10 - audit evidence - judgment and comfort

8/13/2019 10 - Audit Evidence - Judgment and Comfort

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Audit Evidence

Getting comfortable with uncertainty

AuditingProfessor Stephen Rowe


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Audit Evidence Decisions

Nature

Which audit procedures to use

Timing

When to perform the procedures

Extent

What sample size to select for a given procedure

Which items to select from the population


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Persuasiveness of Evidence

Appropriateness

Relevance

Does it address the assertion? Reliable

Can your trust it?

Sufficiency Is it enough?


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Evidence Reduces Noise and Bias

Noise

Random distribution around mean

Non-intentional mistakes (errors) in accounting

Bias

Systematic directional fluctuation

Associated with

Bias in accounting systems (e.g. conservative bad debtestimate methodology)

Intentional misinformation (Fraud) in accounting


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Decreasing noise

When noise in thedistribution is reduced, themean remains unchanged.However, the distributionaround that mean becomes

tighter.

Example: Implementinginventory controls reducesthe level of noise


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Decreasing bias

When bias in the

distribution is reduced,

the entire curve shifts, but

the shape of the curve (i.e.,

the variance) remainsunchanged.

Example: Implementing

credit controls shifts

distribution of error

closer to zero.


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Combined effects


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Getting ComfortableDiscussion of Pentland (1993)


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Pentland (1993)

According to Pentland, what is an audit?

A comfort producing ritual

Is there a difference between

Comfort (Pentland 1996), and

Trust (Klein 2001)

On what do we base trust?


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Accounting & Auditing as Rituals?

What do you think?

(1)Auditing is science.

A technical-rational process of collecting and evaluatingevidence to produce assurance for users of financial

accounting information.

(2) Auditing is ritual.

A social process of performing rituals and followingprofessional norms of behaviour to produce comfort for

users of financial accounting information.


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Discussion

How are audit rituals related to independence in

appearance?

Do users of the financial statements take the ritual or

the rational perspective?

What role does audit evidence play in getting

comfortable?

How is discomfort related to risk & skepticism?


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Comfortable with Judgment

Translating economic states and transactions into financialstatements is inherently uncertain and requires humanjudgment

Providing assurance on those financial statements issimilarly uncertain and requires human judgment

Many audit judgments cannot be efficiently replicated =>others must rely on your professional judgment

Audit partners and investors must be comfortable with

your judgment => do everything you can to increasecomfort

Maintain integrity

Do good work

Do other reasonable actions to engender comfort


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Coming Up

Individual Presentations

Audit Risk

Homework will be online quiz Due next Thursday

Exam next Thursday

Extended office hours on Monday or Tuesday?

Try to get the case materials from bookstore

10 - audit evidence - judgment and comfort

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