AUDIT EVIDENCE CHAPTER 7

Question 1

To support the assertion in financial statement what do an auditor need to do ?

Answer 1

1. Audit objectives
2. Audit Procedures
3. Audit evidence

Question 2

What things that need to be consider in accumulating the evidence ?

Answer 2

1. Audit procedures
2. Sample size to be taken
3. Which item to select
4. Timing

Question 3

State several types of audit evidence

Answer 3

1. Physical examination
2. Confirmation
3. Documentation
4. Analytical Procedures
5. Inquiries
6. Reperformance
7. Recalculation
8. Observation

Question 4

What is physical examination ?

Answer 4

Inspections or counts done by the auditor. It provides reliable evidence via the means of inspection
or counting upon tangible assets

Question 5

What is confirmation ?

Answer 5

Type of evidence where the auditor gets a written or oral response from an independent third party

Question 6

What is Positive Confirmation ?

Answer 6

A request for a response from the third party, whether they agree or disagree with the information stated

Question 7

Types of Positive Confirmation

Answer 7

1. Regular
2. Blank Confirmation

Question 8

In positive confirmation, how regular (+) confirmation is made ?

Answer 8

Please confirm if you owe us $10,000

Question 9

In positive confirmation, how blank confirmation is made ?

Answer 9

Please confirm the amount you owe us

Question 10

What is Negative Confirmation ?

Answer 10

The third party only responds if they find the information incorrect. If they agree, they don’t need to respond

Question 11

What is documentation as audit evidence ?

Answer 11

Inspections done on documented evidence (internal and external)

Question 12

Analytical Procedures

Answer 12

Evaluations conducted on the financial information obtained by studying comparisons and
relationship between financial and non-financial data.

Question 13

Inquiries

Answer 13

Oral or written responses obtained from the client’s
personnel or management to any concern raised by the
auditor

Question 14

Recalculation

Answer 14

Recalculating the figures worked out by client in the purpose of of assessing if there are any difference between the audit’s work and client’s work

Question 15

Observation

Answer 15

Observe the performance
e.g if there is a segregation of duties or not

Question 16

What are the three level of reliability ?

Answer 16

High, Medium and Low

Question 17

For high level of reliability, explain

Answer 17

1. Auditor has direct knowledge about
2. The auditor is directly involved, so there’s less risk of error or bias.
3. Means that the auditor already done the observation, recalculation and all

Question 18

Medium reliability

Answer 18

Evidence that comes from external sources is more reliable than evidence from internal sources. It’s reliable but not as much as direct knowledge.

Question 19

Example of medium reliability

Answer 19

1. Documentation Inspection: Reviewing documents and records.
   External Example: Bank statements, supplier invoices.

Internal Example: Internal reports, sales invoices.

2. Confirmation: Getting verification from third parties.

Example: Confirming account balances with banks or amounts owed by customers.

Question 20

Explain Low level of reliability

Answer 20

Needs More Proof

Evidence that requires further verification because it’s based on information provided by the company’s personnel. It’s the least reliable and needs additional substantiation.

Question 21

Illustrate the level of reliability of high medium and low

Answer 21

High Reliability: You physically count the inventory items yourself (Physical Examination).

Medium Reliability: You review the supplier invoices for inventory purchases and compare them with the company’s records (Documentation Inspection - external). You also confirm with the suppliers that the company actually received the inventory (Confirmation).

Low Reliability: You ask the warehouse manager how they count and record inventory (Inquiry). You’ll need more proof to rely on this information alone.

Question 22

How to check whether the audit evidence is relevant or not

Answer 22

E.g : Check on completeness objective for recording sales of transactions

Evidence : Numerical sequence of prenumbered shipping documents.

Question 23

What is Purpose of having a Relevant Audit Evidence?

Answer 23

Helps auditor to verify that the transactions and events have occurred, are complete, accurate, and properly recorded.

Question 24

How numerical sequence of prenumbered shipping documents can show that the evidence is relevant or not

Answer 24

Completeness: By checking the numerical sequence, the auditor can ensure that all shipments have been recorded without any missing documents.
Example: If shipping documents are numbered 1001, 1002, 1003, etc., and you find a gap like 1001, 1002, 1004, it indicates that document 1003 might be missing.

Accuracy: Ensuring the sequence is unbroken helps verify that the recorded shipments match the actual shipments made.
Example: If document 1003 is missing, it may mean a shipment wasn’t recorded, which affects the sales records.

Question 25

What are the determinants of audit evidence ?

Answer 25

Reliability
Relevant
Timeliness
Sufficient

Question 26

Explain about the determinants of audit evidence which is timeliness and give example.

Answer 26

Refers to the period during which the audit evidence is collected and how current or relevant it is to the audit period being examined

e.g : Year-End Inventory Count: If you are auditing financial statements for the year ending December 31, 2023, an inventory count taken on December 31, 2023, is more timely and relevant than one taken six months earlier

Question 27

Explain about the determinants of audit evidence which is sufficient and give example.

Answer 27

Refers to the quantity of audit evidence collected. It’s about having enough evidence to form a reasonable basis for an audit opinion.

e.g :
Sales Transactions: If you are auditing a large company with thousands of sales transactions, examining a few transactions is not sufficient. You need a large enough sample to be confident that sales are recorded accurately.

Question 28

Imagine you’re auditing a company’s financial statements for the year ending December 31, 2023.

Explain about timeliness and sufficient

Answer 28

Timeliness:
Correct: You check the company’s bank balance as of December 31, 2023.
Incorrect: You use a bank balance from June 30, 2023, which may not reflect the company’s financial position at year-end.

Sufficiency:
Correct: You examine a large enough sample of sales invoices from throughout the year to ensure accuracy and completeness.
Incorrect: You look at only a few sales invoices, which is not enough to form a reasonable conclusion about the total sales.