Rules of Evidence The Institute of Internal Auditors – Puget Sound Chapter Comprehensive Entry Level Training for Auditors October 19-21, 2004 Seattle, Washington
Rules of Evidence Goals of this Learning Module: • Identify and define the four types of evidence. • Identify and define the three standards evidence must meet. • Differentiate between fact and inference in data collected as evidence. • Review evidence and identify the types of evidence used to support the recommendation in the rental car case.
IIA Standard 2300 – Conducting an Audit Internal auditors should • Identify, • Analyze, • Evaluate, and • Record …sufficient information to achieve audit objectives.
Definition of Evidence Evidenceis the sufficient, competent and relevant information used to form a reasonable basis for the evaluator’s judgment and conclusions regarding the organizational program, activity or function being reviewed.
Purpose of Evidence Evidence provides the documentation necessary to support findings, conclusions and recommendations presented in audit reports.
Importanceof Evidence Evidence provides a foundation of reality and objectivity for the work that auditors do.
Categories of Evidence • What are the different types of evidence?
Categories of Evidence • Physical • Testimonial • Documentary • Analytical
IIA Standard 2310 – Identifying Information • What should the standard of evidence be?
Standards of Evidence 2310 Internal auditors should identify… • Sufficient, • Competent, • Relevant, and • Useful …information that achieves the audit objectives.
Sufficient Sufficient information is factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions as the auditor.
Is this evidence sufficient? • Conclusion is $40 dollars has been stolen based on a Z tape showing $355.49 received, while cash drawer has $315.49. • Conclusion is the manager is setting an unethical tone based on the testimony of three employees who report that the manager shows up an hour or more late to work most days of the week. • Conclusion is the manager is arbitrary and capricious based on all 30 employees reporting that the manger allows 12 of the employees to eat at their desk and 18 may not. They all work in the same large room.
Competent • Competent information is reliable and the best attainable through the use of appropriate engagement techniques. • Evident is competent if it is valid, reliable, and consistent with fact. • In assessing competence, consider such factors as whether the evidence is accurate, authoritative, timely, and authentic.
Which evidence is competent? • Evidence obtained in a strong vs. weak internal control environment. • Evidence obtained through direct physical examination, observation, computation, and inspection vs. indirect methods. • Testimonial evidence obtained under conditions where a person may speak freely vs. situations where the person may be intimidated.
Which evidence is competent? • Data on the weather from a festival participant. • Data on concert attendance from a ticket taker. • Information on the misuse of company property from an estranged spouse. • Information on the potential misuses of company sick leave by a supervisor.
Increasing Competency • Obtain written representation from officials of the audited entity
Relevant Relevant information supports engagement observations and recommendations, and is consistent with the engagement’s objectives.
Is this evidence relevant? • The head cashier recently purchased a new house and a new BMW. • The athletic field scheduler is on the board of the soccer association. • The quirky secretary likes to use fuchsia files.
Useful Useful information helps the organization meet its goals.
Reliability of Evidence • What can impact the reliability of evidence?
Reliability of Evidence • Fact vs. Inference • Accuracy • Misinterpretation • Conclusiveness
Fact vs. Inference Bill and Jane Smith, with Timmy, age 10, and Susie, age 7, went for a ride in the country. On the way home, they stopped at Baskin-Robbins for a treat. Which of the following is true, false or unknown? • Mr. And Mrs. Smith took their children for a drive. • They ate ice cream cones on the way home. • Jack Smith did not go with them.
Exercise Look at some of the evidence and decide: • is the evidence physical, testimonial, documentary or analytical, and • is it competent, relevant, and/or sufficient?