Audit Evidence &

Techniques
Prof Dr. Safdar A. Butt

Audit Evidence

Audit evidence refers to the proof or

support needed for justifying an entry or
report.
If an auditor wants to satisfy himself
about the validity of an entry in the books
or financial statements, he must examine
the evidence available to support it.

Qualities of Evidence

Sufficiency
Relevance
Reliability

Audit Techniques
Means used by an auditor:
to acquire necessary audit evidence and
to establish the reliability of audit evidence
so gathered.

Audit Techniques

Vouching
Inspection
Confirmation
Re-computation
Re-tracing entries
Correlation
Reconciliation
Ratio analysis
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Inspection

Also known as physical verification.

Essentially refers to actual inspection of
assets, e.g. cash, investment, vehicles,
furniture, etc.
Also includes presence at a management
activity to verify its efficiency, e.g. yearend stock-taking.

Confirmation

Verification of a fact, balance or condition

from a third party, i.e. a party other than
the client or the auditor.
Examples include balance confirmation
from banks and debtors, valuation report
from outside valuers, etc.
External auditor must always seek
confirmation through his client.
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Re-computation

Entries and balances that are based on

certain computation can best be verified
by carrying out the computation all over
again, e.g. calculation of depreciation,
provisions for bad debts, etc.
By re-computing, an auditor verifies the
arithmetical accuracy as well as the basis
for computation.
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Re-tracing Procedure

Taking an entry and tracing it right

through from original source document up
to its final appearance in Income
Statement or Balance Sheet.
It verifies both the reliability of the system
and accuracy of the entries.

Vouching

Examination of the source document(s)

supporting an entry in the books of
accounts.
Most commonly used audit technique.
Check if the documents:

are correctly drawn up

are duly authorized
are properly recorded
correspond to other records/entries
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Inquiry

Asking questions from the employees or

officers of the company to clarify a
situation.
Asking questions from an outsider, with
approval from the client.

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Correlation
This involves checking an entry or document
with other related documents or entries,
e.g. depreciation expense and provisions
for depreciation accounts are related and
should match each other in terms of years
entries.

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Observation

Just keeping eyes open to observe and

notice how things are handled in the
company.
The attitude of workers and managers.
Manner of handling papers and files.

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Flow Charting

Drawing up flow charts of procedures to

ensure full coverage during audit.
These may already exist in clients
procedure manuals.

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Reconciliation

A reconciliation statement explains the

difference between a balance as shown in ledger
and as shown by another source.
Examples:

Bank Reconciliation Statement

Stock Reconciliation when physical stock list may
show a different balance from cost ledger.

Auditor should check or re-compute these

reconciliation statements
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Ratio Analysis

This is a difficult technique and requires

considerable experience to make a proper
judgment.
Accounting ratios prepared on the basis of
financial statements of a number of years have a
relationship with each other. A careful study of
these ratios can explain a lot of things. For
example, if gross profit margin in percentage is
higher but net profit percentage is less than
previous years, there should be an explanation
or else it indicates a cooking of books.
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Audit Check

It is any action taken by an auditor to

verify audit evidence or bona fides of an
entry or balance.

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Types of Audit Checks

Test Check
Complete Check
Audit in Depth
Surprise Check

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Test Check

Checking documents or entries on a

selective basis.
Necessary when there are large number of
similar accounts or entries.
Example: If a company has 500 trade
debtors, the auditor may decide to audit
only say 50 accounts.

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Complete Check

Checking all the documents or entries.

Possible only in small departments or
units.
May be necessary if test checks indicate
serious weakness of internal control.

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Audit in Depth

This refers to detailed checking of a

particular account, or group of entries.
For example, if a debtors account is to be
audited in depth, each and every entry in
his account will be traced to original
source, cross-checked to related accounts,
and traced to final debtors schedule. Also
confirmation of balance will be sought
from him.
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Relationship between
various checks.
A company has say 500 trade debtors.
If the auditor decides to audit only say 75
accounts, it will be a test check.
If the auditor decides to audit all the 500
accounts, it will be called a complete check.
If only test check is taking place, the auditor will
check 75 accounts in great detail, verifying each
and every entry. This is called audit in depth.

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Surprise Check

This essentially refers to a physical

inspection of an asset without giving prior
notice to the custodian of that asset.
It is very effective as the custodian of
asset does not get a chance to cook up
entries or replace misappropriated items.
Useful for petty cash, or smaller stock
items.
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Thank you
Prof Dr Safdar A Butt

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