AUDIT EVIDENCE DECISIONS

The auditor's decisions on evidence accumulation

can be broken down into the following four sub-
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 ?
Audit Procedures
Is the detailed instruction for the collection of a type for
audit evidence .
For example : Obtain the cash disbursements journal
and compare the payer name, amount, a date on the
cancelled check with the cash disbursements journal.
Sample Size
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 the sample size has been determined for an audit
procedure, it is still necessary to decide which items in the
population to test.
The auditor could :
(I) Select specific period like a week and examine the first
items ( 200 checks)
(2) Select the 200 checks with the largest amounts,
(3) Select the checks randomly, or
(4) Select those checks that the auditor thinks are most
likely to him in error. Or a combination of these methods
could be used.
Timing
The preparation of financial statements usually covers a
period such as a year, and an audit is usually not
complete until several weeks or months after the end of
the period.
Audit Program
The list of audit procedures for an audit area or an entire
audit is called audit Program.
The audit program always includes a list of the audit
procedures. It usually also includes sample sizes, items
to select, and the timing of the tests
Characteristics of Evidence
Persuasiveness OF EVIDENCE
the auditor requires to accumulate sufficient competent
evidence to support the opinion issued . the auditor
must be persuaded that his or her opinion is correct with
a high level of assurance.
Characteristics of Evidence
Competence of evidence
refers to the degree to which evidence can be considers
believable or worthy of trust.
Independence of Provider :
Evidence obtained from a source outside the entity is More
reliable than that obtained from within .
Effectiveness of Client's Internal Controls : When a client's
internal controls are Effective, evidence obtained is more
reliable than when they are weak.
Auditor's Direct Knowledge :
Evidence obtained directly by the auditor through Physical
examination, observation, computation, and inspection is
more competent than information obtained indirectly .
Characteristics of Evidence
Degree of Individuals Qualifications Providing the
Information : The source of information is
independent, the evidence will not be reliable unless the
individual providing it , is qualified to do so.
Degree of Objectivity : Objective evidence is more
reliable than evidence that requires considerable
judgment to determine whether it is correct.
Timeliness : The timeliness of audit evidence can refer
either to when it is accumulated or to the period covered
by the audit.
Characteristics of Evidence
Sufficiency :
The quantity of evidence obtained determines its
sufficiency. Sufficiency of evidence is measured
primarily by the sample size That the auditor selects.
Combined Effect :
The persuasiveness of evidence can be evaluated only
after considering the combination of competence and
sufficiency, including the effects of the factor
influencing competence and sufficiency .
Persuasiveness and Cost :
The persuasiveness and cost of all alternatives should be
considered before selecting the best type or types.
TYPES OF AUDIT EVIDENCE
the auditor can choose from seven broad categories of
evidence :
1 Physical examination
2. Confirmation
3. Documentation
4. Observation
5. Inquiries of the client
6. Re performance
7. Analytical procedures
TYPES OF AUDIT EVIDENCE
1- Physical Examination :
Physical examination is the inspection or count by the
auditor of a tangible asset.
2- Confirmation :
Confirmation describes the receipt of a written or oral
response from an independent third party verifying the
accuracy of information that was requested by the
auditor the request is made to the client, and the client
asks the independent third party to respond directly to
the auditor.
Sources of Confirmation
Information Source
Assets
Cash in bank Bank
Accounts receivable Customer
Notes receivable Maker
Owned inventory out of consignment
Consignee
Inventory held in public warehouses
Insurance company
liabilities

Accounts payable Creditor

Notes payable Lender
Advances from customers Customers
Mortgages payable Mortgagor
Bonds payable Bond holder
Sources of Confirmation
Owners equity

Shares outstanding Registrar and transfer agent

Other confirmation

Insurance coverage Insurance company

Bank, lender, and client’s legal
Contingent liabilities
council
Bond indenture agreement Bond holder
Collateral held by creditors creditor
Documentation

Documentation is the auditor's examination of the

client's documents and records to prove the information
that is or should he included in the financial statements.
Observation :
Observation is the use of senses to assess certain activities .
Inquiries of the Client :
Inquiries are the obtaining of written or oral information
from the client in response to questions from the auditor
Re performance
As the word Re performance involves rechecking
a sample of the computations and transfers of
information made by the client during the period under
audit .
Analytical Procedures
Analytical procedures use comparisons and relationships to
assess whether account balances or other data appear
reasonable.
Cost of Evidence Types
The two most expensive types of evidence are physical
examination and confirmation .
physical examination of inventory can result in
several auditors ; revealing to widely separated
geographical locations. Confirmation is costly because;
the auditor must follow careful procedures in the
confirmation preparation, mailing and receipt, and in
the follow-up of non responses and exceptions.
Understanding
the Client's Industry and Business
an auditor considers knowledge and experience about a client
company; obtained in prior years as a starting point for
planning .
- Assessment of the Entity's Ability to Continue as a
Going Concern :
The probability of financial failure must be considered by
the auditor in the assessment of audit-related risks .
-Indication of the Presence of Possible
Misstatements in the Financial Statements
Significant unexpected differences between the current
year's unedited financial data and other data .
The auditor typically compares the client's balances
and ratios with expected balances and ratios using
one or more of the following types of analytical
procedures:
• Compare client and industry data.
• Compare client data with similar prior-period data.
• Compare client data with client-determined expected
results.
• Compare client data with auditor-determined expected
results.
• Compare client data with expected results, using non
financial data
ESSENTIAL TERMS
Analytical procedures—use of comparisons and
relationships to assess whether account balances or
other data appear reasonable .
Audit procedure—detailed instruction for the
collection of a type of audit evidence
Audit program—list of audit procedures for an audit
area or an entire audit; the audit program always
includes audit procedures and may also include sample
sizes items to select, and timing of the tests
Budgets—written records of the client's expectations for
the period; a comparison of budgets with actual results
may indicate whether or not misstatements are likely .
ESSENTIAL TERMS
 Competence of evidence—the degree to which evidence can
be considered Deliverable or worthy of trust; evidence is competent
when it is obtained
( l) From a relevant source,
(2) From an independent provider,
(3) From a client with effective internal controls,
(4) From the auditor's direct knowledge,
( 5) From qualified providers such as law firms and banks,
( 6) From objective sources, and
( 7) In a timely manner
 Confirmation—the auditor's receipt of a written or oral response from
an independent; third party verifying the accuracy of information
requested.
 Documentation—the auditor's examination of the client's documents
and records to substantiate the information that is or should be inhere
in the financial statements
ESSENTIAL TERMS
 External document— document, such as a vendors in voice, that
has been used by outside party to the transaction being
documented, and that the client now has or can easily obtain.
 Internal document- documents that are prepared and used inside
the client's firm ,such as general journal, ledger, etc.
 Inquiry—the obtaining of written or oral information from the
client in response to specific questions during the audit
 Observation—the use of the senses to assess certain activities
Persuasiveness of evidence—the degree to which the auditor is
convinced that the evidence supports the audit opinion; the two
determinants of persuasiveness are the competence and sufficiency
of the evidence.
 Physical examinations—the auditor's inspection or count of a
tangible asset Reliability of evidence—sees competence of evidence
ESSENTIAL TERMS
Re-performance—the rechecking of a sample of the
computations and transfers of information made by the
client during the period under audit
Sufficiency of evidence—the quantity of evidence;
appropriate sample size
Unusual fluctuations—significant unexpected
differences indicated by analytical procedures between
the current year' s unsuited financial data and other data
used in comparisons
Vouching – the use of documentation to support
recorded transactions or amounts .