Audit Transactions: Evidence & Procedures Guide

Alright guys, let's dive into the nitty-gritty of auditing transactions. Knowing what evidence to gather and which procedures to use is crucial for a successful audit. So, let’s break it down nice and easy.

Understanding Audit Evidence

Audit evidence is basically any information that auditors use to determine if the info being audited is presented fairly, in accordance with established criteria. Think of it as clues that help you form an opinion on whether the financial statements are trustworthy. This evidence can come in many forms, so you've got to be prepared to hunt it down. The goal here is to collect enough high-quality evidence so you can confidently back up your findings and conclusions.

To start, you need to understand that audit evidence isn't just about numbers, even though, yes, we are dealing with accounting, so a lot of it is. It includes things like documents, records, and even confirmations from third parties. The stronger and more reliable your evidence, the better. You’ll also be looking at internal controls. Are they effective? Are they being followed? Strong controls usually mean more reliable data, but you still need to test and verify.

When planning your audit, think about what could go wrong. Where are the potential risks of misstatement? This will help you focus your efforts on the areas that matter most. Remember, it's not just about finding errors, it’s about providing assurance that the financial statements are free from material misstatement. And hey, no one wants to issue an opinion on statements riddled with big errors, right?

Also, keep in mind that you might have to use different methods to gather evidence. Sometimes, it’s as simple as checking documents. Other times, you need to get more hands-on with physical inspections or even re-performing calculations. Mix it up to get a well-rounded view.

Finally, always, always document everything you do and find. Audit documentation is your lifeline. It’s what you’ll use to support your opinion and defend your work if anyone questions it. So, be clear, be thorough, and be organized. Trust me, future you will thank you for it!

Choosing the Right Audit Procedures

Okay, so now you know what audit evidence is. Let's talk about audit procedures. These are the specific steps you take to gather that evidence. Think of them as your detective tools for uncovering the truth. There are many different types of procedures, and the best ones to use will depend on the specific transaction and the risks involved. The key is to select procedures that will give you the most relevant and reliable evidence.

One of the most common audit procedures is inspection. This involves examining records, documents, or tangible assets. For example, if you're auditing sales transactions, you might inspect sales invoices, shipping documents, and customer orders. This helps you verify that the sales actually occurred and were properly recorded.

Then there's observation. This is where you watch someone else perform a task or process. It’s super useful for understanding how internal controls work in practice. Imagine you’re checking if employees are following the correct procedure for handling cash receipts. By observing them, you can see if they’re actually doing what the policy says. Super helpful, right?

Another popular procedure is inquiry. This simply means asking questions. You can ask questions of management, employees, or even third parties. It's a great way to gather information and get different perspectives. Just remember, inquiry alone isn’t enough. You need to back up what you hear with other evidence.

Don’t forget about confirmation. This involves getting written verification from a third party. For example, you might send a confirmation request to a bank to verify the balance of a company’s bank account. It’s a direct way to get reliable evidence.

Recalculation is another useful procedure. It involves checking the accuracy of calculations made by the company. This could be as simple as verifying the totals on an invoice or as complex as re-performing depreciation calculations. Accuracy, accuracy, accuracy!

Finally, there’s analytical procedures. This involves evaluating financial information by studying relationships among data. For instance, you might compare current year sales to prior year sales to identify any unexpected changes. Analytical procedures can help you spot potential problems or areas that need further investigation.

To sum it up, picking the right procedures depends on what you're auditing and the risks involved. Always aim for procedures that give you the most relevant and reliable evidence. It’s all about being thorough and smart in your approach.

Examples of Audit Evidence and Procedures for Common Transactions

To make things crystal clear, let's walk through some specific examples. We'll look at common transactions and discuss what audit evidence you should collect and which procedures are most effective. This way, you’ll have a clearer picture of how to apply these concepts in real-world scenarios. So, let's get to it!

Sales Transactions

When auditing sales transactions, you want to make sure that the sales actually occurred, were recorded accurately, and were properly authorized. Here’s the breakdown:

• Audit Evidence:
  • Sales invoices:
  • Shipping documents:
  • Customer orders:
  • Credit memos:
  • Sales journal:
  • Accounts receivable subsidiary ledger:
  • Bank statements (for cash receipts):
• Audit Procedures:
  • Inspect sales invoices and compare them to shipping documents and customer orders to verify that the sales actually occurred.
  • Trace sales invoices to the sales journal and accounts receivable subsidiary ledger to ensure they were recorded accurately.
  • Examine credit memos to ensure they were properly authorized.
  • Confirm accounts receivable balances with customers.
  • Perform analytical procedures, such as comparing current year sales to prior year sales.

Purchases Transactions

For purchase transactions, you want to verify that the purchases were authorized, received, and accurately recorded. Here's the lowdown:

• Audit Evidence:
  • Purchase orders:
  • Receiving reports:
  • Vendor invoices:
  • Purchase journal:
  • Accounts payable subsidiary ledger:
  • Bank statements (for cash disbursements):
• Audit Procedures:
  • Inspect purchase orders and compare them to receiving reports and vendor invoices to verify that the purchases were authorized and received.
  • Trace vendor invoices to the purchase journal and accounts payable subsidiary ledger to ensure they were recorded accurately.
  • Match receiving reports to vendor invoices to verify that the goods or services were actually received.
  • Confirm accounts payable balances with vendors.
  • Perform analytical procedures, such as comparing current year purchases to prior year purchases.

Payroll Transactions

When auditing payroll transactions, you want to ensure that employees were paid accurately and that payroll taxes were properly withheld and remitted. Here's what you need:

• Audit Evidence:
  • Employee timecards:
  • Payroll register:
  • Payroll tax returns:
  • W-2 forms:
  • Bank statements (for payroll disbursements):
• Audit Procedures:
  • Inspect employee timecards and compare them to the payroll register to verify that employees were paid for the hours they worked.
  • Recalculate payroll taxes to ensure they were properly withheld and remitted.
  • Examine payroll tax returns to ensure they were filed accurately.
  • Compare payroll expenses to prior periods and investigate any significant variances.

Cash Transactions

For cash transactions, you need to verify that all cash receipts and disbursements were properly recorded and authorized. Here's what to look for:

• Audit Evidence:
  • Bank statements:
  • Bank reconciliations:
  • Cash receipts journal:
  • Cash disbursements journal:
  • Supporting documentation for cash receipts and disbursements:
• Audit Procedures:
  • Obtain bank statements and perform bank reconciliations to verify the accuracy of cash balances.
  • Trace cash receipts and disbursements to the cash receipts and disbursements journals.
  • Examine supporting documentation for cash receipts and disbursements to ensure they were properly authorized.
  • Perform surprise cash counts.

Conclusion

Alright, guys, that’s the scoop on audit evidence and procedures! Getting this stuff right is super important for ensuring the accuracy and reliability of financial statements. By understanding what evidence to collect and which procedures to use, you’ll be well-equipped to tackle any audit transaction. So, go out there and audit with confidence!