Chapter 5 - Audit Evidence and the Technology-Driven Audit

What is audit evidence?

is the information to which audit procedures are applied, that the auditor uses to draw conclusions upon which the auditor’s opinion and report are based.

What types of information are used for audit evidence?

Types of information for audit evidence include oral information (inquiries), visual information (observations), paper documents, electronic documents, and data.

What are audit procedures?

are techniques for collecting and analyzing information to provide audit evidence.

How the information is gathered

The nature of audit producer refers to their purpose and type, which varies according to the objectives of the phase in the audit process.

What is the purpose of risk assessment procedures?

identify and assess risk during the phases of the audit process to plan the audit and assess the risk of material misstatement.

What are substantive tests used for?

Determine if accounts and assertions are fairly stated. The tests of details of balances and transactions, and analytical procedures, linked to specific assertions. 

What is sufficient audit evidence?

the quantity of evidence gathered, which depends on the extent of audit procedures and variety of sources.

Oral information

• Oral inquiries made to the accounting staff 

• Oral inquiries made to external information sources 

Visual information

• The auditor observes a message that appears onscreen for a control restricting access to the IT system 

• Inventory observed by audit through live bideo steam sent with smart glasses worn by the client representative 

Paper documents

• Original sales contract provided by client 

• Written confirmation was provided by the client’s customer 

Electronic documents

• A scanned version of a sale contract 

• Electronic confirmation 

Data 

• Data stored in the entity's IT system 

• Data from external information sources ( social media, government agencies) 

Why is audit evidence gathered?

it is used to help the auditor make a variety of judgments and conclusions, such as 

• To accept (or continue with) the client 

• To plan the audit 

• To decide where there could be a risk of material misstatement in the financial statements 

• To develop and perform an appropriate risk response 

• To conclude the type of audit report 

Internal sources of information

Accounting record (aging analysis of accounts receivables, sakes invoices sales, journal)

Management (internal marketing information developed by the entity’s sales function used in making an estimate for warranty provision

External sources of information

• External individuals or organizations

• Indepedent sources outside the entity that provided information to the entity

• service

Expert sources of information

Management expert

Auditor Expert

Tests of controls

Determine if controls are operating effectively 

• Auditor may perform tests of internal control policies and processes to determine if effective

What is Persuasive Audit Evidence

The auditor must be persuaded that his or her opinion is correct with a high level of assurance. The auditor decides if sufficient and appropriate audit evidence has been collected to be able to draw reasonable conclusions, on the basis that the evidence is persuasive, not conclusive. 

What is suffiecnt evidence based off of ?

• The extent of audit procedures

• The different types of audit procedures 

• The variety of sources 

What is Appropriateness of the audit evidence?

• Relevance and reliability of the information used

• Effectiveness of the designated of audit procedures 

• Auditor’s performance of the procedures. 

What does the audoitor need to consider for all of the evidence factors?

the combined effects of sufficient and appropriateness in the context of the risk of material misstatement for the audit objective. 

Evidence gathering decision

the trade-off of the cost of gathering evidence versus its persuasiveness

Relevance of information

Assertions/ Accounts

Period of time

Level of detail

Reliability of Information

Source of Information

• Bias

• Credibility

• Authority

• Obtained Directly by auditor

Nature of Information

• Authentic

• Accurate

• Complete

• Degree of subjectivity

• Controls

Types of Audit Procedures Commonly Used

• Inspection

• vouching and tracing

• Observation

• Confirmation

• Recalculation

• Reperformance

• Inquiry

• Analytical procedures

Inspection

The auditor’s examination or count of a tangible  asset, or inspection of a document 

Auditor can be physically present or through remote observation tools 

Inspection examples?

To test a purchasing control, the auditor inspects purchase orders, using manual or automated tools and techniques, for proper authorization before the purchase is made. 

The auditor uses automated tools, such as drones or smart glasses, to inspect inventory items, which provides audit evidence that the items exist. 

Vouching and Tracing

the use of documentation to support recorded transactions or amounts and the use of documentation to determine if transactions or amounts are included in the accounting recovers.

Observation

Looking at processes or procedures being performed by others; usually by being physically present or through remote tools.

Observation example

As a risk assessment procedure, the auditor may tour a plant, observe what people are doing, and obtain a general impression of a client’s facilities. 

As a test of control, the auditor may observe individuals performing accounting tasks to determine whether the persons responsible are performing them. 

Confirmation

External: The auditor requests a direct response from a third party; must be controlled fully by the auditor. 

Confirmation examples?

Bank accounts and bank facilities with the bank 

Account balances, such as accounts receivables and accounts payable 

Terms of agreements or transactions with third parties 

Recalculation

Checking the mathematical accuracy of information prepared by the client. 

Recalculation example

As a test of detail, check the mathematical accuracy of sales invoices. 

As a test of detail, check the calculator of amortization expense. 

Reperformance

Independently executing procedures or controls that were performed by the client’s internal control system. 

Reperformance example

A control test compares the price of an invoice to an approved price list. 

the reconciliation of accounts payable at year-end, by matching the creditor’s statement to the transactions in the underlying accounting records. 

Inquiry

Obtaining information from knowledgeable people within the entity or outside the entity. 

May range from formal written inquiries to informal oral inquiries. 

Limitations of Inquiry

does not provide sufficient appropriate audit evidence of the absence of a material misstatement or the operating effectiveness of controls. 

It is normally necessary to obtain corroborating evidence through produces. 

Analytical Procedures

Evaluation of information through plausible relationships among data, investigation of fluctuations or relationships that are inconsistent with other relevant information.

What are Design analytical procedures

Evaluations of financial information are done through analysis of plausible relationships among economic and non-financial data.

When can design analytical procedures be performed?

Any time during the engagement

uses of Design Analytical procedures

• Risk assessment as part of planning the audit 

• Substantive analytical procedures (SAP) can support account balances 

• Final overall analytical review for completing the audit, as a final “objective look” 

What are the common types of analytical procedures?

Trend Analysis, Ratio analysis, reasonableness testing

Trend analysis

Analysis of changes in accounts over time, to identify variances and unexpected differences.

Ratio analysis (Common Financial Ratios)

Comparison across time or to a prior year, budget, or industry average, to examine relationships between financial statement accounts and between an account and non-financial data 

Reasonableness testing

Analysis of accounts or changes in accounts between accounting periods, by calculating the expected balance for comparison with the actual balance.  

Analytical Procedures as Substantive Tests

Develop an independent expectation → Define a significant difference → Compute the difference → Investigate significant differences

Factors that affect the degree of precisions of the analytical procedures

• Disaggregation of data, 

• Data reliability 

• Plausibility and predictability of relationship 

• The type of analytical procedure.

Use of Automated tools and techniques

• Saving time 

• Improving the quality of audit evidence by analyzing entire data sets and increasing the information sources 

  • Allows auditors to obtain deeper insights, focus on exceptions and outliers, identify unusual trends 

• Increase the information sources available for use.

Audit Data Analytics

the science and art of discovering and analyzing patterns, identifying anomalies, and extracting other useful information in data underlying or related to the subject matter of an audit through analysis, modelling and visualization for planning or performing the audit. 

Use of Emerging Technologies

AI allows computers to perform routine, repetitive processes and begin to learn or develop “intelligence” that allows them to recognize patterns and take actions automatically. 

Types of AI being used in an audit context

• Machine learning: use of algorithms to ‘learn’ from data 

• Textual analysis: assess, summarize, and analyze existing text in documents 

• Predictive analysis: assist in predicting outcomes, determining expectations

Challenges with ATTs

analyzing historically biased data, client confidentiality, and over-reliance on auditors. 

Audit Documentation

 is the written or electronic record of risk assessments, procedures or tests performed, information obtained and conclusions reached. 

• Support was retained for anything we examined or performed in the audit. 

Purposes of Audit Documentation

• As a basis for planning the audit 

• As a record of the evidence accumulated and the results of the tests 

• To provide support for determining the proper type of auditor’s report 

• Basis for review by supervisory personnel 

Types of Contents and Organization

Permanent files and current files

permanent files

contain data of a historical or continuing pertinent to the current audit. These files provide a convenient source of information about the audit that is of continuing interest from year to year. 

current files

include all audit documentation applicable to only the year under audit. There is one set of permanent files for the client and a set of current files for each year’s audit. 

Certain characteristics of working papers

• properly identified with such information as the client’s name, the period covered, a description of the contents, the name of the preparer, the date of preparation and an index code.

• indexed and cross-referenced to aid in organizing and filing. 

• Completed work must clearly indicate the audit work performed. 

• include enough information to fulfill the objectives for which it was designed. 

Ownership of Working Papers

working papers prepared during the engagement, including those prepared by the client for the auditor, are the property of the auditor. 

Exception to ownership of working papers

subpoenaed by the court or through a disciplinary proceeding or practice inspection, no others have a legal right to examine the working paper.

Confienditaly of Working Papers

The rules of conduct of the professional accounting bodies require their members not to disclose any confidential information obtained in the course of a professional engagement expect with the consent of the client or when required by the courts or by the professional accounting associations.