Lecture No 32

Verification Approach of
Audit
Lecture No 32
Audit Verification Techniques
 Inspection
 This covers the physical review or examination of
records, documents and tangible assets. An example
in substantive testing is examining purchase invoices
to ensure that they have been properly recorded and
analyzed in the financial statements.
 Observation
 This procedure is mainly applicable to tests of
control, but may also be used in substantive testing,
such as the auditor observing the client's inventory
count to gain evidence that the inventory figure in the
financial statements had been arrived at accurately.
 Enquiry
 Seeking relevant information from knowledgeable persons inside or
outside the enterprise.
 An example in substantive testing is asking management for an
explanation as to why a receivable has, or has not, been treated as
bad.
 Computation
 Checking the arithmetical accuracy of records or performing
independent calculations, for example computing or re-computing the
depreciation expense for the year.
 Analytical procedures
 You should note that these procedures are mainly used in
substantive testing rather than as a test of controls. They may help
the auditor to understand relationships between figures in the
financial statements. This is sometimes referred to as the business
approach to auditing.
 Inspection
 This covers the physical review or examination of
records, documents and tangible assets. An example
in substantive testing is examining purchase invoices
to ensure that they have been properly recorded and
analyzed in the financial statements.
 Observation
 This procedure is mainly applicable to tests of
control, but may also be used in substantive testing,
such as the auditor observing the client's inventory
count to gain evidence that the inventory figure in the
financial statements had been arrived at accurately.
Choice of Verification Techniques
 There are no specific rules that exist as to the
type(s) of techniques that the auditor should
use in a given set of circumstances.
 This is principally a matter of audit judgment
and the nature of the audit objective(s). The
auditor has to look at each individual item in
its own right, identify the audit objective(s) for
that particular item and then decide the most
reliable audit evidence available. The
circumstances and evidence available will
affect the type of technique(s) he uses.
Audit Objectives and
Financial Statement
Assertions
Assertions in obtaining audit
evidence:
(a) Assertions about classes of transactions and
events for the period under audit:
i. Occurrence – transactions and events that have
been recorded have occurred and pertain to the
entity;
ii. Completeness – all transactions and events that
should have been recorded have been recorded;
iii. Accuracy – amounts and other data relating to
recorded transactions and events have been
recorded appropriately.
iv. Cutoff – transactions and events have been
recorded in the proper period.
v. Classification – transactions and events have been
recorded in the proper accounts.
evidence:
(b) Assertions about account balances at the period
end.
(i) Existence – assets, liabilities, and equity interests
exist;
(ii) Rights and obligations – the entity holds or controls
the rights to assets, and liabilities are the obligations
of the entity;
(iii) Completeness – all assets, liabilities and equity
interests that should have been recorded have been
recorded;
(iv) Valuation and allocation – assets, liabilities, and
equity interests are included in the financial
statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately
recorded.
evidence:
(a) Assertions about presentation and disclosure:
(i) Occurrence and rights and obligations – disclosed
events, transactions and other matters have
occurred and pertain to the entity;
(ii) Completeness – all disclosures that should have
been included in the financial statements have been
included;
(iii) Classification and understandability – financial
information is appropriately presented and described,
and disclosures are clearly expressed;
(iv) Accuracy and valuation – financial and other
information are disclosed fairly and at appropriate
amounts.
Content Of Financial Statements
They comprise the following:
(a) The primary statements
(i) Balance sheet
(ii) Income statement
(iii) Statement of changes in equity
(iv) Cash flow statement
(v) The notes to the accounts
(b) The directors' report.
(c) The auditor's report.
 Balance Sheet:
 It shows the financial position of the entity.
 Resourced= Sources
 Assets = Owner’s Equity + Liabilities
 Income Statement:
 It shows the financial performance of the
entity.
Substantive Procedures
 Substantive procedures are performed in
order to detect material misstatements at the
assertion level (like; occurrence,
completeness, accuracy, valuation,
existence, rights and control), and include
tests of details of classes of transactions,
account balances and disclosures and
substantive analytical procedures.
Nature of Substantive Procedures
 Tests of details are ordinarily more

appropriate to obtain audit evidence
regarding certain assertions about account
balances, including existence and valuation.
 Analytical procedures are applied on large
volume of transactions, which are predictable
over time. (cost of goods sold, payroll, sale)
Timing of Substantive Procedures
 Year end substantive procedures are always more reliable:
 In considering whether to perform substantive procedures at an interim
date the auditor considers such factors as the following:
 The control environment and other relevant controls. (Like payroll
disbursement)
 The availability of information at a later date that is necessary for the
auditor’s procedures (prov for doubtful debts can be investigated
interim but debtor and inventory can be verified at the year end).
 The objective of the substantive procedure.
 The assessed risk of material misstatement (prefer always at year end).
 The nature of the class of transactions or account balance and related
assertions (like frequency of occurrence of the transactions e.g.
salaries are paid monthly whereas bonuses are paid annually).
Timing of Substantive Procedures
 Extent of performance of substantive
procedures:
 Greater the risk of material misstatement due
to weaknesses in the system of internal
control, the greater would be the risk of
material misstatement in the financial
statements.
 In designing tests of details, the auditor may
use either audit sampling or may choose to
select items to be tested by some other
selective means of testing.

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Verification Approach of

 Tests of details are ordinarily more

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