Professional Documents
Culture Documents
Audit Evidence PDF
Audit Evidence PDF
UNIVERSITY OF MUMBAI
FOR
YEAR: 2014-15
SVKMS
NARSEE MONJEE COLLEGE OF COMMERCE &ECONOMICS
VILE PARLE (W), MUMBAI 400056.
EVALUATION CERTIFICATE
This is to certify that the undersigned have assessed and evaluated the project on
SA 230 : AUDIT DOCUMENTATION & SA 500: AUDIT EVIDENCE
submitted by student of M.Com. Part II (Semester IV) In ADVANCE
ACCOUNTANCY for the academic year 2014-15. This project is original to the
best of our knowledge and has been accepted for Internal Assessment.
Name & Signature of Internal Examiner
Name & Signature of External Examiner
PRINCIPAL
Shri Sunil B. Mantri
Place: MUMBAI
Date:
Name & Signature of Student:
Name: SOUMEET SARKAR
Signature:
3
ACKNOWLEDGEMENT
It is indeed a great pleasure and proud privilege to present this project work.
I thank my project guide Prof. Prakash Degadwala & my M.Com. Coordinator Prof. Hardik Pathak of
THANK YOU
CONTENT
Sr. No.
PARTICULARS
Page No.
INTRODUCTION
11
18
CONCLUSION
28
BIBLIOGRAPHY
30
INTRODUCTION
The word audit is derived from the Latin word audire which means to hear. It is an important
tool of management. It is concerned with making an analytical and critical analysis of the books
of accounts, checking and verification of evidence in support of entries appearing in the books of
accounts, and ascertaining the authenticity of the financial statements. It is also concerned with
the examination of accounting data to determine the extent of an audit examination is too made
on the basis of evidential document such as invoice, money receipts and other records by the
authorized representative of the client. Auditor has used to send for the accountants and
hear whatever they had to say in connection with the accounts. The auditor has to look into the
facts behind figures and he must certify their accuracy. Auditing is to ascertain the balance sheet
and profit and loss account that they show a true and fair view of the financial state of affairs of a
concern. The Institute of Charted Accountants of India has issued a number of statements of
standard auditing practices and accounting standards for guidance of Auditor of India.
DEFINITION of AUDITING
According to DICKSEE, An audit may be said to be such an examination of the books,
accounts and vouchers of a business, as will enable the auditor to satisfy himself that the balance
sheet is properly drawn up, so as to exhibit a true and fair value of the state of the affairs of the
business, whether the profit and loss account gives a true and fair value of the profit and loss for
the financial year. According to the best of his information and explanations given to him and as
shown by the books, and if not, in what respect he is not satisfy.
ORIGIN of AUDITING
Auditing has its origin in the necessity in the development of some system to put a check on the
persons whose duties were to record receipts and disbursements of money on the behalf of
owners. In the ancient days auditing was confined to public accounts only. With the development
of trade and commerce, the need for recording transactions was felt by businessman. This had
necessitated the development of some system of check upon the persons who recorded such
transactions on the behalf of businessman.The audit in its present shape is the result of largescale production inconsequence of Industrial Revolution during the 18th Century. With the
6
development of banking facilities, communication and transport means, the concept of corporate
management
has taken birth. It necessitated the investors to know whether their investment
is
safe or not. Shareholders need an independent person having expert knowledge of accounts
to report on the working of the company and truthfulness of the profit or loss and financial
position disclosed by the management.
As the trade and commerce grew extensively globally, the involvement of public money therein
also increased manifolds. This in turn created a demand from the investors to have the accounts
of the business ventures examined by a person independent of the owners and management of
the business to ensure that they were correct and reliable. Such a demand laid down the
foundation for the profession of auditing. The extent of reliance placed by the public on the
auditors has increased so much with time that it is, unreasonably of course, felt by the public that
nothing can go wrong with an organisation which has been audited. Though the fact that an audit
has been carried out is not a guarantee as to the future viability of an enterprise, it is extremely
important that the auditors carry out their assignments with utmost professional care and
sincerity, to uphold the faith posed by the public in them.
sincerity. One of the steps is the establishment of the Auditing Practices Committee, or the
Auditing and Assurance Standards Board, as it is now known in September, 1982. One of the
main objectives of the Board is to issue auditing standards. Accordingly, the Board issues
Statements on Standard Auditing Practices and Auditing and assurance Standards under the
authority of the Council.
Engagement Standards issued by the IAASB of the IFAC and three auditing standards are in the
pipeline. A list of the Engagement Standards issued by the IAASB and the auditing standards
issued by the ICAI there against is given as Annexure I. A reconciliation of the Engagement
Standards with the auditing standards issued by the ICAI are given as Annexure II.
Further, the Council of the Institute of Chartered Accountants of India has also approved the
following technical drafts:
Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and
Related Services
Revised Classification and Numbering Pattern of the Auditing and Assurance Standards
4. Examine the documentary evidence to establish the accuracy, authenticity and validity of
transactions recorded.
5. Verifying that a proper distinction is made between capital and revenue items.
6. Verification of the title, existence and valuation of assets appearing in the balance sheet.
7. Examination that the statutory requirements are complied with.
8. Verifications of the liabilities stated in the balance sheet.
9. Comparison of balance sheet and profit and loss account and other statements with
underlying records in order to see that they are in accordance there with.
10. Checking the results shown by the balance sheet and profit and loss account to see
whether the results shown are true and fair.
11. Reporting to the proper person as to what extent, accounts reveal a true and fair view of
the state of affairs and of the profit and loss account of the organization.
FUNCTIONS of AUDITING
Important functions of auditing can be summed up as follows:
10
Assisting members of the engagement team responsible for supervision to direct and
supervise the audit work, and to discharge their review responsibilities in accordance
with SA 2203.
Enabling the conduct of quality control reviews and inspections in accordance with SQC
14.
OBJECTIVE of SA 230
The objective of the auditor is to prepare documentation that provides:1. A sufficient and appropriate record of the basis for the auditors report; and
2. Evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.
11
DEFINITIONS
Audit Documentation:- The record of audit procedures performed, relevant audit evidence
obtained, and conclusions the auditor reached (terms such as working papers or workpapers
are also sometimes used).
Audit File:- One or more folders or other storage media, in physical or electronic form,
containing the records that comprise the audit documentation for a specific engagement.
Experienced Auditor:- An individual (whether internal or external to the firm) who has
practical audit experience, and a reasonable understanding of:i.
Audit processes;
ii.
iii.
iv.
REQUIREMENT
1. The auditor shall prepare audit documentation on a timely basis. Preparing sufficient and
appropriate audit documentation on a timely basis helps to enhance the quality of the
audit and facilitates the effective review and evaluation of the audit evidence obtained
and conclusions reached before the auditors report is finalised. Documentation prepared
after the audit work has been performed is likely to be less accurate than documentation
prepared at the time such work is performed.
2. The auditor shall prepare audit documentation that is sufficient to enable an experienced
auditor, having no previous connection with the audit, to understand:a) The nature, timing, and extent of the audit procedures performed to comply with
the SAs and applicable legal and regulatory requirements;
b) The results of the audit procedures performed, and the audit evidence obtained;
and
c) Significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions.
3. In documenting the nature, timing and extent of audit procedures performed, the auditor
shall record:a) The identifying characteristics of the specific items or matters tested;
12
b) Who performed the audit work and the date such work was completed; and
c) Who reviewed the audit work performed and the date and extent of such review.
4. The auditor shall document discussions of significant matters with management, those
charged with governance, and others, including the nature of the significant matters
discussed and when and with whom the discussions took place.
5. If the auditor identified information that is inconsistent with the auditors final conclusion
regarding a significant matter, the auditor shall document how the auditor addressed the
inconsistency.
6. If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant
requirement in a SA, the auditor shall document how the alternative audit procedures
performed achieve the aim of that requirement, and the reasons for the departure.
7. If, in exceptional circumstances, the auditor performs new or additional audit procedures
or draws new conclusions after the date of the auditors report, the auditor shall
document:a) The circumstances encountered;
b) The new or additional audit procedures performed, audit evidence obtained, and
conclusions reached, and their effect on the auditors report; and
c) When and by whom the resulting changes to audit documentation were made and
reviewed.
8. The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the date of
the auditors report.
9. After the assembly of the final audit file has been completed, the auditor shall not delete
or discard audit documentation of any nature before the end of its retention period.
10. In circumstances other than those envisaged in paragraph 13 where the auditor finds it
necessary to modify existing audit documentation or add new audit documentation after
the assembly of the final audit file has been completed, the auditor shall, regardless of the
nature of the modifications or additions, document:a) The specific reasons for making them; and
b) When and by whom they were made and reviewed.
13
The need to document a conclusion or the basis for a conclusion not readily determinable
from the documentation of the work performed or audit evidence obtained.
Audit programmes.
Analyses.
Issues memoranda.
Checklists.
The auditor may include abstracts or copies of the entitys records (for example, significant and
specific contracts and agreements) as part of audit documentation. Audit documentation,
however, is not a substitute for the entitys accounting records.
The auditor need not include in audit documentation superseded drafts of working papers and
financial statements, notes that reflect incomplete or preliminary thinking, previous copies of
documents corrected for typographical or other errors, and duplicates of documents.
14
Oral explanations by the auditor, on their own, do not represent adequate support for the work
auditor performed or conclusions the auditor reached, but may be used to explain or clarify
information contained in the audit documentation.
The existence of an adequately documented audit plan demonstrates that the auditor has
planned the audit.
The existence of a signed engagement letter in the audit file demonstrates that the auditor
has agreed the terms of the audit engagement with management, or where appropriate,
those charged with governance.
In relation to requirements that apply generally throughout the audit, there may be a
number of ways in which compliance with them may be demonstrated within the audit
file:15
a) For example, there may be no single way in which the auditors professional
skepticism is documented. But the audit documentation may nevertheless provide
evidence of the auditors exercise of professional skepticism in accordance with
SAs. Such evidence may include specific procedures performed to corroborate
managements responses to the auditors inquiries.
b) Similarly, that the engagement partner has taken responsibility for the direction,
supervision and performance of the audit in compliance with the SAs may be
evidenced in a number of ways within the audit documentation. This may include
documentation of the engagement partners timely involvement in aspects of the
audit, such as participation in the team discussion required by SA 315.
DOCUMENTATION
of
SIGNIFICANT
MATTERS
&
RELATED
matters are of particular interest to those responsible for reviewing audit documentation,
including those carrying out subsequent audits, when reviewing matters of continuing
significance.
Some examples of circumstances in which, in accordance with paragraph 8, it is appropriate to
prepare audit documentation relating to the use of professional judgment include, where the
matters and judgments are significant:1. The rationale for the auditors conclusion when a requirement provides that the auditor
shall consider certain information or factors, and that consideration is significant in the
context of the particular engagement.
2. The basis for the auditors conclusion on the reasonableness of areas of subjective
judgments (for example, the reasonableness of significant accounting estimates).
3. The basis for the auditors conclusions about the authenticity of a document when further
investigation (such as making appropriate use of an expert or of confirmation procedures)
is undertaken in response to conditions identified during the audit that caused the auditor
to believe that the document may not be authentic.
The auditor may consider it helpful to prepare and retain as part of the audit documentation a
summary (sometimes known as a completion memorandum) that describes the significant
matters identified during the audit and how they were addressed, or that includes crossreferences to other relevant supporting audit documentation that provides such information. Such
a summary may facilitate effective and efficient reviews and inspections of the audit
documentation, particularly for large and complex audits. Further, the preparation of such a
summary may assist the auditors consideration of the significant matters. It may also help the
auditor to consider whether, in light of the audit procedures performed and conclusions reached,
there is any individual relevant SA objective that the auditor cannot achieve that would prevent
the auditor from achieving the overall objectives of the auditor.
17
OBJECTIVE of SA 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.
DEFINITIONS
For purposes of the SAs, the following terms have the meanings attributed below:Accounting Records:- The records of initial accounting 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
journal entries; and records such as work sheets and spreadsheets supporting cost allocations,
computations, reconciliations and disclosures.
Appropriateness of Audit Evidence:- The measure of the quality of audit evidence; that is, its
relevance and its reliability in providing support for the conclusions on which the auditors
opinion is based.
18
Audit Evidence:- Information used by the auditor in arriving at the conclusions on which the
auditors opinion is based. Audit evidence includes both information contained in the accounting
records underlying the financial statements and other information.
Managements Expert:- An individual or organization possessing expertise in a field other than
accounting or auditing, whose work in that field is used by the entity to assist the entity in
preparing the financial statements.
Sufficiency of Audit Evidence:- The measure of the quantity of audit evidence. The quantity of
the audit evidence needed is affected by the auditors assessment of the risks of material
misstatement and also by the quality of such audit evidence.
REQUIREMENTS
1. Sufficient Appropriate Audit Evidence:- The auditor shall design and perform audit
procedures that are appropriate in the circumstances for the purpose of obtaining
sufficient appropriate audit evidence.
2. Information to be Used as Audit Evidence:- When designing and performing audit
procedures, the auditor shall consider the relevance and reliability of the information to
be used as audit evidence. 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.
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 the information;
and
19
b) Evaluating whether the information is sufficiently precise and detailed for the
auditors purposes.
3. Selecting Items for Testing to Obtain Audit Evidence:- When designing tests of
controls and tests of details, the auditor shall determine means of selecting items for
testing that are effective in meeting the purpose of the audit procedure.
4. Inconsistency in, or Doubts over Reliability of, Audit Evidence:- 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 procedures are
necessary to resolve the matter, and shall consider the effect of the matter, if any, on
other aspects of the audit.
There is a significant risk and other means do not provide sufficient appropriate
audit evidence; or
2. 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. Specific items selected may include:
High value or key items:- The auditor may decide to select specific items within a
population because they are of high value, or exhibit some other characteristic, for
example, items that are suspicious, unusual, particularly risk prone or that have a
history of error.
All items over a certain amount:- The auditor may decide to examine items whose
recorded values exceed a certain amount so as to verify a large proportion of the
total amount of a class of transactions or account balance.
21
Tests of controls, when required by the SAs or when the auditor has chosen to do
so; and
The audit procedures described in paragraphs A14-A25 below may be used as risk assessment
procedures, tests of controls or substantive procedures, depending on the context in which they
are applied by the auditor. As explained in SA 330, audit evidence obtained from previous audits
may, in certain circumstances, provide appropriate audit evidence where the auditor performs
audit procedures to establish its continuing relevance10.
22
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. For example, source documents, such as purchase orders and
invoices, may exist only in electronic form when an entity uses electronic commerce, or may be
discarded after scanning when an entity uses image processing systems to facilitate storage and
reference.
Certain electronic information may not be retrievable after a specified period of time, for
example, if files are changed and if backup files do not exist. Accordingly, the auditor may find
it necessary as a result of an entitys data retention policies to request retention of some
information for the auditors review or to perform audit procedures at a time when the
information is available.
INSPECTION:- Inspection involves examining records or documents, whether internal or
external, in paper form, electronic form, or other media, or a physical examination of an asset.
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 controls over their production. An example of inspection used as a test of
controls is inspection of records 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 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 may accompany the observation of inventory counting.
OBSERVATION:- Observation consists of looking at a process or procedure being performed
by others, for example, the auditors observation of inventory counting by the entitys personnel,
or 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
23
observation takes place, and by the fact that the act of being observed may affect how the process
or procedure is performed. You may refer to SA 501 for further guidance on observation of the
counting of inventory.
EXTERNAL CONFIRMATION:- An external confirmation represents audit evidence
obtained by the auditor as a direct written response to the auditor from a third party (the
confirming party), in paper form, or by electronic or other medium. External confirmation
procedures frequently are relevant when addressing assertions associated with certain account
balances and their elements. However, external confirmations need not be restricted to account
balances only. For example, the auditor may request confirmation of the terms of agreements or
transactions an entity has with third parties; the confirmation request may be designed to ask if
any modifications have been made to the agreement and, if so, what the relevant details are.
External confirmation procedures 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. You may refer to SA 505 for further guidance.
RECALCULATION:- Recalculation consists of checking the mathematical accuracy of
documents or records. Recalculation may be performed manually or electronically.
REPERFORMANCE:- Re-performance involves the auditors independent execution of
procedures or controls that were originally performed as part of the entitys internal control.
ANALYTICAL PROCEDURE:- 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. You may refer to SA 520 for further guidance.
INQUIRY:- Inquiry consists of seeking information of knowledgeable persons, both financial
and non- financial, within the entity or outside the entity. Inquiry is used extensively throughout
the audit in addition to other audit procedures. Inquiries may range from formal written inquiries
to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry
process.
24
Responses to inquiries 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 some cases,
responses to inquiries provide a basis for the auditor to modify or perform additional audit
procedures.
Although corroboration of evidence obtained through inquiry is often of particular importance, in
the case of inquiries 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, managements stated reasons for choosing a particular course of
action, and managements ability to pursue a specific course of action may provide relevant
information to corroborate the evidence obtained through inquiry. In respect of some matters, the
auditor may consider it necessary to obtain written representations from management and, where
appropriate, those charged with governance to confirm responses to oral inquiries. You may refer
to SA 580 for further guidance.
The reliability of audit evidence that is generated internally is increased when the related
controls, including those over its preparation and maintenance, 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, inquiry about the application of a control).
Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles, or documents that have been filmed, digitised or
otherwise transformed into electronic form, the reliability of which may depend on the
controls over their preparation and maintenance.
SA 520 provides further guidance regarding the reliability of data used for purposes of designing
analytical procedures as substantive procedures.SA 240 deals with circumstances where the
auditor has reason to believe that a document may not be authentic, or may have been modified
without that modification having been disclosed to the auditor.
27
CONCLUSION
SQC 1 requires firms to establish policies and procedures for the timely completion of the
assembly of audit files. An appropriate time limit within which to complete the assembly of the
final audit file is ordinarily not more than 60 days after the date of the auditors report. The
completion of the assembly of the final audit file after the date of the auditors report is an
administrative process that does not involve the performance of new audit procedures or the
drawing of new conclusions. Changes may, however, be made to the audit documentation during
the final assembly process if they are administrative in nature. Examples of such changes
include:
Documenting audit evidence that the auditor has obtained discussed and agreed with the
relevant members of the engagement team before the date of the auditors report.
SQC 1 requires firms to establish policies and procedures for the retention of engagement
documentation. The retention period for audit engagements ordinarily is no shorter than seven
years from the date of the auditors report, or, if later, the date of the group auditors report.
Standard on Quality Control (SQC) 1, Quality Control for Firms that Perform Audits and
Reviews of Historical Financial Information, and Other Assurance and Related Services
Engagements, issued by the Institute, provides that, unless otherwise specified by law or
regulation, audit documentation is the property of the auditor. He may at his discretion, make
portions of, or extracts from, audit documentation available to clients, provided such disclosure
does not undermine the validity of the work performed, or, in the case of assurance engagements,
the independence of the auditor or of his personnel.
Obtaining audit evidence from different sources or of a different nature may indicate that an
individual item of audit evidence is not reliable, such as when audit evidence obtained from one
source is inconsistent with that obtained from another. This may be the case when, for example,
responses to inquiries of management, internal audit, and others are inconsistent, or when
responses to inquiries of those charged with governance made to corroborate the responses to
28
inquiries of management are inconsistent with the response by management. SA 230 includes a
specific documentation requirement if the auditor identified information that is inconsistent with
the auditors final conclusion regarding a significant matter.
29
BIBLIOGRAPHY:1. www.icai.org
2. www.google.co.in
3. www.wikipedia.org
4. GUIDANCE NOTES ISSUED by ICAI
30