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AUDIT EVIDENCE
Auditor should obtain sufficient appropriate audit evidence to
be able to draw reasonable conclusions on
which to base the audit opinion.
Concept of Audit Evidence
Audit evidence is all the information used by the auditor in
arriving at the conclusions on which his opinion
is based and includes the information contained in the
accounting records underlying the financial
statements and other information. It is obtained from audit
procedures performed during the course of
audit and may include audit evidence obtained from other sources
such as pervious audits and a firm’s
quality control procedures for client acceptance and
continuance.
Accounting records generally include the records of initial
entries and supporting records, such as checks
and records of electronic fund transfers; invoices; contracts;
the general and subsidiary ledgers, journal
entries and other adjustments to the financial statements that
are not reflected in formal cost allocations,
computations, reconciliations and disclosures. The entries in
the accounting records are often initiated,
recorded, processed and reported in the electronic form. In
addition, the accounting records may be part of
integrated systems that share data and support all aspects of
the entity’s financial reporting, operations and
compliance objectives.
Auditor obtains most of the audit evidence from accounting
records of the entity. If accounting records do
not provide sufficient audit evidence, the auditor obtains other
audit evidence.
Other information that the auditor may use as audit evidence
includes:
• minutes of meetings;
• confirmations from third
parties,
• analysis’ reports;
• comparable data about
competitors (benchmarking);
• controls manuals;
• information obtained by
the auditor from such audit procedures as inquiry, observation; and
inspection;
• and other information
developed by, or available to, the auditor that permits the auditor to reach
conclusions through valid reasoning.
Sufficient appropriate Audit Evidence
Sufficiency: The measure of quantity of audit evidence.
Appropriateness: The measure of quality i.e. relevance and
reliability in providing support of
detecting misstatements in account balance classes of
transactions and disclosures and relevant assertions.
The quantity of audit evidence needed is affected by:
- the risk of misstatement
(the greater the risk, the more audit evidence is likely to be required); and
- the quality of such
audit evidence (the higher the quality, the less may be required).
Accordingly sufficiency and appropriateness are interrelated.
However, merely obtaining more audit
evidence may not compensate for its poor quality.
Audit evidence obtained through same audit procedures may be
relevant to certain assertions but not
relevant to other assertions.
The auditor often obtains evidence about an assertion from
different sources or of different nature.
Evidence about an assertion is not a substitute for evidence
regarding another assertion.
Sources of obtaining Audit Evidence
i) Internal source
- through accounting system,
management, employees, underlying documentation
etc.
ii) External
source - third parties, i.e.
suppliers, customers bankers legal advisers and other parties
who have knowledge of the enterprise.
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83
Nature of Audit Evidence
i) Visual
ii) Oral
iii) Documentary
Reliability of Audit Evidence - Generalizations
Following generalizations are considered useful in assessing the
reliability of audit evidence (subject to
certain important exceptions):
i) Audit evidence obtained from independent sources outside the
entity is more reliable.
ii) Evidence generated internally is more reliable when related
controls are effective.
iii) Evidence obtained by an auditor directly is more reliable
than that obtained indirectly or by
interference e.g. Bank balance confirmation certificate received
by an auditor is more reliable than the bank
statement obtained from the management or observation of a
control rather than making inquiry about the
application of a control.
iv) Written evidence is more reliable than oral representation.
v) Audit evidence provided by original documents is more
reliable than that provided by
photocopies and facsimiles.
Other factors relating to Audit Evidence
i) Information on which audit procedures are based should be
sufficiently accurate and
complete. Therefore, auditor should also test the system for
generating such information
while using it for his procedures.
ii) Auditor’s reliance increases when audit evidence obtained
from one source is consistent
with another source; if it is inconsistent further procedures
may be performed.
iii) Cost of obtaining the audit evidence is also considered
when obtaining it.
iv) While forming an audit opinion, the auditor does not have to
examine all the items or
obtain all the evidences which might be available. He can reach
a conclusion by examining
a sample of such transactions. He also relies on persuasive
evidences. However, if evidence
is less than persuasive, he does not consider it reliable.
Assertions in obtaining Audit Evidence
(a) Assertions about classes of transactions and events for the
period under audit;
(i) Occurrence – transactions and events that have been recorded
have occurred and
pertain to the entity;
(ii) Completeness – all transactions and events that should have
been recorded have
been recorded;
(iii) Accuracy – amounts and other data relating to recorded
transactions and events
have been recorded appropriately.
(iv) Cutoff – transactions and events have been recorded in the
proper period.
(v) Classification – transactions and events have been recorded
in the proper
accounts.
(b) Assertions about account balances at the period end.
(i) Existence – assets, liabilities, and equity interests exist;
(ii) Rights and obligations – the entity holds or controls the
rights to assets, and
liabilities are the obligations of the entity;
(iii) Completeness – all assets, liabilities and equity
interests that should have been
recorded have been recorded;
(iv) Valuation and allocation – assets, liabilities, and equity
interests are included in the
financial statements at appropriate amounts and any resulting
valuation or
allocation adjustments are appropriately recorded.
(c) Assertions about presentation and disclosure:
(i) Occurrence and rights and obligations – disclosed events,
transactions and other
matters have occurred and pertain to the entity;
(ii) Completeness – all disclosures that should have been
included in the financial
statements have been included;
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(iii) Classification and understandability – financial
information is appropriately
presented and described, and disclosures are clearly expressed;
(iv) Accuracy and valuation – financial and other information
are disclosed fairly and
at appropriate amounts.
Audit procedures for obtaining audit evidence
Auditor performs audit procedures to obtain an understanding of
the entity, its environment and to assess
risks of material misstatement. Procedures are also applied to
test operating effectiveness of internal
controls and for detection of material misstatements at
assertion level.
The auditor always performs risk assessment procedures to
provide a satisfactory basis for assessment of
risks at financial statement level. In addition to these risk
assessment procedures, which alone are not
sufficient, the auditor performs audit procedures in the form of
tests of control and substantive procedures.
Tests of controls are applied when auditor expects to rely on
operating controls. Through tests of controls,
he tests the controls to support the risk assessment. These are
also applied when substantive procedures
alone do not provide sufficient appropriate audit evidence.
Nature and timing of audit procedures may be affected by the
entity’s data retention policies or their
practice to convert source documents into computer images
through scanning, means of communication
being used by the entity e.g. electronic messaging rather than
written purchase orders.
The auditor uses one or more types of audit procedures described
below:
(i) Inspection of Records or Documents
It consists of examining records or documents whether internal
or external, in paper form,
electronic form, or other media. Inspection provides evidence of
varying degrees of reliability
depending on their nature and source and in the case of internal
records, on effectiveness of
controls over their production.
(ii) Inspection of Tangible Assets
It consists of physical examination of the assets. It may
provide reliable audit evidence of their
existence cannot necessarily about other assertions.
(iii) Inquiry
It means seeking information of knowledgeable persons throughout
the entity or outside the entity.
Those may be formal written or informal oral. It provides an
auditor with new information or
corroborative evidences. It may also bring to high information
different from the one possessed by
the auditor. Certain oral inquiries might be got confirmed
through written representations.
(iv) Confirmations
It is a specific type of inquiry. It is the process of obtaining
a representation of information or an
existing condition directly from a third party. Confirmations
are sought from debtors, creditors,
bankers, legal advisors etc.
(v) Recalculation
It consists of checking the mathematical accuracy of documents
or records. It can be performed
through use of information technology.
(vi) Re-performance
It is the auditor’s independent execution of procedures or
controls that were originally performed
as part of the entity’s internal control, either manually or
through the use of CAATs, for example,
re-performing the aging of accounts receivable.
(vii) Analytical procedures
It consists of evaluations of financial information made by a
study of plausible relationship among
both financial and non-financial data. It includes investigation
of significant fluctuations found and
the relationship that are inconsistent. |
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