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Chapter 3

Evidence collection, sampling, Evaluation and reporting methodologies

Audit evidence is data related to facts and circumstances that have to be examined and
assessed upon implementation of the audit task and which have been ascertained during the
implementation of the audit task by means of respective techniques and procedures for
collecting audit evidence.
Audit evidence focuses the auditors attention on obtaining an understanding of the
business and industry, managements goals and objectives, how management uses its
resources to attain those goals, the organizations competitive advantage in the market, core
business processes, and the resulting earnings and cash flows. Top-down audit procedures
provide evidence about the clients strategic business risks, how management is responding to
those risks, and the viability of the entity. The auditor integrates all information about the client
and clients industry to form expectations about the financial statements. Bottom-up audit
evidence focuses on directly testing transactions, account balances, and the systems that
record the transactions and resulting account balances.
Audit evidence in a typical IT audit comprises system dumps and printouts, interview notes
and a whole variety of audit working papers (e.g. risk analysis, assessment of key risks,
controls review checklists and previous audit reports).
In IT Audits, auditors confront a diverse and sometimes complex range of internal controls.
The continuing evolution of control technology also makes it more difficult for auditors to collect
evidence on the reliability of controls.
Auditors are often forced to compromise in some way when performing the evidence collection
function.

In the end, the auditor develops an audit strategy that blends a combination of topdown and bottom-up evidence.
Important Decisions About Audit Evidence

Four important decisions are made about the scope and conduct of the audit:
1Nature of audit tests: This refers to the type and effectiveness of the audit test. Audit
procedures should provide data about the competitive performance of an entity.
2Timing of audit tests: Timing refers to when the auditor performs audit tests and
draws conclusions. Audit testing at an interim date may permit early consideration of important
matters affecting the year-end financial statements. Many matters involving audit planning,
obtaining an understanding of internal control, assessing control risk, and application of
substantive tests to transactions, can be done prior to the balance sheet date.
3Extent of audit tests: The extent of audit procedures relates to the auditors decision
about how much audit evidence to obtain. More evidence is needed to achieve a low level of
detection risk than high level of detection risk.
4Staffing the audit: Auditors should be assigned to tasks and supervised
commensurate with their level of knowledge, skill, and ability so that they can evaluate the
evidence they are examining. Assignments such as obtaining an understanding of internal
controls, confirming receivables, testing transactions, or testing the application of GAAP, which
are straightforward, might be assigned to entry-level staff.
The audit evidence should be:
Sufficient- the collected data in terms of quantity and quality should substantiate the
findings, evaluations and conclusions and to enable any user of information to reach the
same conclusion;
Reliable - the collected data should be obtained from competent sources using
appropriate techniques and procedures;
Relevant the collected data should correspond to the audit objectives and be logically
related to the findings, evaluations and conclusions;
Reasonable the collected data should be obtained in an economic way and the costs
for its collection should be commensurable with the results to be achieved.

Audit Evidence, Corroborating Information and Audit Procedures

Every auditor must determine the appropriate amount of evidence to collect to be


satisfied that the components of the financial statements and the overall statements are fairly
stated.
Underlying accounting data alone are not sufficient support for the financial statements,
Auditors should design audit procedures to obtain corroborating information. Let us consider
various types of audit evidence which constitute corroborating information.

Types of audit evidence and methods used to obtain it:


Documentary Evidence: is obtained as a result of examination and control of existing
written data in the audited entity, as well as information gathered from external sources;
Analytical Evidence: is obtained as a result of analysis of the evidence collected;

Witness Evidence: is obtained as a result of discussions, interviews, questionnaires,


explanations, etc. documented in working papers;
Material Evidence: is obtained as a result of direct measurement and monitoring
documented in working papers.
The techniques and procedures for obtaining different types of audit evidence are
implemented in combination or separately, depending on the audit objectives.
4. Audit evidence approaches. Audit evidence is obtained through applying
of audit approaches (separately or in combination), described in Standard No.1-system
based approach and/or direct substantive testing approach.
5. The audit evidence is documented according to audit standard No.9 Working Papers.

Types of Corroborating Audit Evidence


There are 7 broad categories of evidence from which the auditor can choose:
1--physical examination
2--confirmations
3--documentation
4--analytical evidence
5--written representations
6--mathematical evidence
7--oral evidence
8--electronic evidence
Types of Audit Procedures
1--Analytical procedures
2--Inspecting
3Confirming
4--Inquiring
5--Counting
6--Tracing
7--Vouching
8--Observing
9--Reperforming
Computer-Assisted Auditing Techniques: May assist in doing several procedures.
Evaluation of evidence obtained

An auditor needs a preponderance of persuasive evidence for each material financial


statement assertion to have a reasonable basis for an opinion. When a reasonable basis exists
an unqualified, qualified or adverse opinion will be issued. If no reasonable basis exists then a
disclaimer of opinion will be issued.
Relationship Among Audit Procedures, Types of Evidence and Assertions
Tracing, vouching, and inspecting involve the use of documentary evidence. Inspecting
could involve the use of physical evidence as do the procedures of counting and observing.
Inquiring will yield evidence in the form of written or oral representations. The better you
understand the examples in Fig. 6-7 the better you will understand the practice of auditing.
Electronic Data Processing and Audit Procedures
In certain entities, accounting data and corroborating evidential matter are available
only in electronic form. Other entities use Electronic Data Interchange (EDI). Business is
transacted completely in electronic format with no paper trail to evidence economic events.
Certain electronic evidence may exist at a certain point in time. However, such evidence may
not be retrievable after a specified period of time.
The auditor needs to consider the implications for the audit of electronic evidence. The
auditor should evaluate whether client practices impact material account balances and
transaction classes, and assess the resulting implications for the nature, timing, and extent of
audit procedures.
If a client maintains records in electronic form, and the auditor can directly access
electronic records, it may have significant implications for the extent of audit procedures. For
example, the auditor may be able to subject 100% of the transactions in a population to being
screened by the computer for a particular characteristic.
The auditors application of computer-assisted audit techniques to electronic data files
has allowed audit strategies where the auditor can target procedures on high-risk
subpopulations.