AUDITING I 2023

CHAPTER FIVE

AUDIT RESPONSIBILITY, OBJECTIVES, EVIDENCE AND RECORDING THE AUDIT

Reading assignment for the following titles since they were discussed in the previous

5.1. Audit Responsibility

5.2. Management Assertions
5.3. Audit Objectives

5.4.AUDIT EVIDENCE

Audit evidence is the information auditors obtain in arriving at the conclusion on which their report is
based. Audit evidence comprises source documents and accounting records underlying the financial
statement assertions and corroborative evidence from other sources.
Auditors should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on
which to base the audit opinion.
Audit evidence can be obtained in many ways, often with a mix of tests of controls and substantive
procedures, although sometimes only substantive procedures will be used along with requires as to the
adequacy of the accounting system as a basis for the preparation of the financial statements.
5.1. Sufficient Appropriate audit evidence
'Sufficiency and appropriateness' are interrelated and apply to both tests of controls and substantive
procedures.
a) Sufficiency is the measure of the quantity of audit evidence.
b) Appropriateness is the measure of quality or reliability of the audit evidence.
Auditors are essentially looking for enough reliable audit evidence. Audit evidence usually indicates what
is probable rather than what is definite (is usually persuasive rather than conclusive) so different sources
are examined by the auditors. However, auditors cannot give absolute but only reasonable assurance that
the financial statements are free from misstatement, so not all sources of evidence are examined.
5.1.1. Sufficiency of Audit Evidence
The auditor’s judgment as to what is sufficient and appropriate evidence is influenced by factors such as
the following.
a) The assessment of the nature and degree of risk of misstatement at both the financial statement
level and the account balance or class of transactions level.
b) The nature of the accounting and internal control system, including the control environment.
c) The materiality of the item being examined.
d) The experience gained during previous audit and the auditors' knowledge of the business and
industry.

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e) The results of audit procedures, and from any audit works carried out in the course of preparing
the financial statements, including indications of fraud or error.
f) The source and reliability of information available.
If they are unable to obtain sufficient appropriate audit evidence, the auditors should consider the
implications for their report.
Tests of Control
In seeking to obtain audit evidence from tests of control, auditors should consider the sufficiency and
appropriateness of the audit evidence to support the assessed level of controls risk.
There are two aspects of the relevant parts of the accounting and internal control systems about which
auditor should seek to obtain audit evidence.
a) Design: the accounting and internal control systems are capable of preventing or detecting
material misstatements.
b) Operation: The system exists and has operated effectively throughout the relevant period.
Substantive Procedures
In seeking to obtain audit evidence from substantive procedures, auditors should consider the extent to
which that evidence together with any evidence from test of control supports the relevant financial
statement assertions.
Substantive procedures are designed to support the financial statement assertions.
Financial statement assertions are the representations of the directors that are embodied in the financial
statements. By approving the financial statements, the directors are making representations about the
information therein. These representatives or assertions may be described in general terms in a number of
ways, one of which is as follows.
- Existence: an asset or liability exists at a given date
- Right and obligations: an asset or liability pertains to the entity at a given date
- Occurrence: a transaction or event took place which pertains to the entity during the relevant period
- Completeness: there are no unrecorded assets, liabilities, transactions or events or undisclosed items
- Valuation: an asset or liability is recorded at an appropriate value.
- Measurement: a transaction is recorded in the proper amount and revenue or expense is allocated to
the proper period.
- Presentation and disclosure: an item is disclosed, classified and described in accordance with the
applicable reporting framework. (eg. Relevant legislation and applicable accounting standards).
- Audit evidence: is usually obtained to support each financial statement assertion and evidence from
one does not compensate for failure to obtain evidence for another. However, tests may provide audit
evidence of more than one assertion.

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- Where tests of control provide satisfactory evidence as to the effectiveness of accounting and internal
control system, the extent of relevant substantive procedures may be reduced, but not entirely
eliminated. Substantive procedures may also be incorporated within other procedures such as test of
control.
5.1.2 Reliability of Evidence
The reliability of audit evidence is influenced by its source (internal or external) and by its nature (visual,
documentary or oral). The following generations may help in assessing that reliability.
a) Audit evidence from external sources (e.g., confirmation received from a third party) is more
reliable than that obtained from the entity's records.
b) Audit evidence obtained from the entity's records is more reliable when the related accounting and
internal control system operates effectively.'
c) Evidence obtained directly by auditors is more reliable than that obtained by or from the entity.
d) Evidence in the form of documents and written representations is more reliable than oral
representations.
e) Original documents are more reliable than photocopies, telexes or facsimiles.
Consistency of audit evidence from different sources will have a corroborating effect, making the
evidence more persuasive. Where such evidence is inconsistent, the auditors must determine what
additional procedures are necessary to resolve the inconsistency.
Auditors must consider the cost-benefit relationship of obtaining evidence but any difficulty or expense is
not in self a valid basis for omitting a necessary procedure.
5.2. Procedures of Obtaining Audit Evidence
Auditors obtain evidence by one or more of the following procedures.
a) Inspection
b) Observation
c) Enquire and confirmation
d) Computation
e) Analytical procedures
a) Inspection
Inspection of records and documents involves inspecting documents, which demonstrate that a
transaction has occurred or is valid, or a balance exists. It may also involve comparing documents to
see that the information contained in both is consistent.
Inspection is an important test of control in that it can be used to test whether documents such as
invoices have been properly authorized. It can also highlight whether a transaction in the accounting

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records does not relate to the client, for example a transaction supported by an invoices which is not
addressed to the client.
The reliability of audit evidences obtained by inspection of records and documents varies according to
the nature/source and effectiveness of internal control over their processing.
Three major categories of documentary evidence exist, given here in descending degrees of reliability
as audit evidence.
i) created and provided to auditors by third parties
ii) created by third parties and held by the entity
iii) created and held by the entity
Inspecting of tangible assets provides reliable audit evidence about their existence but not necessary
as to their ownership or value. (The assets' appearance may indicate they are obsolete, but more work
will be required to confirm exact valuation).
b) Observation
Observation involves looking at a procedure being performed. Examples of observation are attendance
at the stock taker or at the opening of post.
In some ways observation gives limited assurance since it only provides evidence of how the
procedure was performed when the auditor was watching client staff may have been on their best
behavior on that occasion and be less conscientious of other items.
c) Enquires and Confirmation
Enquiries involve seeking information from the client's staff or external sources. Enquiries may range
from formal written ones to third parties to oral ones to person inside the entity response may provide
auditors with.
i) information not previously possessed; or
ii) corroborative audit evidence
The strength of the evidence depends on the knowledge and integrity of the source.
Confirmation aim to verity what is shown in the client's accounting records. Examples of
confirmations include direct confirmation of debts by debtors of the clients or bank balances by the
entity's bank.
d) Computation
Computations involve the auditor checking the arithmetic of the client's records or carrying out other
relevant calculations. Examples of computations include the adding up of bank reconciliation or
ledger accounts.
e) Analytical Procedures
Analytical procedures are the analysis of relationships.

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i) between items of financial data, or between items of financial and non-financial data, deriving
from the same period; or
ii) Between comparable information deriving from different periods to identify consistencies and
predicted patterns or significant fluctuations and unexpected relationships, and the results of
investigation thereof.
5.3 Evidence about Accounting Estimates
The auditors must be especially careful in considering financial statement accounts that are affected by
estimates made by management (often referred to accounting estimates) particularly those for which a
wide range of accounting methods are considered acceptable. Examples of accounting estimates include
allowances for loan losses and obsolete inventory, and estimates of warranty liabilities. Making
accounting estimates is management's responsibility, and such estimates are generally more susceptible to
material misstatement than financial statement amounts, which are more certain in amount. Standard of
auditing requires the auditors to determine that
a) all necessary estimates have been developed
b) the accounting estimates are reasonable, and
c) The accounting estimates are properly accounted for and disclosed.
Determining whether all necessary estimates have been developed and accounted for properly requires
knowledge of the client's business and the applicable generally accepted accounting principles. When
evaluating the reasonableness of accounting estimates, the auditors may use one or more of the following
three basic approaches:
1. Reviewing and testing management's process of developing the estimates – this will often involve
evaluating the reasonableness of the steps performed by management.
2. Independently developing an estimate of the amount to compare to management's estimate.
3. Reviewing subsequent events or transactions bearing on the estimate, such as actual payments of an
estimated amount made subsequent to year-end.
5.4 DOCUMENTING THE AUDIT PROCESS
All audit work must be documented; the working papers are the tangible evidence of the work done in
support of the audit opinion. Auditor should document in their working papers matters, which are
important in supporting their report.
Working papers are the material the auditors prepare or obtain, and retain in connection with the
performance of the audit. Working papers may be in the form of data stored on paper, firm, electronic
media or other media.

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Working papers support, amongst other things, the statement in the auditors' report as to the auditors'
compliance or otherwise with auditing standards to the extent that this is important in supporting their
report.

Working papers are a record of

a) the planning and performance of the audit
b) the supervision and review of the audit work; and
c) The audit evidence resulting from the audit work performed which the auditors consider necessary
and on which they have relied to support their report.

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