Question

How to gather evidence fo an Operation Audit, a Compliance Audit, and a Financial Statement Audit and when and when not to apply that evidence. Use appropriate terminology.

Answer 1

Audit evidence is quite an important aspect for an auditor because it is the basis which uses to form an opinion on the financial statements. Such evidence collected by the auditor should be sufficient and appropriate.

Basically the audit procedures to obtain audit evidence include inspection, confirmations, analytical procedures, inquiry, observation, recalculation & reperformance. Out of these procedures an auditor can apply the ones required in the audit as per the requirements of a type of audit.

Also the audit procedures to obtain audit evidence can be divided into

(a) Risk assessment procedures; and (b) Further audit procedures, which comprise: (i) Tests of controls, when required by the ISAs or when the auditor has chosen to do so; and (ii) Substantive procedures, including tests of details and substantive analytical procedures.

That is at the beginning the risk assessment is done and according to the results of such analysis the substantive procedures are carried out.

Now let us try to understand the manner to gather evidence for specific types of audits.

Operational audit - In case of an operational audit, the focus to be pointed in terms of procedures is towards the use of inquiry, inspection, observation , analytical procedures. Basically operational audit focuses on the part that the operations designed for an entity, whether they are carried out appropriately as per the set procedures or not in an effective and efficient manner. So in this case we would inquire into matters that help us understand about the procedures set, observe whether the said set procedures are actually being carried out or not and also inspect certain areas for more evidence and do certain analytical procedures to understand the state of operations.

Compliance Audit - In a compliance audit basically the aim is to check whether the compliance legal or otherwise which have to be followed or complied by the entity have actually been carried out or not. for this to gather audit evidence the procedures that can be applied is inquiry, inspection, confirmation. Inquiry can be done as to what all compliance are applicable and inspection can be done by checking whether the compliance have been actually carried out or not. and the confirmations can be used to check the external sources which give you a proof that the compliance has been made.

Financial statement Audit - Here the aim is to obtain sufficient and appropriate audit evidence that financial statements as a whole are free from material misstatements and show a true and fair view. Here all the above mentioned audit procedures can be used as per the requirement and nature of any particular financial item.

When and when not to apply such evidence - If any evidence is obtained which helps you and is relevant in forming the relevant opinion then such evidence should be taken as the basis else such can be ignored if it doesn't add value or serve the purpose.