Audit Methods Introduction Traditional audit methods and audit procedures are used to Audit evidence is discussed in this unit. First, what the collect evidence from the accounting recording audit evidence is explained. Then, evidence collecting environment. Audit methods can be grouped into four techniques, audit methods and audit procedures are different groups: a) form audit and material audit, b) discussed. continuous audit and audit by sampling, c) forward audit
Collecting Evidence and backward audit, and d) direct audit and indirect audit.
Collecting evidence is the basis of the independent audit Audit Procedures process. An independent auditor collects evidence to give The ways followed to collect sufficient and quality audit reasonable assurance whether an entity’s financial evidence are called audit procedures. The main audit statements are fairly fair in accordance with accounting processes are; comparison process, control of amount standards. transfers, arithmetic examination and document review
Audit evidence can be defined as any information, Types of Audit Evidence document and record used by the auditor to determine the degree of compliance of the audited information with Audit methods and audit procedures are used as evidence collection tools to collect supporting evidence. Some of predetermined criteria. Audit evidence is also defined in these processes are also the processes used in collecting the ISA 500 Audit Evidence. According to this standard, traditional evidence. In this context, the main audit all information used by the auditor in reaching the procedures used to obtain supporting evidence, in other conclusions based on his opinion is audit evidence. Audit words, the main evidence collection techniques are: evidence includes the information in the accounting records, which form the basis of the financial statements, • Physical Examination and Counting, and other information. • Observation, • Observation of Inventory Count, Audit evidence in the international standards on auditing • Recalculation, is handled in group 5. These standards are as follows: • Investigation (Inquiries of the Client), • ISA 500: Audit Evidence • Inspection, • ISA 501: Audit Evidence-Specific • Re-Monitoring the Recording System (Re- Considerations for Selected Items Performance), • ISA 505: External Confirmations • Document Review, • ISA 510: Initial Audit Engagements-Opening • Analytical Procedures, Balances • Confirmation (External Confirmation). • ISA 520: Analytical Procedures Physical Examination and Counting • ISA 530: Audit Sampling • ISA 540: Auditing Accounting Estimates and Physical examination and counting is a common evidence Related Disclosures collection technique used by independent auditors. • ISA 550: Related Parties Physical examination and counting is the examination and • ISA 560: Subsequent Events counting of the physical assets and documents of the business being audited. In other words, it is a physical • ISA 570: Going Concern examination of whether documents and physical assets in • ISA 580: Written Representations business records actually exist. Types of Evidence by Source Observation The evidence to be collected by the auditor is divided into Observation is to be present during the completion of two according to the source. These are evidence from the certain activities and to witness how the transactions are accounting records and supporting evidence. completed in order to witness a process or event to be The accounting record environment within the enterprise audited. This technique is used to investigate whether the refers to all the accounting information available in the operation observed is performed according to the methods enterprise. As an example of the audit evidence in the and methods determined by the senior management. accounting recording environment; spreadsheet, journal, Observation of Inventory Count ledger, auxiliary ledger, accounting handbook, calculations, electronic funds transfer records, cost The most important method used in collecting evidence distributions and reconciliations can be shown. about stocks is to observe the stock count by the auditor. According to ISA 501: Independent Audit Evidence - Supporting evidence can be categorized as; third-party Special Considerations for Specific Items, the auditor statements, business employee statements, analytical should be present and monitor the count when the stock evidence, documented evidence, arithmetic evidence, and quantities in an enterprise are determined only by a physical evidence. physical count. Inventory counting can be done as of the
balance sheet day, or just before or immediately after the Confirmation (External Confirmation) balance sheet day, on a suitable date. In systems where According to ISA 505 External Confirmation, stocks are monitored according to the continuous confirmation (external confirmation) refers to the audit inventory method, the physical counting of the stocks is evidence obtained from a third party’s written response made and the counting results and accounting records are directly to the auditor in a printed, electronic or other compared. storage medium. In other words, the confirmation process
Recalculation is that the auditor receives written information directly from an independent source outside the enterprise. Recalculation is the confirmation of arithmetic operations such as addition, subtraction, division and multiplication Relevance (Reliability) of Audit Evidence And by the auditor. Recalculation is the evidence collection Qualification of Audit Evidence technique that provides mathematical evidence and is used Both generally accepted auditing standards and in conjunction with other audit processes in the evaluation international standards on auditing order the auditor to of financial information. Recalculation informs the auditor collect appropriate and sufficient evidence during the audit about the arithmetic accuracy of an amount. process. The reliability and qualification of the evidence is Investigation (Inquiries of the Client) closely related to the accuracy of the technique used. The The investigation technique is widely used in the audit quality of the relevance of the evidence is in other words process, in addition to other audit techniques. Supporting its reliability. The qualification of the evidence is related evidence, such as “oral evidence” or “written reports”, is to the number of evidence to be collected.
collected through the investigation technique. Relevance (Reliability) of Audit Evidence
Inspection It is natural that there may be more than one evidence of Inspection is an audit technique similar to analytical an incident and transaction investigated during the audit review. Inspection is the auditor roughly takes a look at process. In this case, first of all, the relevance of the the accounting environment and tries to reveal evidence is essential; the relevance of the evidence extraordinary situations. In this way, unusual transactions depends on whether it is relevant and reliable. The and balances can be estimated. reliability of the information to be used as audit evidence, and hence the audit evidence, is affected by the source, Re-Monitoring of the Recording System (Re- nature, and the circumstances under which the evidence is Performance) obtained. The reliability of the information in the
Re-monitoring of the recording system is a widely used accounting record environment is directly dependent on technique to investigate the accuracy of account balances the effectiveness of the internal control system in the and to test transactions. Re-monitoring the recording customer enterprise. The reliability of accounting system; moving forward from a document selected information in an environment with an effective internal through sampling and looking for the accuracy of the control system is higher than in an environment with a records related to that event. weak internal control system.
Document Review The main factors affecting the relevance and reliability of Document review is the auditor’s examination of internal the supporting evidence are: the validity of the evidence, or external records and documents, which form the basis the source of the evidence, the time of the evidence, and of the subject being audited and are kept in paper, the objectivity of the evidence.
electronic or other media. Document review is the Qualification of Evidence opposite of the technique of re-monitoring the recording Generally accepted auditing standards and international system. standards on auditing (ISA 500) require the auditor to
Analytical Procedures gather sufficient evidence. The qualification of the Accounting is a logic relationship and financial statements evidence is related to the amount of evidence to be are based on equilibrium. Researching the meaningful collected, and the amount of evidence to be collected is relationship that is considered to exist between the data in directly determined by the auditor. Using the subjective the financial statements can be defined as analytical judgment, the auditor collects a different number of procedures. According to ISA 520 Analytical Procedures, evidence in each audit work. The main factors affecting analytical procedures refers to the evaluation of financial the auditor’s collection of sufficient evidence are as information by analyzing meaningful relationships follows; materiality, the quality of the evidence, the risk, between financial and non-financial data. Analytical the cost of the evidence, and the size and characteristics of procedures provide the auditor indirectly with estimated the main mass.
information. Sampling In The Evidence Collection Process
During the audit process, the independent auditor is not expected to examine all past events and documents while
collecting evidence. Due to both the time constraint and Filing and Storing Working Papers other factors, the auditor can make a judgment about the Working papers must be brought together and filed within whole mass using the sampling method. When the a certain time after the completion of the audit work. This historical development of the audit is analyzed, it is period is 60 days after the date of the audit report. focused on sampling instead of a hundred percent examination especially in the audit practices after the Management Assertions (Financıal Table 1930s. The independent auditor may use the sampling Assertions) method to speed up the audit, reduce the cost of the audit, As is known, the audit examines whether the entity’s to ensure the reliability of decisions related to a particular financial statements accurately reflect the entity’s part of financial records, to conclude on the acceptability financial position, operating result, and changes in its of a particular body of documents and records, and to financial position, in accordance with generally accepted decide on the accuracy of the financial statements. accounting principles and accounting standards. Dividing
Sampling Types in Auditing this general assumption regarding the financial statements into sub-assertions will provide a reasonable performance The main sampling types used in the auditing; it can be of the audit function. In the financial statements prepared divided into two groups as non-statistical sampling by the business management, there are management (voluntary sampling) and statistical sampling. assertions regarding each item. The auditor determines Voluntary Sampling: The independent auditor chooses an whether management assertions are correct based on example based on his previous experience, regardless of account balances and transactions. The auditor should set any systemic structure. As is known, non-statistical the audit objectives for this purpose, carry out audit work sampling depends on the subjective judgment of the accordingly, and achieve the audit objective set out in the auditor. audit engagement. In this context, the auditor creates the audit objectives that meet the management assertions. In Statistical Sampling: Statistical sampling, contrary to non- this way, sufficient and appropriate evidence is collected statistical sampling, is that the independent auditor to form the basis of the auditor’s opinion to be disclosed in chooses samples by scientific methods rather than from the audit report. his own experience. In statistical sampling, statistical methods are used to select sampling units.
Sampling Risk in Auditing
Sampling is an inevitable practice in the audit process. However, from time to time, the results of the independent auditor may differ from the real situation. According to this result, the decision to be made would be wrong. In auditing, this is called sampling risk. Sampling risk is the risk arising from the probability that the independent auditor’s conclusion based on a sample is different from the result to be obtained if the same audit techniques are applied to the main body.
Audit Documentation (Working Papers)
In the audit process, the independent auditor collects a lot of evidence. The auditing standards paid great attention to the working papers and asked the auditor to document the evidence collected. In other words, it is not enough to collect evidence in the audit; at the same time, this evidence needs to be documented. Documentation of evidence is done through working papers. Working papers are written records that show the audit paths followed by the auditor, the audit procedures and tests they have performed, the information they have gathered, and the results they have achieved regarding the examination.
Benefits of Working Papers
The purpose of the working papers is to ensure that the audit activity is carried out in accordance with generally accepted auditing standards. Working papers are also a proof that provides assurance to the auditor.