TON DUC THANG UNIVERSITY

ACCOUNTING FACULTY

Chapter 4:
Audit evidence and audit sampling

Course code: 201106

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 Learning objectives

 Discuss the importance of the concepts of

appropriateness and sufficiency;
 Identify factors affecting the appropriateness and
sufficiency of audit evidence;
 Understand types of audit procedures;

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 Learning objectives (Cont.)

 Define audit sampling;

 Identify the various means of gathering audit
evidence;
 Identify factors influencing the determination of
sample size;
 Understand the appropriate methods of selecting
sample items.

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 Contents

4.1 Audit evidence

4.2 Audit sampling

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 4.1 Audit evidence

Paragraph 05, VSA 500

a. Definition of • Information used by the auditor in arriving
Audit evidence at the conclusions on which the auditor’s
opinion is based.
• Include both information contained in the
accounting records underlying the
financial statements and other
information.

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 4.1 Audit evidence
a. Definition of audit evidence

Accounting records: Information Other information:

- accounting entries Independent sources
- supporting records of an entity

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 4.1 Audit evidence
Audit evidence includes:
 Internal documents:
 Sales contracts
 Lease agreements
 Sales invoices
 Purchase orders
 Depreciation and amortization schedules…
 External documents:
 Confirmation statements from banks
 Confirmation replies from customers
 Customer orders…
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 4.1 Audit evidence
b. Requirements for audit
evidence
 Appropriateness (Quality):
• Relevance
• Reliability
 Sufficiency (Quantity):
• Risk of misstatements
• Quality of audit evidence

Auditor should obtain sufficient appropriate audit evidence

to be able to draw reasonable conclusions on which to base
audit opinion. (Paragraph 06, VSA 500).

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 4.1 Audit evidence

Appropriateness

• Relevant
• Reliable

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 4.1 Audit evidence
Appropriateness

• Relevant to financial statement assertions

 Ex: Inspection of Equipment  Existence of
equipment
 NOT VALUATION ASSERTION OF EQUIPEMENT

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 4.1 Audit evidence
Appropriateness
 Relevant to direction of testing

Testing for existence - Vouching

Source Document Subsidiary Ledger/

General Ledger
Testing for completeness - Tracing

Subsidiary Ledger/
Source Document
General Ledger

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 4.1 Audit evidence
Appropriateness

• Reliable:
 external, independent sources more reliable than
internal
 if internal, more reliable if related controls are
effective
 evidence obtained directly by auditor more reliable
 documentary evidence more reliable than oral
representation
 original documents more reliable than photocopies

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 4.1 Audit evidence

Sufficiency
• Risk of misstatements
• Quality of audit evidence

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 4.1 Audit evidence
c. Audit assertions

Audit assertions are properties of:

 An account balance,
 A set of transactions,
 A disclosure in the FS,
 that must be true, for the account
balance, transaction or disclosure to
be correctly stated

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 4.1 Audit evidence
c. Audit assertions
• ABOUT ACCOUNT BALANCES AT THE PERIOD END

• Existence - Assets, liabilities and

equity interests exist.

• Rights and Obligation – The entity

holds or controls the rights to assets, and
liabilities are the obligations of the entity.

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 4.1 Audit evidence
c. Audit assertions
• ABOUT ACCOUNT BALANCES AT THE PERIOD END

• 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 FS at appropriate amounts and any
resulting valuation or allocation adjustments
are appropriately recorded..

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 4.1 Audit evidence
c. Audit assertions
• ABOUT CLASSES OF TRANSACTIONS AND EVENTS

• Occurrence - the 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.

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 4.1 Audit evidence
c. Audit assertions
• ABOUT CLASSES OF TRANSACTIONS AND EVENTS
• Accuracy – amounts and other data
relating to recorded transactions and events
have been recorded appropriately.

• Cutoff – transactions and events have

been recorded in the proper accounts.

• Classification – transactions and events

have been recorded in the proper accounts.

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 4.1 Audit evidence
c. Audit assertions

• ABOUT PRESENTATION AND DISCLOSURE

• Occurrence
• Rights & Obligations
• Completeness
• Classification and Understandability.
• Accuracy & Valuation.

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 4.1 Audit evidence
c. Audit assertions
• ABOUT PRESENTATION AND DISCLOSURE
• Occurrence
• Rights & Obligations
• Completeness
• Classification and Understandability.
• Accuracy & Valuation.

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 4.1 Audit evidence
d. Procedures to collect audit evidence

Physical
Examination
Confirmation
Observation

Audit
Reperformance Inspection
Evidence

Analytical
Recalculation
Client Inquiries procedures
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 4.1 Audit evidence
Physical Examination

It is the inspection or count by the

auditor of a tangible asset.

This type of evidence is most often

associated with inventory and cash.

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 4.1 Audit evidence
External Confirmation
 Representation of information/existing condition
directly from a third party.
 Whether or not confirmations should be used depends
on the reliability needs of the situations as well as the
alternative evidence available.
 Auditors usually send a confirmation letter for:
 Banks.
 Creditors, debtors.
 Stores where keeping the client’s inventory

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 4.1 Audit evidence
External Confirmation

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 4.1 Audit evidence
Inspection of Records
Include the examination and matching of documents,
books and related documents.
 Matching of financial statements with accounting
records.
 Matching of accounting books with relevant
documents.
books documents
documents books
 The matching of the bookkeeping and the other
books.
 The matching of documents and relating documents.

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 4.1 Audit evidence
Analytical procedures
 “Analytical procedures” means the evaluation of
financial information made by a study of plausible
relationships among both financial and non financial
data.
 AP also encompasses the investigation of identified
fluctuations and relationships that are inconsistent
with other relevant information or deviate
significantly from predicted amounts.

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 4.1 Audit evidence

Analytical procedures
 AP are used extensively in practice. AP are required
during the planning and completion phases on all
audits.
 AP are mainly used for different purpose on an audit.
 understand the client’s industry and business
 assess the entity’s ability to continue as a Going
concern
 indicate the Presence of Possible misstatements in
FS
 reduce detailed audit test

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 4.1 Audit evidence
The analytical methods
 Ratio analysis
 Trend analysis
 Comparisons with other firms in the industry
 Comparisons with budgeted figures
 Mathematical relationships with other financial statement
figures
 Mathematical relationships with non-financial information

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 4.1 Audit evidence

Example 1

Items Analytical procedures

Revenue from rental of
hotel rooms
Revenue from school fees

Fuel costs

Value of exported
inventory
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 4.1 Audit evidence
31/12/2014 31/12/2015

Example 2 Based Value of Fixed 23.678.000 46.838.000

Assets
Accumulated (6.987.800) (8.917.800)
depreciation
• Other information:
 In 2014 there was no increase or decrease in fixed assets.
in 2015 there was no any decrease in fixed assets, but has
an increase in fixed assets on 01.03.2015.
 Useful time registration for all fixed assets is 10 years.
 Straight-line depreciation method.
• Required: determining the reasonableness of the
value of accumulated depreciation on 31.1.2015
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 4.1 Audit evidence
Observation
 Looking at processes or procedures being performed.
 Useful in most parts of the audit.
 Rarely sufficient by itself. It is necessary to follow up
initial impressions with other kinds of corroborative
evidence.
 Only provide evidence of working implementation
methods at the time of observation.

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 4.1 Audit evidence
Enquiry
Enquiry is the obtaining of written or oral information
from the client in response to questions from the
auditor.
It usually cannot be regarded as conclusive
because it is not from an independent source and
may be biased in the client’ favor.
Not highly reliable, need to obtain further
corroborating evidence through other procedures.

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 4.1 Audit evidence
Recalculation
 Checking mathematical accuracy of
records/documents

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 4.1 Audit evidence
• Example of audit procedures:
Determine  Inspection of  Review shipping
whether documentation documents as evidence of
material  Inspection of a sale having occurred.
misstatements assets  Tour the manufacturing
exist in the  External facility and inspect client’s
financial confirmation equipment
statements  Obtain confirmations from
client’s customers
regarding amount owed
by the customer to the
client

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 4.1 Audit evidence

Some special audit evidence

Auditors may use the work of other parties:

 Documentation of experts.
 Representative of directors.

 Documentation of internal auditors.

 Documentation of the other auditors.

 Evidence of the parties involved

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 4.2 Audit sampling

Definition

• Audit sampling: the application of an audit

procedure to less than 100% of the items within
a population to obtain audit evidence about
particular characteristics of the population.

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 4.2 Audit sampling

Definition
• Representative Samples:
A representative sample is one in which
the characteristics in the sample of audit
interest are approximately the same as
those of the population.

In practice, an auditor can increase the

likelihood of a representative sample by
using care in designing the sampling
process and selection, and evaluating
the results.
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 4.2 Audit sampling

Non-sampling and sampling risk defined

• Sampling risk: the probability that the auditor
has reached an incorrect conclusion because
audit sampling was used rather than 100%
examination (VSA 530.05).

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 4.2 Audit sampling

Non-sampling and sampling risk defined

• Non-sampling risk: arises from factors,
other than sample size, that cause an auditor
to reach an incorrect conclusion, such as the possibility
that:
The auditor will fail to recognise misstatements
included in examined items
The auditor applies a procedure that is not effective in
achieving a specific objective.

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 4.2 Audit sampling

Minimizing Sampling Risk

Sampling Risk Meter

Step 1 Step 2
Use
Adjust appropriate
sample sample
size selection
method

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 4.2 Audit sampling

Methods to gather audit evidence

100% Selecting Audit

examination specific items sampling

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 4.2 Audit sampling
Statistical versus Non-statistical Sampling

• Statistical sampling: an approach to sampling

that has the following characteristics:
Random sample selection
Use of probability theory to evaluate sample results
Major advantage is defensibility, thorough
quantification of sampling risk

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 4.2 Audit sampling

Statistical and non-sampling sampling

• Non-statistical sampling: sampling approaches that do
not have all the characteristics of statistical sampling.
Major advantage is greater application of audit
experience
The basic principles and essential procedures
identified in VSA 530 apply equally to both statistical
and non-statistical sampling.

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 4.2 Audit sampling

Statistical and non-sampling sampling

Similarities of both approaches:

Step 2
Step 1 Select the Step 3
Plan the sample and Evaluate the
sample perform the results
tests

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 4.2 Audit sampling

Statistical and non-sampling sampling

Differences in approach:

Statistical sampling allows the quantification

of sampling risk in planning the sample (Step 1)
and evaluating the results (Step 3)

In nonstatistical sampling those items that

the auditor believes will provide the most
useful information are selected

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 4.2 Audit sampling

Audit sampling process

Planning and design: The auditor considers the
relationship of the sample to the relevant specific audit
objective or control objective and considers certain
other factors that should influence sample size.

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 4.2 Audit sampling
Audit sampling process
Selection: Sample items are selected in such a way
that the sample can be expected to be representative
of the population.

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 4.2 Audit sampling

Audit sampling process

Performing the procedure and evaluating results:
The auditor performs the required audit procedures
on the items selected, projects the results of the
audit procedures undertaken on the sample to the
population and considers sampling risk.

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 True - false questions

1. The appropriateness of audit evidence refers to its

relevance and reliability.
2. The sufficiency of evidence is a measure of evidence
quality
3. Evidence that is obtained directly from the client is
usually considered more reliable than evidence
obtained from a source independent of the client.

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 True - false questions

4. All audit procedures need to be performed at or after

the client’s balance sheet date.
5. An audit program can be used to record the audit work
performed and identify those responsible for performing
the work

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 Mutiple choice questions

1. Which of the following statements best describes what

is meant by the term appropriateness of audit
evidence?
a. Appropriateness is a measure of the quality of audit
evidence.
b. Appropriateness refers to the relevance and reliability of
audit evidence.
c. Appropriateness is a measure of the quantity of audit
evidence.
d. Both a and b.

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 Mutiple choice questions

2. Which of the following statements is true regarding the

relationship between risk and evidence sufficiency for
substantive tests?
a. Evidence sufficiency will be affected by inherent risk,
but not control risk.
b. Evidence sufficiency will be affected by control risk, but
not inherent risk.
c. Evidence sufficiency will be affected by both inherent
and control risks.
d. None of the above statements are true

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 Mutiple choice questions

3. Which of the following factors affects the relevance of

audit evidence?
a. The purpose of the audit procedure.
b. The direction of testing.
c. The type of procedure.
d. All of the above factors affect the relevance of audit

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 Key terms
1. Evidence
2. Sufficiency
3. Appropriateness
4. Reliability
5. Relevance
6. Sampling
7. Audit sampling
8. Sampling risk
9. Non-sampling risk

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THE END OF CHAPTER 4

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