CHAPTER 7 Nature of Evidence The use of evidence is not unique to auditors auditors Evidence is also used by scientists, lawyers, and historians, and auditors all use evidence to help them draw conclusions
Audit Evidence Decisions 1. Which audit procedures to use - An audit procedure is the detailed instruction that e!plains the audit evidence to be obtained durin" the audit 2. What sample size to select for a given procedure - #nce an audit procedure is selected, auditors can vary the sample si$e from one to all the items in the population bein" tested 3. Which items to select from the population - After determinin" the sample si$e for an audit procedure, the auditor must decide which items in the population to test 4. When to perform the procedures - An audit of %nancial statements usually covers a period such as a year &ormally an audit is not completed until several wee's or months after the end of the period Audit Pro"ram (t includes a list of the audit procedures the auditor considers necessary )ample si$es (tems to select Timin" of the tests *ost auditors use computers to facilitate the preparation of audit pro"r pro"rams ams
Six Characteristics of Reliable Evidence Independence of provider + Evidence obtained from a source outside the entity is more reliable than that obtained from within
Eectiveness of client’s internal controls- hen a client-s internal controls are e.ective, evidence obtained is more reliable than when they are wea' Auditor’s direct knowlede- Evidence obtained directly by the auditor throu"h physical e!amination, observation, recalculation, and inspection is more reliable than information obtained indirectly !uali"cation of individuals providin the infor#ation- Althou"h the source of information is independent, the evidence will not be reliable unless the individual providin" it is quali%ed to do so $eree of ob%ectivit&- #b/ective evidence is more reliable than evidence that requires considerable /ud"ment to determine whether it is correct 'i#eliness- The timeliness of audit evidence can refer either to when it is accumulated or to the period covered by the audit
'&pes of evidence( )h&sical exa#ination + is the inspection or count by the auditor of a tangible asset This type of evidence is most often associated with inventory and cash, but it is also applicable to the veri%cation of securities, notes receivable, and tan"ible %!ed assets Con"r#ation+ describes the receipt of a direct written response from a third party verifyin" the accuracy of information that was requested by the auditor $ocu#entation+$ocu#entation is the auditor-s inspection of the client’s documents and records to substantiate the information that is, or should be, included in the %nancial statements Anal&tical procedures- Anal&tical procedures use comparisons and relationships to assess whether account balances or other data appear reasonable compared to the auditor-s e!pectations In*uiries of the client- In*uir& is the obtainin" of written or oral information from the client in response to questions from the auditor Recalculation- Recalculation involves rechec'in" a sample of calculations made by the client Reperfor#ance- Reperfor#ance is the auditor-s independent tests of client accountin" procedures or controls that were ori"inally done as part of the entity-s accountin" and internal control system +bservation- +bservation is the use of the senses to assess client activities Throu"hout the en"a"ement with a client, auditors have many opportunities to use their senses0si"ht, hearin", touch, and smell0to evaluate a wide ran"e of items