Audit Evidence

“Coming together is a beginning;

keeping together is progress;
working together is success.”
Henry Ford

https://www.brainyquote.com/quotes/quotes/h/henryford121997.html

http://introtoauditing.blogspot.com/2013/06/audit-evidence.html

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Audit Evidence (AS 1105.02)
“Audit evidence is all the information, whether
obtained from audit procedures or other
sources, that is used by the auditor in arriving
at the conclusions on which the auditor's
opinion is based. Audit evidence consists of
both information that supports and
corroborates management's assertions
regarding the financial statements or internal
control over financial reporting and
information that contradicts such assertions.”
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 The Audit Risk Model

Audit Risk of Material Detection

= X
Risk Misstatement Risk

Risk assessment and

results of knowledge Focus of
acquisition substantive
testing

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EVIDENCE (AU-C 500)

Sufficient Evidence is
considered
persuasive
only if these
Appropriate determinants
•Relevant have been
•Reliable met.

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Elements of Designing Procedures

Nature- which procedures?

Timing- when?
Extent – how much?

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Types of Procedures Used to
Gather Evidence AS 1105.15
 Inspection:
◦ “Inspection involves examining records or
documents, whether internal or external, in paper
form, electronic form, or other media, or
physically examining an asset.
 Inspection of records and documents provides audit
evidence of varying degrees of reliability, depending on
their nature and source and, in the case of internal
records and documents, on the effectiveness of the
controls over their production. An example of
inspection used as a test of controls is inspection of
records for evidence of authorization.”

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Observation – AS 1105.16
 “Observation consists of looking at a process or
procedure being performed by others, e.g., the
auditor's observation of inventory counting by
the company's personnel or the performance of
control activities. Observation can provide audit
evidence about the performance of a process or
procedure, but the evidence is limited to the
point in time at which the observation takes place
and also is limited by the fact that the act of being
observed may affect how the process or
procedure is performed.”

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Inquiry – AS 1105.17
 “Inquiry consists of seeking information
from knowledgeable persons in financial
or nonfinancial roles within the company
or outside the company. Inquiry may be
performed throughout the audit in
addition to other audit procedures.
Inquiries may range from formal written
inquiries to informal oral inquiries.
Evaluating responses to inquiries is an
integral part of the inquiry process.”

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Confirmation, Recalculation,
Reperformance – AS 1105.18,.19,.20
 “Confirmation
◦ A confirmation response represents a particular form
of audit evidence obtained by the auditor from a third
party in accordance with PCAOB standards.10
 Recalculation
◦ Recalculation consists of checking the mathematical
accuracy of documents or records. Recalculation may
be performed manually or electronically.
 Reperformance
◦ Reperformance involves the independent execution
of procedures or controls that were originally
performed by company personnel.”

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Analytical Procedures-AS 1105.21
Analytical Procedures
 “Analytical procedures consist of
evaluations of financial information made
by a study of plausible relationships
among both financial and nonfinancial
data. Analytical procedures also
encompass the investigation of significant
differences from expected amounts.”

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Test of Controls
 Test of Controls:
◦ “Designed to evaluate the operating effectiveness
of controls in preventing, or detecting and
correcting, material misstatements at the
assertion level. Designing tests of controls to
obtain relevant audit evidence includes identifying
conditions (characteristics or attributes) that
indicate performance of a control and identifying
deviation conditions that indicate departures
from adequate performance.” AU-C 500.30
◦ Inspection, inquiry, reperformance, observation

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Substantive procedures
 “…are designed to detect material
misstatements at the assertion level. They
comprise tests of details and substantive
analytical procedures. Designing substantive
procedures includes identifying conditions
relevant to the purpose of the test that
constitute a misstatement in the relevant
assertion.” AU-C 500.31
 Test of Details – inspection of documents
and assets, confirmations, inquiry,
recalculations,
 Substantive Analytical Procedures
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Information Produced by Entity
 Accurate and complete

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Information Produced by
Management Specialist
 Competence, capabilities and objectivity

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 Hierarchy of Audit Evidence
(AU 500; AS15)
Best Evidence
•Inspection of tangible assets
•Confirmations
•Recalculations and reperformance
•Inspection of external records or documents

Good Evidence
•Inspection of internal records or documents (good internal control)
•Analytical procedures (good internal control)
•Observation
•Client inquiry (formal questioning of client personnel about audit issues following a
rigorous plan to detect inconsistencies in known facts)

Weak Evidence
•Inspection of internal records or documents (weak internal control)
•Analytical procedures (weak internal control)
•Client inquiry (informal questioning of client personnel about audit issues)

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… of Different Quality
 Relevance to the assertion.
 Independence of the provider.
 Qualifications of the provider.
 Extent of auditor’s direct knowledge.
 Level of objectivity.
 Reliability and extent of internal processing.

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 Management Assertions
(AU-C 315.A114;AS15)
Transactions Accounts Presentation and
Disclosure
 Occurrence  Existence  Occurrence
 Completeness  Rights &  Rights and obligations
 Accuracy obligations  Completeness
 Cutoff  Completeness  Classification &
 Classification  Valuation & understandability
allocation  Accuracy & valuation

Red font is for PCAOB

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Class Activity
 Tie the procedure for gathering evidence to
the assertions. Give an example(s) of how
the procedure would be relevant to the
assertion.
◦ Inspection of documents
◦ Inspection of assets
◦ Observation
◦ Confirmation
◦ Recalculation
◦ Reperformance
◦ Inquiry
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