Question

Audit Evidence – Is it Persuasive?

As a staff auditor you are asked to gather information about the existence of physical inventory. For each of the three types of audit evidence obtained, discuss whether the audit evidence is appropriate and sufficient.

Physical examination of inventory in warehouse.Documented discussion with inventory control manager that the inventory agrees to the accounting records and is in saleable condition.Observation of annual physical inventory count and re-performance of a sample inventory counts.Explain with Real World /or Real Company examples.

Answer 1

Meaning of persuasive - Approximate , not Accurate

Audit is based on sufficient and appropriate audit evidence. Instead of taking all facts into consideration only few facts are considered. Audits are based on sampling that means a series of transactions are assumed to be entire population and all the evidences are collected upon it .

So audit evidences are collected such that reasonable assurance regarding the transaction is found instaed of absolute.Even in the audit report auditor clearly specifies that "In our opinion and to the best of our knowledge " audit performed by us provides true and fair view of financial statements. As audit evidenes collected by the auditor does not give 100% accuracy they considered to be sufficient and appropriate and not absolute and due to this reason audit evidences are assumed to be persuasive.

Hence concluded : Audit Evidences are persuasive.

Check On Sufficiency and Appropriateness of following Evidences obtained:

Physical Examination of inventory in warehouse : Physical examination includes checking the existence , quality and numbers of stock lying in the warehouse . whether it is upto the records shown by management or not and inventory is to be checked at intervals to assure the accuracy.All big and small industries get their inventory physically examined at regular interval. Like Pharmacueticals co. Cipla get examination of physical inventory done to check the quality , expiry date and wehther they are stored proprly or not at regular intervals.

Documented Discussion with Manager : it involves the discussion between the manager and the auditors based on the documents instead of physical examination of stocks .This is to ensure that accounting records are appropriate with real stock and they are ready to sale. In All big companies like Fritolay ,nestle ,cadbury etc. once Physical examination is done auditors discuss the accuracy of documented things with the manager. That includes that they sale what their accounting records show.

Annual physical inventory count and reperformance : This includes counting number of stocks lying and cross checking it with the closing stock lying in balancesheet . and for sample reporformance count : instead of whole population a single block or area is checked and counted . like for cement indutries : Jk Cement etc its not possible to physical examine the whole stock again  and angain and thats why instead of counting counting complete population , a part of population representing entire set of cement stock is checked .