Page 36 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes (c) In our opinion, there is reasonable system of authorization at proper levels
with necessary controls on the issue of stores and allocation of stores and
labor to various job and the related system of internal control of the company
is commensurate with the size of the company and the nature of its business.
22. In respect of trading activities there are no damaged goods in the possession of the
company as on 31st March 1996.

2.7 Audit Evidence

Audit programs should take into consideration the audit evidence required/desired as well as
the various data gathering techniques.

2.7.1 Definition of ‘Auditing Evidence’
The information collected for review of a company’s financial transactions, internal control
practices, and other factors necessary for the certification of financial statements by a certified
public accountant. The amount and type of auditing evidence considered varies considerably
based on the type of firm being audited as well as the required scope of the audit.
The goal of any audit is to determine whether a company’s financial statements comply with the
generally accepted accounting principles applicable to the entity’s jurisdiction. Publicly traded
companies are generally required to present fully audited financial statements to shareholders
periodically.
Rules/standards of audit evidence dictate that the evidence gathered during the audit be:
1. Persuasive: This requires the exercise of good professional judgement. Audit evidence
from the most to least persuasive include: physical examination; externally prepared;
observations; inquiries/testimonial.
2. Competent: Obtaining the best quality of evidence available.
3. Useful: Evidence supporting goals and objectives.
4. Relevant: Evidence needs to be logical and sensible relative to the audit finding.
The types of audit evidence include:
1. Analytical: Review of relationships.
2. Documentary: Evidence exists in some permanent form.
3. Physical: Evidence is obtained via direct observations.
4. Testimonial: Statements made by customers/management; typically needs to be
corroborated.

Audit programs should also consider the source of information/evidence (has it been “tainted”?):
1. Internal (bank account reconciliation, for example)
2. Internal - External - Internal (check)
3. External - Internal (bank statement)
4. External (bank account confirmation returned directly to the auditor)
Various techniques are used to gather audit evidence:
1. Physical Examination
2. Confirmation
3. Observation

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