List seven Major Types of Evidence and Provide a Procedural Example of Each
Physical Examination
It involves auditors of physical verification of the existence of different assets. Auditors can utilize a physical examination to verify the condition or state of an asset. Auditors collect this form of evidence themselves with the main source of evidence being fixed assets.
Documentary Evidence
Documentation is an essential part of an audit. It needs auditors to collect documents about various audit aspects that might be external and internal. The audit evidence source is also essential in the documentation. Auditors can employ different techniques that include tracing or vouching with documentation as audit procedures part.
Oral Evidence
In the audit process, auditors might come across different items where they require to comprehend the design audit process. This is mostly done through inquiries. Auditors can enquire from client’s management about different aspects of their processes or operations to get audit evidence. Nevertheless, inquiries might not be considered a strong kind of evidence.
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Reperformance
Re-performane is the auditor’s process of reperforming different internal controls processes to look for deficiencies. Reperformance audit evidence includes reperforming account or bank payables or receivables reconciliations to assess the internal control in the client place. Auditors can also establish reperformance to determine the client’s control risk.
Observation
In this case, auditors observe different client processes or operational aspects. It can assist auditors to get the client’s processes to view and assess their deficiencies. Observation varies from the physical examination as it centers on processes instead of physical assets.
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Analytical Procedures
Analytical procedures involve carrying out different financial statements analyses to identify any discrepancies or trends. Auditors conduct their computations to conduct analytical procedures. Also, analytical procedures can assist in getting a general perspective of change in the financial year.
Confirmations
This involves circularization to third-party that mostly include receivables, accounts payables, and banks. Auditors confirm recorded closing balance through conformation in the financial statements for specific parties (Oag-bvg.gc.ca, 2018).
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How Analytical Procedures are useful Throughout the Audit
Importance of Analytical Procedures in The risk assessment stage of the audit.
The analytical procedure is utilized to help the auditor in planning the extent, timing, and nature of other auditing procedures. As a substantive test to get evidential matter regarding specific assertions associated with transactions classes or account balances. Analytical procedures assist the auditors to get a comprehension of the client’s business and might direct the attention of the auditor to possible issues and areas needing special investigation.
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Importance of Analytical Procedures in The substantive procedures stage of the audit.
The substantive procedure is anticipated to generate evidence that an auditor assembles to enhance the assertion that are no material misstatements about the accuracy, validity, and completeness of the entity’s financial records. Analytical procedures are utilized as substantive procedures when the auditor regards that the application of analytical procedure can be more efficient or effective compared to tests of details in lowering the material misstatements risk at the assertion level to an adequately low level.
Importance of Analytical Procedures in Near the end of the audit.
Analytical procedures are conducted as a general financial statements review at the end of the audit to determine if they are consistent with the auditor’s comprehension of the entity. Final analytical procedures are not carried out to get extra substantive assurance.
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List the five sources of information that are available to the auditors in developing expectations for analytical procedures.
- Comparable financial data from past periods
- Industrial averages
- Relationship among fundamentals of financial information in a period
- Forecasts or budget
- Relevant nonfictional information for instance numerous operating costs of a trucking business should be related closely to the number of miles driven
List and describe four techniques that may be used by the auditors in developing expectations for analytical procedures.
- Trend Analysis that entails the review of the changes in an account balance over time.
- Ratio analysis entails the relationship comparison between two or more financial statement accounts, or account balances comparison to nonfinancial data. The two primary approaches are cross-sectional analysis and horizontal analysis.
- Regression analysis entails the application of statistical models to measure auditors’ expectations regarding financial statement ratios or amounts.
- The reasonableness test is the same as regression such that anticipation is developed, but applies other approaches to generate the estimate (Ang, 2014).
- When analytical procedures disclose unexpected changes in financial relationships relative to prior years, the auditors consider the possible reasons for the changes. Give several possible reasons for the following significant changes in relationships:
The rate of inventory turnover (ratio of cost of goods sold to average inventory) has declined from the prior year’s rate.
A decline in the rate of inventory turnover implies that the company is holding its inventory longer than it used to in the past. This could be due to an increase in the cost of goods sold compared to before, the competition is higher than it was in the past, there are more preferable substitutes products in the market, there could be a decline in quality or preference, poor marketing strategies, or decline in people purchasing power in the targeted market.
The number of days’ sales in accounts receivable has increased over the prior year.
An increase in accounts receivable days implies that customers are taking longer than before to pay their bills. This might be a warning that customers are not satisfied with the service or product of the company, or the company is making sales to less credit-worthy customers or a longer payment period is being offered by salespersons. It is also a clear indication of low efficiency in credit collection in the company.
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