Chapter 8: Audit Evidence and Assurance
AUDITORS OBTAIN SIX BASIC TYPES OF EVIDENCE AND USE SIX GENERAL TECHNIQUES TO GATHER IT. THE SIX TECHNIQUES ARE (1) RECALCULATION/REPERFORMANCE, (2) OBSERVATION, (3) CONFIRMATION, (4) ENQUIRY, (5) INSPECTION, AND (6) ANALYSIS. ONE OR MORE OF THESE TECHNIQUES MAY BE USED NO MATTER WHAT ACCOUNT BALANCE, CLASS OF TRANSACTIONS, CONTROL PROCEDURE, OR OTHER INFORMATION IS UNDER AUDIT.
Recalculation is redoing calculations already performed by auditee personnel. This produces compelling mathematical evidence as the auditee calculation is either right or wrong. Calculations made using computer programs can be recalculated using auditing software. Recalculation provides highly reliable evidence of mathematical accuracy, but the product is only as good as the components; the auditor must audit every significant part of the original computation if recalculation is to provide strong, persuasive evidence.
A related type of evidence is called reperformance. Usually applied in control testing, the auditor independently executes a procedure of the organization’s internal control. This can provide compelling evidence about the effectiveness of a control procedure.
Observation consists of looking at how policy or procedures is applied by others. It provides highly reliable evidence as to performance or conditions at a given point in time, but it does not necessarily reflect performance at other times or over long periods.
Confirmation consists of a written enquiry to verify accounting records. Direct correspondence with independent external parties is a confirmation procedure widely used in auditing. Most transactions involve external parties so confirmation has a lot of applications.
Enquiry generally involves collecting oral evidence from independent parties, auditee officials, and employees. Evidence gathered by formal and informal enquiry of auditee personnel generally cannot stand alone and must be corroborated by the findings of other procedures. Further enquiries could be made and consistent responses provide an increased degree of assurance. Sometimes, however, the auditor will hear conflicting evidence. The auditor will have to use considerable judgment in reconciling the conflicting evidence or in deciding what additional evidence to gather.
Inspection consists of looking at records and documents or at assets with physical substance. The procedures are of varying degrees of thoroughness: examining, perusing, reading, reviewing, scanning, scrutinizing, and vouching. Physically inspecting tangible assets provides reliable evidence of existence and may give some evidence of condition, and hence valuation, but it does not provide reliable evidence of ownership. Physical inspection of formal documents with intrinsic value, such as securities certificates, also provides reliable evidence about existence. Scanning makes use of auditors’ alertness to unusual items and events in auditee documentation. The procedure usually does not produce direct evidence itself, but it can raise questions for which other evidence must be obtained.
Auditors obtain evidence about financial statement accounts by methods of study and comparison called analysis. Auditing standards provide guidance on using analysis at the risk assessment and overall conclusion stages of the audit, and also for when auditors use analysis as an evidence-gathering procedure during the audit. When analysis is used to provide substantive evidence, auditors need to be careful to use independent, reliable information for comparison purposes.
The audit process begins by obtaining an understanding of the auditee and its risks. There are a wide variety of information sources auditors use to understand the auditee’s business, industry, and environment. Information gathered in prior audits, and documented in the working papers, can also provide relevant and reliable information on the...