Question

Identify and explain five (5) principle techniques for obtaining evidence available to the auditor?

List and briefly explain three (3) objectives when testing transactions.

List and briefly explain three (3) objectives when testing balances.

Explain the differences between walk- through test, tracing and vouching.

Answer 1

1. Identify and explain five (5) principle techniques for obtaining evidence available to the auditor?

Audit evidence is one of the basic principles that govern an audit. There are various methods that can be adopted to obtain audit evidence. The most common ones include:

· Inspection

This is the most efficient method of obtaining audit evidence. Inspection refers to checking all the documents, records, and physical assets. The reliability of these documents and records depends upon the nature and effectiveness of internal control.

· Observation

Another important method of obtaining audit evidence is observation. This method involves the auditor to look at a process of procedure being executed by others. This method can be exemplified by the auditors’ presence at the clients’ physical stock count.

· Inquiry and confirmation

The two aspects of this method include searching about the info from a knowledgeable person inside or outside the company, and responding to any inquiry to substantiate information in the accounting records. These responses might provide the auditor with info which is not previously possessed by him or even with corroborative evidence.

· Computation

This method of obtaining evidence involves the examination of arithmetical accuracy of source documents and accounting records. The method might also involve performing individual calculations.

· Analytical Procedures

Analytical procedures encompass a number of specific procedures the auditor may perform. Auditors employ specific procedures to assess the reasonableness of data and to identify unusual relationships. Because unusual relationships among data can occur for a number of reasons, analytical procedures may address all five financial statement assertions.

2. List and briefly explain three (3) objectives when testing transactions.

The objectives of transaction audit are occurrence, Completeness and Accuracy

· Occurrence

During transaction audit checking the recorded transactions are existing as per the evidences received.

· Completeness

Here, checking the existing transaction are recorded under books of accounts.

· Accuracy

Here, recorded transactions are stated at correct amounts.

3. List and briefly explain three (3) objectives when testing balances.

· Valuation

Valuation testing determines whether the accounts set the right value for assets and liabilities.

· Occurrence

Audits determine whether transactions actually occurred by going over sales ledgers and supporting documents.

· Accuracy

Checking the balances whether it’s recorded under books of accounts with correct value.

4. Explain the differences between walk- through test, tracing and vouching.

· Walk through test

A walk-through test is a procedure used during an audit of an entity's accounting system to gauge its reliability. A walk-through test traces a transaction step-by-step through the accounting system from its inception to the final disposition. In conducting a walk-through test, an auditor will study how a transaction is initiated and moves through a company or organization's accounting system to completion. This involves identifying how a transaction is authorized, recorded - manually, by automated means, or both - and then reported in the general ledger of the books. The auditor will want to know how controls for accuracy are applied at each step in the process and how follow-up steps are taken to improve controls. A walk-through test is only one of many tests performed by auditors during their evaluation of an organization's accounting controls and risk management measures. The test can reveal system deficiencies and material weaknesses that would need to be rectified by the organization as soon as possible.

· Tracing

Tracing refers to first selecting an accounting transaction (a source document) and then following it into the journal or ledger. The direction of testing in this case is from the source documents to the journals or ledgers and tests whether transactions that occurred are recorded (completeness) in the accounting records.

· Vouching

Vouching refers to first selecting an item for testing from the accounting journals or ledgers and then examining the underlying source document. Thus, the direction of testing is from the journals or ledgers back to the source documents. Vouching provides evidence that items included in the accounting journals or ledgers have occurred (are valid).