11 – Audit Evidence

Agenda

• What constitutes audit evidence• Auditor’s responsibility regarding obtaining

audit evidence• Nature and types of audit evidence• Evaluation of audit evidence• Selecting appropriate audit procedures

Relevant ISAs

• ISA 500: Audit Evidence• ISA 501: Audit Evidence – Specific

Considerations for Selected Items• ISA 505: External Confirmation

ISA 500: AUDIT EVIDENCEAudit Evidence

Audit Evidence • All the

information used by the auditor in arriving at the conclusions on which the audit opinion is based.

Financial Statements

Management Assertions

Audit Procedures

Audit Evidence

Audit Opinion

Objective of ISA 500

• The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.

Nature of Audit Evidence

Records of initial entries and supporting records

Invoices

General and subsidiary ledgers

Worksheets

Spreadsheets supporting cost allocations

Adjustment to financial statements

Contracts

Other computational reconciliations

Disclosures

Requirements of Audit Evidence

• The auditor shall design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining audit evidence that is:– Sufficient – Appropriate.

Audit Evidence

Audit Evidence

Sufficient

Quantity

Appropriate

Relevance Reliability

Information to Be Used as Audit Evidence

• If information to be used as audit evidence has been prepared using the work of a management’s expert, the auditor shall, to the extent necessary, having regard to the significance of that expert’s work for the auditor’s purposes:

– Evaluate the competence, capabilities and objectivity of that expert;

– Obtain an understanding of the work of that expert; and– Evaluate the appropriateness of that expert’s work as audit

evidence for the relevant assertion.

Considerations Regarding Evaluation

Greater risk of misstatement requires a higher quantity of audit evidence.

Independent source of the evidence Effectiveness of internal control Documentary evidence Original documents Third party / external evidence

“An auditor should be thorough in searching for evidence and unbiased in its evaluation.”

Selection of Appropriate Audit Evidence

Level Of Reliability Type of Evidence

 High  

Inspection of tangible assets

Re-performance Recalculation Inspection of records

and documentsMedium  

Scanning Confirmation Analytical procedures

Low 

Observation Inquiry

Inconsistency in, or Doubts over Reliability of, Audit Evidence

• If:– audit evidence obtained from one source is

inconsistent with that obtained from another; or– the auditor has doubts over the reliability of

information to be used as audit evidence,• the auditor shall determine what modifications

or additions to audit procedures are necessary to resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the audit.

ISA 501: AUDIT EVIDENCE – SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS

Audit Evidence

Objective of ISA 501

• The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the:– Existence and condition of inventory;– Completeness of litigation and claims involving

the entity; and– Presentation and disclosure of segment

information in accordance with the applicable financial reporting framework.

Areas

• Inventory • Litigations and claims• Segment Information

Inventory

• Attendance at physical inventory counting, unless impracticable, to: – Evaluate management’s instructions and procedures for

recording and controlling the results of the entity’s physical inventory counting;

– Observe the performance of management’s count procedures; – Inspect the inventory; and– Perform test counts; and

• Performing audit procedures over the entity’s final inventory records to determine whether they accurately reflect actual inventory count results.

Litigations and Claims

• Inquiry of management and, where applicable, others within the entity, including in-house legal counsel;

• Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel;

• Reviewing legal expense accounts; and• Written Representations

Segment Information

• Obtaining an understanding of the methods used by management in determining segment information, and:– Evaluating whether such methods are likely to result in– disclosure in accordance with the applicable financial

reporting framework; and– Where appropriate, testing the application of such

methods; and• Performing analytical procedures or other audit

procedures appropriate in the circumstances.

ISA 505: EXTERNAL CONFIRMATIONAudit Evidence

Objective of ISA 505

• The objective of the auditor, when using external confirmation procedures, is to design and perform such procedures to obtain relevant and reliable audit evidence.

Definitions

• External Confirmation • Positive Confirmation • Negative Confirmation • Non-Response • Exceptions

External Confirmation Procedures

• When using external confirmation procedures, the auditor shall maintain control over external confirmation requests, including:– Determining the information to be confirmed or requested;– Selecting the appropriate confirming party;– Designing the confirmation requests, including determining

that requests are properly addressed and contain return information for responses to be sent directly to the auditor; and

– Sending the requests, including follow-up requests when applicable, to the confirming party. (Ref: Para. A7)

Management’s Refusal

• If management refuses to allow the auditor to send a confirmation request, the auditor shall:– Inquire as to management’s reasons for the refusal,

and seek audit evidence as to their validity and reasonableness;

– Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks of material misstatement including the risk of fraud

– Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.

Management Refusal

• If the auditor concludes that management’s refusal to allow the auditor to send a confirmation request is:– unreasonable, or – the auditor is unable to obtain relevant and reliable

audit evidence from alternative audit procedures, • The auditor shall:

– Communicate with those charged with governance – Determine the implications for the audit and the

auditor’s opinion

Evaluating External Confirmation

• The auditor shall evaluate whether the results of the external confirmation procedures provide relevant and reliable audit evidence, or whether further audit evidence is necessary.

Audit Evidence