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ISA 500 Audit Evidence

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Introduction
The purpose of this International Standard on Auditing (ISA) is to establish for provide guidance on what constitutes audit evidence in an audit of financial statements, the quantity and quality of audit evidence to be obtained.
The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.

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Definition

Audit evidence is evidence obtained during a financial audit and recorded in the audit working papers.

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Objective

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 bas the auditors opinion.

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Scope
This International Standard on Auditing (ISA) explains what constitutes audit evidence in an audit of financial statements, and deals with the auditors responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditors opinion.

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Reliability of audit evidence.

It depends on source, where held and type. More reliable- documentary evidence, external evidence, self generated by auditor, external sources evidence, documentary created by 3rd parties and held by auditor. Less reliable- oral evidence, internally generated, entity records, documentary evidence created and held by the client.

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To comply with the above the auditor will need to carry out 2 kinds of test.
TEST OF CONTROLS- which are test performed to obtain audit evidence about the suitability of design and effective operation of accounting and internal control systems. Theses are done prior to during the planning stage of the audit.

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To comply with the above the auditor will need to carry out 2 kinds of test.
SUBSTANTIVE- procedures which are tests performed to obtain audit evidence to detect material misstatements in the financial statement and are of two types:
TEST OF DETAILS OF TRANSACTIONS AND BALANCES.

ANALYTICAL REVIEWS.

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Types of Audit Procedure

Risk Assessment- To obtain the understanding of an entity and check the risky area. Internal Control- the auditor is required to perform tests of controls to obtain audit evidence about their operating effectiveness. Substantive Procedurewhen substantive procedures alone do not provide sufficient appropriate audit evidence.

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Ways of obtaining audit evidence

1. INSPECTION
INSPECTION CONSISTS OF EXAMINING RECORDS, DOCUMENTS OR TANGIBLE ASSETS. THREE MAJOR CATEGORIES OF DOCUMENTARY AUDIT EVIDENCE:
DOCUMENTARY AUDIT EVIDENCE CREATED AND HELD BY 3RD PARTIES LOAN CONTRACTS, LEASES, DEBENTURES, BANK STATEMENTS.

DOCUMENTARY EVIDENCE CREATED BY 3RD PARTIES AND HELD BY ENTITIES SUPPLIERS INVOICES
DOCUMENTARY EVIDENCE CREATED AND HELD BY ENTITY EG. PAID CHEQUES.

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Ways of obtaining audit evidence

2. OBSERVATION
THIS CONSISTS OF LOOKING AT A PROCESS OR PROCEDURE BEING PERFORMED BY THE CLIENTS EMPLOYEES. E.g.: OBSERVING THE COUNTING OF THE CLIENTS INVENTORY AT YEAR END.

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Ways of obtaining audit evidence

3. INQUIRY AND REPRESENTATION
INQUIRY IS THE SEEKING OF INFORMATION OF KNOWLEDGEABLE PERSONS INSIDE OR OUTSIDE THE ENTITY. INQUIRY INCLUDES FORMAL INQUIRIES OR INFORMAL, ORAL INQUIRIES.

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Ways of obtaining audit evidence

4. CONFIRMATION
CONFIRMATION CONSISTS OF A RESPONSE TO AN ENQUIRY TO CORROBORATE INFORMATION CONTAINED IN THE ACCOUNTING RECORDS. EG: AUDITOR NORMALLY REQUEST DIRECT CONFIRMATION OF ACCOUNTS RECEIVABLE.

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Ways of obtaining audit evidence

5. COMPUTATION
THE CHECKING OF THE ARITHMETICAL ACCURACY OF SOURCE DOCUMENTS AND ACCOUNTING RECORDS OR THE PERFORMING OF INDEPENDENT CALCULATIONS.

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Ways of obtaining audit evidence

6. ANALYTICAL REVIEW
ANALYTICAL PROCEDURES CONSIST OF THE ANALYSIS OF SIGNIFICANT RATIOS AND TRENDS INCLUDING THE RESULTING INVESTIGATION OF FLUCTUATIONS AND RELATIONSHIPS THAT ARE INCONSISTENT WITH OTHER RELEVANT INFORMATION OR DEVIATE FROM PREDICTED AMOUNTS.

RATIOS ARE USED TO ANALISE MAJOR AREAS OF THE FINANCIAL STATEMENTS AND THE RESULT ARE EVALUATED FOR REASONABLENESS AND DIVERGENCE FROM EXPECTED TRENDS.

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Ways of obtaining audit evidence

7. QUANTITY OF EVIDENCE

THE QUANTITY OF THE EVIDENCE IS DETERMINED BY THE ASSESSMENT OF RISK. THE GREATER THE RISK THE MORE AUDIT EVIDENCE IS REQUIRED.
IF YOUR ASSESSMENT OF THE ACCOUNTING PROCEDURE AND INTERNAL CONTROL SYSTEMS INDICATE THAT CONTROL RISK IS HIGH, THIS WOULD REQUIRE THE AUDITOR TO GATHER ENOUGH EVIDENCE TO SUPPORT HIS OPINION. EG: INACCURACIES IN COMPUTATION OF PAYROLL/UNAUTHORISED OVERTIME. BUSINESS WHERE THERE IS STIFF COMPETITION.EG. SALES PERSONS ARE PAID COMMISSION BASED ON SALES VOLUME.

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Ways of obtaining audit evidence

8. MATERIALITY OF ITEMS BEING TESTED:
ITEMS THAT ARE MATERIAL IN THE FINANCIAL STATEMENT , INDIVIDUALLY OR AGGREGATED REQUIRE THE AUDITOR TO GATHER ENOUGH EVIDENCE TO SUPPORT HIS OPINION.

EXPERIENCE GAINED IN PREVIOUS AUDIT.

RESULTS OF AUDIT PROCESS FRAUD, MATERIAL ERROR FOUND.

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REALIABILITY OF EVIDENCE
Audit evidence is more reliable when it is obtained from sources independent of the entity Audit evidence is generated internally are more reliable if the system of internal control is effective Audit evidence is obtained directly to auditor

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ASSERTIONS
Existence-All the assets ,liabilities , owner equity , events and activities has exist in the balance sheet or not

Classification-Transactions and events have been recorded and classified in the proper accounts.

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ASSERTIONS
Occurrence-Disclosed events, transactions, and other matters have occurred and pertain to the entity.

Completeness-All disclosures that should have been included in the financial statements have been completed.

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ASSERTIONS

Valuation-It is ascertaining that as asset or liability is recorded at appropriate carrying value or not . The valuation is linked with the accuracy.

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ASSERTIONS

Cutoff-Transactions and events have been recorded in the correct accounting period.

Rights and obligations-All the assets are the rights and liabilities is the obligation

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ASSERTIONS

Accuracy and valuation-Financial and other information are disclosed fairly at appropriate time.