Audit Evidence 1

Chapter 5
Audit Evidence
PowerPoint to accompany:
Learning Objectives
1. Contrast audit evidence with evidence used by other professions.
2. Identify the four audit evidence decisions that are needed to create an
audit program.
3. Specify the characteristics that determine the persuasiveness of
evidence.
4. Identify and apply the eight types of evidence used in auditing.
5. State the purposes of analytical procedures and the timing of each
purpose.
6. Select the most appropriate analytical procedure from among the five
major types.
7. Explain the benefits of using statistical techniques and computer
software for analytical procedures.
2 Copyright 2013 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442539365/Arens/Auditing, Assurance Service and Ethics in Australia /9e
Learning Objective 1
Contrast audit evidence with evidence used by

other professions
Auditors are required by Auditing Standards to accumulate
sufficient appropriate evidence on which to base their
opinions on the financial statements
ASA200
Nature of Evidence
The use of evidence is not unique to auditors: it is also

used extensively by scientists, solicitors and historians.
Identify the four audit evidence decisions that are

needed to create an audit program
Audit Evidence Decisions
Audit procedures / audit program:
Detailed instruction for the collection of audit evidence.
Auditors must consider when designing the audit program, the

nature, timing and extent of audit evidece
Items to select:
Which items in the population to test.
Sample size:
Is likely to vary from audit to audit.
Timing:
Can vary from early in the accounting period to long after it has ended.
Audit Evidence Decisions (contd)
Audit program:
List of audit procedures for an audit area or an entire audit
Usually includes sample sizes, items to select and timing of
the tests
Specify the characteristics that determine the

persuasiveness of evidence
Persuasiveness of Evidence
ASA 500 requires the auditor to obtain sufficient appropriate
evidence to support the opinion issued.
Persuasiveness of evidence is the degree to which the auditor is

convinced that the evidence supports the audit opinion.
Two determinants of the persuasiveness of evidence:

1. Competence
2. Sufficiency
1. Competence (Reliability)
The degree to which evidence can be considered believable or worthy of
trust.
Relevance:
Relevant to the audit objective.
Independence of provider:
Outside evidence is more reliable than inside evidence.
Effectiveness of clients internal controls:
Evidence is more reliable when controls are effective.
Competence (Reliability) (Contd)
Auditors direct knowledge:
o Evidence obtained directly by the auditor is more competent
than indirect evidence.
Qualifications of individuals providing the information
Degree of objectivity:
o Objective evidence is more reliable than evidence requiring
considerable judgement.
Timeliness:
o Can refer to either when it is accumulated or the period
covered by the audit.
2. Sufficiency
Sufficiency of evidence is measured primarily by:
The sample size the auditor selects
Factors determining the appropriate sample size:
Auditors expectation of misstatements
Effectiveness of clients internal controls
Individual items tested also affect the sufficiency of evidence:
e.g. items with large dollar values and items with a high likelihood of
misstatement
Persuasiveness and Cost
High cost is not a reason to avoid collecting evidence the auditor

must figure out a way
Identify and apply the eight types of evidence

used in auditing
Types of Audit Evidence
Physical examination / inspection of tangible assets
Confirmation
Inspection of documentation
Observation
Inquiries of the client
Recalculation
Reperformance vouching and tracing
Analytical procedures.
Evidence Relationships
Physical Examination
Inspection or count by the auditor of a tangible asset:
Usually associated with inventory and cash.
An objective means of:

Ascertaining the quantity and description of the asset
Verifying the assets condition or quality.
Not sufficient evidence to verify:

Ownership
Valuation.
Confirmation
The receipt of a written or oral response from an independent third
party verifying the accuracy of information requested by the auditor.
Costly to obtain as auditors typically obtain written responses.
Two common types of confirmations:

Positive: Recipient is asked to return the confirmation in all
circumstances.
Negative: Recipient is requested to respond only when the
information is incorrect.
Information Confirmed
Technology Impact on Evidence
Technology may weaken a number of traditional forms of audit
Evidence:
Businesses require scanners, printers, e-mail etc to perform
routine transactions
Complex computer information systems
Complex electronic data interchanges.
...have altered not only the actual form of evidential matter

required to be obtained by auditors, but also the reliability of
this evidence
Documentation
Auditors examination of the clients documents and records to
substantiate:
The information that is or should be included in the financial
statements.
An internal document:
Prepared and used within the clients organisation
Retained without ever going to an outside party e.g. duplicate
sales invoice.
Documentation (contd)
An external document:
May originate outside the client and end up in the clients
hands e.g. vendors invoice
May go to an outsider and finally be returned to the client e.g.
cancelled cheques.
Vouching
When auditors use documentation to support recorded
transactions or amounts.
Observation
Use of the senses to assess certain activities.
Auditor may tour the plant to:

Obtain a general impression of the clients facilities
Observe whether equipment is obsolete
Watch individuals performing accounting tasks.
Observation is rarely sufficient by itself.
Inquiries of the Client
Inquiry: obtaining of written or oral information from the client in
response to questions from the auditor.
Usually cannot be regarded as conclusive given:

it is not from an independent source
it may be biased in the clients favour.
Normally necessary to obtain further corroborating evidence

through other procedures.
Recalculation
Recalculation involves rechecking a sample of calculations made by
the client by:
testing the clients arithmetical accuracy including:
extending sales invoices and inventory
adding journals and subsidiary records
checking the calculation of depreciation expense
checking prepaid expenses.
Most auditor recalculations are performed by computer-assisted

audit software.
Reperformance
Reperformance is the auditors independent tests of client
accounting procedures or controls that were originally done as part
of the entitys accounting and internal control system.
Whereas recalculation involves rechecking a calculation,

reperformance involves checking other procedures.
Analytical Procedures
Use of comparisons and relationships:
To assess whether account balances or other data appear
plausible
May be the only evidence needed for certain audit objectives or
small account balances
Are required during the planning and completion phases on all
audits.
Evidence Appropriateness
Audit Procedure Terms
Audit Procedure Terms (contd)
State the purposes of analytical procedures and

the timing of each purpose
Evaluations of financial relationships
Analysis of plausible relationships
Among financial and non-financial data
Understanding the clients industry and business
Assessment of the entitys ability to continue as a going concern.
Analytical Procedures (contd)
Identification of possible misstatements.
Reduction of detailed audit tests.
Timing:
o Planning phase
o Testing phase
o Completion phase.
Select the most appropriate analytical procedure

from among the five major types
Compare client data with:
Industry data
Similar prior-period data
Client-determined expected results
Auditor-determined expected results
Expected results, using non-financial data.
Explain the benefits of using statistical

techniques and computer software for analytical
procedures
Statistical Techniques
Several statistical techniques that aid in interpreting results can be
applied to analytical procedures.
Advantages are:
The ability to make more sophisticated calculations
Their objectivity.
Most common statistical technique is regression analysis.
Auditors Computer Software
Auditors can input the clients general ledger into the auditors
computer system
Software reduces cost of analytical calculations, and assists data
interpretation
Ease of updating calculations when adjusting entries to the
clients statements are made.
Note this is not covered in the textbook
Big data and auditors

Companies have an ever-increasing volume of data
How can auditors use that to their advantage?
Increased sample sizes testing entire populations of transactions
Intelligent analytics to flag areas of fraud risk
Hurdles to using big data
Skill set of auditors training and expertise
Reliance on the algorithms and programming in analytic programs
Lack of auditing standards

Audit Evidence 1

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Chapter 5

Contrast audit evidence with evidence used by

The use of evidence is not unique to auditors: it is also

Identify the four audit evidence decisions that are

Auditors must consider when designing the audit program, the

Specify the characteristics that determine the

Persuasiveness of evidence is the degree to which the auditor is

Two determinants of the persuasiveness of evidence:

The sample size the auditor selects

Factors determining the appropriate sample size:

Auditors expectation of misstatements

Effectiveness of clients internal controls

Individual items tested also affect the sufficiency of evidence:

High cost is not a reason to avoid collecting evidence the auditor

Identify and apply the eight types of evidence

Inquiries of the client

Reperformance vouching and tracing

An objective means of:

Not sufficient evidence to verify:

Two common types of confirmations:

...have altered not only the actual form of evidential matter

Auditor may tour the plant to:

Observation is rarely sufficient by itself.

Usually cannot be regarded as conclusive given:

Normally necessary to obtain further corroborating evidence

Most auditor recalculations are performed by computer-assisted

Whereas recalculation involves rechecking a calculation,

State the purposes of analytical procedures and

Reduction of detailed audit tests.

Select the most appropriate analytical procedure

Explain the benefits of using statistical

Most common statistical technique is regression analysis.

Big data and auditors

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