Audit Evidence and Testing Procedures
Evidence quality
Audit conclusions rest on evidence. Candidates must know the characteristics of good evidence: sufficiency (enough of it), relevance (it addresses the objective), and reliability (its source and nature). Evidence from independent external sources is generally more reliable than internal evidence; documentary evidence beats oral; original documents beat photocopies.
Testing methods
Know the difference between tests of controls (do controls operate effectively?) and substantive tests (are the records and balances correct?). Substantive procedures include analytical review and detailed testing. Sampling may be statistical or judgemental; know why sample sizes grow with higher confidence and lower tolerable error. Understand inspection, observation, inquiry, confirmation, recalculation, and reperformance as evidence-gathering techniques, and know that inquiry alone is rarely sufficient.
Traps to watch
- Assuming more evidence is always better - evidence must be relevant and reliable, not just plentiful.
- Treating management's assertion as sufficient evidence without corroboration.
- Confusing a control test (was the approval done?) with a substantive test (is the payment valid?).
- Ignoring exceptions instead of following up and evaluating their cause.
Rule of thumb
Corroborate inquiry with at least one other technique. If the only evidence is what someone told you, you do not yet have sufficient evidence.
Worked example
To test whether purchase orders are properly approved, the auditor selects a sample and inspects approval signatures (test of control). To test whether the recorded purchases are valid, the auditor traces to goods-received notes (substantive test). These are different questions and need different evidence.