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Discuss about the Nature of the Audit Evidence.

Audit evidence can be referred as the evidences, which are collected during various stages of an audit program and duly documented in the audit working papers. The nature of the audit evidence uses to vary with different stages of auditing .

In the audit planning stage, auditors use to consider those information as the audit evidence, which can be regarded as the most useful and competent audit approach.

Audit evidences for the control testing stage are the information, which can confirm the appropriateness of the auditor’s assertion in context to various accounts of the entity.

The procedure for deriving the audit evidence differs according to nature of the accounts. It is not necessary that a uniform planning can be applicable for every type of accounts. Therefore, the auditors have to prepare audit planning, which include various procedures for obtaining the proper audit evidences for different accounts (Pizzini et al. 2014).

In normal terms, wages and salaries are used for same meanings. According to accounting and financial concept, wages are the payment, which are paid on weekly or daily basis in cash to the workers, especially, related to production. The salary is mainly paid to administrative staffs on monthly basis.

It has been observed that the companies use to suffer from various types of frauds regarding the payment of wages & salaries, even, inspite of having internal control system.

Hence, to get the audit evidence for the clarity in the wages & salaries account, the auditor may include Computer assisted audit techniques in the audit planning.

Computer Assisted Audit Techniques:

By using audit software, auditor can check the wages & salaries account of the company, re-calculate various elements of wages & salary and obtain required information. For example:

  • Auditor can re-calculate the wages and salaries paid to the employees
  • They can check the amount of wages & salaries paid in the beginning and ending of the year and compare the difference with the numbers of employees joined and left the firm during the period.
  • Auditor may also check the records and information of selected staffs on HR files and the actual payroll files (Khlif and Samaha 2014).

The amount and impact of the electricity cost use to vary from company to company. In the factories, the electricity consumption use to be very high in comparison to the administrative offices.

Therefore, there is a great scope for manipulation on the electricity expenses by various means, especially, when the management does not have effective control over the power consumption.

Physical Verification and Comparison:

The audit can get sufficient audit evidence about the transparency in the electricity expenses through physical verification and comparison of electricity related records. For Example:-

  • Auditor should check the meters physically, if possible, examine the meter by any electrical experts, not related to the entity.
  • He can compare the electric bills for consecutive periods to get confirmation that the power consumption did not vary much over the periods.
  • He should compare the amount of bills with the register, maintained by factory administration and office administration (Nicolaescu 2013).

Repairs and maintenance expenses can be defined as expenses, which are incurred for maintaining or increasing the productive capacity of the assets. The range of the assets, for which such costs are incurred, is very wide. It can vary from high-end complex machineries to an ordinary chair.

Computer Assisted Audit Techniques

Therefore, the probability for altercations in the repairs and maintenance account is quite high, as there is no such basic rate for the repairs & maintenance and moreover, as the cost depends on the condition on the asset, the amount of such expenses for the same asset can vary also for different situations (Ettredge et al. 2014).

Categorization and Market Study:

The auditor should prepare an authenticate audit plan, which can measure the expenses with more realistic approach. The audit plan may incorporate categorization and market study of the expenses to check the appropriateness of the amounts. For example:-

  • Auditor should categorize the various repairs and expenses in several different categories as per the nature of the activity.
  • He can make an brief market study on the rates and costs of such expenses to get an idea about the nature.
  • He may employ some technicians to get an estimate of the repairs and maintenance, included in the financial statements.
  • The auditors should check the bills of the expenses and verify the rates through market study (Ege 2014).


By implementing the above mentioned processes, the auditor can collect enough information as the audit evidence to prove the accuracy of the account balances.


Test of Control in auditing can be referred as the testing procedures for examining the efficiency level of the control system, implemented by the client for avoiding or detecting material misstatements (Asare and Wright 2012).

The test of control system is not necessary any more, according to the risk assessment standards. As per the standard, auditors can get required sufficient audit evidences from other risk assessment procedures. But still, the procedure is required by the auditors, when:

  • The auditor plans to rely on the outcomes of the tests to assess the low level of control risk.
  • Other risk assessment procedures are not enough efficient to measure the financial statements.
  • Control risk assessment for the small entities is insufficient due to material weaknesses.

Test of control is mostly used as “dual-purpose” tests, which includes both substantive and compliance tests of financial events

Generally, if the volume of the transactions are huge, the test of control is performed on some selected samples. The sample size uses to be either 40 or 60 units. For the 40 units, no error or deviation is allowed, whereas, for 60 units one error or deviation is considered as negligible if  it does not create any huge impact on the materiality aspect of the firm.

The auditor has selected 50 samples and the set the tolerable error at 5%. It is not also explained on what basis the samples are selected. If the samples are selected on the basis of the higher amount, then 5% error can create great impact, whether, the errors have any materiality aspect or not. For example, if in a sales invoice of $20 million, the phone number or the address of the client is not mentioned unintentionally, then it may not create any material impact on the financial position of the company, but it may raise queries by the tax department due to the involvement of higher amount.

Moreover, the volume of the sales is also not mentioned. If the total number of sales transactions is 10,000, then the 3 errors out of 50 samples means that the total number of error is 500. In that case, the auditor should not rely on the outcomes of the sample testing, as, out of 500 errors, there may be some errors, which can cause material impact on the financial results of the firm. Moreover, 5% tolerable error is quite high to ignore irrespective of the immateriality aspect of such errors (Francis et al. 2013).

Audit Procedure for Electricity

It can be stated that the auditor has selected the higher level amounts as samples. It has been proved to be quite right decisions, as it has covered almost 50% of the total accounts payable. On the other hand, the balance 50%, which consists of balances less than $100,000, has been ignored. It is a common practice to give more priority to the high volume. Therefore, it has been observed in many cases, the misappropriation of cash uses to be caused by manipulating lesser amounts. If such frauds have been taken place in this company also, then it would remain undetected by such audit procedure.

Moreover, as per the AASB standards, any financial transaction should be recognized at the time of agreement. Therefore, if the accounts payable has been recorded but the material is still not received, the transaction should not be considered as an error until the agreement is cancelled by the client  (Asare et al. 2012).

The auditor has set the materiality level below 4%., which explains that if the total percentage of error rises upto 4%, those errors will not be considered as having material impact on the client’s financial statement. The actual audit procedure reveals that the actual percentage of error is 4%, which amounts to $206,702 out of the total accounts payable balance if $51,68,000. The auditor has overlooked the error as it is below the materiality level (Cohen et al. 2014).

In reality, though the percentage is negligible, the amount of total error cannot be ignored from any angle. The auditor should investigate further on the errors. She should check for which reason such errors have occurred. If it is not possible to all the errors, then she should pick some of the errors and check the samples very carefully. Being, an auditor, she cannot provide the clearance on the basis of assumptions (Messier et al. 2013).

It should be noted, the auditor report is not required by the client only but also by various stakeholders of the company. Many investors use to take investment decisions on the basis of the audited report. It provides the confirmation of appropriateness in the financial statement (Badolato et al. 2014). 

Therefore, the auditor cannot make such statements by checking some samples and concluding results through assumptions. Moreover, the auditor has not followed the common auditing practice also. She has set the error level at higher rate than the general rate. In that case, the probability of overlooking the material errors has become higher. Therefore, the auditor should implement some other testing methods to reduce the high risk (Bentley et al. 2013).


As stated in the case of Kingston Cotton Mill Company (1986), “an auditor is not bound to be detective and to work with their suspicion, that there is something wrong. He is a watchdog not a blood hound. He is justified in believing tried servant of the company and is entitled to rely upon their representation provides he takes reasonable care”. Keeping in mind the statement, the auditor should act as a detective and investigate on every possible clues and then draw any conclusion.

The conclusion drawn by the auditor may proved to be correct, but the uncertainty level of the decision is too high. It could be more appropriate if the auditor had set the error level at general stage and investigate the errors further.

Reference List:

Asare, S.K. and Wright, A., 2012. The Effect of Type of Internal Control Report on Users’ Confidence in the Accompanying Financial Statement Audit Report*. Contemporary Accounting Research, 29(1), pp.152-175

Badolato, P.G., Donelson, D.C. and Ege, M., 2014. Audit committee financial expertise and earnings management: The role of status. Journal of Accounting and Economics, 58(2), pp.208-230

Bentley, K.A., Omer, T.C. and Sharp, N.Y., 2013. Business strategy, financial reporting irregularities, and audit effort. Contemporary Accounting Research, 30(2), pp.780-817

Cohen, J.R., Krishnamoorthy, G. and Wright, A., 2014. Enterprise risk management and the financial reporting process: the experiences of audit committee members, CFOs, and external auditors. CFOs, and External Auditors (May 30, 2014)

Ege, M.S., 2014. Does internal audit function quality deter management misconduct?. The Accounting Review, 90(2), pp.495-527

Ettredge, M., Fuerherm, E.E. and Li, C., 2014. Fee pressure and audit quality. Accounting, Organizations and Society, 39(4), pp.247-263

Khlif, H. and Samaha, K., 2014. Internal control quality, egyptian standards on auditing and external audit delays: Evidence from the Egyptian stock exchange. International Journal of Auditing, 18(2), pp.139-154

Messier, W., Glover, S. and Prawitt, D., 2013. Auditing & assurance services: A systematic approach. McGraw-Hill Higher Education

Nicolaescu, E., 2013. Understanding Risk Factors for Weaknesses in Internal Controls over Financial Reporting. Psychosociological Issues in Human Resource Management, 1(3), pp.38-44.

Pizzini, M., Lin, S. and Ziegenfuss, D.E., 2014. The impact of internal audit function quality and contribution on audit delay. Auditing: A Journal of Practice & Theory, 34(1), pp.25-58

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