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The auditor obtains audit evidence to draw reasona


ble conclusions on which to base the audit opinion
by performing audit procedures to:
Obtain an understanding of the entity and its environ
ment, including its internal control, to assess the risks
of material misstatement at the financial statement an
d assertion levels (risk assessment procedures);
Test the operating effectiveness of controls in prevent
ing, or detecting and correcting, material misstateme
nts at the assertion level (tests of controls); and
Detect material misstatements at the assertion level (
substantive procedures) ISA 500

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Sufficient Appropriate Audit Evidence

Sufficiency is the measure of the quantity of


audit evidence

Appropriateness is the measure of quality of


audit evidence, its reliability, & its relevanc
e in providing support for, or detecting, mis
statements in transactions, balances, disclos
ures and related assertions

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Relevance of evidence is th
e appropriateness (pertinen
ce) of the evidence to the au
dit objective being tested.
Reliability is the quality of inf
ormation when it is free from
material error and bias and
can be depended upon by u
sers to represent faithfully th
at which it either purports to
represent or could reasonab
ly be expected to represent.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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.10

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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.11

Reliability of audit evidence


Audit evidence obtained directly by the auditor (e.g.,
observation, re-performance) is more reliable than au
dit evidence obtained indirectly or by inference.
Audit evidence is more reliable when it exists in docu
mentary form, whether paper, electronic, or other me
dium.
Audit evidence is more reliable when it is obtained fro
m independent sources outside the entity..
Audit evidence provided by original documents is mor
e reliable than audit evidence provided by photocopie
s or facsimiles.
The effectiveness of the clients internal control struct
ure has a significant impact on reliability of evidence.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Information Provided by the Auditee

When information pro


duced by the entity i
s used by the auditor
to perform audit proc
edures, the auditor s
hould obtain audit ev
idence about the acc
uracy and completen
ess of the informatio
n.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Audit Procedures for Gathering Evidence

Evidence-gathering techniques are techniques e


mployed by an auditor to obtain evidence.
Evidence-gathering techniques are:
Inquiry
Observation
Inspection (physical evidence and examination
of documents)
Recalculation
Reperformance
Confirmation
Analytical procedures.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Inquiry
Inquiry consists of seeking informatio
n of knowledgeable persons inside (
client) or outside the entity.
Largest amount of audit evidence in a
n audit is obtained from client inquiry
cannot be regarded as conclusive because it is not
from an independent source and might be biase
d
the auditor must gather evidence to corroborate in
quiry evidence by doing other alternative proced
ures.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Inquiry

Famous court case of Escott et al. vs. Bar


Chris Corp. 1968, wherein the court ruled
against the auditor because he did not see
k supporting evidence related to inquiries
made with management. The court stated
he was, too easily satisfied with glib answ
ers to his inquiries.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Observation

Observation consists of looking at a pro


cess or procedure being performed by oth
ers.
For example, the observation by the audi
tor of the counting of inventories by the ent
itys personnel or by the performance of int
ernal control procedures that leave no audi
t trail.
Observation should be supported by oth
er types of evidence.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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count of physical inve


ntory

ISA 501 When inventory is material to the financi


al statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existenc
e and condition by attendance at physical invento
ry counting.
If unable to attend the physical inventory count, t
he auditor should take or observe some physical
counts on an alternative date and, when necessa
ry, perform tests of controls of intervening transac
tions.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Alternative procedures for attending physical invent


ory include Auditor review of:
Managements instructions regarding the applicat
ion of control procedures (e.g. collection of used
stock sheets, accounting for unissued stock shee
ts and count and re-count procedures);
Accurate identification of the stage of completion
of work in progress, of slow-moving, obsolete, or
damaged items and items on consignment
Whether appropriate arrangements are made reg
arding the movement of inventory between areas
and the shipping and receipt of inventory before
and after the cutoff date.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Inspection

Inspection is the auditor's examination of the cli


ent's documents records or tangible assets to
substantiate the important information related t
o the financial statements.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Internal documents and external documents.

Internal documents processed under good internal c


ontrols are more reliable than those processed un
der weak controls.
External documents may be processed by both inter
nal and external parties representing agreement.
External documents like title to property, insurance p
olicies and contracts are very reliable evidence.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Vouching and Tracing


Vouching is the use of documentation to suppor
t recorded transactions or amounts.
It is an audit process whereby the auditor selects
sample items from an account and goes backwar
d through the accounting system to find the sourc
e documentation that supports the item selected.
Tracing is an audit procedure whereby the audit
or selects sample items from basic source docum
ents and proceeds forward through the accountin
g system to find the final recording of the transact
ions (e.g., in the ledger).

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Recalculation & Reperformance

Recalculation consists of checking th


e arithmetical accuracy of source
documents and accounting record
s or of performing independent cal
culations.
Reperformance is the auditors indep
endent execution of procedures or
controls that were originally perfo
rmed as part of the entitys intern
al control, either manually or thro
ugh the use of CAATs.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Recalculation

Examples:
Extending sales invoices
Adding journals and subsidiary records
Checking calculations of depreciation
Checking mechanical accuracy of
records and ledgers.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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CONFIRMATION

Defined: It is the auditors receipt of a written or oral respon


se from a independent third party verifying the accuracy o
r the information requested.
Four Key Characteristics:
1. Information is requested by auditor.
2. Request and response is in writing, sent to the auditor.
3. Response comes from an independent third party.
4. Positive confirmation involves a receipt of information.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Confirmation

An auditor may use a confirmation in response to a si


gnificant risk
The auditor must ordinarily confirm accounts receiv
able.
. Written confirmations received from third parties are
highly persuasive, but very costly and an inconvenien
ce for those who are asked to supply them.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Positive confirmation: Asks the recipien


t (debtor, creditor or other third party) t
o confirm agreement or to express disag
reement with the recorded balance.
Reliable evidence
Negative confirmation: A reply is requ
ested only in the event of disagreement
with the recorded balance.
Use for large number small balances, lo
w control risk, response is expected

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Search for unrecorded liabilities

Defined:
A substantive test usually performed on accounts pay
able is a search for unrecorded liabilities.
This test provides evidence as a completeness and s
ome evidence as to valuation.
By reviewing cash disbursements subsequent to the
balance sheet date, the auditor has a good idea of th
e potential population of unrecorded accounts payabl
e.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Reliability of Procedures

A list of the most reliable to the least reliable evid


ence gathering techniques are in general:
1 Recalculation
2. Inspection.
3 Reperformance.
4 Observation.
5 Confirmation.
6 Analytical procedures.
7 Inquiry.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Cost of Procedures

The auditor considers the relationship between the cost of ob


taining audit evidence and the usefulness of the information o
btained. The evidence-gathering procedures in order of cost f
rom most costly to least costly are in general:
1 Confirmation.
2 Inspection.
3 Recalculation
4. Reperformance
5 Observation.
6 Analytical procedures.
7 Inquiry.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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Thank You for Your Attention

Any Questions?

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
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[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007

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