AUDIT EVIDENCE

Audit Evidence

Audit Evidence

Introduction

Audit evidence refers to the information obtained by an auditor in arriving at the conclusions on which an audit opinion is based. Decisions on the quantity and quality of the audit evidence to be obtained in any audit and the procedures for obtaining this evidence are central to the overall audit process. Guidance on these decisions is provided in the following auditing standards: International 500; Australian 502; Canada 5300; UK 400; USA 326. The International Standard on Auditing 500 (ISA 500) states that audit evidence is obtained from an appropriate mix of tests of controls and substantive procedures or entirely from substantive procedures. Substantive procedures include (1) tests of details of transactions and balances, and (2) analysis of significant ratios and trends including the resulting investigation of unusual items (Allen, 1999, 20).

Discussion and Analysis

Most of these studies have extended Ashton (1974) who examined auditors' internal control judgments over payroll. Ashton found that auditors placed greatest significance on the segregation of duties cues and that the extent of consensus between auditor judgments on the strength of the internal control systems was relatively high compared to the consensus found in studies of other types of expert judges, e.g., stockbrokers and radiologists. The Ashton (1974) study has been extensively replicated and extended by subsequent research.

Trotman & Wood (1991) identify 17 studies that examine consensus in internal control judgments. They conclude that while there is considerable variation in consensus between studies, overall the results show higher mean consensus than is typically reported in non audit studies. This level of consensus was increased by use of the review process. Many of these studies also examined cue usage, judgment stability over time, and self-insight into cue usage. In all of the studies that examined cue usage, a policy-capturing model explained almost all of the variance in subjects' judgments. Normally about four to six cues were found to be significant and there were considerable individual differences in cue usage across auditors.

Bonner (1990) found that differences in consensus in cue weighting between experienced and inexperienced auditors was greater for analytical risk assessments (expert task) than control risk assessments (novice task). While earlier auditing studies found almost no evidence of configural cue usage, more recent studies by Brown & Solomon (1990; 1991) provided evidence of configural cue processing in situations where the nature of the configural processing was specified ex ante based on the context of professional evaluations. Studies that have also examined judgment stability over time have found that stability has been higher than consensus across subjects which are consistent with studies in other areas of judgment/ decision-making. Auditors have also demonstrated a reasonably high level of self-insight in connection with their use of information (Gray, 1993, 49).

Auditors often explicitly or implicitly formulate hypotheses to explain certain factors (e.g., a change in key ratios during preliminary analytical review) and then search for evidence to test the hypothesis. Kida (1984) examined whether the hypothesis-testing strategies employed by auditors affect their search for ...