Procedure For Gathering Audit Evidence

Question 1

Procedure

Answer 1

ISA 500 identifies seven main procedures for gathering audit evidence. Here’s a summary of these procedures along with examples of their application:

1. Inspection:
   
   • Explanation: Examining records, documents, or tangible assets.
   • Application: Inspecting invoices, checking entries in accounting records, or verifying the existence of tangible assets.
2. Observation:
   
   • Explanation: Watching a process or procedure being performed.
   • Application: Observing physical inventory counts, the distribution of wages, or the opening of mail.
   • Note: Limited to the point in time when the observation takes place, and the person being observed may act differently.
3. Inquiry:
   
   • Explanation: Seeking information from knowledgeable persons inside or outside the entity.
   • Application: Asking management about accounting policies, inquiring with employees about specific transactions, and corroborating responses with other evidence.
4. External Confirmation:
   
   • Explanation: A specific type of inquiry seeking confirmation from a third party.
   • Application: Confirming bank balances with the bank or verifying receivables with customers.
5. Recalculation:
   
   • Explanation: Checking the mathematical accuracy of documents or records.
   • Application: Adding up the list of year-end trade receivables or recalculating depreciation expenses.
6. Reperformance:
   
   • Explanation: Independently carrying out procedures or controls originally performed by the client.
   • Application: Reperforming the aging of year-end trade receivables or redoing a bank reconciliation.
7. Analytical Procedures:
   
   • Explanation: Evaluating and comparing financial and non-financial data for plausible relationships and investigating unexpected fluctuations.
   • Application: Comparing last year’s gross profit percentage to this year’s and ensuring any change aligns with expectations.

Scenario: An auditor is verifying the accuracy of a company’s year-end inventory.

Audit Procedures:
1. Inspection: Inspecting inventory records and physical inventory.
2. Observation: Observing the physical inventory count process.
3. Inquiry: Asking warehouse staff about inventory management practices.
4. External Confirmation: Confirming inventory held by third-party warehouses.
5. Recalculation: Checking the mathematical accuracy of inventory valuation calculations.
6. Reperformance: Reperforming the inventory count for a sample of items.
7. Analytical Procedures: Comparing inventory turnover ratios with industry benchmarks.

By selecting the most appropriate procedures for each situation, auditors can gather sufficient and appropriate audit evidence to support their conclusions. If you have any further questions or need more detailed examples, feel free to ask!