Audit

Evidence
Process
Gathering sufficient,
reliable, relevant, and
useful evidence.

AUDIT EVIDENCE
PROCEDURES
following

the audit program

examination
expression

and evaluation of information

of an opinion on the efficiency,

economy, and effectiveness of the
activities

audit program

It is a systematic plan for each phase of audit work

providing a basis for assigning work to the team
members.
It is a means of controlling and evaluating progress
and assisting in training inexperienced staff
members.
It provides a summary record of work done.
It reduces the direct supervision requirement by
providing a clear path for subordinates and
provides
internal
audit
quality
assurance
information.

CRITERIA FOR SUCCESS

the

objectives of the operation should be

stated and agreed to by the auditee up front.
programs should be tailor-made where possible
and the reasoning behind each work step
should be shown.
audit program is a series of detailed
instructions to be followed and prioritized.
All audit programs should be flexible.
Supervisory approval must be shown for all
audit scheduling and staffing.

The audit supervisor must be satisfied with the:

Audit subject
Audit objective
Audit scope
Pre-audit planning
Selection of audit procedures
Procedures for evaluation or testing
Procedures for communication
Report preparation
Follow-up review

The audit program provides for the collection of

audit evidence of:

Structures
Documentation standards
Systems documentation

The overall audit approach must be:

Simple
Practical
Quick
Common sense
Business oriented
Technically competent

STATISTICAL SAMPLING
In many cases the auditor can gain
adequate assurance regarding the
mitigation of risk without having to
examine every single record or
transaction. Under such circumstances,
the auditor may choose to use a variety of
sampling techniques in order to obtain
evidence that is satisfactory and
competent.

WHY SAMPLE?
The

underlying assumption of sampling

is that the results of a sample yield
accurate information about the
population from which the sample was
taken.
Cost and time constraints.

Methods of Sampling
Judgemental
(Non-statistical sampling)

involves the
auditor making a
judgment call as
to the number of
items to be
selected and
which items.

Statistical
sampling
process

of testing
a portion of a
group of items to
evaluate and draw
conclusions about
the population as
a whole.

SAMPLING RISK
The uncertainty that exists in applying
the audit procedures is commonly
referred to as audit risk.
Sampling risk is the risk that the sample
chosen does not appropriately reflect the
population as a whole, while non-sampling
risk is the risk that, having obtained a
representative sample, the auditor still misses
a significant error.

ASSESSING SAMPLING
RISK

2 main aspects of sampling

risk
1.

2.

The risk of over-reliance on controls (beta

risk), which is the risk that the sample
leads the auditor to place reliance on the
control when it is not justified.
The risk of under-reliance on controls
(alpha risk) is the risk that the sample
leads the auditor to evaluate the
population as beyond tolerance levels
erroneously.

When performing substantive

tests
The

risk of incorrect acceptance (beta risk)

is the risk that the sample supports the
auditors conclusion that the amount or
quantity is not materially misstated when
in fact it is.
The risk of incorrect rejection (alpha risk) is
the risk that the sample leads the auditor
to believe that the amount or quantity is
materially misstated when in fact it is not.

PLANNING A SAMPLING
APPLICATION

Audit Objectives
The

auditor may focus on the specific

objectives to be achieved by the tests to
be carried out on the sample selected.

The

sampling technique chosen will be

dependent on the nature of the opinion
the auditor wishes to express.

Population Characteristics
Define

the population about which an

opinion will be expressed in terms of the
populations characteristics.
Any opinions expressed based on a
sample can only be in terms of the
population that was sampled in the first
place.

In any population, a common evaluation technique is to

determine the average value of the population. Three
averages are possible: the mean, the median, and the
mode. In statistical sampling, the most commonly used
average is the mean.
The mean or arithmetic average value of a data set
may be calculated as the sum of all values, divided by
the number of data points.
The median represents the middle value in a
population range.
The mode represents the most frequently occurring
value in a population.

Deviations from the Mean

The amount of variability in the population
defines the spread of values. One method of
determining the variability of a population is to
examine its variability from the mean.
Standard deviations measure dispersion
around the mean. The standard deviation can
be calculated as the square root of the
average of squared deviations of each
member of the population from the mean.

CALCULATING SAMPLE
SIZE
As previously stated, the amount of variability
in the population defines the spread of values.
This will also affect accuracy and consequently
the size of the sample required when
estimating a value. The greater the variability,
the larger the sample size required.
The population size does not normally affect
sample size.

QUANTITATIVE METHODS
In addition to statistical analysis

Trend Analysis
Practice of collecting information and
attempting to spot a pattern, ortrend, in
the information.
Used to evaluate the behavior of a
variable such as turnover of a period of
time.

Chi-Square Tests
Non-parametric tests capable of analyzing
relationships between qualitative data.
Any statistical hypothesis test in which
the sampling distribution of the test
statistic is a chi-square distribution when
the null hypothesis is true.

Correlation Analysis
The measurement of the extent of
association of one variable with another.
In statistics, dependence is any statistical
relationship between two random
variables or two sets of data. Correlation
refers to any of a broad class of statistical
relationships involving dependence.

Graphical Analysis
Scatter diagram, which refers to any
graph of data points. The more discernible
a pattern appears in the graph, the more
likely one variable is related to another
and therefore can be used to predict the
others value.

Learning Curves
Graphical representation of the increase
of learning (vertical axis) with experience
(horizontal axis.
Learning curves are evaluated by
computing the time required per unit of
production each time that the cumulative
output is doubled.

Ratio and Regression Analysis

Ratio analysis assumes a given proportional
relationship between two numbers and is
normally used for comparisons over time.
Regression analysis is used to estimate the
effect that a movement in one variable (the
independent variable) causes a movement
in the other variable (dependent variable).

Linear Programming
An operations research tool used for the
allocation of scarce resources or to
determine optimal blends of raw
materials.
Method to achieve the best outcome
(such as maximum profit or lowest cost)
in a mathematical model whose
requirements are represented by linear
relationships.

PROJECT-SCHEDULING
TECHNIQUES

Program Evaluation Review

Techniques
Used to diagrammatically identify
dependent and independent activities.
Statistical tool, used in project
management, which was designed to
analyze and represent the tasks involved
in completing a given project.

Critical Path Method

Scheduling tool that was developed
independently of PERT but uses a similar
diagram.

GANTT or Bar Charts

Illustrate the start and finish dates of the
terminal elements and summary elements
of a project.

SIMULATIONS

Monte Carlo Simulations

Uses the computer to simulate
uncertainty via random behavior based on
the probabilities entered and then
estimates specified models several times
to determine average performance.

Game Theory
Mathematical models of optimal
strategies under various incentive
schemes. This is used in competitive
environments to explore what if
solutions.

Queuing Theory
Facilitates the use of mathematical
models to minimize the total cost for a
given rate of arrivals; the minimized cost
includes both service costs (facility and
operating costs) and waiting costs (the
idle resources waiting in line or having
service points idle).

COMPUTER-ASSISTED AUDIT
SOLUTIONS
The use of knowledge-based systems which
will permit the distribution of advanced
audit techniques to less skilled staff.
Commonly referred to as ComputerAssisted Audit Tools (CAATs), ComputerAssisted Audit Techniques (CAATs), or more
correctly Computer-Assisted Audit Tools and
Techniques (CAATTs).

Computer-Assisted Audit Tools

and Techniques (CAATTs)
Needed because of the large volumes of
data in multiple locations involved in the
managing of a complex business
environment.
Involves the merging of software into an
audit program.

Information retrieval and analysis

programs and procedures
generalized

audit software
application and industry-related
software
customized audit software
information retrieval software
standard utilities
on-line inquiry

GENERALIZED AUDIT
SOFTWARE
Software designed specifically for auditors
in order to provide a user friendly audit
tool to carry out a variety of standard
tasks required by the auditor such as
examining records, testing calculations,
and making computations.

CUSTOMIZED AUDIT
SOFTWARE
Software designed to run in unique
circumstances and to perform unique
audit tests.

INFORMATIONRETRIEVAL
SOFTWARE
This category of software includes report
writers, program generators, and fourthgeneration languages.

UTILITIES
Programs written to perform common
tasks such as copy, sort, print, merge,
select, or edit. These programs are
normally parameter driven and may be
used in combination with other software.

ON-LINE INQUIRY
Interactive interrogation can provide
comparison data for audit reports, can
provide confirmation of corrective action
taken, and can be an additional source of
audit information.

Other alternatives

conventional programming languages

microcomputer-based software

TEST TRANSACTION
TECHNIQUES

Test data.
Integrated Test Facility (ITF).
Source-code review.
Embedded audit modules (SCARFs
[System Collection Audit Review Files]).
Parallel simulation.