- Auditing is also concerned with sampling and should naturally resort to a study of the theory of statistics. But in order to successfully adopt sampling techniques in audit verification, serious attention must be given to the nature of business data and the characteristics which differentiate them from the data of other fields of inquiry.
- Auditing has to formulate unique concepts which cannot be borrowed elsewhere because they are peculiar to the nature and the function of auditing.
Differences between scientific methods and the auditing method (ibid, pp. 35 ff)
In the long run scientists insist upon the best possible evidence, in the short run they may well be satisfied with something less. An auditor always works in the short run.
In science the testing of hypotheses is frequently, but not always, performed through laboratory experiments under which some conditions can be controlled. (…) This is definitely not true of an audit. Only under the most unusual conditions would an audit be performed twice, and even if it where, the results would not be equivalent to running a laboratory experiment twice.
In auditing the basic assumptions or postulates on which the validity of reasoning rests are not at all well stated (but failure to clearly state and recognize the assumptions underlying one´s reasoning is a weakness. To a considerable extent, the difficulty encountered by auditing in solving some of its major problems is engendered directly by a failure to state its basic assumptions.)
Methodological Procedure in Auditing (Mautz & Sharaf, pp 31 ff) The auditing methodology for dealing with problems or issues of fact may be outlined in these steps:
Recognition (acceptance) of the composite problem (the audit assignment)
Observation of facts relevant to the problem
Subdivision of the composite problem into individual problems
Determination of available evidence pertinent to each individual problem
Selection of applicable audit techniques and development of appropriate procedures
Performance of procedures to obtain evidence
Evaluation of evidence with respect to pertinence and validity
for indications of any additional problems
with respect to adequacy for judgment formation
Formulation of judgment on individual propositions
How do they do it? As a starting point, any discipline needs some basic postulates. The following are the postulates for auditing (suggested by Mautz & Sharaf, pp. 49 ff.) that provide the foundation we need to develop a logical, integrated theory of auditing;
financial statements and financial data are verifiable
There is no necessary conflict of interest between theauditor and the management of the enterprise under audit
The financial statements and other information submitted for verification are free from collusive and other unusual irregularities
The existence of a satisfactory system of internal controleliminates theprobabilityof irregularities
Consistent application of generally accepted principles of accounting results in the fair presentation of financial position and the results of operations
When examining financial data for the purpose of expressing an independent opinion thereon, the auditor acts exclusively in the capacity of an auditor
The professional status of the independent auditor imposes commensurate professional obligations
The Nature of Evidence - General types of evidence:
Natural evidence: exist all around us and is relied upon commonly in every mental activity we perform
Created evidence: is not naturally existent – some effort is required to bring it forth (for example an experiment)
Rational argumentation: much of what we believe does not result directly from observation of natural evidence. Ideas frequently follow logically from observed facts and seems true to us, yet at the same time mental effort is required to proceed from the simple observed fact to the conclusion our minds find appealing.
What we ”see” may be influenced by our knowledge, our experience, and our desires (Mautz & Sharaf, p 84)
Types of Propositions to be judged in Auditing (ibid, p 96-97):
Assertions of existence or nonexistence
Of physical things Present
B Of nonphysical things
Assertions of past events
Assertions of quantitative conditions simple quantities