Chapter

After studying this chapter, you should be able to:

1. Understand the need to evaluate audit evidence gathered to
support the conclusions for the auditor's report.
2. Know how to evaluate audit evidence for sufficiency and
appropriateness.
3. Explain what factors should be considered in evaluating the
sufficiency and appropriateness of the audit evidence
gathered.
 507 Chapter 19

CHAPTER 19
AUDIT EVIDENCE EVALUATION
INTRODUCTION

Each audit is unique, but the approach to all audits is essentially the same.
Management makes assertions in financial statements about the existence,
completeness. rights or obligations, valuation and presentation of financial data.
Those assertions are examined during an audit. The strength of an audit depends on
the relevance and reliability of the evidence gathered. Relevance is determined by
the assertions tested; that is, some evidence will be relevant to an existence assertion
but only tangentially relevant to a valuation assertion. Reliability relates to the
quality of the evidence gathered and is affected by the independence of the evidence
from the influence of the-client or by the quality of the client's overall control
structure. The auditor uses the risk assessments to assist in determining the potential
reliance on internally generated audit evidence. An effective audit combines relevant
and persuasive audit evidence to provide reasonable assurance that the financial
statements are free of material misstatement when the auditor renders an opinion on
the financial statements. It is also important to perform each audit as efficiently as
possible without jeopardizing quality. Determining the sufficiency and
appropriateness of evidence is a matter of professional judgment.

After the planned audit procedures have been performed an evaluation of the
results will take place. This will include a review of the audit documentation and
discussion with the engagement team and any changes to the audit plans as a
result of the procedures performed.

The auditor should be satisfied that sufficient appropriate audit evidence has been
obtained to support the conclusions reached for the auditor's report to be issued.

Auditors should evaluate with professional skepticism the evidence obtained in

relation to their accumulated knowledge of the client and the industries in which it
operates. Professional skepticism is especially important when management is
pressured for results and is also called for when the financial statements before
they are audited show unusually favorable results.
EVALUATING TIIF, SUFFICIENCY AND APPROPRIATENESS
OF AUDIT EVIDENCE
 An audit or financial statetnents is a cumulative and iterative process. As the
auditor performs planned audit procedures, the audit evidence obtained may
cause the auditor to modify the nature, timing, or extent of other planned audit
procedures. Information tnay come to the auditor's attention that differs
significantly from the information on which the risk assessment was based. For
example:

• The extent of misstatelnents that the auditor detects by performing

substantive procedures may alter the auditor's judginent about the risk
assessments and may indicate a material weakness in internal control.

• The auditor may become aware of discrepancies in accounting records, or

conflicting or missing evidence.

• Analytical procedures performed at the overall review stage of the audit

may indicate a previously unrecognized risk of material misstatement.

In such circumstances, the auditor tuay need to reevaluate the planned audit
procedures, based on the revised consideration of assessed risks for all or some of

the classes of transactions, account balances, or disclosures and related

assertions.

The auditor cannot assume that an instance or fraud or error is an isolated

occurrence. Therefore, the consideration of how the detection of a misstatement

• affects the assessed risks of material misstatement is important in

determining whether the assessment remains appropriate.

The auditor's judgment as to what constitutes sufficient appropriate audit

evidence is influenced by such factors as the following:

Significance of the potential misstatelnent in the assertion and the likelihood

of its having a material effect, individually or aggregated with other
potential misstatements, on the financial statements.
 509 Chapter 19

• Effectiveness of management's responses and controls to address the

risks.
Experience gained during previous audits with respect to similar potential
misstatements.

Results of audit procedures performed, including whether such audit

procedures identified specific instances of fraud or error.
 Evidence Evaluation 510
A udit

• Source and reliability of the available information.

• Persuasiveness of the audit evidence.

• Understanding of the entity and its environment, including the entity's

internal control.

The evaluation of the audit evidence obtained would address the following matters.

Materiality
The auditor shall assess whether the amounts established for overall and
performance materiality are still appropriate in the context of the entity's
actual financial results. If a lower materiality than that initially set is
appropriate. the auditor is required to determine:

• Whether it is necessary to revise performance materiality; and

• Whether the nature, timing and extent of the further audit procedures
remain appropriate.

2. Risks
The auditor shall determine whether in the light of the audit findings the
assessed risks of material misstatement at the assertion level is still
appropriate. If not, the risk assessments would be revised and further
planned audit procedures modified.

3. Misstatements
The auditor shall determine the effect on the audit of identified
misstatements and whether there is a need to perform additional audit
procedures. Revisions to the audit strategy and detailed audit plans may be
required when:

• The nature or circumstances of identified misstatements indicate that

other misstatement(s) may exist that, when aggregated with known
misstatements, could exceed performance materiality; or
 511 Chapter 19
• The aggregate of identified and uncorrected misstatements comes close
to or exceeds performance materiality.
4. Fraud
The auditor through the performance of analytical procedures shall assess
whether previously unrecognized risks of material misstatement due to
fraud are present. Also, he/she shall determine whether the identified
misstatements are indicatives of fraud.

5. Evidence
The auditor shall determine whether sufficient appropriate evidence has •
been obtained to reduce the risks of material misstatement in the financial
statements to an acceptably low level. He/she shall consider whether there is
a need for further procedures to be performed.

6. Analytical Procedures
The auditor shall assess whether the analytical procedures performed at the
final review stage of the audit:

• Corroborate the audit findings; or

• Identify previously unrecognized risks of material misstatement.

FACTORS TO CONSIDER

The following factors shall be considered in evaluating the sufficiency and

appropriateness audit evidence:

(a) Materiality ofmisstatements

Is a misstatement in the assertion being addressed significant, and what is
the likelihood of it having a materially affect (individually or combined
with other potential misstatements) on the financial statements?

(b) Management responses

Is management responsive to audit findings, and how effective is the internal

control in addressing risk factors?
 Evidence Evaluation 512
(c) Quality ofinformation
Are the sources of available information reliable and appropriate for
supporting the audit conclusions?

(d) Persuasiveness
Is the audit evidence persuasive or convincing?

(e) Previous experience

What has been the previous experience in performing similar procedures, and
were any misstatements identified?

C) Results ofperformed auditprocedures

Do the results of performed audit procedures support the objectives, and is
there any indication of fraud or error?

(g) Understanding the entity

Do the evidences obtained support or contradict the results of the risk
assessment procedures (which were performed to obtain an understanding of the
entity and its environment, including internal control)?

FINAL ANALYTICAL PROCEDURES

Analytical procedures help auditors assess the overall presentation of the financial
statements. Auditing standards require the use of analytical procedures in both the
planning phase and the final review phase of the audit to assist in identifying
account relationships that are unusual. At the conclusion of the audit, the audit team
analyzes the data from an overall business perspective. The reviewers are not only
looking at the trends and ratios but are asking hard

questions about whether the company's results make sense in relationship to industry
and economic trends.

Analytical procedures are carried out to:

Identify a previously unrecognized risk of material misstatement;
 513 Chapter 19
Ensure that the conclusions formed during the audit on individual
components or elements of the financial statements can be corroborated; and
Assist in arriving at the overall conclusion it's to the reasonableness of the
financial statements.

DOCUMENTATION

The final step in the evaluation process is to record all the significant findings or,
issues in an engagement completion document. This document may include all
information necessary to understand the significant findings or issues, as well as
cross-references, as appropriate to other available supporting audit documentation.

This document would also include conclusions about information the auditor has
identified relating to significant matters that are inconsistent with or contradict the
auditor's final conclusions.

PSA 260, "Comnnmication with Those Charged with Governance" requires that the
auditor shall communicate on a timely basis with those charged with governance the
responsibilities of the auditor in relation to the financial statement audit, including
that:

(a) The auditor is responsible for forming and expressing an opinion of the
financial statements that have been prepared by management with the
oversight of those charged with governance; and

(b) The audit of the financial statements does not relieve management or those
charged with governance of their responsibilities.

Figüre 19-1 shows an example of a letter sent to management and those charged with
governance.
Audit

Figure 19-1 Illustrative Communication of Audit Matters of Governance

Interest
 Evidence Evaluation 514
Valdez & co., CPAs
Ayala Avenue, Makati City
March 15. 20X3

Mr. Cesar Manalo, Managing Director

Metro Express, Inc.
Tandang Sara, Quezon City
(02) 875-0316

Dear Mr. Manalo:

The matters raised In this report arise from our financial statement audit and relate to
matters that we believe need to be brought to your attention.

We have substantially completed our audit of Metro Express' financial statements in

accordance with professional standards. We expect to release our audit report dated
March 20, 20X3 as soon as we obtain the signed letter or representation.

Oui audit performed to obtain reasonable assurance whether the financial statements
are free from material misstatements. Absolute assurance is not possible due to the
inherent limitations of an audit and of internal control, resulting in the unavoidable
risk that some material misstatements may not be detected.

In planning our audit, we consider intemal control over financial reporting to

determine the nature extent, and timing of audit procedures. However a financial
statement audit does not provide assurance on the effective operation of intemal
control at Metro Express, Inc. However, it in the course of our audit, certain
deficiencies in intemal control come to our attention these will be reported to you.

Because fraud is deliberate. there are always risks that material misstatements, fraud,
and other illegal acts may exist and not be detected by our audit of the financial
statements.
515 Chapter 19
 Evidence Evaluation 516
The following is a summary of findings resuEng from be performanæ of be audit
1. We did not identify any material matters (other be idenffed
already discussed wti pu have now been corrected) tzt
need b brough
to your attention.
2. We received good cooperation from management and employees duff-g audit.
To the best of our knowledge, ve also had complete aces b tt•e accounting
records and oher documents frat needed in order to carj cur audit. We did not
have any disagreements wiå management we have resolved all auditing,
accountng disclosure Issues to our saisfacton-

We would also like to draw the matters to your attention:

1. Changes during the period in professional pronouncemenS.

2. %ermatters identified that may be of interest to manqement
Please note that the Philippine Auditing Standards do not require us to des&n
procedures for the purpose of dentifying supplementary matters to communicate with
t'.ose charged wifr govemance. Accordingly, an audit would not usually identty dl such
mates-

This communication is prepared solely for the information of mar*ment a-rd is not intended
for any other purpose. We æcept no responsiblTty to a t"ird party who uses communication.

Yours truly,

Alvin Monico
Valdez& co., CPAs

REVIEW QUESTIONS
Questions

. In the final stage of the risk-based audit process, how shall the engagement
partner or sole practitioner know that sufficient appropriate audit evidence has
been obtained to support the conclusions reached for the auditor's report to be
issued.
 517 Chapter 19
2. Explain briefly the relevance of the following areas in connection.with the
final evalåation of the audit evidence obtained:
(a) Materiality
(b) Risk
(c) Misstatements
(d) Fraud
(e) Evidence
(f) Analytical Procedures
3. In what instances will the auditor be required to revise the audit strategy and
detailed audit plans.

4. Give and explain briefly at least 8 sources of misstatements of financial

statements items.

5. Give and explain at least 8 factors to consider in evaluating the

sufficiency and appropriateness of audit evidence.

6. Give examples of audit matters that should be.communicated by the

auditor to those charged with governance.