ACCO 360: Chapter (5):

Slide 4:
 You got to obtain the evidence from different resources and once you obtain it you got to evaluate it.
 CAS 500 explains that evidence is used by the auditor in order to conclude an opinion.
 Evidence comes from different sources, the more sources you look at, the more reliable the evidence is
going to be. (the auditor, third parties and clients)

Slide 6:
Relationships among evidence, decisions and persuasiveness.
 Audit evidence decisions: quality affecting persuasiveness of evidence.

Nature of audit procedures: Appropriateness

Extent of testing: Sufficiency

Slide 7:
Audit procedure: detailed instructions for the collection of audit evidence. It is what you really do to obtain
evidence with respect to your audit objective.
You can collect the evidence from:
1. Client records.
2. Physical inspection. (most reliable because you’re seeing it yourself)
3. Confirmation from warehouse.

Slide 8:
Audit procedures fall into three categories:
- Risk assessment procedures.
- Test of controls (this one is applicable only if you plan to rely on key controls, if not then this step is
misdoubted) a control is something that is committed by management and it helps detect any irregularity
in which could be fraud.
- Substantive procedures.

What’s the objective of testing controls? (you test control in order to find if it’s reliable or not)
Check signs on cheques in order to put reliance on it. Why would you want to see two signs on a check? Because
you want to make sure that all cheques released are authentic.
Slide 9:
The auditor looks for potentials of risk of material misstatement (inherit risk and control risk of the client).

Slide 10:
When you’re choosing samples and testing, you should fairly understand the industry and the client before you
commit an audit procedure.

Slide 11:
The timing of audit procedures varies from early in the accounting period to after in ends. An audit is usually not
completed until several weeks or months after the end of the fiscal period (which covers a period of one year)

Slide 13:
Two things you got to remember in the sample size:
- What’s the sample size depending on.
- What’s the method chosen in assessment.

Assessed Risk = Sampling method + Size

Slide 14:
When we are looking at a sufficient appropriate evidence, we got to me sure that it is persuasive (reasonable and
absolute assurance) rather than conclusive.

A persuasive evidence is:

A financial statement of 3 years back is appropriate, sufficient but not timely and thus, the evidence is not
persuasive.

Slide 15:
Appropriateness means that there is enough evidence of high quality to form a conclusion with respect to the
audit objective. The auditor must be persuaded that his/her opinion is correct with a high level of assurance.

The sample size will vary depending upon:

** The sampling method and size is related to assessed risks **

Slide 16:
Relevance – is it relevant? Is it relevant to the control being tested?
The evidence should deal with logical connection with the design of the audit procedure. And it is considered in
terms of specific audit objectives.
Slide 17:
Reliability of Evidence – 6 factors to consider when assessing the reliability of evidence:
1. Evidence obtained directly by auditor: through physical examination, observation, reperformance and
inspection.
2. Independence of source: evidence obtained from a source outside the entity is more reliable.
3. Qualification of source.
4. Consistency from multiple sources.
5. Effectiveness of client’s internal control.
6. Degree of objectivity.

** they’re going on the order of how reliable is each one, 1  highly reliable, 6  least reliable **

Slide 20:
Sufficiency is the amount of evidence obtained.
The most important factors in determining the appropriate sample size are:
- The auditor’s expectation of errors. (has to be coinciding with reasonable assurance that they’re giving)
That will help in selecting the procedure that the auditor will use.
- The effectiveness of the client’s internal controls.

Slide 21:
Timeliness of an evidence refers to when was it accumulated or the period it is covered by the audit.
A balance sheet – evidence is persuasive when it is obtained as close as possible to the balance sheet.

Slide 22:
The auditor needs to consider all the of the evidence factors togethers like what are the combined effects of
sufficiency, appropriateness and timeliness. A part of the evidence gathering decision is related to the cost of
gathering the evidence vs. its persuasiveness.

Slide 25:
Internal vs. External Documentation in Inspection
External documents are more reliable than internal documents.

Slide 26:
 Vouching (document to records)
 Tracing (records to documents)

Slide 27:
External confirmation – is the receipt of a written or oral response from an independent third party verifying the
accuracy of information. It costs a bit of time, costs of selections, sending them out.

Slide 28:
Recalculation involves rechecking the mathematical work by a client.
Reperformance involves redoing non-mathematical procedures such as internal control.
Slide 29:
Analytical procedures – is the use of comparisons between financial and non-financial information to determine
whether account balances appear reasonable.

Slide 30:
Inquiry (least reliable: garbage in, garbage out) obtaining written/oral information from a client in response to
questions from the auditor.

Slide 31:
You got to have reperformance to have recalculation but not the other way around. Basically, anything done by
the auditor is considered high.

Problem 5-24:
1. Completeness  low.
2. Accuracy valuation  low.
3. Occurrence  high.
4. Completeness valuation  high.
5. Rights and Obligation  high.
6. Accuracy  moderate.
7. Completeness  high.
8. Accuracy  moderate.

Slide 37:
 Find any exceptions, things that don’t make sense.
 The analytical procedures are done basically in every procedure in the audit process.

Slide 38:
Examples:
 Hotel: # of rooms rate x occupancy rate = estimated total revenue.
 Attendance revenue: # of games x average ticket price per game x average attendance

This is called analytical procedure analysis.

Slide 39:
CAS 520 description of the analytical procedures:
1. Identify plausible relationships.
2. Identify differences you can live with.
3. Compare expected units to actual recorded.
4. What evidence + further procedure recorded.

Problem 5-27:
a.
1. Commissions expense could be overstated during the current year or could have been understated during
each of the past several years. Or, sales may have been understated during the current year or could have
been overstated in each of the past several years.
 2. Obsolete or unsalable inventory may be present and may require markdown to the lower of cost or market.
3. Especially when combined with 2 above, there is high likelihood that obsolete

b.
1. make an estimate

c.
the financial position seems to be worsening as inventories and accounts receivable increase. The company seems
to be trying to hide this possibly with inventory manipulation understatement of the allowance for uncollectible
accounts and understatement of amortizations expense.

Solution:
a. invoice from vendor.
b. physical inspection / confirmation from the warehouse.
c. direct confirmation with the customer.
d. inspection.
g. getting confirmation from the person who holds the cash.
Solution:

a. – Select a sample of shipping documents and trace to sales invoice and then to sales journal. To find sales
shipped but not recorded in the sales journal.
- Select a sample of sales from the sales journal and vouch (trace to) the sales invoice and then to the
shipping document. Any credit sales not shipped (absence of shipping documents) is likely an
inappropriate/non-existent sale.

b.
- Trace cash sale invoices to cash receipts journal or bank deposit. Any sale recorded as a cash sale but not
paid for would likely be a non-existent sale.
- Trace cash deposit for the last week before the year end to the sales journal to find potential unrecorded
sales.

Slide 40:
Audit documentation is audit trail of data.

Slide 41:
Slide 42:
Working papers belong to the auditor. They should contain specific characteristics.

Slide 43:
The working papers are the property of the auditor. Rules of conduct of the professional accounting bodies
requires members not to disclose any confidential information obtained except with the consent of the client or
when required by courts or by the professional accounting associations.

Slide 45:
Skepticism can go from complete trust (less audit evidence and documentation) to complete doubt (extreme
evidence and documentation). And that would be after the evaluation of internal control and this generally done
in the planning stage.

The key element is how much you trust management. Nowadays you got to prove to trust.