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Audit Evidence

Audit evidence
 information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based
(support for the auditor’s opinion)

 This includes both information contained in:

a. Accounting records – records of initial accounting entries and supporting records, such as checks
and records of electronic fund transfers; invoices; contracts; general and subsidiary ledgers,
journal entries, and other adjustments not reflected in journal entries; worksheets and
spreadsheets supporting cost allocations, computations, reconciliations and disclosures.

b. Other information

 Comprises both information that supports/corroborates managements assertions and any that
contradicts such assertions.

 Absence of information (such as management’s refusal to provide requested representation) also

constitutes evidence.

 Audit procedures to obtain evidence include inspection, observation, confirmation, recalculation,

reperformance, analytical procedures, inquiry.

 Inquiry alone does not provide sufficient evidence of the absence of material misstatement
(substantive tests) nor of the operating effectiveness of controls (tests of controls).

 Evidence is gathered throughout the audit when performing:

1. Risk assessment procedures
2. Tests of controls
3. Substantive procedures
4. Other procedures

 Reasonable basis for opinion

o Auditor obtains persuasive not conclusive evidence
o While cost-benefit relationship may be a valid reason for performing only certain procedures,
cost alone or difficulty in obtaining evidence is not a valid basis for omitting procedure for
which there is no appropriate alternative.

Reasonable assurance

 Obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk to an
acceptably low level.

Sufficient Appropriate Evidence

Sufficiency of evidence
 measure of its quantity.
 Affected by the assessment of RMM (the higher the assessed RMM, the more evidence is likely to be
required) and by the quality of such evidence (the higher the quality, the less may be required).
 Obtaining more evidence, however, may not compensate for its poor quality.

Appropriateness of evidence
 measure of its quality (relevance and reliability)
 Relevance
o Logical connection with, or bearing upon, the purpose of the audit procedure and the
assertion under consideration.

o An evidence is relevant if it relates to the objective of the procedure or to the assertion being
tested.
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o Evidence must relate to the financial statement assertion under consideration:

Transactions and Events Balances

Occurrence Existence
Completeness Rights and obligations
Accuracy Completeness
Cut-off Accuracy, valuation and allocation
Classification Classification
Presentation Presentation

o Relevance is affected by the direction of testing.

Risk Accounts likely Assertions Direction of testing

affected (procedure)
Overstatement Revenue, assets Existence/ Vouch from records to support
occurrence
Understatement Expenses, Completeness Trace from support to records
liabilities

 Reliability
o Influenced by its source, its nature and on the individual circumstance under which it was
obtained.

o Generalizations about reliability of evidence:

a. Reliability is increased when it is obtained from independent sources outside the entity.
b. Reliability of evidence generated internally is increased when related controls are
effective.
c. Evidence obtained by the auditor directly is more reliable than that obtained indirectly or
by inference.
d. Evidence in documentary form (paper, electronic or other medium) is more reliable than
that obtained orally.
e. Original documents are more reliable than photocopies or facsimiles, or documents that
have been filmed, digitized or otherwise transformed into electronic form.

o Audit evidence obtained from different sources or of a different nature that are found to be
inconsistent may indicate that the evidence is not reliable.

o Hierarchy of reliability of evidence:

1. Direct personal knowledge
2. External evidence
3. External-internal evidence
4. Internal evidence
5. Oral

Audit procedures

1. Inspection
 examining records or documents, internal or external, paper or electronic or other media, or physical
examination of assets.
 Inspection of documents or tangible assets may provide evidence as to existence but not necessarily
rights and obligations or valuation.

2. Observation
 Looking at a process or procedure being performed by others
 Provides evidence about the performance of process but is limited to the point in time at which the
observation took place, and by the fact that the act of being observed may affect how the process is
performed.
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3. External confirmation
 Direct written response to the auditor from a third party (confirming party) in paper, electronic or other
form.
 Relevant when addressing assertions about account balances and their elements but need not be
restricted to account balances only. Auditor may also request confirmation of agreements or
transactions.

4. Recalculations
 Checking the mathematical accuracy of documents or records. May be manually or electronically.

5. Reperformance
 Auditor’s independent execution of procedures or controls that were originally performed as part of the
entity’s internal control.

6. Inquiry
 Seeking information of knowledgeable persons, financial and nonfinancial, within or outside the entity,
formal written or informal oral.

7. Analytical procedures
 Evaluations of financial information made by a study of plausible relationships of financial and
nonfinancial data.
 Investigation of identified fluctuations and relationships inconsistent with other relevant information or
deviate significantly from predicted amounts.

 Use of analytical procedures:

o Planning – understanding the entity, assessing risks of material misstatements
o Substantive procedures – obtain evidence about financial statement assertions
o Overall review – overall conclusion about whether the financial statements are consistent with
the auditor’s understanding of the entity (assist overall reasonableness of balances)

 Procedures:
o Comparisons of financial and non-financial data
o Ratio analysis

 Substantive analytical procedures

o Evaluate reliability of data from which auditor’s expectation is to be developed:
 Source
 Comparability of information available
 Nature and relevance
 Controls over preparation of financial information
o Develop expectations
o Perform analytical procedures and compare with expectations
o Investigate differences (inquiry and other audit procedures)

 Efficiency and effectiveness of analytical procedures – consider:

o Nature of assertion being tested
 Most effective and efficient for assertions in which potential misstatements are not
apparent from an examination of the detailed evidence or when such detail is
unavailable (e.g. interest expense)
o Plausibility and predictability of data relationships
 Income statement accounts are more predictable
 Accounts with management discretion are less predictable (e.g. rent under contract is
more predictable than office supplies expense)
o Availability and reliability of data used to develop expectations
o Precision of expectations

 Limitations of analytical procedures

o Differences noted do not necessarily indicate misstatements but simply indicate a need for
further examination
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8. Other standard auditing procedures:

a. Footing, cross-footing – to test mathematical accuracy
b. Vouching – examination of support for recorded amounts
c. Reconciliation – comparing amounts of two or more different sources
d. Tracing – starts with source documents and traces forward to books and records
e. Cut-off
o Transactions at or around year-end
o Sales, purchases, cash receipts and disbursements
f. Auditing related accounts simultaneously, such as:
o Debt and interest expense
o Additions to PPE and repairs & maintenance expense
o Investments, dividends income, interest income
g. Written representations
o Written statements by management provided to the auditor to confirm certain matters
or to support other audit evidence. They are audit evidence and are required to be
obtained by the auditor but they do not on its own provide sufficient appropriate
evidence.

Audit evidence prepared using the work of a management expert

Management’s 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 in preparing the financial statements.

When information to be used as audit evidence has been prepared using the work of a management’s expert,
the auditor shall, to the extent necessary, having regard to the significance of that expert’s work for the
auditor’s purposes:

1. Evaluate the competence, capabilities and objectivity of that expert;

Competence relates to the nature and level of expertise of the management’s expert.

Capability relates the ability of the management’s expert to exercise that competence in the
circumstances. Factors that influence capability may include, for example, geographic location, and
the availability of time and resources.

Objectivity relates to the possible effects that bias, conflict of interest or the influence of others may
have on the professional or business judgment of the management’s expert.

2. Obtain an understanding of the work of that expert (includes an understanding of the relevant field of
expertise); and

3. Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.

[PSA 500 par. A35:

If the individual or organization applies that expertise in making an estimate which the entity uses in preparing its
financial statements, the individual or organization is a management’s expert and paragraph 8 applies. (Par. 8 states the
need for the auditor to evaluate competence, capability, objectivity of that expert; understanding of the work of the
expert; evaluate appropriateness of expert’s work as audit evidence).
If, on the other hand, that individual or organization merely provides price data regarding private transactions not
otherwise available to the entity which the entity uses in its own estimation methods, such information, if used as audit
evidence, is subject to paragraph 7 of this PSA, but is not the use of a management’s expert by the entity. (Par. 7 states
the need for the auditor to consider the relevance and reliability of the evidence; but no requirement to evaluate the
competence, capability, objectivity of the expert and understanding of the work of the expert as required in Par. 8)]
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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.
1. Selecting all items (100%)
o Generally, more common for test of details, unlikely for test of controls
o Appropriate in cases such as
 Population consist of small number of large values number of large values
 There is significant risk and other means other means of selection do not provide
sufficient appropriate evidence
 Repetitive nature of calculation or other process performed automatically by an
information system makes 100% examination cost effective

2. Selecting specific items

o Example:
 High value or key items
 All items over a certain amount
 Items to obtain information about matters such as the nature of the entity or nature of
transactions
o Does not constitute audit sampling, does not provide audit evidence concerning the remainder
of the population, thus results of audit procedures cannot be projected to the entire population

3. Audit sampling

Sources:
PSA 500, Audit Evidence
PSA 520, Analytical Procedures
Auditing Theory (E.B. Cabrera)