2. Categories of Evidence AU 326.27-28 Inspection of records or documents AU 326.29 Inspections of tangible assets AU 326.30 Observation AU 326.31-36 Inquiry AU 326.37 Confirmation AU 326.38 Recalculation AU 326.39 Reperformance AU 326.40-41 Analytical Procedures AU 326.42 Scanning
3. Inspection of Records or Documents Internal or external documents in paper form, electronic form, or other media forms Two issues: Reliability of records or documents Internal & external documents Relationship to specific assertions Occurrence and completeness assertions Direction of testing
4. Direction of Testing Vouching – tests occurrence Selecting item from journals then examining underlying source document Tracing – tests completeness Selecting source document and following it to the journals
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6. Questions Which primary assertion is satisfied when an auditor observes the client's physical count of inventory? What is an example of audit evidence with low reliability? Which audit evidence category makes up the bulk of the evidence gathered by the auditor?
7. Inquiry Consists of seeking information of knowledgeable persons throughout the entity or outside the entity Helps to identify the outside environment An inquiry alone does not provide sufficient audit evidence Can be very informal
8. Confirmation The process of obtaining information directly from a third party Must be written requests from the third party Helps provide reliable evidence of existing assets Example: an auditor can send a confirmation to a consignee to verify that a client’s inventory has been cosigned
9. Recalculation Checking the mathematical accuracy of documents or records May use electronic file forms Includes reconciling subsidiary ledgers and testing postings from the journal ledgers Since the auditor calculates this evidence it is viewed as reliable
10. Questions What are some key differences between inquiry and confirmation? Why is recalculation considered to be a highly reliable aspect of an audit? Why would the auditor do an inquiry if the information is not considered reliable?
11. Reperformance Definition in AU 326.39: “Reperformance is the auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control, either manually or through the use of CAATs*, …” Example:reperformingthe aging of accounts receivable Highly reliable audit procedure since the independent auditor creates the evidence * Computer –Assisted Audit Techniques
12. Analytical Procedures Definition in SAS No. 56: “For the purposes of generally accepted auditing standards, the term analytical procedures means evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.” Auditor compares special data with the financial data and attempts to gather evidence by examining the plausiblity of the results Examples: Comparing revenue and costs of materials of different financial years Comparing personnel costs and the number of employees of different financial years
13. Analytical Procedures Reliabilityof analytical procedures depends on: The availabilty andreliability ofthe data used The plausbility and predictability ofthe relationship The precision of the expectation and the rigor of the investigation One of the most important audit procedures Offers the possibility toretreive evidence without muchwork (efficiency)
14. Scanning Special analytical procedure (AU 326.41) Review of accounting data to find significant or unusual items (manually or through use of CAATs) Review: Accountbalances Transaction lists Subsidiary ledgers General ledger control accounts Adjusting entries Suspense accounts Etc. Scanning is unreliable; highly experiencedauditornecessary
15. Reliability of the Types of Evidence Hierarchy of Reliability (table 4-6)
16. Questions Why is reperformance especially helpful to gather evidence? Why are analytical procedures important for the advanced audit? Whyshould scanning as an audit procedure beused in combinationwith other audit procedures?
