This chapter deals with the types of evidence decisions auditors make, the evidence available to auditors, and the use of that evidence in performing audits.
NATURE OF EVIDENCE
• Evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria. • Evidence includes information that is highly persuasive, such as the auditor's count of marketable securities, and less persuasive information, such as responses to questions of client employees. • The use of evidence is not unique to auditors. Evidence is also used extensively by scientists, lawyers, and historians. • The auditor also gathers evidence to draw conclusions.
AUDIT EVIDENCE DECISIONS
• A major decision facing every auditor is determining the appropriate types and amounts of evidence to accumulate to be satisfied that financial statements are fairly stated and the internal control system is effective. • This judgment is important because of the prohibitive cost of examining and evaluating all available evidence. • The auditor's decisions on evidence accumulation can be broken down into the following four sub-decisions:
1. Which audit procedures to use
2. What sample size to select for a given procedure
3. Which items to select from the population
4. When to perform the procedures
1. An audit procedure is the detailed instruction for the collection of a type of audit evidence that is to be obtained at some time during the audit. They should be spelled out in specific terms to permit their use as instructions during the audit. Example: Procedure for the verification of cash disbursements:
Obtain the cash disbursements journal and compare the payee name, amount, and date on the cancelled check with the cash disbursements journal.
2. Once an audit procedure is selected, it is possible to vary the sample size from one to all the items in the population being tested. The auditor might select a sample size of 50 checks, out of 5,000 checks, for comparison with the cash disbursements journal. The sample size for any given procedure is likely to vary from audit to audit. 3. After the sample size has been determined for an audit procedure, it is still necessary to decide which items in the population to test. Several different methods can be used to select the specific checks to be examined. The auditor could (1) select a week and examine the first 50 checks, (2) select the 50 checks with the largest amounts, (3) select the checks randomly, or (4) select those checks that the auditor thinks are most likely to be in error. Or a combination of these methods could be used. 4. The timing of audit procedures can vary from early in the accounting period to long after it has ended. In the audit of financial statements, the client normally wants the audit completed 1 to 3 months after year-end. Timing is also influenced by when the auditor believes the audit evidence will be most effective and when audit staff is available. For example, auditors often prefer to do counts of inventory as close to the balance sheet date as possible.
Audit procedures often incorporate sample size, items to select, and timing into the procedure. The following is a modification of the audit procedure previously used to include all four audit evidence decisions. (Italics identify the timing, items to select, and sample size decisions.) • Obtain the October cash disbursements journal and compare the payee name, amount, and date on the cancelled check with the cash disbursements journal for a randomly selected sample of 40 check numbers.
• The list of audit procedures for an audit area or an entire audit is called an audit program.
• The audit program always includes a list of the audit procedures. It usually also includes sample sizes, items to select, and the timing of the...