AUDIT PROCEDURES

Substantive Testing and Evidence

 Evidence is anything that can

make a person believe that a
fact, proposition, or assertion
is true or false.
Audit evidence is all of the
information used by the auditor
in arriving at the conclusions on
which the audit opinion is
based. (ISA 500)
It includes the accounting
records and other
information underlying the
financial statements.

Evidence

Audit evidence is different from the legal evidence.

In a civil lawsuit, evidence must be
strong enough to incline a person
to believe one side or the other.
In a criminal case evidence must
establish proof of a crime beyond a
reasonable doubt.
Audit evidence provides only
reasonable assurance

Accounting records generally include the records of initial entries

and supporting records.

Initial entries include: records of initial

entries such as checks and electronic
fund transfers; contracts, invoices;
shipping notices, purchase orders, sales
orders, the general and subsidiary
ledgers, journal entries and other
adjustments to the financial statements.
Supporting records examples are
computer files, databases, work sheets,
spreadsheets, computer and manual
logs, computations, reconciliations, and
disclosures.

evidence

The auditor obtains audit evidence to draw reasonable conclusions

on which to base the audit opinion by performing audit procedures
to:

Obtain an understanding of the entity and its

environment, including its internal control, to assess the
risks of material misstatement at the financial statement
and assertion levels (risk assessment procedures);
Test the operating effectiveness of controls in preventing,
or detecting and correcting, material misstatements at the
assertion level (tests of controls); and
Detect material misstatements at the assertion level
(substantive procedures) ISA 500

Substantive Procedures
Defined
Substantive procedures are tests
performed to obtain audit
evidence to detect material
misstatements at the assertion
level.
Two types
(1) tests of details of classes of
transactions, account balances,
and disclosures and
(2) analytical procedures

Legal Proof and

Evidence

Legal standards of proof

beyond a reasonable doubt

preponderance of evidence
clear and convincing evidence
probable cause

Legal evidence
proof results direct or circumstantial
Source
real tangible and can be presented to a court for inspection
testimonial evidence given by witnesses under oath.
original documentary evidence

ASSERTIONS about classes of transactions and events for the period under
audit

Occurrence

Transactions and events that have been

recorded have occurred and pertain to the
entity.

Completeness

All transactions and events that should have

been recorded have been recorded.

Accuracy

Amounts and other data relating to recorded

transactions and events have been recorded
accurately.

Cutoff

Transactions and events have been recorded

in the correct accounting period

Classification

Transactions and events have been recorded

in the proper accounts

Illustration 10.2

ASSERTIONS about account balances at the period end

Existence

Assets, liabilities, and equity interests exist

Rights and obligations The entity holds or controls the rights to

assets and liabilities are the obligations of the
entity
Completeness

All assets, liabilities and equity interests that

should have been recorded have been
recorded

Valuation and
Allocation

Assets, liabilities and equity interests are

included in the financial statements at
appropriate amounts and any resulting
valuation adjustments are appropriately
recorded

Illustration 10.2

ASSERTIONS about presentation and disclosure

Occurrence and
rights and
obligations
Completeness

Disclosed matters have occurred

and pertain to the entity.

All disclosures that should have

been included in the financial
statements have been included
Classification
financial information is
and
appropriately presented and
understandability described, and disclosures are
(not in text)
clearly expressed
Accuracy and
Financial and other information are
valuation
disclosed fairly and at appropriate
amounts
Illustration 10.2

Sufficient Appropriate Audit Evidence

Sufficiency is the measure of the quantity of

audit evidence

Appropriateness is the measure of quality of

audit evidence, its reliability, & its
relevance in providing support for, or
detecting, misstatements in transactions,
balances, disclosures and related assertions

 Relevance of evidence is the

appropriateness (pertinence)
of the evidence to the audit
objective being tested.
Reliability is the quality of
information when it is free
from material error and bias
and can be depended upon
by users to represent
faithfully that which it either
purports to represent or
could reasonably be
expected to represent.

Reliability of audit evidence

Audit evidence obtained directly by the auditor (e.g.,
observation, re-performance) is more reliable than audit
evidence obtained indirectly or by inference.
Audit evidence is more reliable when it exists in
documentary form, whether paper, electronic, or other
medium.
Audit evidence is more reliable when it is obtained from
independent sources outside the entity..
Audit evidence provided by original documents is more
reliable than audit evidence provided by photocopies or
facsimiles.
The effectiveness of the clients internal control structure
has a significant impact on reliability of evidence.

Information Provided by the Auditee

When information
produced by the entity
is used by the auditor
to perform audit
procedures, the
auditor should obtain
audit evidence about
the accuracy and
completeness of the
information.

Nature of Substantive procedures

Tests of details of transactions

are
audit procedures related to
examining
particular classes of
the processing of
transactions through the accounting
systems.
Tests of balances are substantive tests that
provide either reasonable assurance of the
validity of a general ledger balance or
identifies a misstatement in the account.
Analytical procedures

Tests of Balances
Tests of Balances are used to examine the
actual details making up high turnover
accounts such as cash, Accounts
Receivable, Accounts Payable, etc..
Why is tests of balances so important?
Because the auditors ultimate objective
is to express an opinion on financial
statements that are made up of account
balances.

Tests of Balances
In tests of balances the auditor is concerned
with overstatement or understatement of
the line item in the financial statement.
Test makes use of the inherent properties
of double-entry accounting systems.
From the auditors perspective, this means
that a test of one side of the transaction
simultaneously tests the other side of the
transactions.

Audit Procedures for Gathering Evidence

Evidence-gathering techniques are techniques

employed by an auditor to obtain evidence.
Evidence-gathering techniques are:

Inquiry
Observation
Inspection (physical evidence and examination of
documents)
Recalculation
Reperformance

Confirmation
Analytical procedures.

Inquiry
Inquiry consists of seeking information of
knowledgeable persons inside (client)
or outside the entity.
Largest amount of audit evidence in an
audit is obtained from client inquiry
cannot be regarded as conclusive because it is not from
an independent source and might be biased
the auditor must gather evidence to corroborate
inquiry evidence by doing other alternative
procedures.

Observation
Observation consists of looking at a
process or procedure being performed by
others.
For example, the observation by the
auditor of the counting of inventories by
the entitys personnel or by the
performance of internal control procedures
that leave no audit trail.
Observation should be supported by
other types of evidence.

count of physical
inventory
ISA 501 When inventory is material to the financial
statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence
and condition by attendance at physical inventory
counting.
If unable to attend the physical inventory count, the
auditor should take or observe some physical counts
on an alternative date and, when necessary, perform
tests of controls of intervening transactions.

Alternative procedures for attending physical inventory

include Auditor review of:

Managements instructions regarding the

application of control procedures (e.g. collection
of used stock sheets, accounting for unissued
stock sheets and count and re-count
procedures);
Accurate identification of the stage of completion
of work in progress, of slow-moving, obsolete, or
damaged items and items on consignment
Whether appropriate arrangements are made
regarding the movement of inventory between
areas and the shipping and receipt of inventory
before and after the cutoff date.

Inspection
Inspection is the auditor's examination of the
client's documents records or tangible assets
to substantiate the important information
related to the financial statements.

Internal documents and external documents.

Internal documents processed under good internal
controls are more reliable than those processed
under weak controls.
External documents may be processed by both internal
and external parties representing agreement.
External documents like title to property, insurance
policies and contracts are very reliable evidence.

Vouching and Tracing

Vouching is the use of documentation to support
recorded transactions or amounts.
It is an
audit process whereby the auditor selects sample
items from an account and goes backward through
the accounting system to find the source
documentation that supports the item selected.
Tracing is an audit procedure whereby the auditor
selects sample items from basic source documents
and proceeds forward through the accounting system
to find the final recording of the transactions (e.g., in
the ledger).

Recalculation & Reperformance

Recalculation consists of checking
the arithmetical accuracy of
source documents and accounting
records or of performing
independent calculations.
Reperformance is the auditors
independent execution of
procedures or controls that were
originally performed as part of the
entitys internal control, either
manually or through the use of
CAATs.

Recalculation
Examples:
Extending sales invoices
Adding journals and subsidiary records
Checking calculations of depreciation
Checking mechanical accuracy
records and ledgers.

of

CONFIRMATION
Defined: It is the auditors receipt of a written or oral
response from a independent third party verifying the
accuracy or the information requested.
Four Key Characteristics:
1. Information is requested by auditor.
2. Request and response is in writing, sent to the auditor.
3. Response comes from an independent third party.
4. Positive confirmation involves a receipt of information.

Confirmation
An auditor may use a confirmation in response to a
significant risk
The auditor must ordinarily confirm accounts receivable.
. Written confirmations received from third parties are
highly persuasive, but very costly and an inconvenience
for those who are asked to supply them.

Positive confirmation: Asks the

recipient (debtor, creditor or other third
party) to confirm agreement or to
express disagreement with the recorded
balance.
Reliable evidence

Negative confirmation: A reply is

requested only in the event of
disagreement with the recorded
balance.
Use for large number small balances,
low control risk, response is expected

Search for unrecorded liabilities

Defined:
A substantive test usually performed on accounts payable
is a search for unrecorded liabilities.
This test provides evidence as a completeness and some
evidence as to valuation.
By reviewing cash disbursements subsequent to the
balance sheet date, the auditor has a good idea of the
potential population of unrecorded accounts payable.

Reliability of Procedures
A list of the most reliable to the least reliable evidence
gathering techniques are in general:
1 Recalculation
2. Inspection.
3 Reperformance.
4 Observation.
5 Confirmation.
6 Analytical procedures.
7 Inquiry.

Cost of Procedures
The auditor considers the relationship between the cost of
obtaining audit evidence and the usefulness of the information
obtained. The evidence-gathering procedures in order of cost from
most costly to least costly are in general:
1 Confirmation.
2 Inspection.
3 Recalculation
4. Reperformance
5 Observation.
6 Analytical procedures.
7 Inquiry.