8 Types of Evidence Collection
• Why do you need to collect evidence?
Our job as auditors is to collect audit evidence to support our opinion on the
financial statements
• DA: Crime conviction rely on evidence…DNA evidence, fingerprint, gun residue as well
as circumstantial evidence and other others.
• Not all evidence is equal.
• In the session, we will look at various procedures on how to collect evidence.
• 8 types of evidence collection
8 Types of Evidence Collection
1. Physical examination
2. Confirmation
3. Inspection
Vouching
Tracing
4. Analytical procedures
5. Inquiries of the client
6. Recalculation
7. Reperformance
8. Observation
Physical examination (1 of 10)
• Refers to the auditor's review of tangible assets.
• most commonly used for assets like inventory and cash but also applies to securities,
notes receivable, and tangible fixed assets.
• In auditing, there's a difference between physical examination of tangible
assets like cash and inspecting documents like cancelled checks.
• When the item being looked at, like a sales invoice, doesn't have intrinsic
value, it's termed as inspection of document.
Physical examination (1 of 10)
• What is it good for?
• Physical examination in auditing is a primary way to confirm an asset's
existence and is seen as highly reliable evidence.
• Typically, it helps determine an asset's quantity and description, and
sometimes, its quality.
• However, it doesn't confirm the client's ownership of the asset or its correct
financial statement value.
Confirmation (2 of 10)
• Obtaining a direct response from a third party to validate information
accuracy.
• This response, which can be written or electronic, is sought by the auditor
through the client.
• Since it's from an external source, it's deemed highly credible evidence.
• Yet, due to its cost and potential inconvenience to the third party,
confirmations aren't always used despite their applicability.
Confirmation: U.S. Standards (2 of 10)
• According to auditing standards, if auditors are given direct access to a third
party's information through electronic codes or secure websites by the third
party or a service provider, it can qualify as an external confirmation.
• However, if the auditor gets access details from the company's management, it
isn't considered an external confirmation.
• Employing encryption, digital signatures, and verification methods can enhance
the reliability of the confirmation source.
Confirmation – Electronic (2 of 10)
• Traditionally, confirmations were sent in paper form, but electronic methods
are now on the rise.
• While electronic responses, like faxes or emails, raise concerns about
verifying the source's authenticity, third-party services like [Link]
offer a secure way to validate both the auditor and the responder.
• This secure channel ensures faster, safer confirmations.
• Following a fraud incident at Parmalat, Bank of America decided to only
entertain bank confirmations sent via a specific third-party electronic
platform.
Confirmation: Auditing Standards
• Auditing standards mandate the confirmation of a sample of accounts
receivable when feasible, given their significant presence in financial
statements and the reliability of confirmations.
• In contrast, international standards don't have this requirement,
highlighting a difference between U.S. and global practices.
• While only accounts receivable confirmation is emphasized, confirmations
can be beneficial for verifying various other data.
Sample Confirmation
Account Source of information
Cash in bank Bank
Marketable securities Investment custodian
Accounts receivable Customer
Notes receivable Maker
Owned inventory out on consignment Consignee
Inventory held in public warehouses Public warehouse
Cash surrender value of life insurance Insurance compan
Accounts payable Creditor
Notes payable Lender
Advances from customers Customer
Mortgages payable Mortgagor
Bonds payable Bondholder
Shares outstanding Registrar and transfer agent
Insurance coverage Insurance company
Bank, lender, and client’s
Contingent liabilities legal counsel
Bond indenture agreements Bondholder
Collateral held by creditors Creditor
Inspection (of Documents) (3 of 10)
• Involves the auditor reviewing a client's documents and records to validate
the information in the financial statements.
• These documents, which can be paper, electronic, or in other formats, help
run the business systematically.
• Each transaction typically has at least one supporting document, providing
ample evidence for the auditor.
• For instance, for every sale, there might be a customer order, shipping note, and
duplicate invoice. Such documents help the auditor confirm the accuracy of sales
records.
• Documentation is a popular audit evidence source due to its availability and
cost-effectiveness. In some cases, it might be the only viable evidence.
Inspection: Interval vs. External
• Documents in auditing are categorized as internal or external.
• Internal documents are generated and used solely within a company, like
duplicate sales invoices or inventory reports.
• External documents, on the other hand, involve an outside party in the
transaction.
• They can originate externally, like vendors' invoices, or start within the
company and return after external processing, like cancelled checks.
• External documents are more reliable than internal documents
Inspection- Internal vs. External
• An auditor's trust in a document's reliability hinges on
its origin (internal or external) and, for internal
documents, the strength of the internal control during
its creation and processing.
• Documents from weak internal controls might lack
credibility.
• Written or digital evidence is generally more
dependable than verbal information, with originals
holding more weight than photocopies or digital
versions.
• While auditors assess document reliability, they
typically don't authenticate them and aren't expected
to specialize in document verification.
Vouching
• "Vouching" is where auditors validate the Accounting Record 1st
authenticity and correctness of the (sales, purchases
transactions (1st) recorded in the accounting
books. journal etc.)
• Already recorded! Looking for support!
• This is achieved by examining the associated Vouch for
source documents (2nd) that provide evidence support
for each transaction.
• Simply put, vouching is like checking your Support Documents
receipts against your credit card statement to
make sure all the listed purchases are (sales invoice, vendor
accurate and valid. invoice etc.
Example of Vouching-Supplies
• In the company's ledger, you spot an entry indicating a payment of $5,000 for
office supplies in June.
• To vouch for this transaction:
[Link]'d ask the company to provide the invoice or receipt, purchase order and receiving
report for this particular transaction.
[Link] company provides the documentations requested from "Office Supplies Co." dated in
June, detailing a purchase amounting to $5,000.
[Link] cross-check the details: vendor name, date, amount, and description of items bought.
[Link] examination, everything matches perfectly: the invoice from "Office
Supplies Co." indeed supports the recorded transaction of $5,000 in ABC
Corporation's ledger for office supplies.
Tracing
• "Tracing" refers to the process where the Support Document (1st)
auditor starts (1st) with the original source (sales invoice, receiving
documents and follows (or "traces") them report, vendor invoice etc.
through to where they are recorded in the
accounting books or journals (2nd).
Trace
• An auditor is looking to ensure that all
received goods have been properly recorded
in the acquisitions journal (ensuring
"completeness"), they would begin with the Accounting Record 1st
"receiving reports." (sales, purchases
journal etc)
Visit: [Link] for complete course: Lectures, MCQs, TF, & Notes
Example- Tracing
• Auditor come across a receiving report for 100 computers received by
ABC Corporation in June.
• To ensure all received items are properly recorded (completeness
objective), auditor decide to trace this forward to see if this receipt of
computers is reflected in the ledger or acquisitions journal.
• 1. Starting with the receiving report, you note the details: the date in June, the
quantity (100 computers), and the supplier name.
• 2. You then go to the acquisitions journal to find a corresponding entry for the
receipt of 100 computers from that supplier in June.
• 3. After some examination, you find an entry in the acquisitions journal that
matches perfectly with the receiving report.
• By tracing from the shipping document to the acquisitions journal,
you've ensured that received items (in this case, computers) have been
properly recorded by ABC Corporation.
MCQ from Farhat Lectures
• When the auditor inspects documentation to obtain
supporting evidence for recorded transactions or amounts,
the process is often defined as:
A- confirmation.
B- inquiry.
C- vouching.
D- physical examination.
8 Types of Evidence
1. Physical examination
2. Confirmation
3. Inspection
1. Vouching
2. Tracing
4. Analytical procedures
5. Inquiries of the client
6. Recalculation
7. Reperformance
8. Observation
