General

Basic techniques for collecting evidence in auditing

Othuke Andrew Akpeli9 years ago6 years ago034 mins

There are several ways the auditors can gather
sufficient appropriate evidence. The main methodologies are:

·
Inspection
of documents, produces and tangible assets.

·
Observation,
seeing for one is the best possible confirmation especially in connection

with
internal control systems.

·
Enquiry.
Asking questions. This is a necessary and valid technique. The reliability of
the evidence depends on the qualification and integrity of its source. A good
example is the circulation of debtors at the year end to confirm balances in
the sales ledger.

·
Confirmations.
These should be in writing, external sources being preferable to internal
sources; for example, a supplier’s statement can be used to confirm a purchase
ledger balances.

·
Computation-additions,
calculations, reconciliations, etc.

·
Re-performance-testing
controls by re-performing them, for example, checking the bank reconciliation.

·
Sample
testing.

Auditors obtain evidence about each type of
transaction by examining a representative sample of each type. This is called
sample testing and is applied as much to assets and liabilities as to routine
transactions.

The size of the sample to be tested depends on:

·
The
strength of the internal control system;

·
The
materiality of the items;

·
The
number of items involved;

·
The
nature of the item;

·
The audit
risk attached.

Sources of audit evidence

Sources of audit evidence include from within:

·
Accounting
systems;

·
Accounting
records;

·
Documents;

·
Management
and staff.

And from
without:

·
Customers;

·
Suppliers;

·
Lenders;

·
Professional
advisers, etc.

The sources
and amount of evidence required will depend on:

·
Materiality;

·
Relevance;
and

·
Reliability

Of the evidence available from a source.

Remember that auditors have to provide evidence
that is appropriate to the assertion being validated, it must be reliable
evidence, i.e. not flawed by a wrongly performed or invalid test or evidenced
by a copy document rather than an original and there must be enough of it to a
valid test, so it must be sufficient.

Appropriateness

The appropriateness of audit evidence depends upon
whether it assists the auditors in forming an opinion on some aspect of the
assertions on which the financial statements are based. For, example evidence
that a recorded asset exists is relevant to audit objectives.

Reliability

The reliability of audit evidence can be assessed
to some extent on the following presumptions:

·
Documentary
evidence is more reliable than oral evidence.

·
Evidence
from outside the enterprise (e.g. a confirmation bank letter) is more reliable
than that secured solely from within the enterprise.

·
Evidence
originated by the auditor by such means as analysis, audit testing and physical
inspection is more reliable than evidence obtained from others.

·
Evidence
for a figure in the accounts is usually obtained from several sources. For
example, to verify debtors auditors could provide evidence form:

·
Verifying
that there is a good sales system with strong internal controls;

·
Performing
a debtors circularization;

·
Carrying
out ration analysis;

·
Checking
payment of balances after date, etc.

·
The
cumulative effect of several evidential sources which give a consistent view is
greater than that from a single source (i.e. in this case 2+2 = 5).

·
Original documents
are more reliable than photocopies or facsimiles.

Sufficiency

Sufficiency is the great problem. The auditors’
judgments will be influenced by:

·
Their
knowledge of the business and its industry.

·
The
degree of audit risk.

Assessment
of this is helped by considering:

·
Nature
and materiality of items of account (e.g. provisions for liabilities may be
material but may be difficult to measure accurately because of the assumptions
involved.)

·
The
auditor’s experience of the reliability of the management and staff and the
records.

·
The
financial position of the enterprise (in a failing enterprise, directors may
wish to bolster profits by over-valuing assets or suppressing liabilities).

·
Possible
management bias (as above) but also the management may wish to ‘even out’ profits
for stock market image or taxation reasons.

·
The
persuasiveness of the evidence.

·
The
nature of the accounting and internal control systems and the control
environment.