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other more reliable types of evidence such as confirmation with third parties,
physical examination, and documentation are also used extensively. A legal case
also differs from an audit because of the nature of the conclusions made. In a
legal case, a judge or jury decides the guilt or innocence of the defendant. In an
audit, the auditor issues one of several audit opinions after evaluating the evidence.
are: The four major audit evidence decisions that must be made on every audit
4. Which audit procedures to use.
What sample size to select for a given procedure.
Which items to select from the population.
When to perform the procedure. 7-3
An audit procedure is the detailed instruction for the collection of a type of
audit evidence that is to be obtained. Because audit procedures are the instructions
to be followed in accumulating evidence, they must be worded carefully to make
sure the instructions are clear.
An audit program for accounts receivable is a list of audit procedures that
will be used to audit accounts receivable for a given client. The audit procedures,
sample size, items to select, and timing should be included in the audit program. 7-5 7-5
The auditor must obtain sufficient appropriate evidence by performing audit
procedures to afford a reasonable basis for an opinion regarding the financial
statements under audit. There are three major phrases of the standard.
PHRASE MEANING OF PHRASE Obtain sufficient appropriate evidence The auditor must obtain evidence that is
reliable and there must be a reasonable
quantity of that evidence. By performing audit procedures The auditor performs audit procedures to
meet audit objectives using the eight
types of evidence. To afford a reasonable basis for an
opinion regarding the financial statements The auditor cannot expect to be
completely certain that the financial
statements are fairly presented but there
must be persuasive evidence. The
collection of evidence gathered by the
auditor provides the basis for the auditor's
There are two primary reasons why the auditor can only be persuaded
with a reasonable level of assurance, rather than be convinced that the financial
statements are correct:
1. The cost of accumulating evidence. It would be extremely costly for the
auditor to gather enough evidence to be completely convinced.
2. Evidence is normally not sufficiently reliable to enable the auditor to be
completely convinced. For example, confirmations from customers
may come back with erroneous information, which is the fault of the
customer rather than the client.
The two determinants of the persuasiveness of evidence are appropriateness
and sufficiency. Appropriateness refers to the relevance and reliability of
evidence, or the degree to which evidence can be considered believable or
worthy of trust. Appropriateness relates to the audit procedures selected,
including the timing of when those procedures are performed. Sufficiency refers
to the quantity of evidence and it is related to sample size and items to select. 7-6 7.8 Following are six characteristics that determine reliability and an example
DETERMINING RELIABILITY EXAMPLE OF
RELIABLE EVIDENCE Independence of provider Confirmation of a bank balance Effectiveness of client's internal controls Use of duplicate sales invoices for a large
well-run company Auditor's direct knowledge Physical examination of inventory by the
auditor Qualifications of provider Letter from an attorney dealing with the
client's affairs Degree of objectivity Count of cash on hand by auditor Timeliness Observe inventory on the last day of the
fiscal year 7-9
TYPES OF AUDIT EVIDENCE EXAMPLES 1. Physical examination 2. Confirmation 3. Documentation 4. Analytical procedures 5. Inquiries of the client Count petty cash on hand
Examine fixed asset additions Confirm accounts receivable balances of a
sample of client customers Confirm client’s cash balance with bank
Examine cancelled checks returned with cutoff
bank statement Examine vendors’ invoices supporting a
sample of cash disbursement transactions
throughout the year
Evaluate reasonableness of receivables by
calculating and comparing ratios Compare expenses as a percentage of net
sales with prior year’s percentages
Inquire of management whether there is
obsolete inventory Inquire of management regarding the
collectibility of large accounts receivable
balances 7-7 7-9 (continued)
TYPES OF AUDIT EVIDENCE EXAMPLES 6. Recalculation Recompute invoice total by multiplying item
price times quantity sold Foot the sales journal for a one-month period
and compare all totals to the general ledger 7. Reperformance 8. Observation Agree sales invoice price to approved price list
Match quantity on purchase invoice to
receiving report Observe client employees in the process of
counting inventory Observe whether employees are restricted
from access to the check signing machine 7-10 The four characteristics of the definition of a confirmation are:
Written or oral response
From independent third party
Requested by the auditor A confirmation is prepared specifically for the auditor and comes from an
external source. External documentation is in the hands of the client at the time
of the audit and was prepared for...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.
- Fall '13