• The examination standard requires (under GAAS) to obtain sufficient and appropriate audit
evidence, then draw reasonable conclusions and disclose your opinion
• Must of the auditors work involves obtaining and evaluating evidence
Five Evidence Decisions
1. RISK: Which risks could result in a risk of material misstatement at the assertion level?
o Existence, valuation, completeness (liabilities and expenses)
o For each major class of transactions, the auditor looks at the potential for material
o Knowledge of industry, business and operating procedures will help
2. NATURE: Which audit procedures to use
o Type of procedures you’re going to do
3. EXTENT: What sample size to select for a given procedure
o The sample size
o How much are you going to test?
4. SELECTION: Which particular items to select from the population
o What items are you going to select?
5. TIMING: When to perform the procedures
o Two types of audits: interim and year-end
o Year-end is generally test of details, while interim is testing internal controls
o For each major class or transactions, the auditor looks for material misstatement
• Audit Procedure
o The detailed instructions for collection of audit evidence
o Example: when you count inventory you note the quantity, location, tag number, unit of
measure and condition
• Sample Size & Sample Selection
o See below
• The sample size will vary, depending on:
o The sampling methods chosen
o The type of tests (test of controls vs. test of details)
o The amount of assurance to be obtained from the test
• Professional judgement will aid in this decision
• Methods include:
o Interval sampling
o High dollar items
o Random sampling
o Dollar unit sampling
o Haphazard sampling (random sampling) Audit Program
• Summarizes what needs to be done by cycle
• Then determine the audit program used for the cycle
• There is enough evidence of a high enough quality to form a conclusion with respect to the audit
• Sufficiency refers to the quantity of evidence obtained
o Sufficient evidence is persuasive, rather than conclusive
• Appropriateness refers to the quality of evidence obtained
o The more appropriate the evidence, the less evidence you need
o Relevance: pertains to the audit assertion being tested.
o Reliable: depends upon a number of factors, including who examined the evidence, the
state of the client’s systems, and the type of evidence collected.
• Timeliness is also of importance
• The auditor needs to consider all of the evidence factors together (sufficiency, appropriateness
Reliability of Evidence
• Auditor’s direct knowledge — evidence obtained directly by the auditor through physical
examination, observation, reperformance and/or inspection.
• The independence of provider — evidence obtained from a source outside the entity is more
reliable than that obtained from within.
• The effectiveness of client’s internal controls —when a client’s internal controls are effective,
evidence obtained internally is more reliable than when controls are weak.
• The qualifications of the information provider — individuals providing information should be
competent and qualified to do so.
• The degree of objectivity — evidence that requires the use of a high level of judgment is less
• Consistency from multiple sources — evidence with all sources consisten