Gathering Audit Evidence
We must have audit evidence to support our opinion – that means designing methods to collect the evidence, then evaluating it and coming to a conclusion.
Basics from the standard
Audit programs
Testing internal controls
Substantive testing
Substantive analytical procedures
Audit sampling
Auditing inventory
Auditing accounting estimates
Relying on the work of others
Essential – getting a management representation letter
ASA500 basics
To gather audit evidence – the first thing you need to do is design tests of controls (if CR is low or medium), then substantive tests.
Regardless, the very first time you audit a client, you have to figure out if the opening balances are reliable and accurate – otherwise, everything built on those opening balances may be incorrect!
It also is important to know the difference between tests of internal controls and substantive tests. Here is an explainer video
Audit programs
Audit programs contain our plans for how the auditor will gather the evidence they require. It could include plans to test internal controls for a transaction cycle or substantive tests to gather evidence.
These programs need to be highly customised.
Internal controls
We need to be able to identify the weaknesses in internal controls because they help inform our CR assessment and audit risk model.
Here is a full lecture on testing internal controls – remember the main purpose of these tests is to ensure that the controls are operating as per their design.
And now a worked example of physical controls testing using a fictional case.
The video below is an example of testing internal controls from a class exercise used in 2019. You can download the documents below.
If you do find a significant deficiency in the internal controls – you should discuss this with management
If you find more deficiencies that you believe is reasonable, you should INCREASE your CR assessment and then adjust your DR accordingly (it will have to decrease, but by how much depends on the severity of the issues you find). A decrease in DR will usually result in greater substantive testing.
Substantive testing
The number of ways you could test substantively is enormous and likely unlimited. Every client is different, and even year to year can be different.
This grid exercise is a way to help your mind come up with ideas on how you could apply particular tests to accounts and assertions
A key issue that students encounter is using vouching and tracing incorrectly. The video below explains the difference between the two.
One of my full lectures on substantive testing
When you find misstatements (due to fraud or error) – you’ll need to figure out whether the misstatements could result in a material issue. In the video below, learn how to project the error in your sample to the entire population and determine what the misstatement could be.
Dual purpose tests
Sometimes you will come across a control that is automated – for example, the online shopping website automatically calculates the total for the sale and posts a journal entry. How do you design tests when testing the control is likely to be very similar to testing substantively? You use dual-purpose tests. In this video I’ll walk through how to design dual purpose tests effectively
Analytical procedures
Students can often get confused between analytical procedures and substantive analytical procedures. The following video explains the difference.
Now we move into different examples of designing substantive tests.
The next video shows the types of documents you’d normally see in a sales process.
A worked example of actual testing on documents with the (now out of print) Cloud 9 case
Sampling
No matter what type of audit testing you need to do – it is difficult (with current technology) to test the entire population of items or transactions, so sampling occurs.
Not many universities will teach students to calculate sample sizes any more. Most will conduct an overview of the methods and the pros and cons of each. However, if yours does cover this – here is a very old, but still correct, video.
I will more likely ask my students for information about what sampling method should be chosen (statistical vs non-statistical, then the best option within that) and then to provide me with the population they would use to select their sample. I don’t ask them to calculate a sample size – but just the theory behind the choices of sampling method and population. Be sure to check with your course/unit/subject coordinator.
Here are the technical sample size calculation videos – this is often covered in textbooks, but cut from most courses today.
This next video is an entire lecture on sampling (if you’re really keen – no calculations, but lots of theory and examples)
Now there will be some content about auditing specific parts of the accounts
Auditing inventory
Auditing inventory has its own auditing standard – why? Likely because it is often a large component of assets.
Auditing accounting estimates
Auditing accounting estimates is hard – and it isn’t just intangibles. In modern companies – elements of Revenue contain estimates, as well as more traditional estimates like depreciation and warranty liabilities. This is also an area that audit regulators focus on, performance by Australian auditors in this area has been poor.
Accounts Receivable can be tedious to audit and comes with many challenges. Confirmations were a common way to collect audit evidence.
Here is more detail on debtors (receivables) confirmations
Relying on the work of others
Some times you may need to rely on the work of other parties – this may include auditors in other countries (as part of group audits), the internal auditors or experts that you hire.
Video forthcoming – relying on experts hired by the auditor.
Essential – getting a management representation letter
You will collect a significant amount of oral/verbal evidence on the audit that may not be able to be independently corroborated. To ensure you have sufficient appropriate evidence (remember ISA/ASA500?) – we ask management to confirm via writing the things they’ve said to us.
The next step is to complete a set of tasks that occurs at the end of the audit
However, if you’d like to look at some more detailed examples on how to audit specific accounts – you can check out the following page