7/29/2019 Audting 3_Audit Evidence
1/28
AUDITING 3 (Module 1)
Obtaining Audit evidence chapter 5
7/29/2019 Audting 3_Audit Evidence
2/28
Your title here
7/29/2019 Audting 3_Audit Evidence
3/28
AUDT
311 INTRODUCTION
EVIDENCE
Audit evidence is absolutely crucial to the audit function
to Support opinion.
ISA 500 - "The Auditor should obtain : SUFFICIENT APPROPRIATE EVIDENCE
to be able to draw a reasonable conclusions on
which to base audit opinion." :
KEY PHRASE = sufficient appropriate evidence.
Evidence usually relates to Assertions on Fin Stats.
7/29/2019 Audting 3_Audit Evidence
4/28
AUDT
311
Overall measure of whether enough sufficient appropriateevidence is gathered cannot be 100% exactly determined:
BUT SUFFICIENT EVIDENCE:
1) SUFFICIENT means if QUANTITYof evidence is enough.
2) Evidence is Cumulative: E.g. debtors test =
1-debtors circularisation +
2-test if debtors pay (very good evidence they exist!)
3)To calc. quantity of evidence needed
=NO hard and fast way, only: USE professional Judgment + statistical
methods.
This is done as part of the "AUDIT PLAN" stage.
SUFFICIENT
APPROPRIATE EVIDENCE
7/29/2019 Audting 3_Audit Evidence
5/28
AUDT
311
1) APPROPRIATE
Means if QUALITY of evidence is enough. Further broken down into: a)RELIABILITY (source & nature)
b)RELEVANCE (to assertion being tested)
2) RELIABILITY: Hierarchy of Reliability of Evidence:
a) Most Reliable =Developed by auditor: e.g. (inspect stock)
b) Reasonably Reliable
=Evidence from 3rd party (not client) if
1-Independant 2-Reputable
3-Competent e.g. (attorney)
SUFFICIENT
APPROPRIATE EVIDENCE
7/29/2019 Audting 3_Audit Evidence
6/28
AUDT
311
Less Reliable =From 3rd party BUT passed through client.
E.g.: bank statement.
Less Reliable =Evidence from clients SYSTEM and where relatedcontrols it passed through were Effective
Least reliable= Evidence provided by client (lacks independence)
Written more reliable than oral (easy denied)
Original documents More than Photocopies/facsimiles.
Also, REM these are guidelines, e.g. if competence + integrity of
directors employees are strong & acc.sys and internal controls arestrong, evidence from client could be very reliable.
E.g. sheet to shelf = existence BUT shelf to sheet =completeness.
SUFFICIENT
APPROPRIATE EVIDENCE
7/29/2019 Audting 3_Audit Evidence
7/28
AUDT
311
3) RELEVANCE: a)Evidence MUST be MATCHED to assertion tested :
e.g.; self stock count= 'existence some 'valuation' BUTnot 'rights' e.g. could be uncollected but sold .NOR'completeness' yet e.g. must first be traced to records to
determine if all were included in records.
b)E.g. tests of controls as to accuracy will not provevalidity or completeness.
c)A single procedure could be relevant to morethan 1 assertion though.
SUFFICIENT APPROPRIATE
EVIDENCE
7/29/2019 Audting 3_Audit Evidence
8/28
AUDT
311
INFLUENCEING FACTORS IN DETERMINING WHETHERSUFFICIENT APPROPRIATEEVIDENCE HAS BEENOBTAINED.
Factors which MUST influence auditors decision.
THE ASSESMENT of Inherent Risk and Control Riskat the client.
:if higher riskmore evidence from most reliable sourceneeded.
THE MATERIALITY of Item Being Examined: e.g. if stock is very materialauditor must get more of
appropriate evidence.-whygreater likelihood of materialmisstatement.
SUFFICIENT APPROPRIATE
EVIDENCE
7/29/2019 Audting 3_Audit Evidence
9/28
AUDT
311
3) Experience from Previous audits (at sameclient). HISTORY
4) Results of audit procedures ALREADY CONDUCTED
E.g. if test of debtors was good, then do less other tests.
5) RELIABILITY and Source of info. Available. If no reliabletests available, then much more of less reliable tests must do.
6) PERSUASIVENESS of the audit evidence:
e.g.: evidence gathered on one section of audit which is Supportedby evidence from another section = more persuasive .If itContradicts it = less persuasive.
SUFFICIENT APPROPRIATE
EVIDENCE
7/29/2019 Audting 3_Audit Evidence
10/28
AUDT
311
FINANCIAL STATEMENTASSERTIONS:
1)The OBJECTIVE of an audit:
is for an auditor to EXPRESS an OPINION on whether theFINANCIAL STATEMENTS are FAIRLYPRESENTED. In allMATERIAL ASPECTS after comparing it to an IDENTIFIEDREPORTING FRAMEWORK (check other definitions of thisbefore)
2)Embodiment of Assertions:
the financial statements are the EMBODIMENT of the
ASSERTIONS of the DIRECTORS of the COMPANY ,in thePRESCRIBED FORMAT , on the FINANCIAL RESULTS andPERFORMANCE of OPERATIONS ,which they are managingon behalf of shareholders.
ASSERTIONS
7/29/2019 Audting 3_Audit Evidence
11/28
AUDT
311
3)ISA 500R : the auditor should use assertions for classes of transactions ,account
balances, and presentation and disclosure, in sufficient detail to form
a basis for the assessment of risks of material misstatement and the
design and performance of further audit procedures.
4)It is the Auditors duty to gather sufficient evidence to
support assertion being audited.
5)Every assertion should be considered for audit, but thoseassert. presenting highest risk of MATERIAL MISSTATEMENT
by the AUDITOR in his' "OPINION on ... ", must
be concentrated on.
ASSERTIONS
7/29/2019 Audting 3_Audit Evidence
12/28
AUDT
311
6)CATEGORIES OF ASSERTIONS: ISA 500R Categorises the Assertions as follows:
a)Classes of Transactions and Events(for period) e.g:.
sales, purchases, interest received
b)Account Balances carried forward to next year
(at year end)eg:property plant &equipment ,accounts receivabe
c)Presentations and Disclosure :e.g. notes to bal.
Sheet, contingent liabilities
ASSERTIONS
7/29/2019 Audting 3_Audit Evidence
13/28
AUDT
311
1.Classes of TRANSACTIONSAND EVENTS: Assertions about (during period)
1.1.OCCURENCE : recorded trans.& events DID occur and DO PERTAIN to THIS entity
1.2.COMPLETENESS :all that should have been recorded, wererecorded ,none missing.
1.3.ACCURACY :1-Amounts & 2Data were recorded appropriately.
1.4.CUTOFF : in right accounting period.
1.5.CLASSIFICATION (and UNDERSTANDABILITY) :recorded in correct account names.
ASSERTIONS
7/29/2019 Audting 3_Audit Evidence
14/28
AUDT
311
2.ACCOUNT BALANCES :Assertions about(end period).
2.1.EXISTENCE : assets, liabilities, equity's DO actually exist.
2.2.RIGHTS AND OBLIGATIONS : entity holds rights to assets , liabilitiesare obligations of this entity , namedshareholders. : do hold the rights to the equity.
+2-ALL ENCUMBERENCES on ownership must be . .. .:Disclosed 2.3.COMPLETENESS : all that should have been recorded, were recorded,
none missing.
2.4.VALUATION AND ALLOCATION: assets ,liabilities , equity recorded atappropriate valuation amounts and any resulting :valuation adjustments or
allocation adjustments are appropriately recorded . ALSO , :DEPRECIATION and OBSOLECENCE
ALSO allocated to correct accounts in ledger
ASSERTIONS
7/29/2019 Audting 3_Audit Evidence
15/28
AUDT
311
3.PRESENTATION AND DISCLOSURE: Assertions about.
3.1.OCCURENCE
3.2.AND RIGHTS AND OBLIGATIONS. :disclosed events ,transactions& other mattersDID occur and Do pertain to this entity.
3.3.COMPLETENESS : All matters that should be disclosed in FIN Statements., weredisclosed, none missing.
3.4. CLASSIFICATION AND UNDERSTANDABILITY. : Financial info./disclosures areappropriately/ properly PRESENTED and DESCRIBED, and EXPRESED CLEARLY .,and classified correctly in ledger
3.5. ACCURACY amounts disclosed in e.g. notes are not junk
3.6. VALUATION & ALLOCATION. :
1-FINANCIALand 2-OTHER INFORMATION
( e.g. notes on union problems) are disclosed FAIRLY and at APPROPRIATE AMOUNTS. (atcorrect valuation amounts and in a correct and proper'FAIRLY presented' - manner.)
ASSERTIONS
7/29/2019 Audting 3_Audit Evidence
16/28
AUDT
311
No ASSERTION TRANSACTIONEVENTS
ACCOUNT
BALANCESPRESENTATION
DISCLOSURE1 COMPLETENESS 2 OCCURRENCE 3 EXISTENCE 4 ACCURACY 5 CUT OFF
6
CLASSIFICATION (and for Pres. & Disclosure:UNDERSTANDABILITY)
7 RIGHTS and OBLIGATIONS 8 VALUATION and ALLOCATION
ASSERTIONS
7/29/2019 Audting 3_Audit Evidence
17/28
AUDT
311
EXAMPLES OF ASSERTION CLASSIFICATION IN PRACICE: 1. SALES TRANSACTIONS: 1.1. FIRSTLY: all Sales figures PLUS all disclosures pertaining to
sales should be checked for :( leave out Occurrence fordisclosures though)
1.1.1. Occurrence: all sales included DID actually occur. (Not fictitious) 1.1.2. Completeness: all sales made were included in sales total, none
left out. 1.1.3. Accuracy: all sales recorded appropriately, meaning prices
discount & vat rates are correct & correctly calculated. 1.1.4. Cutoff: All sales recorded occurred in accounting period beingaudited. 1.1.5. Classification: All sales posted to proper account incl. Contra
accountsVAT, DISCOUNT, CREDITORS.
ASSERTIONS
7/29/2019 Audting 3_Audit Evidence
18/28
AUDT
311
TRANSACTION
& EVENTSOccurrence Completeness Accuracy Cut-Off Classify &
Understand
ACCOUNT
BALNCESExistence Completeness Rights &
ObligationValue at. &
Allocate
Plant &Equipment All in bal.Sheet existedat time of bal.
sheet
All owned is
included, noneleft out.
Holds rights to
ownership+2-
Encumbrances
On ownership
disclosed.
Reflected at
appropriateamount incl
allocat.
1Obsolete
+2-Dep.PRESENTATION &
DISCLOSURE
Occurrence Completeness Accuracy Cut-off Classify &Understand
Rights & Obligat
2.Auditor self stock count= 'existence some 'valuation' BUT not 'rights' e.g. could be uncollected but sold .NOR 'completeness'
yet because must first be traced to records to determine if all were included in records.
3. Sheet to shelf = existence BUT shelf to sheet =completeness.
4. Tests of controls specifically as to accuracy will not prove validity (occurrence /existence?) or completeness.
EXAMPLE
7/29/2019 Audting 3_Audit Evidence
19/28
AUDT
311
1. Auditor has ONLY 2 things in his TOOLBOX A. TESTS OF CONTROLS =to test if control procedures
complied with
B.SUBSTANTIVE PROCEDURES. =to test if verify /
substantiate 1-TRANSACTIONS
2-BALANCES
TESTS OF CONTROLS
THE AUDITORS TOOLBOX
7/29/2019 Audting 3_Audit Evidence
20/28
AUDT
311
1) CATEGORIES OF TESTS OF CONTROLS:
i) RE-PERFORMANCE: repeating 1-Wholly 2- In Part controlprocedures e.g.: re-perform bank recon.
ii) INSPECTION: verify on docs. If control procedures did happen:e.g.: verify if transaction authorization signature is there.
iii) ENQUIRY: ask person CONCERNED with control procedure asto effective operation of. NOT just accept mngmnts word. E.g.: findout who performs each procedure and what they do.
IV) OBSERVATION: watch process/procedure being performed e.g.:watch what a receiving clerk does when supplier delivers goods.receiving clerk does when supplier delivers goods.
THE AUDITORS TOOLBOX
7/29/2019 Audting 3_Audit Evidence
21/28
AUDT
311
2) Tests of Control are performed to obtain evidence ofwhether
i) Controls suitably designed to
(1)PREVENT
(2)DETECT (3)CORRECT material misstatements)
Operated effectively
THROUGHOUT PERIOD AUDITED. 3) Good results reduce control risk and hence audit risk,
and then less time need spent on substantive tests.
THE AUDITORS TOOLBOX
7/29/2019 Audting 3_Audit Evidence
22/28
AUDT
311
4) LIMITATIONS OF: tests of controls:
a) Good when checked but not in the rest of the Fin. Year. b) Inherent risk? Ch7 e.g. 1-only test some 2- subjectivity-auditor own
method 3-
5) LIMITATIONS OF: internal controls:
i) Cost exceeds benefitlimits capacity of internal controls.
ii) Directed at routine transactions.miss non-routine e.g. sell copier.
iii) Human error.e.g.: calc. discount after vat.
iv) Collusion- e.g. fraudulent pay packet- collude wage clerk, foreman,personell mngr.
v) Mngmnt Override /Abuse of responsibility over internal control- e.g.mngr overrides stop on purchases for overdue acc.49
THE AUDITORS TOOLBOX
7/29/2019 Audting 3_Audit Evidence
23/28
AUDT
311
SUBSTANTIVE PROCEDURES. 1) Tests controls cannot provide 100% assure so
sustant.tests need be done.
2) SUBSTANTIVE TESTS BROADLY DISTIGUISHED
INTO; a) Tests Of Detail.
b) Analytical Procedures. (Very powerful tool)
THE AUDITORS TOOLBOX
7/29/2019 Audting 3_Audit Evidence
24/28
AUDT
311
3) CATEGORIES OF SUBSTANTIVE PROCEDURES:
i) REPERFORMANCE: repeating 1-Wholly 2- In Part same procedures performedby client e.g.: debtors age analysis.
ii) INSPECTION: inspect 1-docs+records, or 2-tangible assets e.g.: inspect fixedasset to verify existence or inspect.Confirmation of Balance Certificate" from longterm loan creditor.
iii) ENQUIRY: 1-oral or 2-formal written: to inside or outside entity to get 1-Corroborative evidence or 2-Plain knowledgeable person inside or outside entity.
iv) CONFIRMATION: procedure of obtain response to an enquiry to corroborateinfo. in the acc. records. Knowledgeable person inside or outside entity
v) RECALCULATION: check arithmetic on source docs & records. E.g.: checkdepreciation calc.
vi) ANALYTICAL PROCEDURES: analysis of ratios + trends , then investigateinconsistent deviations .(statistics)
THE AUDITORS TOOLBOX
7/29/2019 Audting 3_Audit Evidence
25/28
AUDT
311
4) Substantive procedures are performed on a) Balances Assertions=; Existence, Completeness, Rights
& Obligations, Valuation & Allocation.
b) Transactions Assertions=; Occurrence, Completeness,
Cutoff, Classification & Understandability, Accuracy 5) Financial stat. consist of only
a) Collection of balances - bal sheet
b) Summary of totalsinc.stat
THE AUDITORS TOOLBOX
7/29/2019 Audting 3_Audit Evidence
26/28
AUDT
311
6) VOUCHING AND VERIFYING:
a) Vouching: (To Vouch) TRANSACTIONS auditing.
b) Verifying: BALANCES auditing.
c) Example:
i) VOUCHa sales transaction = inspect docs + enquire discounts+ recalculate
ii) VERIFYa debtors balance = confirmation in writing fromdebtors + enquiries as to calc. of prov. bad debts. +re-perform aginganalysis of debtors.
7) DUAL PURPOSE TESTS:
Some tests can be a test of control and substantive test at sametime e.g.: bank recon. Re-perform = test of control (recon is acontrol) and substantive test (bank balance).
THE AUDITORS TOOLBOX
7/29/2019 Audting 3_Audit Evidence
27/28
AUDT
311
Ability Is what you're capable ofdoing.
Motivation determines what you
do.
Attitude determines how well you do
it.THE ENDfor now
7/29/2019 Audting 3_Audit Evidence
28/28