So when you think a little bit more deeply about these concepts, materiality, audit risk, and evidence, when we think about evidence in a little bit more particularity, we start looking at three different attributes of evidence. The nature of the evidence, the extent of evidence, and the timing. One acronym that will be helpful to you is, as you think about materiality, and audit risk, and evidence, think of the net of tests. Nature, extent, and timing. Now the nature of evidence gets at things such as the following. Is it the auditor's own direct personal knowledge? Is that the kind of evidence you're talking about? That's very persuasive. It tends to be very persuasive, assuming a competent auditor. Or is it evidence that you get only from asking, inquiring of management. Hey management, do you have any reason to believe that your revenues are materially misstated? Well, no. As you can see, it's only 2% higher than last year's, and we were in the same business essentially. So, the nature of evidence, if its inquiry, tends to be less persuasive than evidence that you get from your direct personal knowledge. And then there's a whole continuum of evidence that lies between these endpoints. Okay. So, documentary evidence would fall in between, and how persuasive the documentary evidence is, will of course depend on, well, what's the source of the documents? Documents that come from third parties and that therefore have a...more than just a patina of objectivity, are going to be of a more persuasive nature than documents that come from management themselves. And a big example of that would be, if you're looking at, let's say, cash that's held in a bank. Instead of just asking client management what their cash is, which would just be inquiry, or even going one better than that, and asking client management to give you a copy of their bank statement, that they pull from their own records, a better approach is for the auditor to go directly to the bank and say, Hey, we're the auditor of... pick your company, Nike. And Nike says they have a lot of money in your bank. You would provide them with what's called a standard bank confirmation, and the bank would confirm those balances for you. That's more persuasive nature. Extent is the easy one, and this is the attribute of evidence that most people think of. Oh this is more evidence. More evidence has to be better, right? Well, the answer is no, that's not correct. But generally, it is true that more is better. But one thing we will come to later in the course, is you need to think carefully about where it is you're drawing your sample from. If you're drawing more and more evidence from a biased sample, guess what you get? You just get a more precise estimate of a biased view of what should be in the account. And one of the most memorable examples of that, it was how shocked everyone was in United States when the underdog, Donald Trump on the Republican side, won the presidential election over the heavily favored, Democratic candidate, Hillary Clinton. And if you read about what happened there, and how could it be that the experts would have, not only Hilary winning, but the probability of her winning the night before the election, in almost all cases, north of 90%? Well, one big lesson is that when these polls were taken, there was a lot more sampling in the voting jurisdictions that favored urban generally, that favored, heavily, Hillary Clinton's candidacy. So, if you would get more and more evidence from that one source, urban, largely Democratic areas, and you use that as what you think is your objective, neutrally derived sample, that's not going to give you a very good picture. You want to avoid doing something analogous to that when you're trying to assess whether you're getting neutral, evenhanded evidence when you audit an entity. Now how about timing? Well, let's take a look at timing. There's two big, really three, versions of when you can do your auditing procedures. If you're going in the two world only, it's before year end or after year end. Generally, you're going to get more persuasive evidence after year end. You might be thinking, isn't that too late? Well in some sense, it is pushing the bar on being quite late. However, there is an ordinary time lag between the end of the fiscal year, Let's say it's a calendar year, 12-31-17, and the issuance of the financial statements that had been audited. It typically will be six to eight weeks, sometimes longer, sometimes shorter. In fact, one thing that the market looks at for whether there might be some concerns about the fairness with which earnings are reported is, is there a longer delay between the end of the calendar year and the date of the audit report? If there's a longer delay, the idea is that maybe something is amiss. Something was needing very close looking at. But if you just take a look at accounts receivable, one way you can get more confidence if an account was receivable, as of year end, is to see whether after year end, cash, at least some portion of it, has been collected. You're reducing the risk as an auditor. The other way to think about audit tests, if there's a three category, so not just before year end or after, there is an interim period of testing that is done in most field work in auditing. This might occur as early as the second quarter of business for a company. The whole idea there is that if the auditor can go in at that time, collect a lot of the evidence, and you think management has tremendous integrity and that they take financial reporting very seriously, very strong tone at the top, then you could use that evidence as the preponderance of the basis on which you rely for your opinion, and then in between that interim period and the year end, the year end period, you collect a bit more evidence primarily to corroborate what you've gotten to date, okay. As your intuition is telling you, if you are more worried about this risk of misstatement being material, you need to think about more persuasive nature, more expansive extent, but being careful to not just have biased samples, and deferring your timing. So, one thing you can expect when you're asked questions on audit related examinations and quizzes, including if you're interested in pursuing your CPA certification and licence later, is it will ask you different combinations... present you with different combinations of evidence and you'll have to determine what is more persuasive.
