Evidence and audit procedures

Hello. This is Prof. David Hay of the University of Auckland. Today, we'll talk more about auditing and the topic today is evidence. We're going to talk about the evidence that auditors use to complete their work.

Auditors base their opinion on some evidence, and there's guidance and standards telling them just what sort of evidence they should use. The auditing standards, for instance, International Standards on Auditing number 330 says, "The auditors shall design and perform further audit procedures whose nature, timing, and extent are based on and responsive to the assessed risks of material misstatement at the assertion level. Now you know from a previous talk some of those things that are defined in that statement. So we know what the assertion level is. Remember, it's breaking down items in the financial statements and thinking about issues such as the completeness or occurrence of transactions or the existence and completeness of balances. Those are the assertions. We also know what material is. Material is important enough to the users that it needs to be looked at. Now we've got to decide what sort of evidence. Auditors have quite a lot of choice about that. They can look at the end of year balance. They can look at the transactions as they happen. In accounting, we've got the double-entry system so everything's recorded twice. Do we test the accounts receivable because that's one part of the sales transaction, or do we just test the revenue itself? The journal entry there is something like debit accounts receivable credit revenue, as long as we've tested one, we might be reasonably confident about the other.

Then, there are analytical procedures. A lot of auditing is done by analytical procedures. It's testing relationships that are in the financial statements. More than these later in the talk. Let's go on to the next part of audit procedures.