How to Gather Audit Evidence

An auditor investigates a company’s finances and operations to determine whether the company’s records are accurate. In most cases, a CPA or certified auditor conducts an audit. If you are a business owner facing an audit, understanding how audit evidence is gathered can help you prepare for your upcoming audit. If you go through your records and company operations before the auditor arrives, the audit process may run more smoothly.[1]
EditSteps
EditExamining the Records
Review records for completeness. All spaces of a financial ledger or form should be filled in, and each entry should have a verifiable date. If any spaces are blank, there should be some notation or explanation as to why the information wasn’t filled in.[2]
For records of meetings or interviews, the entry should include the action that was taken as a result and any other follow-up actions that were taken later.

Include the names of anyone involved in an entry, and their role in the company, if applicable. For example, if you have a list of deposits made into an account, each entry should include the names of the managers or employees who made the deposit.

Compare account balances and transactions to banking records. Financial ledgers are attached to a business banking or investment account. The company’s ledgers should reconcile against the bank’s records.[3]
In some cases, further investigation may be required. For example, if the company’s records note a $1,000 sale to a client, but only $500 was deposited into the company’s account, the auditor might contact the client to find out how much money the client paid and when.

Get recent bank statements and compare the company’s records to the bank’s records. If there is a discrepancy, mark the transaction and determine why the records are different. If you can identify the reason for the discrepancy in advance and correct your records if necessary, it will save the auditor some time and effort.

Test the effectiveness of internal financial controls. Inadequate controls leave room for error as well as an increased risk for theft or fraud. Make sure all financial software is up-to-date, and use complex passwords that are unique to each user. Make sure passwords aren’t left lying around for anyone to use.[4]
The auditor will keep an eye out for any holes in the company’s financial security that could be exploited. When information about these type of security risks show up in an auditor’s report, it is an opportunity for the company to take steps to close those gaps to protect the company as well as its customers.

Reconcile debt computations with lenders. If your company is carrying debt, pull statements from the lenders and make sure the interest rates and principal owed match your company’s books.[5]
The auditor will also evaluate who approved the debt, any mention of the debt in company meetings, and whether all debt payments are made in full and on time. Make sure these records are clear and available to the auditor.

If the company leases work or office space, the auditor will also evaluate the lease agreements and make sure those obligations are being fulfilled according to the terms of the contract.

Recompute and evaluate expenses. Pull receipts, expense reports, and other expense records and determine their accuracy and legitimacy as business expenses. Unusual items or overly large transactions may be subject to additional scrutiny.[6]
For example, if a company usually has $800 in utility expenses each month, and one month the expense report notes $8,000 for utility expenses, the auditor would reach out to the utility companies for confirmation of the amount and determine why that month was excessive or if the amount was listed in error.

EditSeeking Confirmations of Transactions
Send letters to customers and vendors for repeat transactions. For particularly large or out-of-the-ordinary transactions, write or call and confirm the amount and details of the transaction. Ask the customer or vendor what their records say rather than simply reading your record and asking for confirmation.[7]
For example, if the company pays $2,500 to a particular vendor every month, and then in February the company’s records show it paid that vendor $7,500, you could contact the vendor and ask what their records showed your company paid in February. If the amount is correct, ask for a detailed statement that could help you figure out why the bill was so high. If the amount is incorrect, adjust your books.

Verify supporting information for complex account balances. For some transactions, it makes more sense for the auditor to verify supporting information, such as rates, and then recalculate the total that should be there.[8]
For example, suppose there’s a question about 401(k) withdrawals from employee paychecks. You can verify the rate of those withdrawals from employees, then recalculate the amounts that should have been withdrawn. Compare those calculations to the balances in the employees’ 401(k) accounts.

Analyze market data to confirm financial statements. Particularly if the company trades securities on the open market, look at market data to determine whether your valuation in company financial statements is accurate.[9]
For example, if the company has invested in securities and plans to sell them in 2 years, you could analyze the prevailing market price and performance of those securities to determine their book value.

Check the terms of unusual transactions. Confusing or unusual transactions may raise flags for auditors, since they indicate a higher risk of fraudulent activity taking place at the company. Identify these transactions in your books and talk to customers or vendors to figure out what was going on.[10]
For example, a transaction for the purchase of a large amount of products, followed nearly immediately by a return of the proceeds of that sale to the customer without a return of product, might raise audit flags.

Use intermediaries for related-party transactions. If two managers, company officers, or employees are involved in a transaction, the auditor typically uses third-party records, if available, to confirm the transaction was above board. If you know those records exist, you can go ahead and request them to justify the transaction.[11]
The auditor will seek out audit evidence from any intermediaries, such as banks, agents, or attorneys, to confirm the business rationale and terms of the transaction.

EditInspecting the Premises
Verify the existence of assets through physical inventory. Something may be listed in the books, but that doesn’t mean it’s actually present. Particularly in a retail sales environment, regular inventory enables you to correct the books through the auditing process.[12]
Notes and photos, as well as inventory records, help document this evidence.

Observe how broken or expired product is disposed of, and which employees have responsibility for marking down that product for the records.

Interview employees about policies and procedures. Employees may be questioned generally about policies and procedures, or asked specific questions about particular transactions that have raised red flags. While an employee interview on its own may not constitute objective, reliable audit evidence, it may point to other evidence or information.[13]
Employees in financial and managerial roles in particular should expect to have conversations with the auditor throughout the auditing process.

In more serious situations, the auditor may submit written questions to employees so that their responses are preserved in writing.

Look for uncontrolled documents or nonconforming products. Random documents or notes posted on walls or machines may indicate an alternate procedure that doesn’t exactly follow policy or that presents security concerns. The same is true for products that aren’t kept or stored where they’re supposed to be.[14]
For example, if an auditor of a retail store found piles of product hidden behind a desk in the office rather than out on the sales floor, they would want to determine the status of those products and why they were being segregated from the rest of the inventory.

Notes taped to machines may indicate that something isn’t working properly and needs to be repaired, or that staff members have not been properly trained on how to operate the machine. These random notes become a part of basic policy and procedure, even if their message isn’t communicated through standard channels.

Note poor cleaning or improvised repairs. Walk through the workplace and look for machines or fixtures that have been temporarily “repaired” by employees using duct tape or shims. Implement proper maintenance procedures before the audit to make sure everything is clean and in working order.[15]
If a workplace is messy, it may indicate that there’s a larger issue, or that a problem isn’t being adequately addressed. This can raise red flags for auditors.

Machines and fixtures are business assets that require regular maintenance to live out their service life. If these assets aren’t being cleaned, repaired, and maintained properly, the company could lose money.

EditTips
It’s a good idea to stay on top of these processes even when you’re not facing an audit. This will help you maintain good operational safeguards that will protect you in the event of an audit and make the process go smoothly.

Actively look for positive evidence of things the company is doing right. The audit report will be better received if the auditor can point to practices or policies that are working.[16]
Make notes in audit reports as specific as possible, so the company can implement new policies and procedures to address the problem.[17]
EditReferences
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Today in History for 15th April 2019

Historical Events

1850 – City of San Francisco incorporated
1878 – Harley Procter introduces Ivory Soap
1915 – NY Giant Rube Marquard no-hits Bkln, 2-0
1929 – 33rd Boston Marathon won by Canadian Johnny Miles in 2:33:08.6; his second win in the event
1957 – Congress gives Post Office $41M; restoring Saturday mail delivery
1997 – America On Line begins service in Japan

More Historical Events »

Famous Birthdays

1707 – Leonhard Euler, Swiss mathematician (Euler’s Constant), born in Basel, Switzerland (d. 1783)
1889 – Thomas Hart Benton, Missouri, painter/muralist (Lonesome Road)
1932 – Nikolai Stepanovich Porvatkin, Russian cosmonaut
1944 – Dave Edmunds, Welsh singer and guitarist (Rockpile – Girls Talk), born in Cardiff, Wales
1968 – Stacey Williams, model (SI Swimsuit 1996), born in Philadelphi, Pennsylvania
1980 – Natalie Casey, British actress

More Famous Birthdays »

Famous Deaths

1881 – Sophia Perovskaya, Soviet icon, aristocrat, and socialist revolutionary (Narodnaya Volya), who helped orchestrate the successful assassination of Tsar Alexander II of Russia, executed by hanging at 27
1975 – John B McKay, US test pilot (X-15), dies
1976 – Gerald Smith, antisemite/catholic (National Christian Crusade), dies at 78
1988 – Han G. Hoekstra, Dutch poet (Zandloper), dies at 81
1990 – Greta Garbo, Swedish actress (Anna Karenina, Camille), dies at 84
2012 – Murray Rose, Australian Olympic gold winning swimmer, dies from leukemia at 73

More Famous Deaths »

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How to Do Glitter Roots

Glitter roots are the latest party and festival style! This fun and fabulous hairstyle is quick and easy to do, and it uses only a few different products. Begin by styling your hair down, in space buns, or in braids before you get to work on the glitter. Then mix together clear hair gel and chunky glitter to create a glitter gel. Apply the glitter gel to your parting and enjoy your new look! To remove the glitter, simply use hairspray and paper towels, or wash it out with olive oil.

EditSteps
EditStyling Your Hair before Adding Glitter
Part your hair down the center for a simple glitter roots style. Comb your hair free of any knots or tangles with a rattail comb and then use the end of the comb to create a straight parting down the center of your scalp. Begin with the end of the comb at the center of your hairline and gently draw it backward, through the middle of your head.[1] This simple hair down style is great if you want to do glitter roots quickly.

Do space buns for popular glitter roots look. Glitter roots with space buns is a new twist on a favorite retro hairstyle! Part your hair down the center and tie it into 2 pigtails. Twist each pigtail and coil it into a bun that rests flat on your head. Tie each bun with a hair elastic and use bobby pins to secure any flyaway strands.[2] Space buns are usually done quite high up, just above your ears. However, you can experiment with different heights to see what style you prefer.

Create 2 braids for a chic glitter root look. Comb your hair and create 2 braids with 1 on each side of your head. There are plenty of options to choose from, such as regular braids, French braids, or fishtail braids. Any braids that create a parting in your hair will work well with glitter roots.[3] Spray your braids with hairspray once they are complete to keep them secure.

Try a temporary hair color to help your glitter roots stand out. Get a bright, pastel hair shadow, chalk, or mist to add to your style. Follow the manufacturer’s directions closely and apply the temporary color to your parting after you have styled your hair. The temporary color will simply rinse out when you wash out your glitter roots.[4] Adding a temporary color product is great if you want to achieve a bold, pastel look that can easily be removed when you’re ready.

Use a pastel hair dye to create a bold look with your glitter roots. Pastel hair dyes and glitter roots are a popular festival combination! Pick a pastel pink, purple, blue, or green dye depending on the color that you prefer. Bleach your hair first and then mix the dye with white conditioner. Use a tinting brush to add the mixture to your hair, making sure to create an even coating, and then rinse the dye out of your hair once the specified time is up.[5]
Alternatively, visit a hair salon to get your hair professionally dyed.

You can match your hair dye to the glitter if you prefer or choose contrasting colors.

EditApplying Glitter to Your Roots
Get chunky hair glitter and clear hair gel. You can find hair glitter for sale at hair product stores, some clothing stores, and online. Pick a type that has large or chunky particles if possible, as these are easier to remove and are less abrasive on your scalp compared to fine particles. Any ordinary, colorless hair gel works well.[6]
There are a variety of different colors of hair glitter available including purple, pink, yellow, orange, green, blue, gold, and silver.

You can mix and match different colors and shapes of glitter to create a combination that you love.

If you can’t find hair glitter, you can use regular craft glitter too! The only difference is that hair glitter has an adhesive added which helps it to stick to your hair better.

Mix 3 tbsp (75 g) of clear hair gel with 1 tbsp (20 g) of hair glitter. Get a small bowl and place the clear hair gel and the hair glitter inside. Use a spoon to mix the ingredients until they are thoroughly combined and the glitter looks like it’s spread evenly throughout the gel.[7]
You can add more or less glitter depending on how glittery you want your roots to be.

Apply the glitter gel to your parting using a tinting brush or paintbrush. Dip the brush directly into the glitter gel and swirl it slightly so that the brush is covered. Try to get plenty of gel on the brush to ensure that you get an even glitter coating. Begin at your hairline and brush the glitter gel outward from your parting, aiming to get an even cover. Stop adding glitter where your parting ends.[8]
You can make the glitter roots as wide as you like. Some people prefer the glitter to spread towards their space buns, while others prefer a very thin glitter line. If you aren’t sure how wide to make your glitter roots, aim for out from each side of your parting.

Add larger, decorative sequins or pieces of glitter to embellish your look. You can keep the glitter roots look simple and just use the glitter gel, or you can add in a few standout elements. Pick out 5-10 of your favorite sequins, large pieces of glitter, or faux rhinestones and place these along with your glitter roots. Try to spread these out evenly so that there are a few large, standout elements surrounded by smaller glitter particles.[9] The extra sequins, glitter, or faux rhinestones will stick to the gel.

Large heart or star-shaped glitter pieces make great additions.

EditRemoving Glitter from Your Hair
Refrain from picking the glitter out of your scalp and hair. If the glitter is bugging you, this may seem like a quick fix. However, this method is ineffective and can hurt your scalp. Wait until you can remove the glitter with a paper towel and hairspray, or oil and shampoo, instead.[10] You may also accidentally pull out strands of hair if you try to pluck the glitter from your scalp.

Picking out the pieces of glitter is especially ineffective if they are fine rather than chunky.

Use hairspray if you want to wait before washing your hair. Although it sounds counterintuitive, hairspray works wonders for getting glitter out of hair. Spray a wad of paper towels generously with hairspray. Blot at the glitter to lift it away, starting at the front of the parting and working your way towards the back.[11] The paper towels need to be wet to work properly, so use plenty of hairsprays.

Apply oil to remove the glitter if you want to wash your hair immediately. Pour olive oil into your palm and work the oil through your hair. Use your fingers to massage the oil through your hair and over your scalp. Aim to add enough oil so that your hair looks wet.[12] Alternatively, you can use coconut oil instead. Any basic oil works well.

Wear an old shirt while you do this in case the oil drips.

Wash your hair after 10 minutes to remove the oil and glitter. Use your regular shampoo and lather your hair as you usually would. Rinse out your hair thoroughly with running water to wash out all of the glitter, oil, and shampoo.[13] When lathering the shampoo, pay the most attention to where the glitter is.

EditTips
Add small amounts of glitter to your hair at a time, because it’s easy to add more glitter if you need it but not so easy to get it out if you add too much.

EditThings You’ll Need
EditStyling Your Hair before Adding Glitter
Rattail Comb

Hair Elastics

Bobby pins

Temporary hair shadow, chalk, or mist (optional)

Pastel hair dye (optional)

White conditioner (optional)

Tinting brush (optional)

EditApplying Glitter to Your Roots
Chunky hair glitter

Clear hair gel

Small bowl

Spoon

Tinting brush or paintbrush

Large sequins, glitter pieces, or faux rhinestones (optional)

EditRemoving Glitter from Your Hair
Hairspray

Paper towels

Olive or coconut oil

Shampoo

EditReferences
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