 In this presentation, we will take a look at the concepts of audit evidence and sampling. In other words, what is audit evidence? How is it used? How is it accumulated? Support Accounting Instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course, each course then organized in a logical, reasonable fashion, making it much more easy to find what you need then can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. And how is sampling involved within the gathering or the process of gathering audit evidence? We'll start off with audit evidence. What is audit evidence? It's going to be evidence that helps the auditor evaluate management's financial statement assertions. So you'll recall the process here of course being management put together the financial statements management is responsible for the financial statements management is asserting within the audit within the engagement of the audit that they have put together the financial statements in accordance with some set of principles generally accepted accounting principles and therefore in accordance with these assertions. Now we want to go in and dig into the evidence to see whether or not they have indeed put the financial statements together in accordance with those assertions how we gather evidence. We call that evidence audit evidence. So yes, it is going to be similar to like a detective and then we auditors imagine ourselves to be like Sherlock Holmes over here and you know collecting audit evidence. So the remember that the audit evidence then evidence that helps the auditor evaluate management's financial statement assertions consists of underlying accounting data and any additional information available to the auditor. So what type of audit evidence are we going to look at what we are going to look at the accounting data of course that's going to be part of the evidence that we'll look into but we might have other information that's going to be available to the auditor as well. That information could be generated from the client or it could be originated or generated externally. We'll talk about how to gather the audit evidence and what the value or ranking of that evidence is just like if we were having a case and we're putting together a case where Sherlock Holmes we're trying to figure out how valuable this evidence is. There's going to be a lot of information of course as there is all the time there's going to be more information than than we can deal with. What we need to do is take the relevant information decide how relevant it is so that we can then come up with some accurate measure or some kind of reasonable process to determine whether or not we have enough evidence to to say that the assertions have been met or have not been met. As we start to rank then the value of our evidence and what type of evidence we want to spend our time pursuing and what type of evidence possibly is not worth our time pursuing. We will consider things such as where did that evidence come from? Did that evidence come from internal to the company or was that evidence provided by something external to the company and we'll discuss more of those type of things related to the types of audit evidence in future presentations. Relevance evidence related to a specific assertion being tested. This is something that seems very obvious but many people get it wrong or in other words when we think about test questions this is actually a fairly difficult type of test question because often times we think about different types of evidence we as auditors say hey I know I have to do this I have to do A, B, C and D I know I have to gather this evidence that's what it says in the procedures I'm looking at my check sheet that's what I have to do but if you were to ask them what exactly is the assertion given all the assertions that we looked at in prior presentation which exact assertion is it that you're testing for often times auditors are not as able to basically exactly say what the assertion is that they're testing for and you need to know that in order to test it well in order to really do the job up to up to up to par up to what you want to be doing it towards so when we think about relevance then what we're thinking about evidence related to a specific assertion being tested and the specific assertion then is not simply just that are the financial statements in accordance with journal accepted accounting principles that's not a specific assertion that's the general process you're trying to do overall a specific assertion would be something like existence I'm testing for existence I'm testing for accuracy I'm testing for whether this is being reported correctly or something like that that's going to be specific not just well I'm just testing to see if this is in accordance with gap with generally accepted accounting principles which is a huge huge set of rules that you couldn't create one test for it you need to get into the specifics and then reliability evidence they can be relied on to signal the true state of a specific assertion that is tested so again some things are going to be more reliable than others and one of the examples of reliability is for example did this information come from internal to the company or external to the company so if we're testing something like cash say the classic example would be well if we want the financial statement if we look at cash we're trying to check it we want a reconciliation possibly and we might want say a bank statement we want to confirm the balance from the bank now they could give us a bank statement internally from the company but that could have been altered not saying it would be not trying to say that the company would alter a bank statement or anything like that but it possibly could be it would be more valuable evidence if we got the bank statement directly from the bank which is one procedure we're often going to do when we test cash we're going to go to the bank and say hey you tell us what independently without talking to the to the company and what's on their financial statements what the bank balances at this given point in time and that's going to be more valuable evidence so when we think about the evidence we're gonna have to rank it just like Sherlock Holmes does right we're gonna rank the evidence or a detective does and we want to see if it's gonna be reliable evidence how reliable is the evidence and we have to determine what type of evidence we want to spend our time looking into and we want to spend our time looking into the most reliable evidence that we can we want to gather really the least amount of evidence that can then test our assertion we don't want to spend more time that we don't have to be spending doing things that we don't need to be doing we want to be efficient and the way to be efficient is to basically value the evidence that we have sampling auditors examine a subset of the transaction based on previous audits and understanding of the company's internal controls or knowledge of the company's industry so when we think about sampling once again note that when we consider the evidence there's a lot of data just like any kind of detective work there's way too much data we cannot take in all the data we can't basically test all the data most of the time therefore we're really reliant on sampling especially for talking about large companies the larger the company is the more it's going to be impossible for us to test all the data not only that but we can't do substantive testing we're gonna have to rely more on internal controls oftentimes we're actually gonna have to rely on the system just like we do for the government the checks and balances of the system we as citizens are reliant on those checks and balances to stay in place and keep people in check the same thing is basically true with the large companies as well we need the internal controls we need to test whether the internal controls aren't not only are put together but have been put in place are actually being used in a process and test whether those internal controls are in place and that's going to be part of basically our sampling process to do that we'll do some type of sampling we're going to base that sampling based on our understanding of the company possibly based on prior audits that's going to have some impact on the sampling we're going to have our sampling is going to be based on our knowledge of the company and of course the industry so different types of industries will will dictate in terms of what type of things are going to be more important to some industries or or the other and the point of the sample is of course for us to make an accurate decision with less information you can think of it as the same kind of process you might see in some type of polling situation where possibly you have some type of political poll and you want to say what people think about a certain person or what they're going to vote on or something like that of course you're not going to call everybody in the country in order to do that you have to do some type of sampling and you could do statistical sampling to limit the amount of calls that you need to do and still get an accurate sample that hopefully will be representative of the entire population now there's different ways that that can happen different sampling types of methods that can be used given the different objectives that are in place so we'll talk about different sampling methods later as we get into the sampling process so examining every transaction would not be cost-effective that's of course the bottom line you just can't do it all the evidence can't be done we couldn't ask everybody in the country you know who they're going to vote for that would be ridiculous but we can get some pretty accurate numbers using sampling and if we use statistical sampling and we use different types of method that are going to be applicable towards the type of assertions that we're looking for we can be much much more efficient in terms of exactly what type of sampling we need what type of testing we need to do in order to get to the level of assurance that we need to get to for our auditing process