Audit Evidence and Audit Procedures: Kuliah 7

Kuliah 7
Audit Evidence and

Audit Procedures
©2015 FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS PADJADJARAN 7-1

Phases of a Financial Statement Audit
Risk
Phase I Assessment
Phase II Risk
Response
Reporting
Phase III

Audit Process - Risk Based Audit
Plan Design Evaluate audit
Assessment
the Audit further audit evidence
Response
Reporting
procedures obtained
Risk
Risk
Perform risk Perform Prepare the
assessment further audit auditor’s
procedures procedures report
What events could occur Did the events identied What audit opinion, based
that would cause a occur and result in a on the evidence obtained,
material misstatement in material misstatement in is appropriate on the
the financial statements? the financial statements? financial statements?
identify potential Obtain evidence

Draw conclusion
fraud & error about assertions

The auditor’s objective : to obtain reasonable
assurance about whether the financial statements
are free from material misstatement, whether due
ISA/SA to fraud or error.
200
Reasonable assurance is obtained when the
auditor has obtained sufficient appropriate audit
evidence to reduce audit risk.
The auditor shall design and perform audit

ISA/SA procedures that are appropriate in the
500 circumstances for the purpose of obtaining
sufficient appropriate audit evidence.

Reasonable Assurance
assurance
Uncertainty
reasonable (audit risk)
assurance
no evidence = Sufficient Evidence = cost

no assurance appropiate
evidence

Audit evidence

Audit Evidence
Evidence – is anything that can make a person believe that

a fact, proposition, or assertion is true or false.
• The use of evidence is not unique to auditors, it is also used
extensively by such other professionals as scientists, lawyers,
judges, and historians.
• Although these professionals rely on different types of evidence
and use evidence in different settings and in different ways,
lawyers, scientists, and auditors all use evidence to help them
draw conclusions.

Audit Evidence
Audit evidence – Any information used by the auditor in

arriving at the conclusions on which the opinion is based.
• The auditor’s opinion and report should be supported by
sufficient appropriate evidence.
• Audit evidence provides persuasive, not conclusive
Category of audit evidence

• Information supports management’s assertions (i.e. accounting
records underlying the financial statements); and
• Corroborating information obtained from audit procedures
performed during the course of the audit.

Audit evidence decisions

Audit Evidence Decisions
Obtaining sufficient appropriate audit evidence is a matter

of auditor’s decisions that should be made when the auditor
develops an audit program.
1. Which audit procedures to use
2. What sample size to select for a given procedures
3. Which items to select from the population
4. When to perform the procedures (timing)
Auditors also have to allocate their audit staffs to conduct the
audit procedures (staffing).
©2015 FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS PADJADJARAN 7 - 10

Audit Evidence Decisions
Evidence Decision Description

Audit procedures The detailed instruction that explains the audit
evidence to be obtained during the audit
Sample size Once a procedure is selected, auditors can vary
the sample size from one to all items in the
population being tested
Items to select The auditor can select a week and examine the
first 50 checks or select 50 checks with the
largest amounts, or select the checks randomly
or select those checks that the auditor thinks
are most likely to be in error.
Timing The timing of audit procedures can vary from
early in the accounting period to long after it
has ended

Audit procedures to obtain
sufficient appropriate evidence

Audit Procedures
An audit procedure is the detailed instruction that explains

the audit evidence to be obtained during the audit.
• The ways of obtaining audit evidence.
Audit procedures to obtain audit evidence can include :
• inquiry
• inspection,
• observation,
• confirmation,
• recalculation,
• reperformance, and
• analytical procedures,

Audit Procedures
Inquiry consists of seeking information of knowledgeable

persons inside or outside the entity.
• Inquiries may range from formal written inquiries addressed to
third parties to informal oral inquiries addressed to persons
inside the entity.
• Inquiry of the client is the obtaining of written or oral information
from the client in response to specific questions during the audit.
Example : Ask the account payable clerk about procedures for
verifying vendor’s invoice.
• Inquiry is used extensively throughout the audit, but it usually
least persuasive and need supported by other audit procedures.

Audit Procedures
Inspection consists of examining documents and records or

tangible assets.
inspection Tangible
Documents assets
Examination of the client’s Physical examination of

documents and records to the assets for existence
substantiate the and condition.
information that is or
should be included in the
financial statements

Audit Procedures
Inspection of documents & records – VOUCHING AND TRACING
ASSERTION/
DIRECTION OF TESTING
AUDIT OBJECTIVE
VOUCHING EXISTENCE OR
(test for overstatement) OCCURENCE
Source Ledger
Journal
Documents
TRACING
(test for understatement)
COMPLETENESS

Audit Procedures
Inspection of documents & records – INTERNAL AND EXTERNAL
MOST RELIABLE
EXAMPLES
External documents sent Confirmation
directly to the auditor Cut-off bank statements
External documents held Vendor.s invoices
by client Regular bank statements
Internal documents Deposit slips
circulated externally Copy of delivery slip
Internal documents Duplicate sales invoice
not circulated externally Purchase requisition
LEAST RELIABLE

Audit Procedures
Observation consists of looking at a process or procedure

being performed by others.
• Observation provides audit evidence about the performance
of a process or procedure, but is limited to the point in time at
which the observation takes place.
• Observation is mostly visual, but also involves all the other
senses (hearing, touch, and smell).
• Example :
– Site visit at the client’s production facilities
– Observe inventory taking by client

Audit Procedures
Confirmation is the auditor’s receipt of a written/oral response

from an independent third party verifying the accuracy of
information requested.
• It is the act of obtaining audit evidence from an independent
third party in support of a fact or condition.
• Typically used to confirm the :
− existence of accounts receivable, bank balances, inventory
held by third parties, etc.
− completeness of accounts payable and other potential
unrecorded liabilities.
• Highly persuasive evidence.

Audit Procedures
Recalculation consists of checking the arithmetical accuracy

of source documents and accounting records or of performing
independent calculations.
• Example : footing, cross-footing, extention test, recomputation
• Relatively reliable because the auditor performs it.
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 : The auditor reperformed the process of making
bank reconciliations.

Audit Procedures
Analytical procedures consist of evaluations of financial

information through analysis of plausible relationships among
both financial and non-financial data.
• Comparisons of related figures, trends, ratios, and identifies
fluctuations or relationships that are inconsistent with other
relevant information or that differ from expected values by a
significant amount.
• Example :
− Comparison of the entity’s current sales figure with prior periods or
forecasts,
− Comparison of the entity’s ratio of sales to accounts receivable
with industry averages,
− Relationship between payroll expense and number of employees

Audit Procedures
Analytical procedures used in:

- risk assessment phase to identify matters that have
financial statement and audit implications.
Examples : unusual transactions or events, amounts,
ratios, and trends.
- risk response phase as further audit procedures
(substantive analytical procedures) to obtain evidence
about a financial statement assertion.
- reporting phase as an overall review of the financial
statements at, or near, the end of the audit.

Audit Evidence Decisions &
Sufficient Appropriate Evidence
Audit procedures
Appropriate
& timing
Staffing
Sample size
Sufficient
& items to select

Audit Evidence Decisions &
Audit Program
Audit Procedures
Sample size
Items to select
Timing
Staffing
AUDIT
PROGRAM

Objectives- Procedures- Evidence
Procedure Illustration Evidence Objective
Review bank statement Existence,

Inspecting Dec 20xx Documentary right, valuation
(review, read,
inspect) Inspect building in
progress Physical Existence
Ask client’s lawyer

about litigation Written Rep All Objectives
Inquiring
(ask, inquire) Discussed with
management about the Oral Valuation
impaiment of inventories

Counting Physical Existence &

Count petty cash funds
(count) Valuation
Observing Observe inventory Existence,

(observe) counting taken by client Physical Completeness,
Valuation
Tracing trace sales invoice
to sales journals Documentary Completeness,
(trace)
Valuation
Vouch transactions
Vouching recorded in journal to Existence,
Documentary
(vouch) their supporting Valuation
documents

Confirming Sent confirmation Existence,

(confirm) request to all Confirmation Right,
receivables
Valuation
Reperforming
(recompute, Recompute the amount
foot, of interest expense Mathematical Valuation
crossfoot
Analytical
count current profit Existence,
(compute, margin & compare with Analytical Completeness,
compare, prior years Valuation
scan)

Persuasiveness of audit evidence

Persuasiveness of Evidence
Two determinants:
Appropriateness Sufficiency
The measure of The measure of

the quality of the quantity of
audit evidence. audit evidence
Persuasive
evidence

Appropriateness of Evidence
The appropriateness of audit evidence is influenced by its
relevance and its reliability :
The pertinence of the evidence to the audit

1. Relevance
objective/assertion being tested.
Example :
Assertion/ Relevan
Audit Objective Procedure
Existence/Occurrence Vouching
Completeness Tracing

Is the Evidence Relevant to the Assertion Being Tested?

2. Relliability Refers to the degree to which evidence can be

believable or worthy of trust.
• Relliable evidence helps in persuading auditors
that the assertion being tested is fairly or not fairly
stated.
The reliability of evidence is influenced by its source and

its nature.
Independence of provider Qualification of provider
Auditor’s direct knowledge Objectivity of evidence
Effectiveness of internal controls Timeliness

Sufficiency of Evidence
The sufficiency of audit evidence is influenced by :
Materiality of accounts
Risk of Material Misstatement
Effectiveness of internal controls
Size and Characteristics of Population

Sufficiency of Evidence
Factors that influence decisions about the sufficiency of

evidence :
Less Evidence Factors Related to More Evidence
Required Sufficiency of Evidence Required
Accounts that are Accounts that are
Materiality
less material more material
Assertions that are Risk of Material Assertions that are
a lower RMM Misstatement (RMM) a higher RMM
Effective IC Internal Control Least Effective
Smaller, more Larger, more
Size and Charactristics of
homogenous heterogeneous
Population
populations populations

The audit documentation.

Audit Documentation
Audit documentation is the principal record

of auditing procedures applied, evidence
obtained, and conclusions reached by
the auditor in the engagement.
(“Audit Working Papers”)

Nature and Purposes of
Audit Documentation
Audit documentation provides:

a) Evidence of the auditor’s basis for a conclusion about
the achievement of the overall objectives of the auditor;
and
b) Evidence that the audit was planned and performed in
accordance with ISAs and applicable legal and
regulatory requirements.

Nature and Purposes of
Audit Documentation
Additional purposes :
• Assist in planning and performing the audit.
• Assist in supervising the audit work
• Accountability for its work.
• Retaining a record of matters of continuing significance to
future audits.
• Enabling the conduct of quality control reviews and inspections
• Enabling the conduct of external inspections in accordance with
applicable legal, regulatory or other requirements.

Form, Content and Extent of Audit
Documentation
Depend on factors such as:

• The size and complexity of the entity.
• The nature of the audit procedures to be performed.
• The identified risks of material misstatement.
• The significance of the audit evidence obtained.
• The nature and extent of exceptions identified.
• The need to document a conclusion or the basis for a
conclusion not readily determinable from the documentation
of the work performed or audit evidence obtained.
• The audit methodology and tools used.

Form, Content and Extent of Audit
Documentation
• Audit documentation may be recorded on paper or on

electronic or other media.
• Examples of audit documentation include:
− Audit programs.
− Analyses.
− Issues memoranda.
− Summaries of significant matters.
− Letters of confirmation and representation.
− Checklists.
− Correspondence (including e-mail) concerning
significant matters.

Audit File Contents and Organization

Permanent Files
These files are intended to contain

data of a historical or continuing
nature pertinent to the current audit.

Current Files
Audit program
General information
Working trial balance
Adjusting and reclassification entries
Supporting schedules

Relationship of Audit Documentation
to Financial Statements
FINANCIAL STATEMENTS
Cash 122
Acc. ………………….
WORKING TRIAL BALANCE AJE’s
Prelim. AJE’s Final Expense 90
Cash 212 (90) 122 Cash 90
LEAD SCHEDULE – CASH A-1
Per G/L AJE’s Final
Petty Cash A-2 5 5
Cash in Bank:
General A-3 186 (90) 96
Payroll A-4 21 21
212 (90) 122
Relationship of Audit Documentation
to Financial Statements
LEAD SCHEDULE – CASH A-1
Per G/L AJE’s Final
Petty Cash A-2 5 5
Cash in Bank:
General A-3 186 (90) 96
Payroll A-4 21 21
212 (90) 122
A-2 A-3 A-4
Cash Count Sheet Bank Reconciliation Bank Reconciliation
A-3/1 A-3/2 A-4/1 A-4/2

Confirmation O/S Check List Confirmation O/S Check List

Types of Supporting Schedules
Analysis
Trial balance or list
Reconciliation of amounts
Tests of reasonableness
Summary of procedures
Examination of supporting documents
Informational
Outside documentation

Characteristics of Audit Documentation
• Each audit file should be properly identified.

• Documentation should be indexed and cross-referenced
• Completed documentation must clearly indicate the audit
work performed.
• It should include sufficient information.
• It should plainly state the conclusions reached.

Effect of E-commerce
• Audit evidence is increasingly in electronic form.

• Auditors must evaluate how electronic information
affects their ability to gather evidence.
• Auditors use computers to read and examine evidence.
• Software programs are typically Windows-based.

End

Audit Evidence and Audit Procedures: Kuliah 7

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Kuliah 7

Audit Evidence and

©2015 FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS PADJADJARAN 7-1

©2015 FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS PADJADJARAN 7-2

the Audit further audit evidence

identify potential Obtain evidence

©2015 FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS PADJADJARAN 7-3

The auditor shall design and perform audit

©2015 FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS PADJADJARAN 7-4

no evidence = Sufficient Evidence = cost

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©2015 FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS PADJADJARAN 7-6

Evidence – is anything that can make a person believe that

©2015 FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS PADJADJARAN 7-7

Audit evidence – Any information used by the auditor in

Category of audit evidence

©2015 FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS PADJADJARAN 7-8

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Obtaining sufficient appropriate audit evidence is a matter

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Evidence Decision Description

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An audit procedure is the detailed instruction that explains

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Inquiry consists of seeking information of knowledgeable

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Inspection consists of examining documents and records or

Examination of the client’s Physical examination of

©2015 FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS PADJADJARAN 7 - 15

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Observation consists of looking at a process or procedure

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Confirmation is the auditor’s receipt of a written/oral response

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Recalculation consists of checking the arithmetical accuracy

Reperformance is the auditor’s independent execution of

©2015 FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS PADJADJARAN 7 - 20

Analytical procedures consist of evaluations of financial

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Analytical procedures used in:

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Procedure Illustration Evidence Objective

Review bank statement Existence,

Ask client’s lawyer

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Procedure Illustration Evidence Objective

Counting Physical Existence &

Observing Observe inventory Existence,

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Procedure Illustration Evidence Objective

Confirming Sent confirmation Existence,

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The measure of The measure of

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The pertinence of the evidence to the audit

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2. Relliability Refers to the degree to which evidence can be