audit evidence

INTERNAL AUDIT:

OBTAINING EVIDENCE INTERNAL AUDIT

Session Objectives :

Session Objectives 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 2 Explain the main categories of audit evidence; Identify the techniques for gathering audit evidence; Explain the competence of audit evidence; Identify factors relevant to evaluating the quality of audit evidence

WHAT IS AUDIT EVIDENCE? :

WHAT IS AUDIT EVIDENCE? 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 3 Evidence is information for proof of action taken and belief of facts at hand. Auditors need to gather evidence to arrive at judgments or conclusions and make recommendations about certain aspects of the ORGANISATION. The Auditor should obtain relevant and reliable audit evidence sufficient to enable him/her to draw reasonable conclusions.

Nature of Audit Evidence :

Nature of Audit Evidence 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 4 The Underlying Accounting Information. This includes documents such as ledgers, journals, and reconciliations. Corroborating Information. This is information that confirms or gives support to what is in the accounting data. It includes material objects, verbal statements, observations, etc. Examples are the minutes of the supervision committee, AGM..

Nature of Audit Evidence :

Nature of Audit Evidence 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 5 It is important to note that auditors need both types of evidence. The underlying accounting data on its own is not enough to support an opinion and therefore evidence to support such accounting data is always necessary. For example, the bank balance per ledger in the books may be corroborated by direct confirmation with the commercial bank.

Nature of evidence:

Nature of evidence 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 6 Circumstantial Evidence . This is supplementary information that indirectly bears on the audit although it does not go to the extent of substantiating a particular transaction or belief. Examples of circumstantial evidence include: System of internal control; Lifestyle of the staff of the Trade statistics; Employee integrity.

  Gathering Audit Evidence:

Gathering Audit Evidence 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 7 Examination : Examining documents, material objects, e.g. payment vouchers, receipts, etc. Confirmation : Written confirmation usually by direct request. E.g. request a commercial bank to confirm a bank balance on a specified data. Observation : This involves looking at a procedure or operation when being performed and determining the manner of its performance. An example is to observe (by checking) on the system of internal control in application .

 Gathering Audit Evidence:

Gathering Audit Evidence 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 8 Vouching : Inspecting the payment vouchers and corroborative documents e.g. suppliers invoices, LPOs to substantiate the accounting information. Verification : This is associated with totals. The auditor verifies the valuations, the existence and ownership of assets and transactions. It can be by physical inspection, calculation, inspecting logbooks, etc. Re-performance : This involves recalculation, re-totaling, retracing postings, etc .

Gathering Audit Evidence:

Gathering Audit Evidence 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 9 Comparisons : Comparison of amounts with similar balances or totals for the previous year . Reconciliation: Two representations of an account from different sources are compared and agreed, e.g. Bank reconciliation. Review : This is mainly analytical review of accounts and transactions to see if they make general sense.

Sources of Evidence :

Sources of Evidence 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 10 Taxpayers and suppliers. Management and employees. Accounting systems and underlying documents. Physical assets. Any other third parties e.g. leaders, Councillors , NGOs, community. The Press. The Government, including documents, publications and policies. Legal requirements.

Competence of Evidence :

Competence of Evidence 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 11 Competence refers to the quality and power of audit evidence to be persuasive. The auditor looks for competent evidence to persuade him to reach a conclusion. Incompetent evidence is irrelevant and is unreliable . The competence of evidence depends on the type of evidence and the way it was gathered. Evidence obtained directly by the auditor (through his work and knowledge) or from an independent source outside the area being audited is more credible than that gathered from employees and insiders.

Competence of Evidence :

Competence of Evidence 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 12 The following should be considered when determining the competence of evidence: Relevance: Evidence should be relevant to the audit objective. Sufficiency : Evidence gathered by the internal auditor should be sufficient and of the right kind. Reliability : Its solidity to be relied upon. Documentary evidence is preferred to oral evidence, evidence from an independent source is more reliable than that from employees and the evidence gathered by the auditor is more reliable than that from employees.

Evaluating Evidence :

Evaluating Evidence 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 13 Character of the Evidence : How directly an evidence verifies a particular item under examination. The more directly it does the more convincing it is. For example, a bank confirmation directly verifies the bank balance. Quantity of the data gathered. Reliability of evidence increases with more data because it allows a more extensive check on details .

Evaluating Evidence :

Evaluating Evidence 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 14 Consistency of the evidence. The more inconsistent the evidence is the more unreliable it becomes . The auditor should then increase vigilance. The layout/presentation/format of evidence affects its quality, e.g. crossings and erasures in ledgers. Complex data may require interpretation before it is used by the internal auditor.

Interrelationship of Evidence. :

Interrelationship of Evidence. 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 15 Consistency among evidences; Representativeness and availability of the evidence (should always use a representative sample ); Corroborativeness of evidence. The quality of evidence increases if several types exist and they corroborate each other;

Environment and Context::

Environment and Context : 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 16 The auditor will evaluate the following: Internal Control System as the reliability of various kinds of evidence is dependent on adequacy of the controls Whether evidence is reasonable or not depends on the surrounding circumstances, because grounds for suspicion may exist; Material items call for more convincing evidence Items of high risk call for greater vigilance in evaluating the evidence

The Element of Time:

The Element of Time 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 17 Time factor is very important in evaluating evidence. The internal auditor should evaluate: Whether the data is up to date; The interval between the dates the evidence was generated and when it is being examined since later evidence confirms earlier evidence; Subsequent events may mean additional corroborative evidence is necessary; Consider the surprise factor e.g. on spot cash counts.

The Human Factor: :

The Human Factor: 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 18 In evaluating evidence, the auditor needs to consider the following: The existence of conflict of interest on behalf of the organisation , sacco , e.g . staff and board members could be Tenderers of the same organisation ; Control of outside parties e.g. suppliers may be directly or indirectly controlled by management or the Executive Committee members; There should be proper and meaningful authorisations e.g. signatures could be forged. Management traits e.g. honesty and integrity; Restricting the auditor from accessing evidence should pose serious questions about the reliability of that evidence.

The end :

The end Thanks for listening 4/22/2011 Kandole Patrick FCCA,CPA, Msosc, Bcom(Hons) 19