11 Audit Evidence

Agenda
What constitutes audit evidence Auditors 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

Audit Evidence

ISA 500: AUDIT EVIDENCE

Audit Evidence
All the information used by the auditor in arriving at the conclusions on which the audit opinion is based.
Financial Statements

Audit Opinion

Management Assertions

Audit Evidence

Audit Procedures

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 auditors 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

Appropriate

Quantity

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 managements expert, the auditor shall, to the extent necessary, having regard to the significance of that experts work for the auditors 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 experts 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 Inspection of tangible assets Re-performance Recalculation Inspection of records and documents Scanning Confirmation Analytical procedures Observation Inquiry

High

Medium

Low

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.

Audit Evidence

ISA 501: AUDIT EVIDENCE SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS

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 managements instructions and procedures for recording and controlling the results of the entitys physical inventory counting; Observe the performance of managements count procedures; Inspect the inventory; and Perform test counts; and

Performing audit procedures over the entitys 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.

Audit Evidence

ISA 505: EXTERNAL CONFIRMATION

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)

Managements Refusal
If management refuses to allow the auditor to send a confirmation request, the auditor shall:
Inquire as to managements reasons for the refusal, and seek audit evidence as to their validity and reasonableness; Evaluate the implications of managements refusal on the auditors 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 managements 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 auditors 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