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For a quick understanding, I would like to present Four Types of important Audit Evidence as a capsule mode:
I. Physical examination: Inspection or count by the auditor of a tangible asset. It’s Different from examining documentation is that the asset has inherent value.
II. Confirmations: The receipt of a written or oral response from an independent third party.
III. Documentation:
1. Types of Documents:
(A) Internal Documents: Prepared and used within client company. And ensure that it does not go outside the client.
(B) External Documents: Document has been in hands of an outside party to the transaction and more reliable than internal documents.
2. Document Vouching:
(A) Examination of documents that support a recorded transaction or amount.
(B) The direction of testing must be from the recorded item to the supporting document.
3. Document Tracing:
(A) The primary test for unrecorded items and therefore tests the completeness assertion.
(B) The direction of testing must be from the supporting document to the recorded item.
IV. Observation
(A) Auditor witnesses the physical activities of the client.
(B) Differs from physical examination because physical examination counts assets, while observation focuses on client activities.
The auditor may choose from seven different types of evidence:
1. Physical examination--of a tangible asset such as inventory, cash, or fixed assets. Your text points out that some items, such as checks, are assets only during that period when they have inherent value; prior to execution and after cashing, checks are classified as documents. Physical examination is a way to verify that an asset exists, or to verify its condition, but not to determine whether the client owns the asset.
2. Confirmation--is the receipt of a written or oral response from and independent third party verifying information requested by the auditor. Because of the independence of the third party, confirmations are a highly desirable, though costly, type of evidence. SAS 67 (AU 330) describes two types of confirmations. A positive confirmation asks the respondent to provide an answer in all circumstances, while a negative confirmation asks for a response only if the information is incorrect. As you might predict, negative confirmations are not as competent as positive confirmations. Note that SAS 67 requires confirmation of a sample of accounts receivable due to the materiality of receivables for most companies. Some typical types of information that auditors confirm are listed in Table 7-3. Note the proviso that confirmations must be under the control of the auditor for maximum reliability of the evidence.
3. Documentation--consists of the client's business documents used to support accounting events. A strength of documentation is that it is prevalent and available at a low cost. Documents can be internal or externally generated. Internal documents provide less reliable evidence than external ones, particularly if the client's internal control is suspect. Documents that are external and have been prepared by qualified individuals such as attorneys or insurance brokers provide additional reliability. The use of documentation in support of a client's transactions is called vouching. It is important to note that electronic records are considered valid documents, per SAS 80.
4. Analytical procedures--are comparisons of account balances and relationships as a check on reasonableness. Analytical procedures are required during the planning and completion phases of all audits and may be used for the following purposes: 1) to better understand the client's industry and business; 2) assess the client's ability to continue as a going concern; 3) to indicate the possibility of misstatements ("unusual fluctuations")in the client's financial statements; 4) to reduce the need for detailed audit tests
5. Inquiries of the client directly from the auditor.
6. Re performance (rechecking) of samples of computations or information made by the client.
7. Observation by the auditor during the course of the audit.
-external confirmation
-tracing the vouchers.
-compliance reports
-random checking on Internal Controls
Physical Examination eg FIXED ASSET CHKUP
Inquiries From Client, from Suppliers and Customer and bank
Documentation Verification
Reperoform the Calculations
And Critical Analsys of Data
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