Sources and the Relative Merits of Different Types of Audit Evidence - Coursework Example

Introduction Audit evidence is the expression formed by the auditor on the business records in the various stages of his assignment these stages include the audit acceptance stage, audit planning stage, in the control planning stage, in the substantive stage and finally in the conclusion or opinion formulation stage. There are various thresholds that the audit evidence should meet these are:- The evidence should be sufficient persuasive, complete useful and relevant. Several types of audit evidence exist and wish to discuss them fully and their characteristics fully. Types of audit evidence Examination/Inspection This is physical determination of details by the auditor, he gathers all the financial records concerning the client and goes through them each at a time however sometimes it is not possible to go through the entire records as this may involve a lot of documents, in this case the auditor resolves to other methods of inspection such as sampling methods which may be either systematic or non systematic. Systematic sampling involves using a clearly defined routine of selecting the items to be audited; it is simply a regular way of sampling. Non systematic sampling involves using random methods of choosing documents to be audited, thus it is irregular as no defined method is used to select the chosen samples. This method involves examination of the following items. (Guthrie and Lee parker 2006) Assets These are all physical items owned by a business; these may include Land, motor, buildings and other freehold property. Besides these physical assets there is also another class of assets referred to as intangible assets, this class contains such items as patents, copyrights and good will. What the auditor does in looking for audit evidence is that he checks these particular items individually for things like physical location for those it can be verified. Items which may require verification are buildings and freehold property. The other thing to be considered by the auditor in gathering audit evidence is depreciation of some of the property this is mainly so when it comes to motor vehicles and other machinery. The auditor also considers amortizations for intangible assets such as goodwill and patents. The other class of assets is the Current assets that include fast moving goods of the business and other short term items of the business among these are the inventory, account receivables, and liquid money that is held by the business. It should however be noted that all the items may not involve the same methods of gathering the evidence as some tend to offer a complicated documentation process while others have a simpler system thus for the auditor to decide what method to use he has to consider each of these items and determine which of the items requires what method. In the following discussion I wish to determine what method to use in each of the selected items in the current assets namely inventory and account receivables. Under the examination method different modes are used by the auditor depending on the item involved. (Elder, Bisley and Arens 2008) Inventories These require physical counts by the auditor to verify the amounts indicated in the records, this verification may involve several methods - The client does the counting and the auditor simply observes and does test counting for some of the items. -The auditor does literal counting for all inventories Other procedures touching on inventory involve examination of purchase invoices and sales reports for a given period. Also determining whether the inventory is pledged or is subject to liens. Accounts receivables These all debts owned to the business what the auditor needs to check when it comes to these is whether some are overdue and also check on the ones that may look very s8uspicious.These may include recurrent accounts with very huge balances etc Checking of these accounts mainly provide evidence on rights and obligations. Advantage of this method of evidence gathering The auditor gets first hand information, this reduces the chances of being deceived thus is the most reliable method. It gives the auditor to understand properly the systems of the clients business and this may help in other areas in the course of his audit. Besides the advantages this method consumes a lot of time. Analytical procedures This involves use of financial ratios and other forms that show relation in financial information in conducting an audit assignment. These have become an integral part of auditing as the Audit Standards Board has made it compulsory when carrying out assignments. What the auditor does is that he examines the financial summaries prepared by the firm's accounts and uses the analytical procedures to check out for traces and relations, this helps the auditor in verifying the credibility of the financial statements prepared. This method is mainly used to gather audit evidence on credibility of financial records of businesses. (Wallace 2007). Advantages of this method Compared to the examination method of audit evidence it is not cumbersome as it involves definite calculations by the auditor It saves time for other procedures as the auditor uses already prepared financial records. The main disadvantage on using analytical procedures is that information relied on by the auditor may be faulty which directly relates to the summaries he comes up thus the credibility of the audit evidence is ruined. The other factor that may not set use of analytical procedures as the best method of gathering audit evidence is that there is reliance on the auditors reasoning and professional judgment. Inquiry This method requires the auditor to directly ask questions to the employees of the business or various people involved in various departments, the enquiries may done either through designed questionnaires or it may be done directly through word of mouth. Incase the auditor uses the questionnaires he should structure them in such a way that they remain simple and clear. When he gets the questionnaires back he needs to examine the answers and consolidate the same into evidence .The same will happen with the information he has gathered orally as will be required to summarize in writing so that he comes up with the evidence required. (Terrell 2003) Advantages of this method It is quick and evidence is not difficult to come up with as one gets it directly from the individuals involved ion the business. It also does not involve much time investment especially with small businesses or firms. The major disadvantage is that individuals may not be relied upon to give correct information as hey will always give out information that favors them. Observation In this method the auditor simply makes a follow up of several activities that happen in the business this method can only be used in physical processes such as visiting the business during pay days and having to checkout for dummy workers or monitoring g the pay system. The main advantage about this method is that the auditor gets reliable information as it is firsthand and he makes his own conclusions based on what he sees. The disadvantage however is that individual in a certain business may act in a different way when the auditor is around, this would lead him to making conclusions that do not necessarily represent the actual situation. (Knapp 2004) Computation This involves arithmetic confirmations by an auditor of the financial records as presented by the business accountants. The auditor is supposed to recheck the balances in the final financial records; these include balances in balance sheets, profit and loss accounts and other necessary final business records. He goes through all financial records and carries out arithmetic confirmations trying to come up with information that he may use as audit evidence. This methods main advantage is that it is time saving as data utilized is summarized thus he spends little time gathering the evidence. Its main disadvantage though is that the financial records contain information that is faulty depending on the documents earlier on used to prepare the statements, this the evidence produced by the auditor.(Champlan 2004) Confirmation This method involves using the primary documents to confirm the figures appearing in the final documents, an example may be use of bank statements to confirm the amount appearing in the bank balance column of current assets in the Balance sheet. This method is very reliable in gathering audit evidence as it involves use of primary evidence to gather evidence. The auditor is also in a position to understand better or other aspects of the business he not find out from looking at the financial statements. Its major undoing is that it involves a lot of work and thus consumes a lot of time in verifying the balances (Wallace 2007) Conclusion Gathering audit evidence is very vital for an auditor undertaking an auditing assignment this is so especially because it gives the business owners a clear and true picture of what is going on in their businesses, it is also helps give a reflection of the kind of personnel running the business thus helps him make decisions on firing hiring or retention of his work force. References Arens, A., Beasley M and Elder R (2004) Auditing assurance service 10th Edition Prentice hall New York Champlain J (2004) Auditing information System, Wiley, New York Guthrie J., and Lee parker (2006) Accounting auditing and accountability journal, auditing evidence and how to go about it Vol 20 pp 24-26 Knapp M. (2004) Contemporary Auditing, 7th edtn, southwestern college, New York Stewart J (2005), International journal of auditing, the various ways of realizing audit evidence vol 56 pp 32-38 Terrel E (2003) Accounting and auditing guide, audit evidence, Library of congress London Wallace E (2007) Accounting and auditing 2007 CCH, Inc, New York HI, I checked the assignment; it's done well but the word count leaving the bibliography a far less (1351) can you please add 150 words more to it. Read More