Chapter-Five Audit Evidence 1. Audit evidence: It is the information obtained by the auditor in arriving at conclusions on which their reports are based. During financial statement audits, the auditors gather and evaluate evidence to form an opinion about whether the financial statements follows the appropriate criteria, usually, generally accepted accounting principles The auditors must gather sufficient competent evidence to provide an adequate basis for their opinion on the financial statements 1
Cont’d Sufficient competent evidential matter is to be obtained through inspection, observation, inquires, and confirmation to afford a reasonable basis for an opinion regarding the financial statements under audit. The nature of assertions for which the auditor collects evidences for an independent financial audit are the following: A. Existence: The inclusion of an item of asset or liability in the balance sheet implies an assertion by the preparer that the asset or the liability exists at the date of the balance sheet. B. Rights and obligations: it is asserted that the assets shown in the balance sheet are the rights of the organization and liabilities are the obligations on the date of the balance sheet 2
Cont’d C.Occurrence: there is an assertion that the transactions reflected in the financial statements are occurred during the relevant accounting period and that they pertain to the organization. D.Completeness: this assertion implies that there are no unrecorded assets, liabilities or transactions. E.Valuation: this assertion implies that the assets and liabilities are included in the balance sheet are at an appropriate value i.e. as per the normally accepted bases of valuation. 3
Cont’d F. Measurement: This assertion implies that transactions have been recorded at proper amounts and that revenues and expenses have been allocated to the proper accounting periods G. Presentation and disclosure : This assertion implies that the disclosure, classification and description of various item in the balance sheet and in the income statements are in accordance with the generally accepted accounting standards and relevant statutory requirements 4
Cont’d Audit Evidence Decisions Major decision of an auditor involves determining the appropriate type and amount of evidence. In this judgment the cost factor should be considered. The auditors' decisions on evidence accumulation can be broken down in to four sub decisions: A. Which audit procedure to use (Audit Procedure?) B. Which sample size to select for a given procedure (Sample Size?) C. Which items to select from population (Items?) D. When to perform the procedures (Timing) 5
Cont’d A. Audit procedures
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