Today's Topic - Methods of Obtaining Audit Evidence

[Revision Series for IPCC audit]

Dear IPCC Student,

 

Exams are approaching.

Time to revise is reducing.

Are you worrying about How to revise the whole syllabus in last 15 days?

 

We have a Solution-

You concentrate on the subjects which you consider vast to revise, & we’ll provide you the revision for Audit.

For these last 15 days, we’ll provide you one topic every day to revise & the manner in which you are required to write the answer.

If you want the discussion on any specific topic, you can mail us & we’ll provide you the tips for the same to revise & remember it fast.

 

Today’s Topic –

 

Methods of Obtaining Audit Evidence

(It specifically states the ‘method’ & not the ‘procedure’, therefore it includes – Inspection, Observation, Inquiry, Computation & Analytical review. Don’t mention Compliance Procedure & Substantive Procedure.)

 

If the Q is for 2 marks, just explain these 5 methods in one line-

Inspection – Inspection of all the documents created & held by the Entity & the Third party.

Observation – Observing each & every procedure followed by the Entity.

Inquiry – Obtaining the knowledge of Entity’s Business & inquiring from Employees.

Computation – Checking the Arithmetical accuracy of the documents prepared by the Entity.

Analytical Review – Studying significant ratios & financial trend of the Entity.

 

If the Q is for 4 marks, first explain what is Audit Evidence in one line & than explain the above 5 methods in two lines –

Audit Evidence – It is the information required as evidence, to present True & Fair view of Books of Accounts, i.e. Profit & Loss Account and Balance Sheet.

Methods of Obtaining the Audit Evidence are as follows -

1.      Inspection – Inspection of all the documents created & held by the Entity, created & held by the Third party, prepared by the third party but held by the Entity.

2.      Observation – Observing each & every procedure followed by the Entity from the starting of the procedure till the final result of the procedure, in order to find any material misstatement.

3.      Inquiry – It is the method of directly or indirectly obtaining the knowledge of Entity’s Business & inquiring from Employees about the Entity’s Business & procedures.

4.      Computation – It includes checking the Arithmetical accuracy of the documents prepared by the Entity and cross tallying the results of different procedures to find accuracy of the financial documents.

5.      Analytical Review – Studying significant ratios & financial trend of the Entity, in order to find the financial position of the Entity and whether the Entity has made the correct disclosure of its financial position.

 

If the Q is for 8 marks, first explain what is Audit Evidence & than explain the above 5 methods in detail –

Audit Evidence – It is the information required as evidence during Compliance & Substantive Procedures, to present True & Fair view of Books of Accounts, i.e. Profit & Loss Account (related to revenue activity) and Balance Sheet (related to Assets & Liabilities position).

Auditor is required to follow the following methods of Obtaining the Audit Evidence -

1.      Inspection – Inspection of all the documents & records created & held by the Entity, created & held by the Third party, prepared by the third party but held by the Entity. These documents & records may include physical or electronic data, which may be made available from internal or external sources. Inspection of different records may differ from each other based on the nature & source of the data. E.g. physical inspection of fixed assets for its existence, inspection of documents for proper authorization, etc.

(firstly need to explain that – what is required to be inspected, than what is inspection, than what are the sources of documents & methods of inspection, than give the example.)

2.      Observation – Observing each & every procedure followed by the Entity from the starting of the procedure till the final result of the procedure, in order to find any material misstatement. It provides the evidence of actual performance, which can be compared with the information provided in the documents in order to check the true & fair view of the documents. E.g. observing the procedure of purchase of raw material, observing the procedure of making the final product to obtain loss during the process.

(firstly explain what is observation, than explain what is required to be observed & what is the need to do the observation, than give the example.)

3.      Inquiry – It is the method of directly or indirectly obtaining the knowledge of Entity’s Business & inquiring from Employees about the Entity’s Business & procedures. This inquiry may be related to financial or non-financial data, may be obtained from internal or external sources, may include formal or informal communication, may be in the form of written or oral information. Different ways of inquiry provide different aspects of the information which help in finding the audit evidence for any material misstatement.

(firstly explain what is inquiry, than explain what are the different methods or sources of inquiry, than what is the need to conduct the enquiry, than give the example.)

4.      Computation – It includes checking the Arithmetical accuracy of the documents prepared by the Entity and cross tallying the results of different procedures to find accuracy of the financial documents. It can be performed manually or electronically. Auditor can also recompute or reperform the procedure in order to find whether the Entity has followed the correct procedure or not. E.g. recalculating the financial ratios, preparing Bank reconciliation statement, etc.

(firstly explain what is computation & what are the areas related to computation, than what is the need of computation and then give the example.)

5.      Analytical Review – Studying significant ratios & financial trend of the Entity, in order to find the financial position of the Entity and whether the Entity has made the correct disclosure of its financial position. It provides a relationship between financial & non-financial information, provides a comparison between current & previous year data, provides the deviation of actual data from the budgeted data. E.g. calculating the various ratios.

(firstly explain what is analytical review & the need for the same, than give the example.)

Therefore, with the help of these methods, an Auditor can obtain the evidence that whether the Entity has presented the true & fair view of financial position or not.

Best Wishes,

'Revision Series for IPCC' Team

[Revision Series for IPCC audit]

Dear IPCC Student,

 

Exams are approaching.

Time to revise is reducing.

Are you worrying about How to revise the whole syllabus in last 15 days?

 

We have a Solution-

You concentrate on the subjects which you consider vast to revise, & we’ll provide you the revision for Audit.

For these last 15 days, we’ll provide you few topics to revise & the manner in which you are required to write the answer.