2022 Audit Evidence 2023

Audit Evidence
Chapter 2
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-1

After studying this chapter the students should be
able to
 Contrast audit evidence with evidence used by other
professions.
 Identify the four audit evidence decisions that are
needed to create audit program.
 Specify the characteristics that determine the
persuasiveness of evidence.
 Identify and apply the eight types of evidence used in
auditing
 Understand the purposes of audit documentations
 Prepare organized audit documentation.
General Definitions
Evidence is
a thing or set of things helpful in forming a conclus
ion or judgment
Evidence is
anything presented in support of an assertion. This
support may be strong or weak. The strongest type
of evidence is that which provides direct proof of
the truth of an assertion

Audit criteria include policies, procedures, and
requirements. Audit evidence is used to determine
how well audit criteria are being met. Audit
evidence is used to determine how well policies are
being implemented, how well procedures are being
applied, and how well requirements are being
followed.

Audit Evidence Definition
Evidence in an audit is information that is collected
and required in the review of an entity’s financial
transactions, balances, and internal controls to
certify the financial statements as being fairly
represented.
Audit Evidence is all the information used by the
auditor in arriving at the conclusions on which the
audit opinion is based or to determine which audit
opinion to issue
. 7-5
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
An audit is an evidence gathering process. Audit evidence
is used to evaluate how well audit criteria are being met.
Audits must be objective, impartial, and independent, and
the audit process must be both systematic and
documented.
Audit criteria are standards against which the actual
performance (adequacy of systems and practices and the
economy, efficiency and effectiveness of activities) is
compared or evaluated.
Objective evidence is data that supports the existence of
something.

Objective evidence has a couple of specific purposes. First,
it provides credibility to the audit process. By keeping
evidence of facts gathered during the audit, we can be
confident that an audit actually took place. The auditor
didn’t just go through the motions. Real people were
interviewed, actual records were examined, and current
processes were analyzed. Anybody can review the
evidence that was gathered and feel confident that the
audit was effective.

Learning Objective 1
Contrast(dissimilarity) audit
evidence with evidence used by other
professions.

Nature of Evidence
The use of evidence is not unique to auditors.
Evidence is also used by scientists, lawyers,

and historians.

Evidence
• Also called Primary Evidence
• More reliable
• More satisfactory proof of a fact
Not upon the accuracy of the statement but upon the
probability of its existence
• Original documents, especially if signed or initialed
Audit evidence is what auditors obtain through

–observation (of conditions)
–interviews (of people)
–examination (of records)
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 10
Standards of Audit Evidence
Sufficiency
Competence
Audit evidence consists of both information that supports

and corroborates management's assertions regarding the
financial statements or regarding the internal control over
financial reporting and regarding the information that
contradicts such assertions.
Good auditing evidence should be sufficient, reliable,

provided from an appropriate source, and relevant to the
audit at hand.
Sufficiency
the sufficiency of Audit evidence is a measure of the
quantity of evidence needed.
• Is it enough?
• Is the evidence:
– Factual?
– Adequate?
– Convincing?
• Would a layperson come to the same conclusion as the
auditor? • Use your judgment, but be objective

The quantity of evidence obtained determines its sufficiency
Sufficiency of evidence is measured primarily by the
sample size the auditor selects.
Sample of 100 more sufficient then sample of 50.
Two factors determine the appropriate size sample:
1. Auditor’s expectations of misstatements and

2. the effectiveness of the client’s internal control
If the test sample doesn’t represent the data as a whole, then
not sufficient. X: a large dollar amount for a sample that has
mostly small ones

Sufficiency takes into account whether or not the material
provided is of an adequate quantity that would allow
auditors to make an accurate judgment. If an auditor was
given just one bank statement of a company, it would not be
enough to make any determinations on the financial
standing of that company.
The quantity of audit evidence needed is affected by the
risks of misstatement assessed by the auditor, whereby the
higher the risks the more audit evidence required and by the
quality of the evidence, where the higher the quality the less
evidence perhaps required. A large amount of audit
evidence may, however, not compensate for its poor quality.

Appropriateness is a measure of the quality of audit evidence
needed.We measure the quality of evidence by it’s relevance
and it’s reliability.
Both the quality and quantity of audit evidence needed for an
audit are effected by the risk of material misstatement for the
relevant assertions in a significant account or disclosure.
The risk of material misstatement is the risk that the financial

statements of an organization have been misstated to a
material degree. This risk is assessed by auditors at the two
levels noted below. When the risk of material misstatement is
high, the level of detection risk is lowered (increases the
amount of evidence obtained from substantive procedures).
Doing so reduces the overall audit risk.
Misstatements can arise from fraud or error.' In other words,
a misstatement arises where there is a difference between the
reported figures, and what is expected to be reported in order
for the financial statements to be fairly presented (or show a
true and fair view). Misstatements can be factual, in the case
of a clear breach of a requirement of a financial reporting
standard, or could be judgmental, arising from unsuitable
estimation techniques or the selection of inappropriate
accounting policies.
A misstatement is an error, either intentional or
unintentional, that exist in a transaction or financial
statement account balance

Misstatement in audit is the difference between the
requirement of accounting standard and the actual financial
statement prepared by entity management.
A material misstatement is information in the financial

statements that is sufficiently incorrect that it may impact the
economic decisions of someone relying on those statements.
a material misstatement is untrue information in a financial

statement that could affect the financial decisions of one
who relies on the statement.

The reliability of evidence is related to it’s source, nature
and the circumstances under which it is obtained, for
instance, evidence from outside the company is generally
more reliable than evidence from inside the company,
however, evidence from external source that is not
knowledgeable could be unreliable.
The source and nature of the audit evidence influence it’s

reliability
whereby documentary evidence is normally more reliable
than verbal evidence.

Nature: Nature refers to the type of information that is
received. For example, the information can be provided
through legal documents, presentations, orally from
employees, or through a physical confirmation.
Nature: Audit evidence is usually considered sufficient
when the information is provided through presentations,
physical confirmation, or legal documents.
a document concerning a legal matter; a document drawn up
by a lawyer.
Physical examination is where the audit inspects the
asset physically and counts them whenever required.
This evidence is collected wherever possible based on
the nature of the audit.
Verification is also defined as “An inquiry into the value,
ownership, title, existence, possession, and presence of any
charge on the assets.”
And verification is a function of examining assets to check
& liabilities to check:
Value
Ownership
Title
Existence
Possession and
To see whether the assets are free from any charge or
difficulty etc.

as status, location, purchase date, last service date, and
other documents, etc. This is done to validate if all the
assets are present with the right information or not.
Also, the ownership is checked because the asset can be
either sold, stolen, or given on a lease. Similarly, the title or
the deed of an asset is verified. It's done to validate if the
asset is present with the rightful owner or not. Therefore, it
is important to check ownership.

Create and maintain a fixed asset register
Cross-check physical asset records with the book records to

see if they match or not. If they don't match you can check
what is the issue and resolve it.
Depreciation calculation as per the legal necessities
Labeling and tagging fixed assets for quick and simple
identification of assets.
What Are the Main Features of Asset Infinity's Asset
Management Related to Audit?
Below we have mentioned features of Asset Infinity's asset
management related to Audit:

Source: The source of accounting evidence can be
obtained directly from the company or externally.
Externally sourced information is generally regarded as
more trustworthy and is therefore preferred.
Source: It is one of the major factors that influence the

reliability of the audit evidence. External source
information will always be preferred over any internal
information because it is generally considered void(lack)
of any bias.
whether it is generated by the client, a third party or the
auditor;
Auditing standards have established some general
guidelines so the Auditor can judge the reliability of
evidence.
1. Audit evidence is more reliable when it comes from
knowledgeable outside source.
2. Audit evidence is more reliable when it exists in
documentary form.
Evidence obtained from a knowledgeable source that is

independent of the company is more reliable than evidence
obtained only from internal company sources.

Competence
• Is it reliable?
• Is there better evidence that can be reasonably obtained?
Relevance
• Is it useful?
• Does the information have a logical, sensible relationship
to the issue?
• It can be factual, but not relevant.

Relevance means the relationship of the evidence with the
audit procedure and the assertion being checked.
A given set of audit procedures may provide audit evidence
that is relevant to certain assertions, but not others.
For example, confirmation of balance from a customer is a
relevant evidence as regards existence of receivable, but it
may not be relevant as regards the collectability of the
balance due from customer.
Also, physical observation of inventories is relevant
evidence relating to existence, but is not appropriate
evidence to ensure that the entity owns the inventories.

On the other hand, audit evidence from different sources or
of a different nature may often be relevant to the same
assertion. For example, Checking the terms of the agreement
and confirming the same from the third party.

Relevance. The relevance of audit evidence refers to its
relationship to the assertion or to the objective of the control
being tested.
Relevance. The relevance of audit evidence refers to its
relationship to the assertion or to the objective of the control
being tested. The relevance of audit evidence depends on:
The design of the audit procedure used to test the assertion
or control, in particular whether it is designed to (1) test the
assertion directly or control directly and (2) test for
understatement or overstatement; and
The timing of the audit procedure used to test the assertion
or control.

The relevance of information to be used as audit evidence
may be affected by the direction of testing. For example, if
the purpose of an audit procedure is to test for
overstatement in the existence or valuation of accounts
payable, testing the recorded accounts payable may be a
relevant audit procedure. On the other hand,
when testing for understatement in the existence or
valuation of accounts payable, testing the recorded
accounts payable would not be relevant, but testing such
information as subsequent disbursements, unpaid invoices,
suppliers’ statements, and unmatched receiving reports may
be relevant.

A given set of audit procedures may provide audit evidence
that is relevant to certain assertions, but not others. For
example, inspection of documents related to the collection of
receivables after the period end may provide audit evidence
regarding existence and valuation, but not necessarily cutoff.
Similarly, obtaining audit evidence regarding a particular
assertion, for example, the existence of inventory, is not a
substitute for obtaining audit evidence regarding another
assertion, for example, the valuation of that inventory. On
the other hand, audit evidence from different sources or of a
different nature may often be relevant to the same assertion.

Tests of controls are designed to evaluate the operating
effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level.
Designing tests of controls to obtain relevant audit evidence
includes identifying conditions (characteristics or attributes)
that indicate performance of a control, and deviation
conditions which indicate departures from adequate
performance. The presence or absence of those conditions
can then be tested by the auditor.

Substantive procedures are designed to detect material
misstatements at the assertion level. They comprise tests of
details and substantive analytical procedures. Designing
substantive procedures includes identifying conditions
relevant to the purpose of the test that constitute a
misstatement in the relevant assertion

Identify the four audit evidence

decisions that are needed to
create an audit program.

Major decision of an auditor involves determining
1. The appropriate type of evidence
2. The amount of evidence
In this judgment the cost factor should be considered
The auditors’ decisions on evidence accumulation can be
broken down in to four sub decisions.

Terms Definition
Auditing procedures are steps of action taken in the

process of verification or accomplishing specific
tasks to be performed. Auditing procedures are
identified and selected in relation to particular
items to be verified
Examples of auditing procedures are vouching,
checking, comparing, reconciling, scanning,
analyzing, testing, inquiry, observation, inspection,
etc.
Conti.
Audit procedures: are detailed instruction for the
collection of a particular type of audit evidence that
is to be obtained at some time during the audit.
Procedure is an action, such as a step performed as
part of an audit program or as part of the client's
internal controls.

Cont.
Population size The number of items in the

population from which a sample is drawn.
Population: is all of the items that contain the

characteristics that you wish to understand.
Thankfully, in the case of audit sampling the
population is usually easy to define, e.g. all the
assets on the asset register, all the sales during the
period under review.
Sample size – how many items should be tested
for each audit procedure.
Sampling: Selecting a small but pertinent and
representative number of records to represent the
entire population of records.
The decision of how many items to test must be
made by the auditor for each audit procedures
Items to select
It is necessary to decide which items in the
population to test

Timing
The timing decision is affected by when the client
needs the audit to be completed,
al so it can be affected by the auditor’s belief on
effective timing for accumulation of evidence and
the availability of audit staff.
When the evidence is accumulated or the period
covered by the audit.

Audit Evidence 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

Audit Procedures for Obtaining Audit Evidence
Audit procedures can be classified into the following
categories
1) Risk assessment procedures, and
2) Further audit procedures, which consist of
a) Tests of controls, and
b) Substantive procedures, including tests of details
and substantive analytical procedures.

Selecting Items for Testing to Obtain Audit Evidence
Designing substantive tests of details and tests of controls

includes determining the means of selecting items for
testing from among the items included in an account or the
occurrences of a control. The auditor should determine the
means of selecting items for testing to obtain evidence
that, in combination with other relevant evidence, is
sufficient to meet the objective of the audit procedure.

The alternative means of selecting items for testing are:
1. Selecting all items;
2. Selecting specific items; and
3. Audit sampling.

The auditor may decide that it will be most appropriate to
examine the entire population of items that make up a class
of transactions or account balance (or a stratum within that
population). 100% examination is unlikely in the case of
tests of controls; however, it is more common for tests of
details. 100% examination may be appropriate when, for
example
The population constitutes a small number of large value
items; • There is a significant risk and other means do not
provide sufficient appropriate audit evidence; or
• The repetitive nature of a calculation or other process
performed automatically by an information system makes a
100% examination cost effective.
Selecting all items (100 percent examination) refers to
testing the entire population of items in an account or the
entire population of occurrences of a control (or an entire
stratum within one of those populations). The following are
examples of situations in which 100 percent examination
might be applied:
1. The population constitutes a small number of large value
items;
2. The audit procedure is designed to respond to a
significant risk, and other means of selecting items for
testing do not provide sufficient appropriate audit evidence;
and
3. The audit procedure can be automated effectively and
applied to the entire population.
Selecting specific items refers to testing all of the items in a
population that have a specified characteristic, such as:
1. Key items. The auditor may decide to select specific items
within a population because they are important to
accomplishing the objective of the audit procedure or exhibit
some other characteristic, e.g., items that are suspicious,
unusual, or particularly risk-prone or items that have a
history of error.
2. All items over a certain amount. The auditor may decide
to examine items whose recorded values exceed a certain
amount to verify a large proportion of the total amount of
the items included in an account.

The auditor also might select specific items to obtain an
understanding about matters such as the nature of the
company or the nature of transactions.
The application of audit procedures to items that are
selected as described in paragraphs 25-26 of this standard
does not constitute audit sampling, and the results of those
audit procedures cannot be projected to the entire
population.
Audit sampling is the application of an audit procedure to
less than 100 percent of the items within an account balance
or class of transactions for the purpose of evaluating some
characteristic of the balance or class

Audit sampling is designed to enable conclusions to be
drawn about an entire population on the basis of testing a
sample drawn from it.
Audit sampling is an investigative tool in which less than
100% of the total items within the population of items are
selected to be audited. It is an auditing technique that
provides supporting evidence that allows auditors to issue
audit opinions without having to audit every single item and
transaction.

1. Watch employees count inventory to determine whether
company procedures are being followed.
2. Count a sample of inventory items and record the amount
in the audit files.
3. Calculate the ratio of sales commission expense to sales as
a test of sales commissions.
4. Review the accounts receivable with the credit manager to
evaluate their collectability
5. Compare a sales invoice with the sales journal for
customer name and amount.
6. Obtain a written statement from a bank stating that the
client has $15,671 on deposit and liabilities of $500,000 on a
demand note.
7. Add the sales journal entries to determine whether they
were correctly totaled.
8. Extend the cost of inventory times the quantity on an
inventory listing to test whether it is accurate.
9. Obtain information about internal control by requesting
the client to fill out a questionnaire.
10. Trace goods dispatch notes/sales invoices to entries in
sales ledger and trade receivable subledger
11. Discuss and confirm with management that there are no
unrecorded liabilities.

Audit program: An audit program is a set of
policies and procedures that dictate how auditing
is to be implemented. These measures are
generally employed to determine what kind of
evidence, and how much evidence must be
collected and evaluate- as well who will collect
and evaluate it, and when this should be done.
An audit program is a listing of audit procedures to
be performed in completing the audit.

An audit program is a set of arrangements that are
intended to achieve a specific audit purpose within
a specific time frame. It includes all of the
activities and resources needed to plan, organize,
and conduct one or more audits.

Audit Program
It includes a list of the audit procedures

the auditor considers necessary.
 Sample sizes
 Items to select
 Timing of the tests
Most auditors use computers to facilitate

the preparation of audit programs.

Specify the characteristics that

determine the persuasiveness
of evidence.
Persuasive Having the power to influence. Most
audit evidence is persuasive

Persuasiveness of Evidence
Competence
Sufficiency
Combined effect
Persuasiveness and cost

Competence
 Relevance
 Independence of provider
 Effectiveness of internal controls
 Auditor’s direct knowledge
 Qualifications of providers
 Degree of objectivity
 Timeliness

Objective evidence can be defined as information
which is based on facts obtained through
observation, measurement, test or other means.
There are two basic "types" of objective evidence:
1. Physical objective evidence that can be seen,
touched or witnessed by several people
simultaneously.
2. Testimony given to you by management as
being company policy, procedure, etc

Relevance refers to the extent to which the
information bears a clear and logical relationship
to the audit criteria and objectives.
Relevance also refers to the relationship of
evidence to its use. The information used to prove
or disprove an issue is relevant if it has a logical,
sensible relationship to that issue. Information that
does not is irrelevant and, therefore, should not be
included as evidence.

Evidence relevance is often related to the assertion
being tested. For example evidence that is relevant
for testing the existence assertion would not be
relevant for testing the completeness assertion.
The reliability of evidence is related to it’s source,
nature and circumstances under which it is
obtained. for examples evidence from a source
outside the company is generally more reliable than
evidence from a source inside the company.

Reliability concerns whether there is a likelihood
of coming up with the same answers when either
the audit test is repeated or information is obtained
from different sources. This means that a
measurement or evidence-gathering process is
more reliable when repeated measures or
performances of the process produce the same
result .

Appropriateness of evidence is a measure of the
quality of evidence, meaning its relevance and
reliability in meeting audit objectives for classes
of transactions, account balances, and related
disclosures. If evidence is considered highly
appropriate, it is a great help in persuading the
auditor that financial statements are fairly stated.

Note that appropriateness of evidence deals
only with the audit procedures selected.
Appropriateness cannot be improved by
selecting a larger sample size or different
population items. It can be improved only by
selecting audit procedures that are more relevant
or provide more reliable evidence.

Conti.
Sufficiency: is an amount of evidence, which is

enough to form a reasonable opinion. The
quantity of evidence obtained determines its
sufficiency. Therefore, the sample size selected
by auditors is important in determining the
sufficiency of evidence.

Combined effect: The persuasiveness of evidence
can only be evaluated after considering the
combination of appropriateness, sufficiency and
securities. a sample of very appropriate evidence
is not persuasive unless it is also timely. Similarly,
a large sample of unreliable evidence is not
persuasive. There are direct relationships among
the four evidence decisions and the four qualities
that determine the persuasiveness of evidence.

Relationship between persuasive and cost
In making decision about evidence for a given

audit, both Cost and persuasiveness must be
considered. The auditor’s goal is to obtain a
sufficient amount of timely, reliable evidence that
is applicable to the information being verified, and
to do so at the lowest total cost, with the greatest
amount of efficiency

Identify and apply the seven types

of evidence used in auditing.

Types of Audit Evidence
1. Physical examination
2. Confirmation
3. Documentation
4. Analytical procedures
5. Inquiries of the client
6. Reperformance
7. Observation
8. Inspection

Audit evidence is what auditors obtain through
–observation (of conditions)
–interviews (of people)
–examination (of records)
Physical Evidence
• Obtained by observing:
–People
–Property
–Events
Physical Observations: Auditors verify the tangible and
intangible assets through inspections and on-spot
observations. This is typically conducted during inventory
audit procedures.
Physical Evidence
• Obtained by observing:
–People
–Property
–Events
Physical objective evidence that can be seen, touched or

witnessed by several people simultaneously.

Physical examination means to view physical
evidence of an asset. For example. The auditor
might physically examine plant, equipment,
Automobiles, buildings ,factory machinery or
inventory items to obtain evidence as to their
existence and condition.
Physical evidence: Refers to the inspection or count
by the auditor of tangible asset. This type of
evidence is most associated with inventory and
cash but it is also applicable to the verification of
securities, notes receivable and tangible fixed
assets
Confirmation is the communication with outside
parties to authenticate internal evidence.
Confirmation: This term refers to getting account
balance verification from unrelated third parties. A
good example is sending letters to customers or
vendors of the business to verify accounts
receivable or accounts payable balances.

Confirmation is the process of obtaining and
evaluating a response from a debtor, creditor, or
other party in reply to a request for information
about a particular item affecting the financial
statements. It is written form.
Confirmation: Entails the receipt of a written
response, requested by the auditor, from an
independent third party verifying the accuracy of
information as well as to authenticate internal
evidence.

Documentation is Written or printed paper that
bears information that can be used to provide
significant evidence. Could also be a recording,
computer readable information, or a photograph.
Most common type of evidence
• May be external
• May be internal (originates with auditee)
• Source affects reliability

Documentary evidence: is commonly refers to the
auditor’s examination of the client’s documents
and records to verify the information that is or
should be included in the financial statements. For
example, the client normally retains bank
statement, property tax bill, notes receivables,
notes payables, bond certificate, contracts, debit
memorandum, credit memorandum a customer
purchase order, a shipping document, and duplicate
sales invoices for each sales transaction.

Analytical Evidence
• Analysis and verification
• Source = computations, comparisons
• Types:
– Standards
– Prior year or years’ performance
– Similar operations
– Laws/regulations
– Reasoning
– Component information

Analytical procedures
use comparisons and relationships to assess whether
account balances or other data appear reasonable
compared to the auditor ’ s expectations.
Understand the client’s industry and business
(highlighted any changes)

 Assess the entity’s ability to continue as a
going concern (assess the likelihood of failure)
Going concern: The expectation that a
business will remain operating for at least another
12 months.
 Indicate the presence of possible misstatements

in the financial statements (Significant
unexpected differences. Unusual fluctuations)

Reduce detailed audit tests analytical procedure
reveals no unusual fluctuations, this implies the
possibility of a material misstatement is
minimized. Perform fewer detailed tests.
Tests of details are used by auditors to collect
evidence that the balances, disclosures, and
underlying transactions associated with a client's
financial statements are correct. For example, an
auditor could test the prepaid expenses asset
account by examining each of the prepaid
expenses that comprise the ending prepaid
expenses balance.
Analytical procedure A comparison of financial
statement amounts with an auditor's expectation.
An example is to compare actual interest expense for the
year (a financial statement amount) with an estimate of
what that interest expense should be. The estimate can be
found by multiplying a reasonable interest rate times the
average balance of interest bearing debt outstanding
during the year (the auditor's expectation). If actual
interest expense differs significantly from the expectation,
the auditor explains the difference in audit
documentation.Examine expense line items to see if there
are any unusual expenditures in a reporting period that
require additional investigation.
Analytical Procedures.
Audits studies relationships among data.
Unusual fluctuations occur when significant
difference are not expected but do exist or when
significant differences are expected but do not
exist. Required during the planning and
completion phases on all audits.

Analytical procedures are one of many financial
audit processes which help an auditor understand the
client's business and changes in the business, and to
identify potential risk areas to plan other audit procedures
Analytical procedures include comparison of financial
information (data in financial statement) with
1. prior periods
2. budgets
3. forecasts
4. Similar industries and so on.

Inquiries of the client: Auditor obtains information
from the client in response to questions. Although
much evidence is obtained through inquiry, it
cannot be regarded as conclusive and may be
biased in the client’s favor. or ask questions of
client personnel.

Inquiry: This term refers to questioning
knowledgeable people who work for your client.
Auditors typically question department heads
and key employees to understand how each
department works. You can’t sample an inquiry
because you have to take the whole response into
account in order to understand it.

Reperformance is the auditor’s independent tests
of client accounting procedures or controls that
were originally done as part of the entity’s
accounting and internal control system. Whereas
recalculation involves rechecking a computation,
reperformance involves checking other
procedures.

Reperformance: This term refers to checking
the sampling work the client has already done.
For example, company policy dictates that no
employee is paid unless she has turned in a
timesheet. The client states that this rule is in use
for 100 percent of all paychecks. You can test
this client assertion by taking a sample of payroll
checks and matching them to the timesheets.

For example, the auditor may compare the price
on an invoice to an approved price list, or may
reperform the aging of accounts receivable.
Another type of reperformance is for the auditor
to recheck transfers of information by tracing
information included in more than one place to
verify that it is recorded at the same amount
each time.

Recalculation: This term refers to checking the
mathematical accuracy of figures and totals on a
document. For example, a sample may have three
columns: cost per item, items ordered, and total.
You perform recalculation if you verify the figures
on the invoice by multiplying cost per item times
items ordered and making sure the figure equals
the total.

For example, the auditor normally makes limited
tests to ascertain that the information in the sales
journal has been included for the proper
customer and at the correct amount in the
subsidiary accounts receivable records and is
accurately summarized in the general ledger.

Observation: Concerns the use of the senses to
assess(to determine the value, significance, or
extent of) certain activities. Auditor witnesses the
physical activities of the client differs from
physical examination because physical
examination counts assets, while observation
focuses on client activities.
Observation is the process of viewing a client
activity for example the auditor may observe the
application of internal control procedures such as
the client’s inventory taking procedures to be
occurred or not.
Observation: This means watching the client’s
employees do their jobs. An example is to be in
attendance when your client takes its physical
ending inventory in order to verify that it exists.
The auditor uses the inspection procedure when
examining records or documents.
Inspection provides evidence about the existence of
the asset.

Inspection involve a reading or point by point
review of document or record for example. The
terms examine , review(to examine again), read,
and scan are often describe applications of the
inspection techniques.
the entity’s application of accounting policies like
revenue recognition.

For example, the client often retains a customer
order, a shipping document, and a duplicate sales
invoice for each sales transaction. These same
documents are useful evidence for the auditor to
verify the accuracy of the client’s records for
sales transactions. Documentation is widely used
as evidence in audits because it is usually readily
available at a relatively low cost. Sometimes, it is
the only reasonable type of evidence available.

Relationships
Types of
evidence
Audit Specific
procedures instructions
Sample Items to Timing

size select of tests

Information Often Confirmed
Information Source
Assets
Cash in bank Bank
Accounts receivable Customer
Notes receivable Maker
Owned inventory out on consignment Consignee
Inventory held in public warehouses Warehouse
Cash surrender value of life insurance Insurance co.

Information Source
Liabilities
Accounts payable Creditor
Notes payable Lender
Advances from customers Customer
Mortgages payable Mortgagor
Bonds payable Bondholder

Information Source
Owners’ Equity
Shares outstanding Registrar and
transfer agent
Other Information
Insurance coverage Insurance co.
Contingent liabilities Bank, lender,
and clients
legal counsel
Bond indenture agreements Bondholder
Collateral held by creditors Creditor

Documentation
Analytical procedures
Inquiries of the client
Reperformance
Observation

Competence of Types of Evidence
Type of evidence
Independence of provider
Effectiveness of client’s internal controls
Auditor’s direct knowledge
Qualifications of provider
Objectivity of evidence
Terms and Types of Evidence
Terms Type of Evidence

Examine Documentation
Scan Analytical procedures
Read Documentation
Compute Analytical procedures
Recompute Reperformance
Foot Reperformance

Scanning requires critically reviewing (rereading)
accounting records of an organization with the aim
of detecting errors, omissions or unusual entries.
It involves scrutinizing entries in accounting
documents to ascertain their authenticity and
accuracy. During the scanning procedure, the auditor
is on the lookout for unusual items, such as
unauthorized debits on revenue accounts or
fraudulent credits on expense accounts.

Foot (add) the individual accounts payables
located in the subsidiary ledger and compare the
total with the general ledger to determine if the
amounts agree.

Terms and Types of Evidence
Terms Type of Evidence

Trace Documentation/
Reperformance
Compare Documentation
Count Physical examination
Observe Observation
Inquire Inquiries of client
Vouch Documentation

Tracing refers to first selecting an accounting
transaction (a source document) and then following
it into the journal or ledger. The direction of testing
in this case is from the source documents to the
journals or ledgers and tests whether transactions
that occurred are recorded (completeness) in the
accounting records.

Tracing

Vouching refers to first selecting an item for
testing from the accounting journals or ledgers and
then examining the underlying source document.
Thus, the direction of testing is from the journals or
ledgers back to the source documents. Vouching
provides evidence that items included in the
accounting journals or ledgers have occurred (are
valid).

Vouching

Understand the purposes of

audit documentation.

Definitions
Audit documentation (working papers) are records

kept by the auditor of procedures applied, tests
performed, information obtained, and pertinent
conclusions reached
in the engagement. The documentation provides
the principal support for the auditor's report.

Working papers are the evidence of work done
by the auditor, he should prepare working papers in
order to provide evidence that audit was properly
performed according to GAAS standards

Audit Documentation
Audit documentation is the principal record

of auditing procedures applied, evidence
obtained, and conclusions reached by
the auditor in the engagement.

Audit Documentation
Purposes of audit documentation
Ownership of audit files
Confidentiality of audit files

Audit documentation should be prepared in
sufficient detail to provide a clear understanding of
its purpose, source, and the conclusions
reached. Also, the documentation should be
appropriately organized to provide a clear link to
the significant findings.

Conti.
Confidentiality: according to relevant ethical

requirements auditors shall respect the
confidentiality of information acquired and not
disclose any such information to third parties
without proper and specific authority, unless there
is a legal or professional right or duty to disclose,
nor use the information for their personal
advantage or the advantage of third parties.

Sarbanes-Oxley Act
The Sarbanes-Oxley Act

requires auditors of public
companies to prepare and
maintain audit working
papers for a period of no
less than seven years.

Prepare organized audit

documentation.

Permanent Files
These files are intended to contain

data of a historical or continuing
nature pertinent to the current audit.

The permanent file typically includes the following:
Extracts or copies of such company documents of
continuing importance as the articles of
incorporation, bylaws, bond indentures and
contracts( pension plans, leases & stock options).
Analyses from previous years of accounts that have
continuing importance the auditor such as long-
term debt, stockholder’s equity accounts, good will
and fixed assets.
Information related to the evaluation of internal
control such as organizational charts and
flowcharts and other internal controls. 7 - 117
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Incorporation is the legal process used to form a
corporate entity or company. A corporation is a
separate legal entity from its owners, with its
own rights and obligations. Corporations can be
created in nearly all countries in the world and
are usually identified as such by the use of terms.

Bylaws
The rules and regulations enacted by an
association or a corporation to provide a
framework for its operation and
management.
Bylaws may specify the qualifications,
rights, and liabilities of membership, and
the powers, duties, and grounds for the
dissolution of an organization.
bylaws
the written rules for conduct of a corporation,
association, partnership or any organization. They
should not be confused with the Articles of
Corporation which only state the basic outline of
the company, including stock structure. Bylaws
generally provide for meetings, elections of a
board of directors and officers, filling vacancies,
notices, types and duties of officers, committees,
assessments and other routine conduct. Bylaws
are, in effect a contract among members,

Current Files
Audit program
General information
Working trial balance
Adjusting and reclassification entries
Supporting schedules

General information includes audit planning
memos, copies of minutes of the board of
directors meeting, supervisors’ review
comments.
An audit program is a set of arrangements that
are intended to achieve a specific audit purpose
within a specific time frame. It includes all of the
activities and resources needed to plan, organize,
and conduct one or more audits.

Types of Supporting Schedules
Analysis
Trial balance or list
Reconciliation of amounts
Tests of reasonableness

A test of reasonableness schedule contains
information that enables the auditor to evaluate
whether a certain account balance appears to be
misstated.
One example of a test of reasonableness schedule
is a schedule that compares current year expenses
to prior years' amounts. This type of schedule is
intended to show which accounts need
investigation due to significant variances.

Types of Supporting Schedules
Summary of procedures
Examination of supporting documents
Informational
Outside documentation

Characteristics of Audit
Documentation
Each audit file should be properly identified.
Documentation should be indexed and

cross-referenced.
Completed documentation must clearly indicate

the audit work performed.
It should include sufficient information.
It should plainly(clearly) state the conclusions reached.

Fairness and reliability relate to good and honest
reporting. Fairness deals with honesty in reporting
the telling of an accurate and complete story.
Reliability deals with information you can count on
and trust as part of the performance story. Fair and
reliable performance information is not misleading.

End of Chapter 2

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Audit Evidence

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-1

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The use of evidence is not unique to auditors.

Evidence is also used by scientists, lawyers,

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-9

Audit evidence is what auditors obtain through

Audit evidence consists of both information that supports

Good auditing evidence should be sufficient, reliable,

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 12

Two factors determine the appropriate size sample:

1. Auditor’s expectations of misstatements and

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The risk of material misstatement is the risk that the financial

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A material misstatement is information in the financial

a material misstatement is untrue information in a financial

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The source and nature of the audit evidence influence it’s

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Cross-check physical asset records with the book records to

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Source: It is one of the major factors that influence the

Evidence obtained from a knowledgeable source that is

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Identify the four audit evidence

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Auditing procedures are steps of action taken in the

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Population size The number of items in the

Population: is all of the items that contain the

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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 39

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

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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 41

Designing substantive tests of details and tests of controls

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