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Audit Evidence

Auditors design detailed audit procedures to obtain sufficient appropriate audit evidence.
Procedures can include inspection, observation, confirmation, recalculation, reperformance, and
analytical procedures, often in some combination.

This section further explains

audit procedures for obtaining audit evidence, and

specific types of audit procedures.

Audit procedures for obtaining audit evidence


The evidence-gathering process involves the following steps:

1. designing the audit procedures or tests;

2. carrying out the audit procedures or tests and/or gathering evidence;

3. analyzing evidence and drawing conclusions, which may also involve evaluating
performance against the audit criteria; and

4. making decisions about whether additional information is required and can be obtained
(go back to step 1) or whether sufficient appropriate evidence exists.

Audit procedures typically focus on the key risk areas identified through a risk analysis.

It is not unusual for audits to be redesigned during the examination stage as teams encounter
unforeseen difficulties in gathering sufficient evidence of appropriate quality. Auditors have to be
alert to any signs that the evidence-gathering process may not be achieving the level of
assurance required for the audit assignment and take appropriate corrective action. If there are
any potential amendments to the audit program, communicate these changes and raise any
other issues, on a timely basis, with the senior members of the audit team. In instances where
modifications did not take place before the start of field work, modify the audit steps as the work
progresses, obtain approval for changes to audit programs, and include appropriate information
on the nature, timing, and extent of steps to be performed.

Inspection. Inspection of documents and records provides varying degrees of reliability,


depending on the nature and source of the documents. Inspection of physical assets provides
highly reliable evidence of existence and some indication of value (if it does not appear damaged
or obsolete) but not necessarily of ownership or value.

Observation. Observation of the application of a client's or entity's policy or procedure provides


assurance of that procedure at a given point in time, but not necessarily of its performance at
other times during the year.

See OAG Annual Audit 7062 for guidance on observation of inventory counting.

External confirmation. Confirmation is a written request addressed to third parties.


See OAG Annual Audit 7050 for guidance on external confirmations.

Recalculation. Computation or recalculation provides a high level of assurance regarding


arithmetical accuracy.

Analytical procedures
Analytical procedures are used throughout the audit process and are conducted for the following
primary and secondary purposes:

Primary

Risk assessmentto direct attention to higher risk areas in determining the nature,
timing, and extent of audit procedures

Substantive testingto obtain audit evidence of accuracy or to identify potential


misstatements/errors as a substitute for tests of details

Overall conclusionto assist in assessing the propriety of audit conclusions reached and
in evaluating the overall opinion/report

Secondary

Understanding the businessto deepen our understanding of the entity

Entity communicationsto develop more meaningful entity communications through a


deeper understanding of the relevant business and audit issues.

Auditors use analysis at various stages of the audit for different purposes. They use preliminary
analytical procedures when planning the audit to confirm the planned audit approach or to
identify new risk areas that need to be addressed during the audit. At the reporting phase of the
audit, auditors use analytical procedures to assess whether the opinion/report taken as a whole
is reasonable and consistent with their knowledge of the subject matter and the expected results
where applicable.

Inquiry
Inquiry is used throughout the engagement to

obtain knowledge of the entity;

develop the preliminary audit approach;

collect specific evidence; and

corroborate evidence collected by other means.

A solid understanding of the control environment is important in order to assess the extent to
which inquiry will be effective in obtaining reliable evidence. For example, in an environment in
which management's integrity and trustworthiness are high, the auditor may be able to place
relatively more reliance on inquiry. A decision regarding the extent to which inquiry will provide
sufficient, appropriate evidence is required.

Inquiry involves

considering the knowledge, objectivity, experience, responsibility, and qualifications of the


individual to be interviewed;

asking clear and concise questions;

using open or closed questions appropriately;

listening actively and effectively; and

considering the interviewee's responses and asking follow-up questions.

Inquiries can often be efficiently combined with other testing procedures such as observation and
will frequently be followed up by further audit procedures to obtain sufficient appropriate
evidence.

Inquiry is sometimes referred to as in-depth inquiry to emphasize that the technique is expected
to be performed with rigour. Do not infer from seeing the word inquiry on its own that it means
rigour is unnecessary.

Audit Evidence

Meaning and definition of Audit Evidence


Audit evidence generally refers to the information collected for reviewing the financial transactions
of a company in addition to its internal control practices and other essential factors required for the
certification of financial statements. The type and amount of the considered auditing evidence varies
significantly on the basis of the type of organization being audited in addition to the required scope of
the audit. The audit evidence are important to be collected by an auditor during the process of his
auditing work.
The main objective of any audit is to find out the compliance of a companys financial statements
with the GAAP applicable to the jurisdiction of the entity. The publicly traded companies are usually
required to present fully audited financial statements to shareholders at regular intervals.
Methods of obtaining Audit Evidence
Audit evidence is one of the basic principles that govern an audit. There are various methods that
can be adopted to obtain audit evidence. The most common ones include:
Inspection
This is the most efficient method of obtaining audit evidence. Inspection refers to checking all the
documents, records, and physical assets. The reliability of these documents and records depends
upon the nature and effectiveness of internal control.
Observation
Another important method of obtaining audit evidence is observation. This method involves the
auditor to look at a process of procedure being executed by others. This method can be exemplified
by the auditors presence at the clients physical stock count.
Inquiry and confirmation
The two aspects of this method include searching about the info from a knowledgeable person inside
or outside the company, and responding to any inquiry to substantiate information in the accounting
records. These responses might provide the auditor with info which is not previously possessed by
him or even with corroborative evidence.
Computation
This method of obtaining evidence involves the examination of arithmetical accuracy of source
documents and accounting records. The method might also involve performing individual
calculations.
Analytical review
This method involves conducting a study of important ratios and trends and examining unusual
fluctuations and items.

Audit Report

Meaning and definition of Audit Report


Audit report, as recorded in the annual report, examines to check the compliance of a companys
financial statements with GAAP. The audit report is, sometimes, also referred as the clean opinion.
An audit report includes three paragraphs the first stating the responsibilities of the auditor and
directors; the second stating the use of GAAP; and finally the third paragraph stating the auditors
opinion.
An audit report is, therefore, an official evaluation of an organizations financial status, in combination
with the opinion of the auditor and collected data on the companys financial transactions and
situation. This is a general process for companies it use while evaluating their records and providing
financial info to present as well as future investors.
Constituents of Audit Report
It is important to know about what is contained in an audit report. Besides, it is also important for the
auditor to examine the financial statements of a company prior to issuing the audit report. These
financial statements are required to be presented fairly in terms of cash flows, results of operations,
and financial status in compliance with GAAP.
In addition to the letterhead of the auditing firm, the key elements included in an audit report are as
follows:
a title indicative of the word independent,
that the financial statement, which is the subject of the report, was audited,
a statement stating that the financial statements are a responsibility of the management and
the auditor is just giving his opinion,
the audit was created in line with the generally accepted auditing standards,
a statement that the auditor planned and accomplished the audit
In addition to the aforesaid constituents, an audit report must feature a declaration that the auditor
believes that there is a reasonable basis for the opinion. Also, it should state an opinion that the
financial statements are presented fairly in all material aspects. Moreover, in the closing part, the
report should essentially contain the signature of the auditors firm, either manually or printed form,
and the date on which the audit report was created.

Audit Sampling

Meaning and definition of Audit Sampling


Audit sampling can be defined as the process of applying auditing procedures to under 100% of
different items in an organizations account balance in a way that every single unit might have an
equal probability of being selected.
Techniques for Audit Sampling
There are certain important sampling techniques that can be adopted by an auditor. These include:
Haphazard sampling
The haphazard sampling technique is the one adopted by the auditor in cases where the sample
does not follow a structured technique. Haphazard sampling is, however, not appropriate during the
use of statistical sampling. Besides, it is also important for the auditor to always ascertain that
haphazard sampling is not doctored in a way that by design avoids sampling items which, for
instance, are difficult to locate. All items in the population should get a chance of being selected.
Stratified sampling
This sampling technique involves the auditor to split items included in a sample into their different
sections. For instance, in a payroll sample the auditor might divide the sample in full-time males, full-
time females, part-time males, and part-time females thus working out the percentage of sections in
the population.
Systematic sampling
The systematic sampling is also referred as interval sampling. This sampling technique involves the
auditor to take the number of sampling units in the population and segregate this into the sample
size so as to provide a sampling interval. In a sales invoice, for example, where the sampling interval
is 25, the auditor will determine an initial point for sampling and subsequently sample every
25th sales invoice.
Block sampling
Block sampling is a sampling technique wherein the auditor applies measures to such items which
occur in the same block of sequence or time. However, the block sampling technique should be used
with caution as valid references cannot possibly be made beyond the examined period or block.

Judgment
This sampling technique allows the auditor to use his judgment in making selection of samples. The
basic issues influencing the selection of sample are:
value of the items
relative risk involved
representativeness of the sample

Power and Duties of the Auditor

Companies Act, 1956

Sec 227 - Powers and duties of auditors.

(1) Every Auditor of a company shall have a right of access at all times to the books and accounts
and vouchers of the company, whether kept at the head office of the company or elsewhere, and
shall be entitled to require from the officers of the company such information and explanations as
the auditor may think necessary for the performance of his duties as auditor.

(1A) Without prejudice to the provisions of sub-section (1), the auditor shall inquire:

(a) Whether loans and advances made by the company on the basis of security have
been properly secured and whether the terms on which they have been made are not
prejudicial to the interests of the company or its members.

(b) Whether transactions of the company which are represented merely by book entries
are not prejudicial to the interests of the company.

(c) Where the company is not an investment company within the meaning of Section 372
or a banking company, whether so much of the assets of the company as consist of
shares, debentures and other securities have been sold at a price less than that at which
they were purchased by the company.
(d) Whether loans and advances made by the company have been shown as deposits.

(e) Whether personal expenses have been charged to revenue account.

(f) Where it is stated in the books and papers of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment,
and if no cash has actually been so received, whether the position as stated in the
account books and the Balance Sheet is correct, regular and not misleading.

(2) The auditor shall make a report to the members of the company on the accounts examined by
him, and on every Balance Sheet and Profit and Loss Account and on every other document
declared by this Act to be part of or annexed to the Balance Sheet or Profit and Loss Account,
which are laid before the company in general meeting during his tenure of office, and the report
shall state whether, in his opinion and to the best of his information and according to the
explanations given to him, the said accounts give the information required by this Act in the
manner so required and give a true and fair view :

(i) In the case of the balance-sheet, of the state of the company's affairs as at the end of
its financial year and

(ii) In the case of the profit and loss account, of the profit or loss for its financial year.

(3) The auditor's report shall also state :

(a) Whether he has obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purposes of his audit.

(b) Whether, in his opinion, proper books of account as required by law have been kept
by the company so far as appears from his examination of those books, and proper
returns adequate for the purposes of his audit have been received from branches not
visited by him.

(bb) whether the report on the accounts of any branch office audited under section 228 by
a person other than the company's auditor has been forwarded to him as required by
clause (c) of sub-section (3) of that section and how he has dealt with the same in
preparing the auditor's report.

(c) whether the company's balance sheet and profit and loss account dealt with by the
report are in agreement with the books of account and returns.

(4) Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in clauses (a),
(b), (bb) and (c) of sub-section (3) is answered in the negative or with a qualification, the auditor's
report shall state the reason for the answer.

(4A) The Central Government may, by general or special order, direct that, in the case of such
class or description of companies as may be specified in the order, the auditor's report shall also
include a statement on such matters as may be specified therein :

Provided that before making any such order the Central Government may consult the Institute of
Chartered Accountants of India constituted under the Chartered Accountants Act, 1949, in regard
to the class or description of companies and other ancillary matters proposed to be specified
therein unless the Government decided that such consultation is not necessary or expedient in
the circumstances of the case.
(5) The accounts of a company shall not be deemed as not having been, and the auditor's report
shall not state that those accounts have not been, properly drawn up on the ground merely that
the company has not disclosed certain matters if :

(a) those matters are such as the company is not required to disclose by virtue of any
provisions contained in this or any other Act, and

(b) those provisions are specified in the balance sheet and profit and loss account of the
company.

QUALIFIED REPORTS
QUALIFIED -- SCOPE LIMITATION
SCOPE PARAGRAPH MODIFY FIRST SENTENCE OF SCOPE
EXCEPT AS DISCUSSED IN THE FOLLOWING PARAGRAPH
PARAGRAPH, ... - EXCEPT
EXPLANATORY PARAGRAPH ADD EXPLANATORY PARAGRAPH BEFORE
WE WERE UNABLE TO OBTAIN AUDITED OPINION PARAGRAPH
FINANCIAL STATEMENTS SUPPORTING THE - WE WERE UNABLE TO AUDIT
COMPANY'S INVESTMENT IN A FOREIGN - NOTE SCOPE LIMITATION
AFFILIATE STATED AT $250,000 AT DECEMBER 31, - NOR WERE WE ABLE TO SATISFY OURSELVES
19X4 OR ITS EQUITY IN EARNINGS OF THAT BY OTHER PROCEDURES
AFFILIATE OF $650,000, WHICH IS INCLUDED IN
NET INCOME FOR THE YEAR THEN ENDED AS
DESCRIBED IN NOTE X TO THE FINANCIAL
STATEMENTS; NOR WERE WE ABLE TO SATISFY
OURSELVES AS THE CARRYING VALUE OF THE
INVESTMENT IN THE FOREIGN AFFILIATE OR
EQUITY IN ITS EARNINGS BY OTHER AUDITING
PROCEDURES.
OPINION PARAGRAPH MODIFY FIRST SECTION OF OPINION
IN OUR OPINION, EXCEPT FOR THE EFFECTS OF PARAGRAPH
SUCH ADJUSTMENTS, IF ANY, AS MIGHT HAVE - EXCEPT FOR THE EFFECTS OF SUCH
BEEN DETERMINED TO BE NECESSARY HAD WE ADJUSTMENTS, IF ANY
BEEN ABLE TO EXAMINE EVIDENCE REGARDING - HAD WE BEEN ABLE TO OBTAIN EVIDENCE
THE FOREIGN AFFILIATE INVESTMENT AND - NOTE SCOPE LIMITATION
EARNINGS, ...
QUALIFIED -- NON-GAAP
EXPLANATORY PARAGRAPH ADD EXPLANATORY PARAGRAPH BEFORE
THE COMPANY HAS EXCLUDED FROM OPINION PARAGRAPH
PROPERTY AND DEBT IN THE ACCOMPANYING - NOTE NON-GAAP ITEM
BALANCE SHEET, CERTAIN LEASE OBLIGATIONS - PROVIDE AMOUNTS IF REASONABLE POSSIBLE
THAT, IN OUR OPINION, SHOULD BE
CAPITALIZED IN ORDER TO CONFORM WITH
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES. IF THESE LEASE OBLIGATIONS
WERE CAPITALIZED, PROPERTY WOULD BE
INCREASED BY $300,000, LONG TERM DEBT BY
$250,000, AND RETAINED EARNINGS BY $50,000
AS OF DECEMBER 31, 19X4. ADDITIONALLY, NET
INCOME WOULD BE INCREASED BY $50,000 AND
EARNINGS PER SHARE WOULD BE DECREASED
BY $0.50 FOR THE YEAR THEN ENDED.
OPINION PARAGRAPH MODIFY FIRST SECTION OF OPINION
IN OUR OPINION, EXCEPT FOR THE EFFECTS OF PARAGRAPH
NOT CAPITALIZING CERTAIN LEASE - EXCEPT FOR THE EFFECTS OF NOT
OBLIGATIONS, AS DISCUSSED IN THE - NOTE NON-GAAP ITEM
PRECEDING PARAGRAPH, ...

1) TITLE
NDEPENDENT AUDITOR'S REPORT
- INDEPENDENT
TO THE STOCKHOLDERS OF ABC COMPANY 2) ADDRESSEE
- GROUP THAT HIRES AUDITOR GENERALLY NOT
MANAGEMENT
WE HAVE AUDITED THE ACCOMPANYING 3) INTRODUCTORY PARAGRAPH
BALANCE SHEET OF ABC CORPORATION AS OF - WE HAVE AUDITED
DECEMBER 31, 19x4, AND THE RELATED
STATEMENT OF INCOME, RETAINED EARNINGS - LIST FINANCIAL STATEMENTS
AND CASH FLOWS FOR THE YEAR THEN ENDED. - INDICATED MANAGEMENT'S RESPONSIBILITY
THESE FINANCIAL STATEMENTS ARE THE - INDICATED AUDITOR'S RESPONSIBILITY
RESPONSIBILITY OF THE COMPANY'S
MANAGEMENT. OUR RESPONSIBILITY IS TO
EXPRESS AN OPINION ON THESE STATEMENTS
BASE ON OUR AUDIT.
WE CONDUCTED OUR AUDIT IN ACCORDANCE 4) SCOPE PARAGRAPH
WITH GENERALLY ACCEPTED AUDITING - GAAS
STANDARDS. THOSE STANDARDS REQUIRE THAT - REASONABLE ASSURANCE STATEMENTS ARE
WE PLAN AND PERFORM THE AUDIT TO OBTAIN
FREE OF MATERIAL MISSTATEMENT
REASONABLE ASSURANCE ABOUT WHETHER
THE FINANCIAL STATEMENTS ARE FREE OF - EXAMINING ON A TEST BASIS EVIDENCE
MATERIAL MISSTATEMENT. AN AUDIT INCLUDES SUPPORTING AMOUNTS AND DISCLOSURES
EXAMINING, ON A TEST BASIS, EVIDENCE - ASSESSING ACCOUNTING PRINCIPLES USED
SUPPORTING THE AMOUNTS AND DISCLOSURES AND SIGNIFICANT ESTIMATES MADE, AS WELL
IN THE FINANCIAL STATEMENTS. AN AUDIT AS EVALUATING OVERALL PRESENTATION
INCLUDES ASSESSING THE ACCOUNTING - AUDIT PROVIDES A REASONABLE BASIS FOR
PRINCIPLES USED AND SIGNIFICANT ESTIMATES OUR OPINION
MADE BY MANAGEMENT, AS WELL AS
EVALUATING THE OVERALL FINANCIAL
STATEMENT PRESENTATION. WE BELIEVE THAT
OUR AUDIT PROVIDES A REASONABLE BASIS
FOR OUR OPINION.
IN OUR OPINION, THE FINANCIAL STATEMENTS 5) OPINION PARAGRAPH
REFERRED TO ABOVE PRESENT FAIRLY, IN ALL - IN OUR OPINION
MATERIAL RESPECTS, THE FINANCIAL POSITION
- PRESENT FAIRLY, IN ALL MATERIAL RESPECTS
OF ABC CORPORATION AS OF DECEMBER 31,
19x4, AND THE RESULTS OF ITS OPERATIONS - IN CONFORMITY WITH GENERALLY ACCEPTED
AND ITS CASH FLOWS FOR THE YEAR THEN ACCOUNTING
ENDED IN CONFORMITY WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES.
ANDERSON AND ZINDER, P.C., CPAs 6) SIGNATURE
- FIRM
MARCH 5, 19x5 7) DATE
- END OF FIELDWORK
Significance of Cost Audit

The Importance of Cost Audit


Cost audit is the verification of the correctness of cost accounts and of
adherence to the cost accounting plan.

Objectives of Cost Audit


1. General objectives: General objectives include verification
ofcost accounts detection and prevention of frauds and errors,
verification of cost of each cost unit and cost centre and providing
assistance and advice to management.
2. Social objective: Ensuring optimum utilisation of resources,
determination of fair prices and protecting interest of various
parties.
Importance of Cost Audit

For management:
Determination and allocation of cost of products.
Helps to identity wastage, inconsistency and irregularity in
production and, thus, take corrective measures.

Help in proper valuation of inventory.

For shareholders:
Measure to determine the managerial efficiency.

Optimum utilisation of resources.

For Government:
Provides data for deciding to offer subsidy or tariff protection

Help to tax the prices of commodities under the scheme of


price control.

Serves as a basis to charge tax on the cost of finished

Miscellaneous:
1. Facilitates settlement of industrial disputes.

2. Ensures that consumers get the product at fair price.

3. Compare standard cost with actual cost.