LECTURE 6:

AUDIT EVIDENCE

Learning objectives
After studying this lecture, students should be able to:
 Define audit evidence
 Describe the components of and the meaning of ‘sufficient
appropriate audit evidence’
 Identify the common management assertions for classes of
transactions, account balances and disclosure
 Understand the seven evidence-gathering techniques
 Obtain evidence that management acknowledges its responsibility
for the fair presentation of the financial statements in a
management representation letter

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 CONTENT
 6.1. The Basis of Evidence
 6.2. Financial Statement Assertions
 6.3. Sufficient Appropriate Audit evidence
 6.4. Audit Procedures for Obtaining Audit Evidence
 6.5. Written Representations

6.1. THE BASIS OF EVIDENCE

 Definition

• Audit evidence is information used by the auditor in

arriving at the conclusions on which the auditor’s opinion is
based.
• It includes the accounting records and other information

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 6.1. THE BASIS OF EVIDENCE
 Audit evidence & legal evidence

Audit evidence needs only to prove reasonable assurance,

whereas in a legal environment there is a more rigorous
standard of proof and documentation
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6.1. THE BASIS OF EVIDENCE

 Electronic evidence

• Some of the entity’s accounting data and other information

may be available only in electronic form.
• The electronic nature of the accounting documentation
usually requires that the auditor use computer-assisted audit
techniques (CAATs)

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 6.2. FINANCIAL STATEMENT ASSERTIONS

 Management is responsible for the fair presentation of

financial statements so that they reflect the nature and
operations of the company based on the applicable
financial reporting framework (IAS, GAAP, etc.)

6.2. FINANCIAL STATEMENT ASSERTIONS

(From Lecture 1)

Assertions may fall into the following categories:

 Assertions about classes of transactions and events,

and related disclosures, for the period under audit
 Assertions about account balances, and related
disclosures, at the period end

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 Management Assertions for
Each Category of Assertions
Transactions and Events Account Balances
Occurrence Existence
Completeness Completeness
Accuracy Accuracy, valuation and
allocation
Cutoff
Classification Classification
Rights and obligations
Presentation Presentation

6.3. SUFFICIENT APPROPRIATE AUDIT EVIDENCE

• 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 auditor’s
opinion. – ISA 500
• Reasonable assurance is obtained when the auditor has
obtained sufficient appropriate audit evidence to reduce audit
risk to an acceptably low level. – ISA 200

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 Persuasiveness of Evidence
Two determinants:

Appropriateness Sufficiency
(relevance and reliability) (quantity)

The persuasiveness of evidence can be evaluated only after

considering the combination of appropriateness and sufficiency
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ISA 500 Audit

Sufficient Appropriate (Quality)
Evidence

Quantity – Sufficient Relevance Reliability

to support the audit The evidence • External better than
opinion gathered must internal
Factors to consider are: cover the FS • Internal more reliable
• Risk assessment assertions when control
• Nature of accounting effective
and internal control • Auditor obtained
systems directly better than
• Materiality of the Quality of indirectly or by
item evidence will also inference
• Experience gained affect the Quantity • Documentary better
during previous audits of evidence than oral
• Source and reliability • Original documents
of information more reliable than 12
available copies/faxes

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 6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Evidence Gathering Techniques

Analytical Inquiries
procedures

Audit
Confirmation Observation
Evidence

Reperformance Inspection
Recalculation

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6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inquiry

 Definition:
Consists of seeking information of knowledgeable persons
inside or outside the entity.

 Examples

Obtaining written or oral information from the client in

response to specific questions during the audit.

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 6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inquiry (cont.)

 Corroboration:
 In a typical audit, the largest amount of audit evidence is
obtained from client inquiry, but it cannot be regarded
as conclusive because it is not from an independent
source and might be biased in the client’s favour.
 The auditor must gather evidence to corroborate inquiry
evidence by doing other alternative procedures.

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6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Observation

 Definition:
Consists of looking at a process or procedure being
performed by others.

 Examples

Observation by the auditor of the counting of inventories

by entity’s personnel, site visit at the client’s facilities.

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 6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Observation (cont.)

• Observation provides audit evidence about the performance

of a process or procedure but is limited to the point in time
at which the observation takes place and by the fact that the
act of being observed may affect how the process or
procedure is performed.
• Sufficient evidence is rarely obtained through observation
alone. Observation techniques should be followed up by
other types of evidence gathering procedures.

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6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Observation (cont.)
 Observation of Physical Inventory Procedures:
The attendance by the auditor will enable him to:
• evaluate management’s instructions and procedures for
recording and controlling the results of the entity’s physical
inventory counting;
• observe the performance of management’s count procedures;
• inspect the inventory;
• perform test counts; and
• perform audit procedures over the entity’s final inventory
records to determine whether they accurately reflect actual
inventory count results
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 6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inspection (of Tangible Assets, Records or Documents)

 Definition:
Consists of examining records, documents or tangible
assets.

 Examples

Reviewing sales orders, sales invoices, shipping

documents, bank statements, customer return documents,
customer complaint letters, etc.

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6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inspection (of Tangible Assets, Records or Documents)

 Inspection of tangible assets:

• consists of physical examination of the assets.

• Inspection of tangible assets may provide reliable audit
evidence with respect to their existence, but not necessarily
as to the entity’s rights and obligations or the valuation of the
assets.
• Inspection of individual inventory items ordinarily
accompanies the observation of inventory counting.

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 6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inspection (of Tangible Assets, Records or Documents)

 Inspection of Documents:
Inspection of records and documents provides audit evidence of
varying degrees of reliability depending on their nature, source and
the effectiveness of internal controls over their processing:
• The nature of documents includes quantity of information
contained, the difficulty of access to them, and who has custody.
• The source of the documents may be from inside or outside the
firm.
• The source outside the firm may or may not be independent of the
client.
• The source may be competent or incompetent.
• The controls over the recording process may be effective or
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6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inspection (of Tangible Assets, Records or Documents)

 External and Internal Documents:

 An internal document is one that has been prepared and
used within the client’s organisation and is retained without
ever going to an outside party
 An external document is one that has been in the hands of
someone outside the client’s organisation who is a party to
the transaction being documented

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 6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inspection (of Tangible Assets, Records or Documents)

 Vouching and Tracing:

 Vouching is an audit process whereby the auditor selects
sample items from an account and goes backwards through
the accounting system to find the source documentation that
supports the item selected (e.g. a sales invoice)
 Tracing is an audit procedure whereby the auditor selects
sample items from basic source documents and proceeds
forward through the accounting system to find the final
recording of the transaction (e.g. in the ledger)

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6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inspection (of Tangible Assets, Records or Documents)

 Vouching and Tracing:

Tracing (completeness)
Source
Ledger and journal
document
Vouching (Occurrence)

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 6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Recalculation

 Recalculation consists of checking the arithmetical accuracy

of source documents and accounting records or of performing
independent calculations
 Computation evidence is relatively reliable because the
auditor performs it. Recalculation may be performed through
the use of CAATs (e.g. ACL), for instance to check the
accuracy of totals in a file

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6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Recalculation (cont.)

Examples:
• Extending sales invoices
• Adding journals and subsidiary records
• Checking calculations of depreciation
• Checking mechanical accuracy of records and ledgers.

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 6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Re-performance

• Re-performance is the auditor’s independent execution of

procedures or controls that were originally performed as part
of the entity’s internal control, either manually or through the
use of CAATs, for example, re-performing the ageing of
accounts receivable

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6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Analytical procedures

• 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 that deviate from predictable amounts

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 6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Analytical procedures (cont.)

Analytical Procedures are performed in 3 stages (ISA 520) :

Preliminary Analytical procedures in

1 planning (compulsory) (ISA 315)

Substantive Analytical procedures as

2 substantive procedures (optional)

3 Review Analytical procedures at the overall

review stage (compulsory) of an audit
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6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Confirmation

• Confirmation consists of response to an inquiry to

corroborate information contained in the accounting records.
• Confirmation is the act of obtaining audit evidence from a
third party in support of a fact or condition
• Because confirmations from independent third parties are
usually in writing, and are requested directly by the auditor,
they are highly persuasive evidence. The main disadvantage
of confirmations is that they are costly, time-consuming and
an inconvenience to those asked to supply them

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 6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Confirmation (cont.)

 Types of confirmation:
 Positive confirmation: A request that the confirming party
respond directly to the auditor indicating whether the
confirming party agrees or disagrees with the information in
the request, or providing the requested information.
• Reliable evidence
 Negative confirmation: A request that the confirming party
respond directly to the auditor only if the confirming party
disagrees with the information provided in the request.
• Use for large number small balances, low control risk,
response is expected.
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6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Reliability of procedures

1. Recalculation (most reliable)

2. Inspection
3. Re-performance
4. Observation
5. Confirmation
6. Analytical procedures
7. Inquiry (least reliable)

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 6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Cost of procedures

1. Confirmation (most costly)

2. Inspection
3. Recalculation
4. Re-performance
5. Observation
6. Analytical procedures
7. Inquiry (least costly)

 The auditor considers the relationship between the cost of

obtaining audit evidence and the usefulness of the
information obtained.
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6.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Cost of Types of Evidence

• Most expensive:
• Inspection of tangible assets
• Confirmation
• Moderately costly:
• Inspection of documentation
• Analytical procedures
• Reperformance
• Least expensive:
• Observation
• Inquiries of the client
• Recalculation
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 Which one of the following procedures would give
the most persuasive evidence that a control operated
as the assurance providers had been advised?
A. Inspection of the controls handbook
B. Inquiry of the staff operating the control
C. Observation of the staff operating the control
D. Reperformance of the control by audit staff

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For each of the following tests, select the type of procedure which is
being used.
1. The assurance provider writes to a sample of customers asking
them to inform him of the balance they owe the company at the year
end.
A Inspection
B Observation
C Confirmation
2. The assurance provider looks at a share certificate to confirm that
the company has an investment in Company A.
D Inspection
E Observation
F Confirmation
3. The assurance provider attends the inventory count and ensures
that it is being carried out in accordance with the issued instructions.
G Inspection
H Observation
I Confirmation
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 For each of the following pieces of evidence, select whether
it is more reliable or less reliable than the piece of evidence it
is paired with.
1. A sales invoice is more reliable/less reliable than a
purchase invoice.
A More reliable
B Less reliable
2. An original copy of a lease agreement is more reliable/less
reliable than a photocopy.
C More reliable
D Less reliable
3. A bank statement is more reliable/less reliable than the
cash at bank nominal ledger account.
E More reliable
F Less reliable
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Case study
For each of following audit procedures, indicate which type of evidence is
being gathered:
1. Sending a written request to the client’s customers requesting that they
report the amount owned to the client.
2. Examining large sales invoices for period of two days before and after
year- end to determine sales recorded in the proper period
3. Agreeing the total of account receivable subsidiary ledger to account
receivable gerneral ledger account
4. Comparing the current year gross profit percentage with the gross
profit percentage for the last year.
5. Watching the client’s warehouse personel count of the raw material
inventory
6. Performing test count of the warehouse personel count the raw
material inventory
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 6.5. WRITTEN REPRESENTATIONS

 Written Representation (WRs) are required by ISA 580

 WRs deals with the auditors’ responsibility to obtain written
representation from management, those charged with
governance
 Written confirmation of oral representation avoids confusion
and disagreement.
 Written confirmation are normally required of senior
management.

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6.5. WRITTEN REPRESENTATIONS

 Written representation - Contents

A number of elements are required auditors to confirms

in writing, management (usually the directors in UK) has
statutory duties in respect of FS:
- Fulfilled its responsibility for the preparation of the
financial statement in accordance with the applicable
financial reporting framework
- Provided the auditor with all relevant information and
access
- Recorded and reflected all transactions in the financial
statements
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 6.5. WRITTEN REPRESENTATIONS

 Written representation – Contents (cont.)

Other matters of WRs may contain:
 Whether the selection and application of accounting policies are
appropriate
 Whether matters as the following, where relevant under the
applicable financial reporting framework, have been recognized,
measured, presented or disclosed in accordance with that
framework.
 Whether all deficiencies in internal control of which management
is aware have been communicated to auditors.
 Specific written representation required by other ISAs
 Support for management’s judgement or intent in relation to a
specific assertion
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6.5. WRITTEN REPRESENTATIONS

 The confirmation is are normally done when the auditors

receive a signed copy of FS.

 Written representations are dated as near as possible, but

not after, the date of the auditor’s report on the financial
statement.

 Written representation cannot be used instead of other

(better) evidences which the auditors expect to exist

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 According to ISA 580, Written Representations which
three of the following is an auditor required to
confirm in writing with management?
A. Management’s belief that it has fulfilled its
responsibility for the preparation of financial
statements.
B. All transactions have been reflected in the
financial statements.
C. The fact that management has provided the
auditor with all relevant information.
D. Management’s agreement of the level of
materiality used during the audit

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For each of the following statements concerning written

representations, select whether they are true or false.
1. The auditor should evaluate whether the representations
appear reliable and are consistent with other evidence
obtained before they are relied on as audit evidence.
A True
B False
2. Written representations are appropriate evidence when
evidence the auditors expected to be available is unavailable.
C True
D False
3. If written representations given do not agree with other
evidence, auditors should not trust any other representations
made by management during the course of the audit.
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F False 44

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 Auditors seek written representations from management to support
oral representations that have been made during the course of the
audit.
For each of the following in relation to a statutory audit, select
whether a written representation is required or not required.
1. The directors have fulfilled their responsibility for the
preparation of the financial statements.
A Required
B Not required
2. The accounting policies selected and applied by management
are appropriate.
C Required
D Not required
3. A material item, subject to management judgement, for which
no other evidence could reasonably be expected to exist.
E Required
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Written representations may be sought as audit evidence.

Which two of the following are valid circumstances in
which written representations may be required?
A. To support other evidence about the suitability of
accounting policies
B. Where information which would normally be expected
to be available is unavailable
C. To support inspection of a board minute introducing
the directors’ intention to sell a material investment
D. When the alternative audit procedure would be too
time consuming

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 Which two of the following are purposes of a written
representation letter?
A. Acknowledgement that management has fulfilled its
responsibility for the preparation of the financial
statements
B. Provision of evidence in respect of material items
where other evidence is available
C. Acknowledgement by management of its belief that
the aggregate of uncorrected misstatements is
immaterial to the financial statements
D. Confirmation by management of the scope of the work
to be carried out by the assurance firm
E. Provision of details of proposed modifications to the
auditor’s report
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