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Table of contents List of Tables and Diagram Diagram 1.1 Classification of audit evidence Page Diagram 1.2 Audit procedures to obtain audit evidence Page 15 Diagram 1.3 The appropriateness of type of evidence Page 20 Audit evidence and technical methods to collect audit evidence in the independent audit of financial statements Abstract Auditors use various techniques to control accounts in order to get valid relevant samples There are many way to obtain a relevant audit evidence and auditors have to use: Physical examination, Confirmation, Documentation, Analytical Procedure, Inquiries of the Client, Re-performance, Observation Another major technique used in audit is audit sampling The purpose of audit procedures is to offer detailed audit steps which are to be performed during the audit fieldwork and which will achieve the explicit audit objectives These procedures are to be developed by the auditor and approved by audit management, and in the case of a decision of not performing a procedure, a comment with the reason for that decision needs to be included in the audit procedures Introduction Auditing has occurred over 100 years on the world However, it has just appeared in the 1990s At the beginning, The independent auditing firm turned up, followed by State Audit in 1994 and Internal Audit in 1997 Since then, audit activities have grown rapidly Especially, Vietnamese independent audit firms are getting to improve gradually both quantity and quality to meet promptly with the economic development In order to thrive, the enterprises need to enhance the management control while accounting system plays an important role Auditing always go with and continue accounting If accounting is the recording, storing, sorting, retrieving, summarizing, and presenting the information, Auditing is an objective examination and evaluation of the financial statements of an organization to make sure that the records are a fair and accurate representation of the transactions they claim to represent However, the thing above is that auditor can give their opinions to improve management processes and benefit to the users The key that leads to success of audit is audit evidence, which is the foundation so that auditors can give their opinion about the fair and accurate representation of financial statements and then they can rely on it to draw conclusions If the audit evidences are not sufficient in terms of quality as well as quantity, it will have a great impact on audit conclusions, ignoring risk and fraud is extremely huge This can cause serious impact on operation of customer’s firm as well as external users using financial statements In order to collect highly reliable audit evidence, it depends on auditor’s competence, experience also audit techniques which are results of summarizing, generalizing audit experience based on the dialectical method, specific scientific method, plan analysis, the probability and statistical analysis That is why collecting audit techniques has to be continuously enhance and improve to meet the variety of information and increasingly sophisticated fraud level Recognizing the importance of problem, as an auditing student through learning and searching process, I have boldly chosen the topic “ Audit evidence and technical methods to collect audit evidence in the independent audit of financial statements” With the desire understanding more in depth about collecting audit evidence in the current audit firm The content consists of three following parts: Chapter 1: Essential general theory of audit evidence and the techniques of collecting audit evidence Chapter 2: Current situation of applying techniques of collecting audit evidence in financial audit conducted by independent auditors in Viet Nam Chapter 3:Recommendations and solutions to improve methods of collecting audit evidence CHAPTER 1: Essential general theory of audit evidence and the techniques of collecting audit evidence 1.1 Theoretical basis of audit evidence 1.1.1 Concept of audit evidence Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based and includes the information contained in the accounting records underlying the financial statements and other information Auditors are not expected to examine all information that may exist Audit evidence, which is cumulative in nature, includes audit evidence obtained from audit procedures performed during the course of the audit and may include audit evidence obtained from other sources, such as previous audits and a firm's quality control procedures for client acceptance and continuance 1.1.2 Classification Audit evidence used in the financial audit represent the aggregate of information used by the financial auditor in order to present a conclusion that the audit opinion reflects and includes all the information contained in accounting registries that are reflect in the financial statements Financial audit evidence is considered any document or statement obtained by the auditor in developing his / her activity and is relevant to the financial auditor in obtaining a reasonable opinion One can mention that the financial auditor can use a large and variable set of probative information of different pattern, such as oral statements of the client or of a third party, written discussion with third parties and the financial auditor‘s own remarks Accounting registries usually gather audit evidence such as: initial transaction registration and supporting documents, invoices, contracts, journal registry, financial statements accommodation that are not reflected in the financial transactions and other documents ( such as: spread sheets that justify cost allocation, calculus, reconciliations and information presentation) Diagram 1.1: classification of audit evidence 1.1.3 Requirement of audit evidence The International Standard on Auditing (ISA) 500 describe what constitutes audit evidence in an audit of financial statements, and promote the auditor‘s responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence Audit evidence must give to the auditor a reasonable assurance that the financial statements not contain a material misstatement The formula “reasonable assurance” is an important aspect of the auditor‘s report because this refers to the fact that the financial statements may be not correct in absolute terms Sometimes, the financial statements could contains a material misstatement because of the limitations inherent in an audit,such as: • It is not suitable to test 100% of every item within the financial statements in order to keep a balance between costs and benefits • Inherent limitations in accounting and internal controls of the client firm • Possibilities that client staff and management may not be entirely honest • Estimates used in the financial statements • Judgements made on behalf of auditors including risk assessments and materiality as well as judging which tests are appropriate and which tests are not A reasonable assurance is obtained when the auditor has obtained sufficient,appropriate audit evidence to reduce audit risk (that is the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level It is for the above reasons that auditors express an opinion‘ rather than confirm the accounts are completely accurate According to the ISA, audit evidence need to be ‘sufficient‘ and ‘appropriate‘ Appropriateness on the other hand is the measure of quality of audit evidence Audit evidence is said to be appropriate if it is relevant and reliable in the given set of circumstances However, the appropriateness of audit evidence is affected by the time, source and the circumstances under which such evidence is obtained Sufficient appropriate audit evidence is obtained by applying appropriate audit procedures keeping the risk assessment in consideration It is up to the auditor to decide whether a certain audit procedure is appropriate enough to obtain sufficient appropriate evidence in a particular situation Sufficient appropriate audit evidence is said to have been obtained if the audit risk is reduced by the auditor (through application of audit procedures) to such level that enables the auditor to draw reasonable inferences on which ultimately auditor’s opinion will be based However, the two features of evidence are NOT independent and isolated rather they are closely interrelated A quality audit evidence, even if it is in small quantity, might be enough in some situation i.e higher the quality lesser the amount of evidence required, however, a large quantity of audit evidence cannot be a substitute for inappropriateness of audit evidence i.e poor quality of audit evidence cannot be rectified by merely increasing the amount of evidence ‘Sufficient‘ refers to the quantity, as well as the quality, of the audit evidence Appropriateness‘ of audit evidence is related to the nature and timing of audit procedures Appropriateness (the quality of evidence) is achieved if the evidence obtained is relevant and reliable Also, the audit evidence should be sufficiently documented so that they can be used before issuing the auditor's report Audit evidence needs to support the auditors opinion in the auditor‘s report and the audit file should indicate how the auditor has arrived at their audit opinion Regarding this aspect, in the past audit firms (like Arthur Andersen in Enron scandal) have been accused by public opinion and regulatory bodies because the audit evidence that they have obtained has not been sufficient or appropriate enough to justify their audit opinion Auditors must ensure that when planning and performing audit procedures, they believes that these procedures are adequate enough in order to obtain sufficient and appropriate audit evidence (because audit procedure and audit evidence are not the same – auditors use procedures to generate evidence) Other aspects that auditors need to consider are relevance and reliability of the information to be used as audit evidence Sometimes it is indicate to obtain audit evidence from other sources outside of the entity being subject to audit This source is more appropriate than an internal one For example, bank confirmations can offer audit evidence concerning the existence of bank accounts at the reporting date and this kind of audit evidence is more important than a bank statement even that one is signed and stamped 1.2 Techniques to collect audit evidence in financial audit Management is responsible for the fair presentation of financial statements that reflect the nature and operations of the entity In representing that the financial statements are fairly presented in conformity with generally accepted accounting principles, management implicitly or explicitly makes assertions regarding the recognition, measurement, presentation, and disclosure of information in the financial statements and related disclosures Assertions used by the auditor could be classsified into the following categories: a Assertions about classes of transactions and events for the period under audit: The assertions about classes of transactions and events for the period under audit are occurrence, completeness, accuracy, cut-off and classification Relating occurrence, transactions and events that have been recorded have occurred and pertain to the entity About completeness, all transactions and events that should 10 incurred until recorded in accounting books However, the audit firm will not perform 100% relevant documents for all account balances because it takes too much time and is ineffective The auditor usually chooses representative sample for testing The transactions with large amount or irregularity are parts of the audit sample The characteristic of audit samples are based mainly on the experience of the auditor therefor normally partner of the auditor will set the characteristic of audit samples and then the auditor will perform There are two different methods to conduct the documentation technique depending on the characteristics of items, transactions: - Firstly, check the original documents to the accounting records or in some audit companies they call it “ from floor to book” to check the completeness of the record of transactions incurred by customers With this test forms, the primary objective of the auditor is to verify the correct period of economic operations by checking vouchers, bills incurred at the end of the year or early next fiscal year of the accounts: revenue, expenses, income, purchases, - Secondly, check the accounting books to original documents or in some companies they call it “ from book to floor” to verify the existence of these transactions have been carrying In the process of reviewing the data, if the detection of large value transactions or unusual fluctuation Auditors will conduct detailed checks such as: check in order from the balance sheet, general ledger, to source documents of those transactions This method is usually used extensively in the audit work because of the convenient in gathering evidence The evidence is usually available in the audited entity and also costs less to collect than other techniques However, the 25