Shahjalal University of Science and Technology, Sylhet

An Assignment
On
Audit Evidence

Course Title: Assurance & Risk Management

Course code: BUS 498

Submitted To
Dr Md Nazrul Islam
Professor
Department of Business Administration
SUST, Sylhet

Submitted By

Name Reg. No
Akber Shiddique Sunny 2018731062
Md Sagar 2018731039
4th year 1st semester
Department of Business Administration
SUST, Sylhet

Date of Submission: 20/03/2023

 1. What is audit evidence?

Audit evidence is the information used by the auditor to support their conclusions
about the accuracy and completeness of an organization's financial statements.
Audit evidence can take many forms, including physical documents, electronic
records, and verbal statements from individuals with knowledge of an
organization's financial activities. The audit evidence obtained by the auditor is
used to evaluate whether the financial statements are presented accurately and
correctly in accordance with generally accepted accounting principles (GAAP) or
other applicable accounting principles. Audit evidence supports the auditor's
opinion on the financial statements and is necessary to ensure that users of the
financial statements can rely on the information provided. The audit evidence must
be sufficient, reliable and appropriate to support the auditor's conclusions. Auditor
should carefully evaluate the audit evidence received and use its professional
judgment to determine its relevance and reliability. They should also ensure that
they have obtained sufficient audit evidence to support their conclusions, taking
into account the risk of material misstatement of the financial statements.

2. What factors do you consider before determining the

sufficiency of Audit Evidence?
There are several factors that an auditor should consider when determining the
sufficiency of audit evidence. These include:
The nature and complexity of the transactions: More complex transactions may
require more extensive audit procedures and a greater amount of evidence to
support the auditor's conclusions.
The materiality of the items being audited: The auditor should consider the
significance of the item being audited and the potential impact on the financial
statements if the item is misstated.
The level of risk associated with the item being audited: The auditor should
consider the risk of material misstatement associated with the item being audited
and whether additional evidence is necessary to address the risk.
The reliability of the evidence: The auditor should consider the source of the
evidence and whether it is reliable. For example, documentary evidence is
generally more reliable than oral evidence.
The availability of evidence: The auditor should consider the availability of
evidence and whether additional evidence can be obtained.
The effectiveness of internal controls: The auditor should consider the
effectiveness of the organization's internal controls and whether they can rely on
them to reduce the amount of evidence required.
The results of prior audits: The auditor should consider the results of prior audits
and whether additional evidence is necessary based on the findings of those audits.
Overall, the sufficiency of audit evidence depends on the specific circumstances of
the audit and requires the exercise of professional judgment by the auditor.

3. Describe Audit procedures?

Audit procedures refer to the steps taken by an auditor during an audit to obtain the
necessary audit evidence to support their opinion on the financial statements. There
are various types of audit procedures, and they can be classified into two
categories: substantive procedures and test of controls.
Substantive procedures are procedures performed to detect material misstatements
in the financial statements. Some examples of substantive procedures include:
Analytical procedures: These are procedures used to analyze relationships and
trends in financial data to identify potential misstatements or irregularities.
Inspection of documents and records: This involves the examination of physical or
electronic documents and records to support the transactions or balances in the
financial statements.
Confirmation: This involves obtaining written or electronic responses from third
parties to verify the existence, ownership, or balance of a particular account or
transaction.
Observation: This involves the auditor's observation of the physical inventory,
processes, or activities to support the financial statement amounts.
Test of controls are procedures performed to determine whether the organization's
internal controls are operating effectively. Some examples of test of controls
include:
Inquiry: This involves the auditor's inquiry of the management or employees of the
organization to determine the effectiveness of the internal controls.
Inspection of documents and records: This involves the examination of physical or
electronic documents and records to determine whether the internal controls are
operating effectively.
Re-performance: This involves the auditor's re-performance of the control activity
to determine whether it is operating effectively.
Overall, audit procedures are designed to provide the auditor with the necessary
evidence to support their opinion on the financial statements and provide
reasonable assurance that they are free from material misstatements. The auditor
must use professional judgment to determine the appropriate procedures to be
performed based on the specific circumstances of the audit.
4. Describe cost and time of collecting Audit Evidence.
The cost and time involved in collecting audit evidence can vary depending on the
nature and complexity of the audit, the quality and reliability of the evidence, and
the availability of the information.
Collecting audit evidence can be time-consuming, as auditors must review a
significant amount of financial data, perform various audit procedures, and
document their findings. Additionally, auditors may need to coordinate with third-
party service providers or experts to obtain necessary evidence or information.
The cost of collecting audit evidence can also vary depending on the nature of the
evidence required. For example, obtaining electronic records may be less
expensive than obtaining physical documents, as it does not require the same level
of resources to store or transport the information. Similarly, obtaining information
from third-party service providers or experts may involve additional costs.
In order to manage the costs and time involved in collecting audit evidence,
auditors must carefully plan and execute their audit procedures, using professional
judgment to determine the appropriate procedures based on the risk of material
misstatement in the financial statements. They may also leverage technology and
data analytics tools to streamline the process and reduce the time and cost involved
in obtaining and analyzing the necessary evidence.
Overall, the cost and time involved in collecting audit evidence can be significant,
but they are necessary to provide reasonable assurance that the financial statements
are free from material misstatement and comply with applicable accounting
standards.

5. What are the Characteristics that determine the

pureness of Audit evidence?
The pureness or reliability of audit evidence is essential in providing assurance that
the financial statements are free from material misstatement. The following are the
characteristics that determine the pureness of audit evidence:
Relevance: The evidence should be relevant to the financial statement assertion
being tested. It should directly support or contradict the assertion being made and
should be linked to the relevant account balance, transaction, or disclosure.
Sufficiency: The evidence should be sufficient in quantity and quality to support
the auditor's conclusion. This means that the evidence should be enough to provide
reasonable assurance that the financial statements are free from material
misstatement.
Objectivity: The evidence should be obtained from independent and unbiased
sources, free from any personal or financial interest in the outcome of the audit.
Reliability: The evidence should be reliable and trustworthy. This means that it
should be accurate, complete, and verifiable, and obtained from a credible source.
Timeliness: The evidence should be obtained in a timely manner. It should be
relevant and reliable at the time it is obtained and should not become obsolete or
outdated before the completion of the audit.
Consistency: The evidence should be consistent with other audit evidence
obtained. It should not contradict other evidence obtained during the audit, and any
inconsistencies should be resolved.
Overall, the pureness of audit evidence is crucial in providing reasonable assurance
that the financial statements are free from material misstatement. Auditors must
use their professional judgment to evaluate the quality and reliability of the
evidence obtained and to ensure that it meets the above characteristics.

6. What are the different types of Audit Evidence

There are several types of audit evidence that auditors can use to obtain
information about the financial statements and assess their reliability. The
following are some of the different types of audit evidence:
Documentary evidence: This includes physical or electronic documents that
support the transactions or balances in the financial statements, such as invoices,
receipts, bank statements, and contracts.
Physical evidence: This includes tangible items that can be examined to support the
financial statements, such as inventory, property, and equipment.
Analytical evidence: This includes the use of analytical procedures to analyze
trends and relationships in financial data to identify potential misstatements or
irregularities.
Testimonial evidence: This includes written or oral statements obtained from
management or third-party service providers, such as attorneys or accountants,
regarding the financial statements or internal controls.
Observation evidence: This includes the auditor's observation of the physical
inventory, processes, or activities to support the financial statement amounts.
Expert evidence: This includes the use of experts in areas such as valuation, tax, or
legal matters to provide opinions or evidence related to the financial statements.
Internal evidence: This includes the auditor's review of the organization's internal
controls, such as policies and procedures, to support the financial statement
amounts.
Overall, auditors may use one or more types of audit evidence to obtain sufficient
evidence to support their opinion on the financial statements. The selection of the
appropriate type of evidence depends on the auditor's professional judgment, the
nature of the financial statements, and the specific circumstances of the audit.
Objectives 7-35
Industry Averages Mahogany products
1999 1998 1999 1998
Current Ratio 3.30 3.80 2.20 2.60
Days to collect 87.00 93.00 67.00 60.00
Receivable
Days to sell Inventory 126.00 121.00 93.00 89.00
Purchase Dividend by 11.70 11.60 8.50 8.60
Account payable
Inventory divided by .56 .51 .49 .48
current assets
Operating income .08 .06 .14 .12
divided by tangible
assets
Operating income .06 .06 .04 .04
divided by net sales
Gross margin .21 .27 .21 .19
percentage
Earning-per share $14.27 $13.91 $2.09 $1.93
As part of Analytical procedures of mahogany products, inc.

Required:
For each of the preceding ratios,

a) State whether there is a need to investigate the results further and, if so, the
reason for further investigation.
b) State the approach you would use in the investigation
c) Explain how the operations of Mahogany products appears to differ from
those of the industry.
Answer:
A) State whether there is a need to investigate the results further and, if
so, the reason for further investigation.
Current Ratio: The current ratio of Mahogany Products decreased from 2.6 in 1998
to 2.2 in 1999, while the industry average decreased from 3.8 to 3.3. Further
investigation is needed to understand why the current ratio is decreasing and
whether it could lead to liquidity problems for the company.
Days to collect Receivable: The days to collect receivable for Mahogany Products
decreased from 60 in 1998 to 67 in 1999, while the industry average increased
from 93 to 87. Further investigation is needed to understand why the company is
able to collect receivables faster than the industry average and whether this is
sustainable.
Days to sell Inventory: The days to sell inventory for Mahogany Products
decreased from 89 in 1998 to 93 in 1999, while the industry average increased
from 121 to 126. Further investigation is needed to understand why the company is
able to sell inventory faster than the industry average and whether this is due to an
increase in demand or a decrease in production.
Purchase Dividend by Account payable: The purchase dividend by account payable
for Mahogany Products decreased from 8.6 in 1998 to 8.5 in 1999, while the
industry average remained stable at 11.6. Further investigation is needed to
understand why the company is able to negotiate better payment terms with its
suppliers than the industry average.
Inventory divided by current assets: The inventory divided by current assets for
Mahogany Products increased from 0.48 in 1998 to 0.49 in 1999, while the
industry average increased from 0.51 to 0.56. Further investigation is needed to
understand why the company is holding more inventory relative to its current
assets compared to the industry.
Operating income divided by tangible assets: The operating income divided by
tangible assets for Mahogany Products increased from 0.12 in 1998 to 0.14 in
1999, while the industry average increased from 0.06 to 0.08. Further investigation
is needed to understand why the company is generating higher operating income
relative to its tangible assets compared to the industry.
Operating income divided by net sales: The operating income divided by net sales
for Mahogany Products remained stable at 0.04 in both years, while the industry
average remained stable at 0.06. No further investigation is needed.
Gross margin percentage: The gross margin percentage for Mahogany Products
remained stable at 0.21 in both years, while the industry average decreased from
0.27 to 0.21. Further investigation is needed to understand why the company is
able to maintain its gross margin percentage while the industry average is
decreasing.
Earning-per share: The earning-per share for Mahogany Products increased from
$1.93 in 1998 to $2.09 in 1999, while the industry average increased from $13.91
to $14.27. Further investigation is needed to understand why the company's
earnings-per share is significantly lower than the industry average.
B) State the approach you would use in the investigation
The approach for investigating the results further would involve obtaining more
detailed information about the company's financial statements and operations, such
as reviewing the company's sales and production processes, analyzing the
company's cash flow and working capital management, and comparing the
company's financial ratios with industry benchmarks and historical trends.
C) Explain how the operations of Mahogany Products appear to differ
from those of the industry.
Based on the information provided, Mahogany Products appears to have different
operations compared to the industry in several areas:
Current Ratio: Mahogany Products has a lower current ratio compared to the
industry in both 1999 and 1998. This suggests that they may have a higher level of
short-term debt or lower levels of current assets compared to their current
liabilities, which could indicate a risk of liquidity problems in the future.
Days to collect Receivable: Mahogany Products has a lower number of days to
collect receivables compared to the industry in both years. This could indicate a
more efficient accounts receivable process, which could be beneficial for cash
flow.
Days to sell Inventory: Mahogany Products has a lower number of days to sell
inventory compared to the industry in both years. This could suggest that they have
a more efficient inventory management process or a higher demand for their
products.
Purchase Dividend by Account payable: Mahogany Products has a lower purchase
dividend by accounts payable compared to the industry in both years. This could
suggest that they are paying their suppliers more quickly, which could be beneficial
for maintaining good relationships with suppliers, but could also indicate a risk of
cash flow problems.
Inventory divided by current assets: Mahogany Products has a lower inventory
divided by current assets ratio compared to the industry in both years. This
suggests that they have a lower level of inventory compared to their current assets,
which could indicate a more efficient inventory management process.
Operating income divided by tangible assets: Mahogany Products has a higher
operating income divided by tangible assets ratio compared to the industry in both
years. This suggests that they are more efficient at generating operating income
with their tangible assets, which could be a positive indication of their operational
efficiency.
Operating income divided by net sales: Mahogany Products has a lower operating
income divided by net sales ratio compared to the industry in both years. This
suggests that they have a lower profit margin compared to the industry, which
could be an area of concern for profitability.
Gross margin percentage: Mahogany Products has a similar gross margin
percentage to the industry in both years. This suggests that they are able to
maintain a similar level of profitability.
Objectives (7-36)
Below are the Auditor’s Calculation of several key ratios for Cragston Star
products. The primary purpose of this information is to assess the risk of financial
failure, but any other relevant conclusions are also desirable.
Ratio 1999 1998 1997 1996 1995
Current ratio 2.08 2.26 2.51 2.43 2.50
Quick ratio .97 1.34 1.82 1.76 1.64
Earnings before taxes divided by 3.50 3.20 4.10 5.30 7.10
interest expense
Account Receivable turnover 4.20 5.50 4.10 5.40 5.60
Days to collect receivable 108.20 83.10 105.20 80.60 71.60
Inventory turnover 2.03 1.84 2.68 3.34 3.36
Days to sell Inventory 172.60 195.10 133.90 107.80 108.30
Net sales divided by tangible .68 .64 .73 .69 .67
assets
Operating income divided by net .13 .14 .16 .15 .14
sales
Operating income divided by .09 .09 .12 .10 .09
tangible assets
Net income divided by common .05 .06 .10 .10 .11
equity
Earnings per share $4.30 $ $4.49 $4.26 $4.14
Required:
A. What major conclusions can be drawn from this information about the
company’s future?
B. What additional information would be helpful in your assessment of this
company’s financial condition?
C. Based on the ratios above, which aspects of the company do you believe
should receive special emphasis in the audit?
Answer:
1. What major conclusions can be drawn from this information about the
company’s future?
Based on the information provided, several conclusions can be drawn about
Cragston Star Products:
Liquidity: The company appears to have a relatively stable liquidity position, with
a consistently high current ratio over the past five years. However, the quick ratio
has been decreasing over time, which suggests that the company may have some
difficulty meeting short-term obligations.
Profitability: The operating income divided by net sales and operating income
divided by tangible assets ratios have remained relatively stable over the past five
years, indicating that the company has not significantly improved its profitability
during this time.
Debt management: The earnings before taxes divided by interest expense ratio has
remained relatively stable, suggesting that the company has been able to manage
its debt obligations well.
Accounts receivable: The accounts receivable turnover ratio has fluctuated over the
past five years, but the days to collect receivables have generally increased over
time. This indicates that the company may be having difficulty collecting its
outstanding receivables.
Inventory management: The inventory turnover ratio has fluctuated over the past
five years, but the days to sell inventory have generally decreased over time. This
suggests that the company has improved its inventory management, but still may
be holding onto inventory for too long.
Asset utilization: The net sales divided by tangible assets ratio has fluctuated over
the past five years, but remains below 1, indicating that the company may not be
fully utilizing its assets to generate sales.
Return on equity: The net income divided by common equity ratio has been
decreasing over the past three years, which suggests that the company may not be
generating as much profit for its shareholders as it has in the past.
Overall, the information suggests that Cragston Star Products may face challenges
in improving its profitability and managing its accounts receivable. However, the
company has a stable liquidity position and appears to be managing its debt
obligations well.
 2. What additional information would be helpful in your assessment of this
company’s financial condition?
While the ratios provided offer some insight into Cragston Star Products' financial
condition, additional information would be helpful in making a more complete
assessment. Some additional information that could be useful includes:
Revenue sources: Understanding where the company's revenue is coming from
would help assess the sustainability of its current financial position. For example,
if the company is heavily reliant on a single product or customer, this could
increase its risk of financial failure.
Industry trends: Information about industry trends would provide context for the
company's financial ratios. If the company's ratios are in line with industry
averages, this would indicate that its financial position is relatively stable. If, on
the other hand, the company's ratios are significantly different from industry
averages, this could suggest that it is facing challenges that are specific to its
industry.
Market share: Information about the company's market share would help assess its
competitive position within the industry. A decline in market share could indicate
that the company is losing ground to competitors, which could affect its future
financial performance.
Debt structure: Understanding the company's debt structure would provide more
insight into its ability to manage debt. For example, information about the
company's debt maturity schedule would help assess its ability to make principal
and interest payments in the future.
Capital expenditures: Information about the company's capital expenditures would
provide insight into its future growth prospects. If the company is investing heavily
in new equipment or facilities, this could suggest that it is expecting to grow its
business in the future. On the other hand, if the company is not investing in new
capital expenditures, this could suggest that it is not expecting to grow its business
in the near term.
 3. Based on the ratios above, which aspects of the company do you believe
should receive special emphasis in the audit?
Based on the ratios provided, the following aspects of the company should receive
special emphasis in the audit:
Liquidity: The current ratio and quick ratio have declined over the years, indicating
a potential liquidity problem. The days to collect receivables and days to sell
inventory have increased, which may suggest a slowdown in the collection of
receivables and/or inventory management. Therefore, it would be important to
investigate the company's liquidity and assess its ability to meet its short-term
obligations.
Profitability: The company's profitability ratios, such as operating income divided
by net sales, operating income divided by tangible assets, net income divided by
common equity, and earnings before taxes divided by interest expense, have
remained relatively stable over the years. However, the net sales divided by
tangible assets have declined, which may indicate declining profitability or
inefficient use of assets. The auditor should investigate the reasons behind the
declining profitability and evaluate the company's ability to generate profits in the
long run.
Inventory Management: The inventory turnover ratio has declined over the years,
which may indicate inefficient inventory management, overstocking, or obsolete
inventory. The auditor should assess the company's inventory management policies
and procedures and ensure that the inventory is properly valued and reported.
Accounts Receivable Management: The accounts receivable turnover ratio has
declined over the years, which may suggest that the company is having difficulty
collecting its receivables. The days to collect receivables have also increased,
indicating that the company is taking longer to collect payments from its
customers. The auditor should investigate the reasons behind the declining
accounts receivable turnover ratio and evaluate the effectiveness of the company's
accounts receivable management policies and procedures.