CHAPTER FOUR

AUDIT
EVIDENCE
 OBJECTIVE 1:

CONTRAST AUDIT EVIDENCE WITH EVIDENCE

USED BY OTHER PROFESSIONS.
 NATURE OF EVIDENCE
 Evidence was defined as any information used by the auditor to determine
whether the information being audited is stated in accordance with the
established criteria.

 The information varies greatly in the extent to which it persuades the

auditor whether financial statements are fairly stated.

 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.
 OBJECTIVE 2

IDENTIFY THE FOUR AUDIT EVIDENCE DECISIONS

THAT ARE NEEDED TO CREATE AN AUDIT
PROGRAM.
WHAT FOUR THINGS SHOULD BE INCLUDED IN AN
AUDIT PROGRAM?

➢ The four things to be included are:

1. audit procedures.

2. sample size.

3. timing of the tests .

4. items to select.
WHAT FOUR THINGS SHOULD BE INCLUDED IN AN
AUDIT PROGRAM?
 The auditor must make four major decisions regarding what evidence to
gather and how much to accumulate:

1. Which audit procedures to use?

 An audit procedure is the detailed instruction that explains the audit evidence
to be obtained during the audit. For example, the audit procedure for the
verification of cash expenditure is to Examine the cash expenditure journal in
the accounting system and compare the payee, name, amount, and date with
online information provided by the bank about checks and electronic transfers
processed for the account.
 AUDIT EVIDENCE DECISIONS (CONT.)
2. What sample size to select for a given procedure?

Once an audit procedure is selected, auditors can vary the sample

size from one to all the items in the population being tested. In an
audit procedure to verify cash expenditure , suppose 6,600 checks
and electronic transfers are recorded in the cash expenditure
journal. The auditor might select a sample size of 50 expenditure for
comparison with the cash expenditure journal.
 AUDIT EVIDENCE DECISIONS (CONT.)
3. Which items to select from the population?
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 expenditure from a
population of 6,600 for comparison with the cash expenditure
journal, several different methods can be used to select the
specific items to be examined.
 AUDIT EVIDENCE DECISIONS (CONT.)
The auditor can:

(1) select a week and examine the first 50 transactions.

(2) select the 50 expenditure with the largest amounts.

(3) select the items randomly.

(4) select those transactions that the auditor thinks are most likely to be in
error.

(5) Or, a combination of these methods can be used.

 AUDIT EVIDENCE DECISIONS (CONT.)
4. When to perform the procedures?
The timing decision is affected by when the client needs the audit to be completed. In the audit of
financial statements, the client normally wants the audit completed one to three months after
year-end.

The SEC currently requires that all public companies file audited financial statements with the SEC
within 60 to 90 days of the company’s fiscal year-end, depending on the company’s size.

However, 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.
 AUDIT EVIDENCE DECISIONS (CONT.)
The list of audit procedures for an audit area or an entire audit is called an audit
program. The audit program always includes a list of the audit procedures, and it usually
includes sample sizes, items to select, and the timing of the tests.

Audit engagement software assists the auditor in selecting the procedures to be

performed and other evidence decisions, based on identified risks and other audit
planning decisions.

Normally, there is an audit program, including several audit procedures, for each
component of the audit. Therefore, there will be an audit program for accounts
receivable, one for sales, and so on.
 OBJECTIVE 3

SPECIFY THE CHARACTERISTICS THAT DETERMINE

THE PERSUASIVENESS OF EVIDENCE.
 PERSUASIVENESS OF EVIDENCE
Audit standards require that the auditor accumulate sufficient
appropriate evidence to support the opinion issued.

The two determinants of the persuasiveness of evidence are

appropriateness and sufficiency.

1. Appropriateness of evidence is a measure of the quality of evidence,

meaning its relevance and reliability in meeting audit objectives for classes
of transactions, account balances, and related disclosures.
 PERSUASIVENESS OF EVIDENCE

➢ Relevance of evidence means that the evidence must

pertain to or be relevant to the audit objective.

➢ Reliability of evidence refers to the degree to which

evidence is believable or worthy of trust. Reliability
depends on the following characteristics:
 RELIABILITY DEPENDS ON THE FOLLOWING
CHARACTERISTICS:
1. Independence of provider.
2. Effectiveness of client’s internal controls.
3. Auditor’s direct knowledge.
4. Qualifications of individuals providing the
information.
5. Degree of objectivity.
6. Timeliness.
 RELIABILITY DEPENDS ON THE FOLLOWING
CHARACTERISTICS:
1. Independence of provider:
Evidence obtained from a source outside the entity is more reliable than that
obtained from within. Communications from banks, attorneys, or customers is
generally considered more reliable than answers obtained from inquiries of the
client.

2. Effectiveness of client’s internal controls:

When a client’s internal controls are effective, evidence obtained is more reliable
than when they are not effective.
 RELIABILITY DEPENDS ON THE FOLLOWING
CHARACTERISTICS:
3. Auditor’s direct knowledge:

Evidence obtained directly by the auditor through physical examination, observation,

recalculation, and inspection is more reliable than information obtained indirectly.

4. Qualifications of individuals providing the information:

Although the source of information is independent, the evidence will not be reliable unless
the individual providing it is qualified to do so. Also, evidence obtained directly by the
auditor may not be reliable if the auditor lacks the qualifications to evaluate the
evidence.
 RELIABILITY DEPENDS ON THE FOLLOWING
CHARACTERISTICS:

5. Degree of objectivity
Objective evidence is more reliable than evidence that requires
considerable judgment to determine whether it is correct. Examples of
objective evidence include confirmation of accounts receivable and bank
balances and the physical count of securities and cash. Examples of
subjective evidence include a letter written by a client’s attorney
discussing the likely outcome of outstanding lawsuits against the client.
 RELIABILITY DEPENDS ON THE FOLLOWING
CHARACTERISTICS:

6. Timeliness
Evidence is usually more reliable for balance sheet accounts when it is
obtained as close to the balance sheet date as possible. For income
statement accounts, evidence is more reliable if there is a sample from
the entire period under audit, such as a random sample of sales
transactions for the entire year, rather than from only a part of the
period such as a sample limited to only the first 6 months.
 PERSUASIVENESS OF EVIDENCE
2- Sufficiency of evidence refers to the quantity of evidence obtained.

The sample size that is considered sufficient is affected by two factors:

A. The auditor’s expectation of misstatements.

B. The effectiveness of the client’s internal controls.

In making decisions about audit evidence, both persuasiveness and cost

must be considered. The auditor’s goal is to obtain a sufficient amount of
appropriate evidence at the lowest possible total cost
 OBJECTIVE 4

IDENTIFY AND APPLY THE EIGHT TYPES OF

EVIDENCE USED IN AUDITING.
 TYPES OF AUDIT EVIDENCE
1. Physical examination.
2. Confirmation.
3. Inspection.
4. Analytical procedures.
5. Inquiries of the client.
6. Recalculation.
7. Reperformance.
8. Observation.
 1. PHYSICAL EXAMINATION :

The inspection or count of a tangible asset by the

auditor.
This type of evidence is most often associated with inventory
and cash, but it is also applicable to the verification of
securities, notes receivable, and tangible fixed assets.
 1. PHYSICAL EXAMINATION (CONT.)
Physical examination is a direct means of verifying that an asset actually exists
(existence objective) .

Physical examination is considered one of the most reliable and useful types of
audit evidence.

However, physical examination is not sufficient evidence to verify that existing

assets are owned by the client (rights and obligations’ objective), and proper
valuation for financial statement purposes usually cannot be determined by
physical examination (accuracy and realizable value objectives).
 2. CONFIRMATION :

The receipt of a direct written response from a third party

verifying the accuracy of information that was requested
by the auditor.
The response may be in paper form or electronic or other
medium, such as the auditor’s direct access to information
held by the third party.
 2. CONFIRMATION (CONT.)

Because confirmations come from third-party sources instead

of the client, they are a highly regarded and often used type of
evidence. However, confirmations are relatively costly to obtain
and may cause some inconvenience to those asked to supply
them. Therefore, they are not used in every instance in which
they are applicable.
 2. CONFIRMATION (CONT.)
There are two common types of confirmation requests:

a. Positiveconfirmations: Ask the recipient to respond in all

circumstances.

A positive confirmation may request the recipient to provide the

information (a blank form), or the confirmation may include the
information and request the respondent to indicate whether he or she
agrees with the information. This latter type is often used because the
response rate is higher than for the blank form.
 2. CONFIRMATION (CONT.)

b. Negative confirmations: The recipient is asked to respond

only when the information is incorrect.

Because confirmations are considered significant evidence only

when returned, negative confirmations are less competent than
positive confirmations.
 2. CONFIRMATION (CONT.)
Limitations of confirmation :
Confirmation as a type of evidence could have some limitations include the following :
❑ Confirmation from debtors may provide audit evidence for existence and right and
obligation assertions, but not for valuation, The external auditor should be alert of the
possibility that the customer may sign the confirmation without verification form the
books.
❑ Confirmation from creditors may not be effective verify completeness assertion (The
completeness assertion is an auditing concept that ensures all transactions and events
that should be recorded have been recorded. )
❑ Confirmation request should be directed to appropriate individual .
 2. CONFIRMATION (CONT.)
❑ Certain parties may not provide objective or unbiased response to a
confirmation request.
❑ The external auditor should also consider the respondent’s competence,
knowledge, ability and desire to respond to confirmation request.
❑ The external auditor should be alert whether there are any indications that
the confirmation received may not be reliable. The reliability of response
should be considered and external audit procedures should be performed
to dispel any concern. The external auditor may choose to verify the source
and contents of a response in a telephone call to the purported sender.