Question

Identify and briefly explain the eight general audit procedures used to gather evidence (10 pts).

Provide an example for each of the eight procedures.

Answer 1

The auditor may carry out the following audit procedures to gather audit evidence:

1. Inquiry: It consists of seeking both financial and non-financial information of knowledgeable persons within or outside the entity. Inquiry may involve -Asking clear, concise, and relevant questions using open or closed questions appropriately, Listening actively and effectively etc.

For example, auditors often use management inquiry to learn more about the company's transaction flows and internal control testing.

2. Observation: It is an audit procedure that consists of looking at a process or procedure being performed by others to obtain the evidence about the actual performance.

For example, observation of the inventory counting being performed by the entity’s staff and observing the performance of control activities.

3. Inspection of Records or Documents: It is based on the examination of records or documents, whether internal or external, that could be held in various forms, ie paper, electronic. Inspection of records and documents provides audit evidence whose reliability depends on their nature and source. Inspection of certain documents may provide direct audit evidence of the existence of an asset,

For example, inspection of an executed contract that may provide evidence in respect of the entity’s application of accounting policies like revenue recognition.

4. Inspection of Tangible Assets: It consists of physical examination of the assets. Inspection of tangible assets may provide appropriate audit evidence with respect to their existence.

For example, while observing an inventory count, the auditor may inspect individual inventory items to verify its existence.

5. Recalculation: It consists of checking the mathematical accuracy of documents or records to verify the accuracy of the recording of transactions.

For example, recalculating depreciation charged on tangible assets.

6. Confirmation: It is the process of obtaining a representation of information or of an existing condition directly from a third party. Confirmation is an audit evidence that is obtained as a direct written response from a third party in paper form, electronic medium or other medium.

For example, the auditor may seek direct confirmation of receivables balances by communication with debtors.

7. Re-performance: It involves the independent execution of procedures or controls by the auditor that were originally performed as part of the entity’s internal control.

For example, re-performing the aging of accounts receivable

8. Analytical Procedures: It involves evaluation of financial information through analysis of relationship among both financial and non-financial data. These procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information. It includes use of -Trend analysis, Ratio analysis, Reasonableness testing, Regression analysis.

For example, reviewing the current ratio over several reporting periods.