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INTRODUCTION -AN OVERVIEW OF AUDITING:

Economic decisions in every society must be based upon the information available at
the time the decision is made. For example, the decision of a bank to make a loan to a
business is based upon previous financial relationships with that business, the financial
condition of the company as reflected by its financial statements and other factors.
If decisions are to be consistent with the intention of the decision makers, the
information used in the decision process must be reliable. Unreliable information can
cause inefficient use of resources to the detriment of the society and to the decision
makers themselves. In the lending decision example, assume that the barfly makes the
loan on the basis of misleading financial statements and the borrower Company is
ultimately unable to repay. As a result the bank has lost both the principal and the
interest. In addition, another company that could have used the funds effectively was
deprived of the money.

As society become more complex, there is an increased likelihood that unreliable


information will be provided to decision makers. There are several reasons for this:
remoteness of information, voluminous data and the existence of complex exchange
transactions

As a means of overcoming the problem of unreliable information, the decision-maker


must develop a method of assuring him that the information is sufficiently reliable for
these decisions. In doing this he must weigh the cost of obtaining more reliable
information against the expected benefits.

A common way to obtain such reliable information is to have some type of verification
(audit) performed by independent persons. The audited information is then used in the
decision making process on the assumption that it is reasonably complete, accurate and
unbiased.

ORIGIN AND EVOLUTION


The term audit is derived from the Latin term audire, which means to hear. In early
days an auditor used to listen to the accounts read over by an accountant in order to
check them
Auditing is as old as accounting. It was in use in all ancient countries such as
Mesopotamia, Greece, Egypt. Rome, U.K. and India. The Vedas contain reference to
accounts and auditing. Arthasashthra by Kautilya detailed rules for accounting and
auditing of public finances.

The original objective of auditing was to detect and prevent errors


and frauds

1)Auditing evolved and grew rapidly after the industrial revolution in the 18th century
With the growth of the joint stock companies the ownership and management became
separate.
2)The shareholders who were the owners needed a report from an independent expert
on the accounts of the company managed by the board of directors who were the
employees.
3)The objective of audit shifted and audit was expected to ascertain whether the
accounts were true and fair rather than detection of errors and frauds.

Reasons for Issuing Auditing Standard Error: Reference


source not found Error: Reference source not found Error:
Reference source not found
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard Error:
Reference source not found Error: Reference source not found Error: Reference source
not found, due to the requirements of the legislative, provisions explained below.
The Corporate Law Economic Reform Program (Audit Reform and Corporate
Disclosure) Act 2004 (the CLERP 9 Act) established the AUASB as an independent
statutory body under section 227A of the Australian Securities and Investments
Commission Act 2001, as from 1 July 2004. Under section 336 of the Corporations Act
2001, the AUASB may make Auditing Standards for the purposes of the corporations
legislation. These Auditing Standards are legislative instruments under the Legislative
Instruments Act 2003.

Main Features
This Auditing Standard: Provides explanatory guidance on what constitutes audit evidence;
Requires the auditor to obtain sufficient appropriate evidence;
Requires the auditor to use assertions in obtaining audit evidence; and
Provides explanatory guidance on audit procedures for obtaining audit evidence.

standard of Auditing 500 was revised in 1.04.2009 by the Institute of Chartered


Accountants of India. Auditor needs to form an opinion after checking books of
accounts. For the purpose of examining books auditor should obtain audit evidence to
form a conclusion and to support his examination. As of the aim of reporting and forming
conclusions on the financial statements different audit evidences are obtained by the
auditor. Audit evidence helps to draw reasonable audit conclusions. Audit evidence
should be obtained for both accounting information contained in the financial statements
and also for other information. Auditor may obtain an internal evidence for example
when sales are made by the client to the customers, sales invoices are issued to the
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customer, which forms an internal evidence which are further evidenced by receipt of
money from the customers.
Other examples of internal evidences are material issued note, goods received note
or any other evidence generated internally by the client. There can also be internal
external evidences prepared by the clients and later on issued to their customers for
further processing and payment. For example any invoice which is prepared internally
and issued to the customer for further processing and payment. There can also be other
evidences that are not generated by the client and obtained by the auditor directly from
third party. For instance, auditor can obtain balance confirmation certificates from the
third party , may be debtors balance confirmation , creditors balance confirmation and
other such evidence obtained from the third party without dealing with the client. There
can also be external internal evidence flowing from outside the clients organization into
the clients organization, We can give here example of a purchase invoice.
Thus in brief, the evidence can be
1. Internal Evidence
2. Internal- External evidence
3. External Evidence
4. External internal evidence.
However, it is important to know that external evidence which is obtained by
the third party directly from the third party is a more reliable audit evidence. The simple
reason behind this is clients involvement is absent . hence, chances of manipulation in
this type of evidence by the client is not there.

This Auditing Standard:


provides explanatory guidance on what constitutes audit evidence;
requires the auditor to obtain sufficient appropriate evidence;
requires the auditor to use assertions in obtaining audit evidence; and
provides explanatory guidance on audit procedures for obtaining audit evidence.

AUDITING STANDARD Error: Reference source not found Error:


Reference source not found
Error: Reference source not found
Application
This Auditing Standard applies to:
an audit of a financial report for a financial year, or an audit of a financial report for a
half-year, in accordance with Part 2M.3 of the Corporations Act 2001; and
an audit of a financial report for any other purpose.
This Auditing Standard also applies, as appropriate, to an audit of other financial
information.
Operative Date
This Auditing Standard is operative for financial reporting periods commencing on or
after Error: Reference source not found.
Introduction
The purpose of this Auditing Standard is to establish mandatory requirements and to
provide explanatory guidance on what constitutes audit evidence in an audit of a
financial report, the quantity and quality of audit evidence to be obtained, and the audit
procedures that the auditor uses for obtaining that audit evidence.
The auditor shall obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditors opinion.

Concept of Audit Evidence


Audit evidence means all the information used by the auditor in arriving at the
conclusions on which the auditors opinion is based, and includes the information
contained in the accounting records underlying the financial report and other
information. Auditors are not expected to address all information that may exist, see
paragraph 18. Audit evidence, which is cumulative in nature, includes audit evidence
obtained from audit procedures performed during the course of the audit and may
include audit evidence obtained from other sources such as previous audits and a firms
quality control procedures for client acceptance and continuance.
Accounting records generally include the records of initial entries and supporting
records, such as cheques and records of electronic fund transfers, invoices, contracts,
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the general and subsidiary ledgers, journal entries and other adjustments to the
financial report that are not reflected in formal journal entries, and records such as work
sheets and spreadsheets supporting cost allocations, computations, reconciliations and
disclosures. The entries in the accounting records are often initiated, recorded,
processed and reported in electronic form. In addition, the accounting records may be
part of integrated systems that share data and support all aspects of the entitys
financial reporting, operations and compliance objectives.
Those charged with governance are responsible for the preparation of the
financial report based upon the accounting records of the entity. Under paragraph 5 of
this Auditing Standard, the auditor needs to obtain some audit evidence by testing the
accounting records, for example, through analysis and review, reperforming procedures
followed in the financial reporting process, and reconciling related types and
applications of the same information. Through the performance of such audit
procedures, the auditor may determine that the accounting records are internally
consistent and agree to the financial report. However, because accounting records
alone do not provide sufficient audit evidence on which to base an auditors opinion on
the financial report, the auditor, under paragraph 5 of this standard, needs to obtain
other audit evidence.
Other information that the auditor may use as audit evidence includes minutes of
meetings, confirmations from third parties, analysts reports, comparable data about
competitors (benchmarking), controls manuals, information obtained by the auditor from
such audit procedures as enquiry, 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 is the measure of the quantity of audit evidence. Appropriateness is
the measure of the quality of audit evidence, that is, its relevance and its reliability in
providing support for, or detecting misstatements in, the classes of transactions,
account balances, and disclosures and related 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 also by the quality of such audit evidence
(the higher the quality, the less may be required). Accordingly, the sufficiency and
appropriateness of audit evidence are interrelated. However, merely obtaining more
audit evidence may not compensate for its poor quality.
A given set of audit procedures may provide audit evidence that is relevant to
certain assertions, but not others. For example, inspection of records and documents
related to the collection of receivables after the period end may provide audit evidence
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regarding both existence and valuation, although not necessarily the appropriateness of
period-end cut-offs. On the other hand, the auditor ordinarily obtains audit evidence
from different sources or of a different nature that is relevant to the same assertion. For
example, the auditor may analyse the ageing of accounts receivable and the
subsequent collection of receivables to obtain audit evidence relating to the valuation of
the allowance for doubtful accounts. Furthermore, obtaining audit evidence relating to a
particular assertion, for example, the physical existence of inventory, is not a substitute
for obtaining audit evidence regarding another assertion, for example, the valuation of
inventory.
The reliability of audit evidence is influenced by its source and by its nature and
is dependent on the individual circumstances under which it is obtained. Generalisations
about the reliability of various kinds of audit evidence can be made, however, such
generalisations are subject to important exceptions. Even when audit evidence is
obtained from sources external to the entity, circumstances may exist that could affect
the reliability of the information obtained. For example, audit evidence obtained from an
independent external source may not be reliable if the source is not knowledgeable.
While recognising that exceptions may exist, the following generalisations about the
reliability of audit evidence may be useful:
Audit evidence is more reliable when it is obtained from independent sources outside
the entity.
Audit evidence that is generated internally is more reliable when the related controls
imposed by the entity are effective.
Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly or by
inference (for example, enquiry about the application of a control).
Audit evidence is more reliable when it exists in documentary form, whether paper,
electronic, or other medium (for example, a contemporaneously written record of a
meeting is more reliable than a subsequent oral representation of the matters
discussed).
Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles.
An audit rarely involves the authentication of documentation, nor is the auditor trained
as or expected to be an expert in such authentication. However, under paragraph 5 of
this Auditing Standard, the auditor needs to consider the reliability of the information to
be used as audit evidence, for example, photocopies, facsimiles, filmed, digitised or
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other electronic documents, including consideration of controls over their preparation


and maintenance where relevant.
When information produced by the entity is used by the auditor to perform audit
procedures, the auditor shall obtain audit evidence about the accuracy and
completeness of the information.
In order for the auditor to obtain reliable audit evidence, the information upon
which the audit procedures are based needs to be sufficiently complete and accurate.
For example, in auditing revenue by applying standard prices to records of sales
volume, the auditor considers the accuracy of the price information and the
completeness and accuracy of the sales volume data. Obtaining audit evidence about
the completeness and accuracy of the information produced by the entitys information
system may be performed concurrently with the actual audit procedure applied to the
information when obtaining such audit evidence is an integral part of the audit
procedure itself. In other situations, the auditor may have obtained audit evidence of the
accuracy and completeness of such information by testing controls over the production
and maintenance of the information. However, in some situations the auditor may
determine that additional audit procedures are needed. For example, these additional
audit procedures may include using computer-assisted audit techniques (CAATs) to
recalculate the information.
The auditor ordinarily obtains more assurance from consistent audit evidence
obtained from different sources or of a different nature than from items of audit evidence
considered individually. In addition, obtaining audit evidence from different sources or of
a different nature may indicate that an individual item of audit evidence is not reliable.
For example, corroborating information obtained from a source independent of the entity
may increase the assurance the auditor obtains from a management representation.
Conversely, when audit evidence obtained from one source is inconsistent with that
obtained from another, the auditor ordinarily determines what additional audit
procedures are necessary to resolve the inconsistency.
The auditor ordinarily considers the relationship between the cost of obtaining
audit evidence and the usefulness of the information obtained. However, the matter of
difficulty or expense involved is not in itself a valid basis for omitting an audit procedure
for which there is no alternative.
In forming the auditors opinion, the auditor does not examine all the information
available because conclusions ordinarily can be reached by using sampling approaches
and other means of selecting items for testing. Also, the auditor ordinarily finds it
necessary to rely on audit evidence that is persuasive rather than conclusive, however,
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to obtain reasonable assurance,1 the auditor is not satisfied with audit evidence that is
less than persuasive.

The Use of Assertions in Obtaining Audit Evidence


Those charged with governance are responsible for the fair presentation of a financial
report that reflects the nature and operations of the entity. In representing that the
financial report gives a true and fair view (or is presented fairly, in all material respects)
in accordance with the applicable financial reporting framework, those charged with
governance and management implicitly or explicitly make assertions regarding the
recognition, measurement, presentation and disclosure of the various elements of a
financial report and related disclosures.
The auditor shall use assertions for classes of transactions, account balances, and
presentation and disclosures in sufficient detail to form a basis for the assessment of
risks of material misstatement and the design and performance of further audit
procedures.
Under paragraph 20 of this Auditing Standard, the auditor needs to use assertions in
assessing risks by considering the different types of potential misstatements that may
occur, and thereby designing audit procedures that are responsive to the assessed
risks. Other Auditing Standards, such as ASA 315 Understanding the Entity and Its
Environment and Assessing the Risks of Material Misstatement, ASA 330 The Auditors
Procedures in Response to Assessed Risks, ASA 501 Existence and Valuation of
Inventory and ASA 505 External Confirmations, discuss specific situations where the
auditor is required to obtain audit evidence at the assertion level.

Assertions used by the auditor fall into the following categories:


Assertions about classes of transactions and events for the period under audit:
Occurrence - transactions and events that have been recorded have occurred and
pertain to the entity.
Completeness - all transactions and events that should have been recorded have been
recorded.
Accuracy - amounts and other data relating to recorded transactions and events have
been recorded appropriately.
Cut-off - transactions and events have been recorded in the correct accounting period.
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Classification - transactions and events have been recorded in the proper accounts.
Assertions about account balances at the period end:
Existence - assets, liabilities, and equity interests exist.
Rights and obligations - the entity holds or controls the rights to assets, and liabilities
are the obligations of the entity.
Completeness - all assets, liabilities and equity interests that should have been
recorded have been recorded.
Valuation and allocation - assets, liabilities, and equity interests are included in the
financial report at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded.
Assertions about presentation and disclosure:
Occurrence, rights and obligations - disclosed events, transactions, and other matters
have occurred and pertain to the entity.
Completeness - all disclosures that should have been included in the financial report
have been included.
Classification and understandability - financial information is appropriately presented
and described, and disclosures are clearly expressed.
Accuracy and valuation - financial and other information are disclosed fairly and at
appropriate amounts.
The auditor may use the assertions as described above or may express them differently
provided all aspects described above have been covered. For example, the auditor may
choose to combine the assertions about transactions and events with the assertions
about account balances. As another example, there may not be a separate assertion
related to cut-off of transactions and events when the occurrence and completeness
assertions include appropriate consideration of recording transactions in the correct
accounting period.

Audit Procedures for Obtaining Audit Evidence


In accordance with paragraph 5 of this standard, the auditor is required to obtain
sufficient appropriate audit evidence to be able to draw reasonable conclusions on
which to base the auditors opinion. Under ASA 315 and ASA 330, the auditor needs to
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perform audit procedures to:obtain an understanding of the entity and its environment,
including its internal control, to assess the risks of material misstatement at the financial
report and assertion levels (audit procedures performed for this purpose are referred to
in the Auditing Standards as risk assessment procedures);
when necessary or when the auditor has determined to do so, test the operating
effectiveness of controls in preventing, or detecting and correcting, material
misstatements at the assertion level (audit procedures performed for this purpose are
referred to in the Auditing Standards as tests of controls); and detect material
misstatements at the assertion level (audit procedures performed for this purpose are
referred to in the Auditing Standards as substantive procedures and include tests of
details of classes of transactions, account balances and disclosures, and substantive
analytical procedures).
The auditor needs to perform risk assessment procedures to provide a
satisfactory basis for the assessment of risks at the financial report and assertion levels.
Risk assessment procedures by themselves do not provide sufficient appropriate audit
evidence on which to base the auditors opinion, however, and are supplemented by
further audit procedures in the form of tests of controls, when necessary, and
substantive procedures.
Tests of controls are necessary in two circumstances. When the auditors risk
assessment includes an expectation of the operating effectiveness of controls, under
ASA 330, the auditor needs to test those controls to support the risk assessment. In
addition, when substantive audit procedures alone do not provide sufficient appropriate
audit evidence, under ASA 330, the auditor needs to perform tests of controls to obtain
audit evidence about their operating effectiveness.
The auditor needs to plan and perform substantive audit procedures to be
responsive to the related assessment of the risks of material misstatement, which
includes the results of tests of controls, if any. The auditors risk assessment is
judgemental, however, and may not be sufficiently precise to identify all risks of material
misstatement. Further, there are inherent limitations to internal control, including the risk
of management override, the possibility of human error and the effect of systems
changes. Therefore, under ASA 330, the auditor needs to design and perform
substantive audit procedures for material classes of transactions, account balances and
disclosures to obtain sufficient appropriate audit evidence.
Under paragraph 5 of this Auditing Standard, the auditor needs to use one or
more types of audit procedures described in paragraphs 31 to 43 below. These audit
procedures, or combinations thereof, may be used as risk assessment procedures,
tests of controls or substantive audit procedures, depending on the context in which
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they are applied by the auditor. In certain circumstances, audit evidence obtained from
previous audits may provide audit evidence where the auditor, under ASA 330, has
performed audit procedures to establish its continuing relevance.
The nature and timing of the audit procedures to be used may be affected by the
fact that some of the accounting data and other information may be available only in
electronic form or only at certain points or periods in time. Source documents, such as
purchase orders, bills of lading, invoices, and cheques, may be replaced with electronic
messages. For example, entities may use electronic commerce or image processing
systems. In electronic commerce, the entity and its customers or suppliers use
connected computers over a public network, such as the Internet, to transact business
electronically. Purchase, shipping, billing, cash receipt, and cash disbursement
transactions are often consummated entirely by the exchange of electronic messages
between the parties. In image processing systems, documents are scanned and
converted into electronic images to facilitate storage and reference, and the source
documents may not be retained after conversion. Certain electronic information may
exist at a certain point in time. However, such information may not be retrievable after a
specified period of time if files are changed and if backup files do not exist. An entitys
data retention policies may require the auditor to request retention of some information
for the auditors review or to perform audit procedures at a time when the information is
available.When the information is in electronic form, the auditor may carry out certain of
the audit procedures described below through CAATs.

Inspection of Records or Documents


Inspection consists of examining records or documents, whether internal or external, in
paper form, electronic form, or other media. Inspection of records and documents
provides audit evidence of varying degrees of reliability, depending on their nature and
source and, in the case of internal records and documents, on the effectiveness of the
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controls over their production. An example of inspection used as a test of controls is


inspection of records or documents for evidence of authorisation.
Some documents represent direct audit evidence of the existence of an asset, for
example, a document constituting a financial instrument such as a stock or bond.
Inspection of such documents may not necessarily provide audit evidence about
ownership or value. In addition, inspecting an executed contract may provide audit
evidence relevant to the entitys application of accounting policies, such as revenue
recognition.

Inspection of Tangible Assets


Inspection of tangible assets consists of physical examination of the assets. Inspection
of tangible assets may provide reliable audit evidence with respect to their existence,
but not necessarily about the entitys rights and obligations or the valuation of the
assets. Inspection of individual inventory items ordinarily accompanies the observation
of inventory counting.

Observation
Observation consists of looking at a process or procedure being performed by others.
Examples include observation of the counting of inventories by the entitys personnel
and observation of the performance of control activities. Observation provides audit
evidence about the performance of a process or procedure, but is limited to the point in
time at which the observation takes place and by the fact that the act of being observed
may affect how the process or procedure is performed. See ASA 501, for further
mandatory requirements and explanatory guidance on observation of the counting of
inventory.

Enquiry
Enquiry consists of seeking information of knowledgeable persons, both financial and
non-financial, throughout the entity or outside the entity. Enquiry is an audit procedure
that is used extensively throughout the audit and often is complementary to performing
other audit procedures. Enquiries may range from formal written enquiries to informal
oral enquiries. Evaluating responses to enquiries is an integral part of the enquiry
process.
Responses to enquiries may provide the auditor with information not previously
possessed or with corroborative audit evidence. Alternatively, responses might provide
information that differs significantly from other information that the auditor has obtained,
for example, information regarding the possibility of management override of controls. In
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some cases, responses to enquiries provide a basis for the auditor to modify or perform
additional audit procedures.
Ordinarily, the auditor performs audit procedures in addition to the use of enquiry to
obtain sufficient appropriate audit evidence. Enquiry alone ordinarily does not provide
sufficient audit evidence to detect a material misstatement at the assertion level.
Moreover, enquiry alone is not ordinarily sufficient to test the operating effectiveness of
controls.
Although corroboration of evidence obtained through enquiry is often of particular
importance, in the case of enquiries about management intent, the information available
to support managements intent may be limited. In these cases, understanding
managements past history of carrying out its stated intentions with respect to assets or
liabilities, managements stated reasons for choosing a particular course of action, and
managements ability to pursue a specific course of action may provide relevant
information about managements intent.
In respect of some matters, the auditor obtains written representations from those
charged with governance and management to confirm responses to oral enquiries. For
example, the auditor obtains written representations from those charged with
governance and/or management on material matters when other sufficient appropriate
audit evidence cannot reasonably be expected to exist or when the other audit evidence
obtained is of a lower quality. See ASA 580 Management Representations, for further
mandatory requirements and explanatory guidance on written representations.

Confirmation
Confirmation, which is a specific type of enquiry, is the process of obtaining a
representation of information or of an existing condition directly from a third party. For
example, the auditor may seek direct confirmation of receivables by communication with
debtors. Confirmations are frequently used in relation to account balances and their
components, but need not be restricted to these items. For example, the auditor may
request confirmation of the terms of agreements or transactions an entity has with third
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parties, the confirmation request is designed to ask if any modifications have been
made to the agreement and, if so, what the relevant details are. Confirmations also are
used to obtain audit evidence about the absence of certain conditions, for example, the
absence of a side agreement that may influence revenue recognition. See ASA 505,
for further mandatory requirements and explanatory guidance on confirmations.

Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation can be performed through the use of information technology, for example,
by obtaining an electronic file from the entity and using CAATs to check the accuracy of
the summarisation of the file.

Reperformance
Reperformance is the auditors independent execution of procedures or controls that
were originally performed as part of the entitys internal control, either manually or
through the use of CAATs, for example, reperforming the ageing of accounts receivable.

Analytical Procedures
Analytical procedures consist of evaluations of financial information made by a study of
plausible relationships among both financial and non-financial data. Analytical
procedures also encompass the investigation of identified fluctuations and relationships
that are inconsistent with other relevant information or deviate significantly from
predicted amounts. See ASA 520 Analytical Procedures, for further mandatory
requirements and explanatory guidance on analytical procedures.
Conformity with International Standards on AuditingExcept as noted below, this Auditing
Standard conforms with International Standard on Auditing ISA 500 Audit Evidence,
issued by the International Auditing and Assurance Standards Board of the International
Federation of Accountants. The main difference between this Auditing Standard and ISA
500 is that ISA 500 includes a Public Sector Perspective. This Auditing Standard does
not include a separate section on the public sector as it is sector neutral.

Compliance with this Auditing Standard enables compliance with ISA


500.
Types of Audit Evidence based on the means of collection.
1. Inspection
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Inspection is done by the auditor of books of accounts and other relevant


records. Inspection can be done internally or externally and types of evidence may be in
paper form , electronic form etc. Even auditor may prefer to do physical examination of
an asset for getting conclusive view about the asset appearing in the balance sheet. In
this case it is said to be more reliable audit evidence. Its reliability depends upon the
nature and source of audit evidence. Auditor may inspect the information in the books of
accounts and to obtain reasonable reliability of what is appearing in the books of
accounts , auditor may cross check with other evidence and for in-depth examination
and inspection decide to physical examine the asset.
2.observation
The auditor when watches the internal processes being performed within the
organization of the client, it is said to be observation. It is the close verification of the
processes performed by the client. We can take example of inventory counting in these
case. Auditor observes the inventory counting performed by the client and forms his
conclusion about the control activities performed. By observation auditor can know
about the internal control in the organization is strong or weak. He can also check by
observing authorization procedures whether it is done properly and genuinely or not by
the management.
3. External confirmation
To check the genuineness of the transactions appearing in the books of accounts,
auditor prefers to obtain external confirmation directly from the third party. It is always
said that external evidence is more reliable than internal evidence because it is obtain
externally without clients involvement and hence more reliable. We can take instance of
balance confirmation in this case, for example debtors balance confirmation, creditors
balance confirmation

Compliance and substantive audit procedures


Compliance procedures are the tests of internal control. This is for the purpose to check
whether there is internal control operating within the organization, whether it is operating
effectively or not, whether the operation throughout the period was effective or not.
Substantive evidence is about whether the evidence obtained is complete, accurate ,
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valid as to the information produced by the accounting system.

Factors from which reliability of audit evidence is increased


1. Evidence if the source is from outside the entity.
2. Internal evidence reliability increases when internal control is effective.
3. External evidence is more reliable than internal evidence as of the absence of the
involvement of the client.
4. Written form evidence is more reliable
5. If the audit evidence is obtained from original documents then they are more reliable
rather than photocopies of it.
.

While using the work of Management expert, what care


needs to be taken by the auditor?
1. Alternative sources of audit evidence available or not is to be checked.
2. The nature, Complexity and risk of material misstatement involved should be kept in
mind.
3. the nature , scope and objective of the expert work should be verified.
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4. Management expert is from within or outside the organization should be checked


because of the chances of biased opinion.
5. Whether the work of the management expert is being influenced by the exercise of
control by the management should be verified
6. Whether Management expert follows technical performance standards or other
professional and industry requirements should be checked.
7. The nature and extent of control on the Management Experts work should be kept in
mind.
8. Previous experience if any with the management expert of the auditor should also be
taken into consideration.
9. knowledge and experience of the management expert should also be counted.

Requirements
Sufficient Appropriate Audit Evidence
1) The auditor shall design and perform audit procedures that are appropriate in the
circumstances for the purpose of obtaining sufficient appropriate audit evidence.
Information to Be Used as Audit Evidence
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2) When designing and performing audit procedures, the auditor shall consider the
relevance and reliability of the information to be used as audit evidence
3) When information to be used as audit evidence has been prepared using the work of
a managements expert, the auditor shall, to the extent necessary, having regard to the
significance of that experts work for the auditors purposes,:
(a) Evaluate the competence, capabilities and objectivity of that expert;
(b) Obtain an understanding of the work of that expert; and
(c) Evaluate the appropriateness of that experts work as audit evidence for the relevant
assertion. 9. When using information produced by the entity, the auditor shall evaluate
whether the information is sufficiently reliable for the auditors purposes, including as
necessary in the circumstances:
(a) Obtaining audit evidence about the accuracy and completeness of theinformation
(b) Evaluating whether the information is sufficiently precise and detailed for
the auditors purposes.Selecting Items for Testing to Obtain Audit Evidence
4) When designing tests of controls and tests of details, the auditor shall determine
means ofselecting items for testing that are effective in meeting thepurpose of the audit
procedure. Inconsistency in, or Doubts over Reliability of, Audit Evidence
5) If:(a) audit evidence obtained from one source is inconsistent with that obtained from
another; or
(b) 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 proceduresare
necessary to resolve the matter, and shall consider the effect of the matter, ifany, on
other aspects of the audit.

Selecting Items for Testing to Obtain Audit Evidence


1) An effective test provides appropriate audit evidence to an extent that, taken with
other audit evidence obtained or to be obtained, will be sufficient for the auditors
purposes. In selecting items for testing, the auditor is required by paragraph 7 to
determine the relevance and reliability of information to be used as audit evidence; the

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other aspect of effectiveness (sufficiency) is an important consideration in selecting


items to test. The means available to the auditor for selecting items for testing are:
(a) Selecting all items (100% examination);
(b) Selecting specific items; and
(c) Audit sampling.
The application of any one or combination of these means may be appropriate
depending on the particular circumstances, for example, the risks of material
misstatement related to the assertion being tested, and the practicality and efficiency of
the different means.
Selecting All Items
2) The auditor may decide that it will be most appropriate to examine the entire
population of items that make up a class of transactions or account balance (or a
stratum within that population). 100% examination is unlikely in the case of tests of
controls; however, it is more common for tests of details. 100% examination may be
appropriate when, for
example:
The population constitutes a small number of large value items;
There is a significant risk and other means do not provide sufficient appropriate audit
evidence; or
The repetitive nature of a calculation or other process performed automatically by an
information system makes a 100% examination cost effective. Selecting Specific Items
The auditor may decide to select specific items from a population. In making this
decision, factors that may be relevant include the auditors understanding of the entity,
the assessed risks of material misstatement, and the characteristics of the population
being tested. The judgmental selection of specific items is subject to non-sampling risk.

Sufficient Appropriate Audit Evidence


1) Audit evidence is necessary to support the auditors opinion and report. It is
cumulative in nature and is primarily obtained from audit procedures performed during
the course of the audit. It may, however, also include information obtained from other
sources such as previous audits (provided the auditor has determinedwhether changes
have occurred since the previous audit that may affect its relevance to the current
audit)7 or a firms quality control procedures for client acceptance and continuance. In
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addition to other sources inside and outside the entity, the entitys accounting records
are an important source of audit evidence.
Also, information that may be used as audit evidence may have been prepared using
the work of a managements expert. Audit evidence comprises both information that
supports and corroborates managements assertions, and any information that
contradicts such assertions. In addition, in some cases the absence of information (for
example, managements refusal to provide arequested representation) is used by the
auditor, and therefore, also constitutes audit evidence.
2) Most of the auditors work in forming the auditors opinion consists ofobtaining and
evaluating audit evidence. Audit procedures to obtain audit evidence can include
inspection, observation, confirmation, recalculation,reperformance and analytical
procedures, often in some combination, in addition to inquiry. Although inquiry may
provide important audit evidence, and may even produce evidence of a misstatement,
inquiry alone ordinarily does not provide sufficient audit evidence of the absence of a
material misstatement at the assertion level, nor of the operating effectiveness of
controls.
3) As explained in SA 200,reasonable assurance is obtained when the auditor has
obtained sufficient appropriate audit evidence to reduce audit risk (i.e., the risk that the
auditor expresses an inappropriate opinion when the financial statements are materially
misstated) to an acceptably low level.
4)The sufficiency and appropriateness of audit evidence are interrelated. Sufficiency is
the measure of the quantity of audit evidence. The quantity of audit evidence needed is
affected by the auditors assessment of the risks of misstatement (the higher the
assessed risks, the more audit evidence is likely to be required) and also by the quality
of such audit evidence (the higher thequality, the less may be required). Obtaining more
audit evidence, however, maynot compensate for its poor quality..

Sources of Audit Evidence


1)Some audit evidence is obtained by performing audit procedures to test the
accounting records, for example, through analysis and review, reperforming procedures
followed in the financial reporting process, and reconciling related types and
applications of the same information. Through the performance of such audit
procedures, the auditor may determine that the accounting records are internally
consistent and agree to the financial statements.

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2) More assurance is ordinarily obtained from consistent audit evidence obtained from
different sources or of a different nature than from items of audit evidence considered
individually. For example, corroborating information obtained from a source independent
of the entity may increase the assurance the auditor obtains from audit evidence that is
generated internally, such as evidence existing within the accounting records, minutes
of meetings, or a managementrepresentation.
3) Information from sources independent of the entity that the auditor may use as audit
evidence may include confirmations from third parties, analysts reports, and
comparable data about competitors (benchmarking data).

Conclusion
Auditor for the purpose of performing audit and forming reasonable conclusion on the
financial statement obtains audit evidence, which thus supports his conclusive opinion.

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INDEX

Sr.No

Name of Topic

Page No

Introduction an Overview of Auditing

1
23

Origin and Evaluation

Reason for Issuing SA -500

3-4

Auditing Standard 500

5-6

Sufficient Appropriate Audit Evidence

6-8

Use of Audit Evidence

9-10

Audit Procedure for Obtaining Evidence

11-12

Inspection of Records and Documents

13-14

Confirmation

15

10

Compliance with Auditing Standard

16

11

Compliance and Substantive Procedures

17

12

Use of Auditing Standard

18

13

Requirements

19

14

Sources of Audit Evidence

20-22

15

Conclusion

16

Wipro Audit Report

23

24