The auditor obtains evidence in performing compliance and substantive procedures by one or more of the following methods:
- Inspection
- Observation
- Inquiry and Confirmation
- Computation and
- Analytical review.
The timing of such procedures will be dependent, in part, upon the periods of time during which the audit evidence sought is available.
Inspection : Inspection consists of examining records, documents or tangible assets. Inspection or records and documents provides evidence of varying degrees of reliability depending on their nature and source and the effectiveness of internal control over their processing. Three major categories of documentary evidence which provide different degrees of reliability to the auditor are:
(i) documentary evidence created and held by the third parties;
(ii) documentary evidence created by third parties and held by the entity; and
(iii) documentary evidence created and held by the entity. Inspection of tangible assets provides reliable evidence with respect to their existence but not necessarily as to their ownership or value.
Observation : Observation consists of looking at a process a procedure being performed by the others. For example, the auditor may observe the counting of inventories by client personnel or the performance of internal control procedures that leave no audit trial.
Inquiry and confirmation : Inquiry consists of seeking appropriate information from knowledgeable person inside or outside the entity. Queries may range from formal written inquires addressed to third parties to informal oral inquires addressed to persons inside he entity. Responses to inquiries may provide the auditor with information which he did not previously possess or may provide him with corroborative evidence. Confirmation consists of the response to an inquiry to corroborate information in the accounting records. For example, the auditor normally requests confirmation of receivable by direct communication with debtors.
Computation : Computation consists of checking the arithmetical accuracy of source documents and accounting records or of performing independent calculations.
Analytical Review : Analytical review consists of studying significant ratios and trends and investigating unusual fluctuation and item. Process of judgment formation by auditor : After the audit, the auditor issues his report which contains his opinion on the state of affairs the accounts are depicting. The opinion that the auditor expresses is the result of exercise of judgment by him on facts, evidence and circumstances he has come across in the course of audit. The judgment is formed on the under noted basis :
- Identification of the assertions to be examined.
- Evaluation of the assertions as to relative importance.
- Collections of the necessary information or evidence about the assertions to enable him to give an informed opinion.
- Evaluation of the evidence as valid or not valid, pertinent or not pertinent, sufficient or not sufficient.
- Formulation of judgment as to fairness of the assertions under consideration.