Audit evidence, procedures, Sources of evidence.pptx

Audit evidence–procedures, Sources of evidence- Reliability - Methods of obtaining audit evidence – Documentation, Direct confirmation Re–computation, Analytical review techniques, Representation by management - Audit Sampling–Types of sampling, Test checking, Techniques of test checks.

1. UNIT III Audit Evidence

2. Audit evidence–procedures, Sources of evidence- Reliability - Methods of obtaining audit evidence – Documentation, Direct confirmation Re–computation, Analytical review techniques, Representation by management - Audit Sampling–Types of sampling, Test checking, Techniques of test checks.

3. Audit Evidence – Procedures Audit procedures are the steps or techniques used by auditors to gather sufficient and appropriate audit evidence. These are designed based on the audit objectives and nature of the client's business.

4. Types of Audit Procedures: 1. Risk Assessment Procedures: Performed to understand the entity and its environment Help identify and assess risks of material misstatement Examples: Inquiries with management Analytical procedures (trend analysis) Observation of processes Inspection of documents

5. 2. Further Audit Procedures: These are performed in response to identified risks. A. Tests of Controls: Evaluate the design and operating effectiveness of internal controls Examples: Checking approval signatures Observing segregation of duties

6. B. Substantive Procedures: Used to detect material misstatements in the financial statements. Subdivided into: Tests of Details – In-depth examination of transactions, balances, and disclosures ➤ Example: Verifying invoice against purchase order Substantive Analytical Procedures – Comparing financial and non-financial data to identify unusual trends ➤ Example: Comparing gross profit % over several years

7. Sources of Audit Evidence Audit evidence can be gathered from various sources . The quality and reliability of evidence depend on where it comes from . A reliable source leads to stronger audit conclusions . 1. Internal Sources: Evidence generated within the client organization . ✅ Examples: Books of accounts and ledgers,Sales invoices, purchase orders,Payroll records, Management reports Minutes of meetings ⚠️ Reliability: Less reliable , especially if internal controls are weak May be biased or manipulated

8. 2. External Sources: Evidence obtained from outside the client organization . ✅ Examples: Bank confirmations Legal letters from client’s lawyer Supplier or debtor statements Correspondence with tax authorities Third-party valuations or audit reports ✅ Reliability: Highly reliable , especially when obtained directly by the auditor

9. 3. Auditor’s Own Observations and Work : Evidence created or verified through the auditor's direct actions . ✅ Examples: Physical inspection of assets (e.g., inventory) Re-computation of figures like depreciation Re-performance of procedures Observation of control activities (e.g., cash counting) ✅ Reliability: Considered highly reliable , as the auditor personally verifies the evidence

10. Methods of Obtaining Audit Evidence Auditors use various methods to collect sufficient and appropriate evidence to support their audit opinion. Each method is chosen based on the nature of the item being audited.

11. Method Description Example 1. Inspection Examining records, documents, or physical assets Inspecting invoices, contracts, stock register 2. Observation Watching a process or procedure being performed Observing physical inventory count 3. Inquiry Seeking information from knowledgeable persons (written or oral) Asking management about doubtful debts policy 4. Confirmation Getting a direct response from third parties to confirm information Confirming bank balances, accounts receivable 5. Recalculation Checking the mathematical accuracy of documents or records Recalculating interest, depreciation, provisions 6. Re-performance Auditor independently executes procedures or controls Re-performing bank reconciliation 7. Analytical Procedures Evaluating financial info by comparing relationships/trends Comparing this year’s sales to last year’s sales