Skip to main content

Probability and Evidence

 How can we collect evidence to form a conclusion? Evidence guide our thinking or our thinking guides collection of evidence. How much is sufficient evidence and what are relevant evidence both in the context of legal inquiry and auditing. As I am more in practice of auditing and also auditing exercises not exactly like advocating in favor of client, it is more unbiased perspective to look for evidence. 

Being skeptical about client professionally can be said to be little negatively biased yet we are not actively seeking for frauds, we are more of neutral evidence collector. Then it is perfectly suitable place to be to seek neutral evidence. Auditors are both fact finders and judge for collected evidence given the benchmark of financial reporting framework (with high degree of subjectivity). 

Going back to our first quest, whether evidence leads to thinking or thinking process leads to evidence collection. Let us take an example of bank branch with 23000 deposit holders, should we proceed it with a framework of this this and this area is high risk areas and we should focus only on them or we should go through whole data set with fresh insight and then proceed accordingly. 

For first approach we take previous years results and adjust it with recent developments or measures taken against past errors in terms of control development. But problem with this approach is, it narrow down sample size and all previously ignored issues will be ignored by recent evidence collector too. Sample size will be narrowed down as say previously 3000 accounts were opened and faulty account codes were used in 3 accounts out of 500 accounts sampled and hence concluded that 3/500 times only accounts will be faulty. Low risk but somehow erroneous finding of previous period will compel evidence collector to sample in similar way and due to low risk and consequence of previous period, for this period sample size will also be around 500 or lower than 500 or promotion of 500/3000 and previous periods 20,000 and unaudited 2500 accounts will go unaudited again.

let us take another approach, more inductive and from the whole dataset instead of using prior period knowledge. it is more costly approach and somehow ignoring efforts of previous periods. But the truth must be the first priority for evidence collector. which evidence to seek after under this approach will be determined by studying the whole 23000 accounts their changes and any risk identified should be limited to this period only as different economic environment for different period translate same accounts with different attributes of risk for the information use. 

Comments

Post a Comment

Popular posts from this blog

Averaging practice in stock market and Liquidity problem in Banking

Investors in equity market (secondary) are quite familiar with averaging practice of prices. When a stock of higher cost was already purchased but the prices drop down, then purchasing stocks at lower prices (must be probable to gain some increment in those latest prices) will average the per unit cost and given increment in latest prices but lower than previous prices till make loss over previously purchased stock lesser loss making. Now, thinking the institutional capacity of banks and financial institutions and production and distribution capacity of national economy, given flood of remittance, there must be a lag in mobilization of funds through banks. Thereby keeping interest rate at lower side till national economy's capacity to produce and distribute gets increased. However, let's imagine a scenario where funds are ever demanded and loans are distributed at higher cost. Deposit rates are increased in the name of liquidity problem or liquidity premium is so high that retu...
Post a Comment
Read more

Hindu Jurisprudence- Smriti And some property law

I just don’t have the energy to write against the popular teaching (perhaps I have read the wrong books) that Hindu jurisprudence is contained within the Smriti, mainly the Manusmriti, and the property systems of the two schools — Mitakshara and Dayabhaga (I forget which region each school belongs to). But these are laws, not jurisprudence. I admit I do not know the subject of jurisprudence deeply — such a tragedy — but it seems to me these were laws made for the time and place according to the wisdom of the sages of that era. The Smriti writers themselves clearly said that the source of their understanding is the Veda. So, anyone who wants to understand exactly what truth Hindus hold must study the Vedas. Those who cannot may go through the Upanishads (major texts distilled by sages to teach the essence of the Jñāna part of the Veda). Those who still find that difficult may turn to the Mahabharata (which is in itself a “great battle” to understand), or they may study Mīmāṁsā, Nyāya-śā...
Post a Comment
Read more

Usha

I bow down to mother Vindhyabasini/Brindabasini/Bindubasini whose grace and affection alone uplift unbearable pain of this life/ignorance. Nobody but Guru Gorakhnath is my Guru but am not that fortunate to get knowledge from himself. Neither read anything written by him.  During the discussion with few wise men it suddenly occurred or reiterate the already obtained knowledge of unreal nature of thoughts. However, this just helped to connect Usha with Savitur and once again ignite enthusiasm to write meaning of Gayatri Mantra. First line is dedicated to three kind of Jagat or realities excluding Om (which is not a wise thing to do but Om itself contains 3 Jagat and one last supreme reality so it is waste to discuss other line after explaining Om). First one is almost 16 hours a day i.e. waking state where we gather all information and act upon them. Second is dream state which is in its concrete form is 8 hours a day, unknown processing of information gathered during waking state. 3...
Post a Comment
Read more