(Procedures of obtaining audit evidence:-
i) Inspection:– This is the physical review of examination of records, documents and tangible assets. An example of a test of control is examining sales invoices for authorization: An example of a substantive procedure would be to check the physical existence of a tangible asset. Additional work may be required to determine ownership, valuation and contractual obligations.
ii) Observation:– This involves looking at a process or procedure being performed. An example is the distribution of wage packets to see that internal control procedures are adhered to or the observation auditors of stock being counted in accordance with stock taking instructions.
iii) Enquiry and confirmation: – Seeking relevant information from knowledgeable persons inside or outside the enterprise, whether formally or informally, orally or in writing. The reliability of this technique depends on the qualification and integrity of the source. An example is the seeking of formal representations from management on the value of a material subsidiary company in an overseas country or the circularization of debtors for independent verification of year-end balances.
ii) Computation: – This involves checking the arithmetical accuracy of records
or performing independent calculations e.g. recomputing the depreciation charge and comparing with the client‘s figure.
iii) Analytical review- Analytical review can be defined as the study of relationships between element of financial information expected to
conform to a predictable pattern based on the organization‘s experience and between financial information and non-financial information.
Analytical procedures concern not only analysis (of ratios, trends and relationships) but also the investigation of fluctuations. The analysis usually considers both comparisons and relationships.
For example the auditor can compute the debtors days ratio for the current year and compare this with the previous year. This will provide valuation information in evaluating whether customers are settling their accounts when due and if there is need to create a provision for doubtful accounts.