UNIT 5: AUDIT EVIDENCE

5.1 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.
5.1.1 Sufficient Appropriate audit evidence
'Sufficiency and appropriateness' are interrelated and
apply to both tests of controls and substantive procedures.
 Cont’d
A. Sufficiency is the measure of the quantity of audit
evidence.
B. Appropriateness is the measure of quality or reliability of
the audit evidence.
5.1.1.1 Sufficiency of Audit Evidence
 The auditors judgment as to what is sufficient appropriate
and 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.
 Cont’d

C. The materiality of the item being examined.

D. The experience gained during previous audit and the
auditors' knowledge of the business and industry.
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.
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.
 Cont’d

 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 have 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.
 Cont’d
5.1.1.2 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.'
 Cont’d

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.
5.1.2 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
 Cont’d
5.1.3 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 an
accounting estimates) particularly those for which a wide
range of accounting methods are considered acceptable.
 Standard of auditing requires the auditors to determine
that
all necessary estimates have been developed
the accounting estimates are reasonable, and
the accounting estimates are properly accounted for
and disclosed.
 Cont’d
 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.
 Cont’d

5.2 DOCUMENTING THE AUDIT WORKING PAPERS

 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 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.
 Cont’d
5.2.1 Form and Content of Working Papers
 Working papers should record the auditors' planning, the
nature, timing, and extent of the audit procedures performed,
and the conclusions drawn from the audit evidence obtained.
 Auditors should record in their working papers their
reasoning on all significant matters, which require the
exercise of judgment, and their conclusions thereon.
 Cont’d
 The form and content of working papers are affected by
matters such as:
A. the nature of engagement
B. the form of the auditors' report
C. the nature of complexity of the entity's business
D. the nature and condition of the entity's accounting and
internal control system
E. the needs in the particular circumstances for direction,
supervision and review of the work of members of the audit
team, and
F. the specific methodology and technology the auditors use.
 Cont’d
5.3.2 Examples of Working Papers
 These include the following.
A. information concerning the legal and organizational
structure of the client
B. extracts or copies of important legal documents, agreements
and minutes
C. information concerning the client's industry, economic and
legal environment
D. evidence of the planning process and any changes thereto
E. evidence of the auditors' understanding of the accounting
and internal control system
F. evidence of inherent and control risk assessment and any
revisions
 Cont’d
G. evidence of the auditors' consideration of the work of internal
audit
H. analysis of significant ratios and trends
analysis of transactions and balances
I. details of confirmation procedures on work carried out by other
auditors
J. copies of communications with other auditors, experts and other
third parties
K. copies of correspondence with the client, reports to directors or
management and notes of discussions with the entity's directors or
management concerning audit matters
 Cont’d
L. letters of representation from the entity's directors or
management
M. a summary of the significant aspects of the audit
including details of the information available, the
amount involved, management's views, the conclusions
reached and how these matters are resolved or treated
N. copies of the approved financial statements and
auditor's reports.
O. a record of the nature, timing, extent, and results of
auditing procedures
 Cont’d
 Working papers should show:
the name of the client
the balance sheet date
the fire reference of the working paper
the name of the person preparing the working paper
the date of the working paper was prepared
the subject of the working paper
the name of the person reviewing the working paper
the date of the review
 Cont’d
 Working papers should also show:
the objective of the work done
the source of information
how any sample was selected and the sample size
determined
the work done
a key to any audit ticks or symbols
the results obtained
analysis of errors or other significant observations
the conclusions drawn
the key points highlighted
 Cont’d
 For recurring audits, working papers may be split between:
A. permanent audit files: updated with new information of
continuing importance; and
B. current audit files: contain information relating primarily
to the audit of a single period.
5.2.3 Confidentiality, Safe Custody and Ownership
Auditors should adopt appropriate procedures for
maintaining the confidentiality and safe custody of their
working papers.
Working papers are the property of the auditors. They are
not a substitute for, not part, of the entity's accounting
records.
 UNIT 6: AUDIT REPORT

6.1 INTRODUCTION
 The audit report is the means by which the auditors express their
opinion on the truth and fairness of a company's financial
statement for the benefit principally of the shareholders, but also
for the users.
6.2 STATUTORY REQUIREMENTS
 International Auditing Standards require the auditors to state
explicitly whether in the auditors' opinion the annual accounts
have been properly prepared in accordance with the GAAP and in
particular whether a true and fair view is given.
In the balance sheet, of the state of the company's affairs at the
end of financial year.
In the profit and loss account, of the company's profit or loss for
the financial year; and
 Cont’d
In the case of group accounts, of the state of affairs at the end
of financial year and the profit or loss for the year of
undertakings including in the consolidation, so far as concerns
member of the company.
 The following are matters with which the auditors imply
satisfaction in an unqualified report.
A. Proper accounting records have been kept and proper returns
adequate for the audit received from branches not visited.
B. The accounts are in agreement with accounting records and
returns.
C. All information and explanations have been received as the
auditors think necessary and they have had access at all
times to the company's book, accounts and vouchers.
 Cont’d
D. Details and directors' emoluments and other benefits, and
particular of higher paid employees have been correctly disclosed
in the financial statements.
E. Particulars of loans and other transactions in favor of directors and
others have been correctly disclosed in the financial statements.
F. The information given in the directors' report is consistent with the
accounts.
6.3 AUDITORS' REPORT ON FINANCIAL STATEMENTS
 Auditors' reports on financial statements should contain a clear
expression of opinion based on review and assessment of the
conclusions drawn from evidence obtained in the course of the
audit.
6.3.1 Basic Elements of the Audit Report
Auditors' reports on financial statements should include the
following matters.
 Cont’d

A. A title identifying the person or person to whom the report

is addressed.
B. An introductory paragraph identifying the financial
statement audited.
C. Separate sections, appropriately headed, dealing with
respective responsibilities of directors (or equivalent
persons) and auditors
the basis of the auditors' opinion
the auditors' opinion on the financial statements
D. The manuscript or printed signature of the auditors and
E. The date of the auditors' report.
 Cont’d
Unqualified Opinion
Example 1: Unqualified Opinion
 In our opinion the financial statements give a true and fair view of
the state of the company's affairs at 31 December 20__ and of its
profit (loss) for the year then ended and have been properly
prepared in accordance with GAAP.
Explanation of Auditors' Opinion
 A Auditors should explain the basis of their opinion by including
in their report:
A. a statement as to their compliance or otherwise with Auditing
standards, together with the reasons for any departure there from:
B. a statement that the audit process includes
examining, on a test basis, evidence relevant to the amount and
disclosures in the financial statements
 Cont’d
assessing the significant estimates and judgments made by the
reporting entity's directors in preparing the financial statements;
considering whether the accounting policies are appropriate

C. A statement that they planned and performed the audit

so as to obtain reasonable assurance that the financial
statements are free from material misstatement, whether
caused by fraud or other irregularity or error, and that
they have evaluated the overall preparation of the
financial statements.
 Cont’d
Date and Signature of the Auditors' Report
Auditors should not express an opinion on financial
statement until those statements and all other financial
information contained in a report of which the audited
financial statements form a part have been approved by
the directors, and the auditors have considered all
necessary available evidence.
The date of an auditors' report on a reporting entity's
financial statements is the date on which the auditors
signed their report expressing an opinion on those
statements.
 Cont’d
 The date of the auditors' report is, therefore, the date on
which, following;
receipt of financial statements and accompanying
documents in the form approved by the directors for release
review of all documents which they are required to
consider in addition to the financial statements (for
example the directors' report, chairman's statement or other
review of an entity's affairs which will accompany the
financial statements); and
completion of all procedures necessary to form an opinion
on the financial statements (and any other opinion required
by law or regulation) including a review of post balance
sheet events.
 Cont’d
6.3.2 Forming an Opinion on the Financial Statement
 The principal matters, which auditors consider in forming
an opinion may be expressed in three question.
Have they completed all procedures necessary to meet
auditing standards and to obtain all the information and
explanations necessary for their audit?
Have the financial statements been prepared in accordance
with the applicable accounting requirements?
Do the financial statements, as prepared by the directors,
give a true and fair view?
 Cont’d
6.4 QUALIFICATIONS IN AUDIT REPORTS
The standard on audit reports aimed:
to outlaw the use of ambiguous ways of qualifying
to categorize the circumstances giving rise to qualification
to prescribe suggested wording and format for different
categories of qualification
to introduce a distinction between material and fundamental
problems
to promote better drafting by using non-technical language and
clear presentation.
Example 2: Qualified Opinion: Limitation on the auditor's work
Qualified opinion arising from limitation in audit scope
 Cont’d
Except for adjustments that might have been found to be
necessary had we been able to obtain sufficient evidence
concerning cash sales, in our opinion the financial statements
give a true and fair view of the state of the company's affairs
as at 31 December 20.. and of its profit(loss) for the year
then ended and have been properly prepared in accordance
with generally accepted accounting principles. In respect
alone of the limitation on our work relating to cash sales:
A. we have not obtained all the information and explanations
that we considered necessary for the purpose of our audit,
and
B. we were unable to determine whether proper accounting
records had been maintained.
 Cont’d
Example 3: Disclaimer of Opinion
 Opinion: Disclaimer on view given by financial statements
Because of the possible effect of the limitation in evidence
available to us, we are unable to form opinion as to whether the
financial statements give a true and fair view of the financial
affairs as at 31 December 20.. or of its profit(loss) for the year
then ended. In all the respects, in our opinion the financial
statements have been prepared in accordance with GAAP. In
respect of the limitation on our work relating to stock and work
in progress.
A. We have not obtained all the information and explanations that
we considered necessary for the purpose of our audit, and
B. We were unable to determine whether proper accounting
records had been maintained.
Cont’d
6.4.3 Circumstances Giving Rise to Disagreements
The explanatory notes suggest that circumstances
giving rise to disagreement include the following.
Inappropriate accounting policies
Disagreement as to facts or amounts included in the
financial statements.
Disagreement as to the manner or extent of disclosure
of facts or amounts in the financial statements.
Failure to comply with relevant legislation or other
requirements
 Cont’d
 Where the auditors disagree with the accounting treatment
or disclosure of a matter in the financial statements, and in
the auditors' opinion the effect of that disagreement is
material to the financial statements.
A. the auditors should include in the opinion section of their
report
i. a description of all substantive factors giving rise to the
disagreement
ii. their implications for the financial statements
iii. whenever practicable, a quantification of the effect on the
financial statements.
 Cont’d
B. when the auditors conclude that the effect of the
matter giving rise to disagreement is so material or
persuasive that the financial statements are seriously
misleading, they should issue an adverse opinion:
C. in the case of other material disagreements, the
auditors should issue a qualified opinion indicating
that it is expressed except for the effects of the matter
giving rise to the disagreement.