AUDIT EVIDENCE

AUDIT EVIDENCE

•  In order for the auditor's opinion to be considered trustworthy, auditors must come to their conclusions
having completed a thorough examination of the books and records of their clients and they must
document the procedures performed and evidence obtained, to support the conclusions reached.
• ISA 500 Audit Evidence states the objective of the auditor, in terms of gathering evidence, is:'to design
and perform audit procedures in such a way 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.’
•  Sufficiency relates to the quantity of evidence.
• Appropriateness relates to the quality or relevance and reliability of evidence.
 AUDIT EVIDENCE

Sufficient evidence
There needs to be ‘enough’ evidence to support the auditor's conclusion. This is a matter of
professional judgment. When determining whether there is enough evidence the auditor must
consider the following:
1.  The risk of material misstatement. (receivables are low risk area, less evidence will be required)
2.  The materiality of the item
3.  The nature of accounting and internal control systems
4.  The results of controls tests
 AUDIT EVIDENCE

5.. The auditor's knowledge and experience of the business

6. The size of a population being tested.
7.  The size of the sample selected to test
8.  The reliability of the evidence obtained
Appropriate evidence
Appropriateness of evidence breaks down into two important concepts:
•  Reliability
•  Relevance.
 AUDIT EVIDENCE

Reliability: Auditors should always attempt to obtain evidence from the most trustworthy
and dependable source possible.
1. Evidence obtained from an independent external source is more reliable than client
generated evidence. E.g obtain confirmation from bank, receivables, payables.
2.  Evidence obtained directly by the auditor is more reliable than evidence obtained
indirectly (evidence obtained through client).
3. Client generated evidence is the least reliable source of evidence. Client generated
evidence is more reliable if effective controls are in place.
 AUDIT EVIDENCE

4.  In addition, written evidence is more reliable than oral evidence as oral representations
can be withdrawn or challenged.
5. Evidence obtained from original documents is more reliable than copies as it may be
difficult to see whether copies have been tampered with.
Relationship between reliability & sufficiency of evidence: the more reliable the
evidence the less of it the auditor will be sufficient. However, if evidence is unreliable it
will never be appropriate for the audit, no matter how much is gathered.
 AUDIT EVIDENCE

• Relevance: it means the evidence relates to the financial statement assertions being
tested.  For example, when auditing the non current assets(NCA) the auditor will:
•  Select a sample of items from physically present NCA and trace them to fixed asset
register to confirm the completeness of accounting records.
•  Select a sample of items from fixed asset register and trace them to physical NCA to
confirm the existence of non current assets.
•  While the procedures are similar in nature, their purpose (and relevance) is to test
different assertions regarding NCA balances.
 FINANCIAL STATEMENTS ASSERTIONS

Auditors perform a range of tests on the significant classes of transaction and account balances. These
tests focus on what are known as financial statements assertions:
Assertions about classes of transactions and events (profit or loss items):
1. Occurrence selected sample from the ledger and review the relevant invoices
2. Completeness select a sample from GRN & pur invoices and we traced them in the pur ledger
3. Accuracy
4. Cut-off
5. Classification
 FINANCIAL STATEMENTS ASSERTIONS

Assertions about account balances(balance sheet items):

1. Existance Select sample from FAR and visit the location to inspect the asset
2. Rights & obligation
3. Completeness… select a sample from the sites and traced them in the FAR
4. Valuation
5. Classification/allocation
 FINANCIAL STATEMENTS ASSERTIONS

1. Occurrence – the transactions and events recorded and disclosed actually occurred and
pertain to the entity.
2. Completeness – all transactions and events that should have been recorded have been
recorded, and all related disclosures that should have been included have been included.
3. Accuracy – amounts and other data have been recorded appropriately and related
disclosures have been appropriately measured and described.
4. Cut-off – transactions and events have been recorded in the correct accounting period.
5. Classification – transactions and events have been recorded in the proper accounts.
 FINANCIAL STATEMENTS ASSERTIONS

1. Existence – assets, liabilities and equity interests recorded in F/S should actually exists.
2. Rights and obligations – Only those assets should be recorded for which entity holds or
controls the rights to assets and only those liabilities should be recorded which are the
obligations of the entity.
3. Completeness – all assets, liabilities and equity interests that should have been recorded
have been recorded, and all related disclosures that should have been included have been
included.
 FINANCIAL STATEMENTS ASSERTIONS

4. Valuation– assets, liabilities and equity interests have been included in the financial
statements at appropriate amounts and any resulting valuation or allocation adjustments
have been appropriately recorded, and related disclosures have been appropriately measured
and described.
5. Classification/allocation – assets, liabilities and equity interests have been recorded in
the proper accounts.
• A- ccuracy
• C- ompleteness
• C- lassification
• A- llocation
• C- ut off
• O- ccurance
• V- aluation
• E- xistance
• R-ights & obligation
SOURCES OF AUDIT EVIDENCE
 SOURCES OF AUDIT EVIDENCE

• Tests of control: Tests of control are designed to evaluate the operating effectiveness of
controls in preventing or detecting and correcting material misstatement.
•  Substantive procedures: Substantive procedures are designed to detect material
misstatement at the assertion level.
• The stronger the control system the lower the control risk and as a result, there is a lower
risk of material misstatement in the financial statements.
 SOURCES OF AUDIT EVIDENCE

In order to be able to rely on controls the auditor will need to:

1.  Ascertain how the system operates
2.  Document the system in audit working papers
3.  Test the operation of the system (TOC)
4. Assess the design and operating effectiveness of the control system
5.  Determine the impact on the audit approach for specific classes of transactions (P&L
items), account balances (B/S items) and disclosures. 
 SOURCES OF AUDIT EVIDENCE

A test of control provides evidence of whether a control procedure has operated effectively.
For example, inspecting an invoice for evidence of authorisation. It is irrelevant whether the
invoice is for $100 or $1000 as it the control being tested, not the amount. Therefore, it
could be said that a test of control provides indirect evidence over the financial statements.
The auditor makes the assumption that if controls are working effectively there is less risk
of material misstatement in the financial statements. However, the test of control itself does
not test the figure within the financial statements, this is the purpose of a substantive
procedure.
 SOURCES OF AUDIT EVIDENCE

• Substantive procedures consist of:

1.  Tests of detail: tests of detail to verify individual transactions and balances.
For example: A test of detail looks at the supporting evidence for an individual transaction
such as inspection of a purchase invoice to verify the amount(accuracy)/date(cut
off)/classification of a specific purchase. If there are 5000 purchase invoices recorded
during the accounting period, this one test of detail has only provided evidence for one of
those transactions. 200
 SOURCES OF AUDIT EVIDENCE

2. Substantive analytical procedures: analytical procedures (as seen in the chapter 'Risk')
involve analysing relationships between information to identify unusual fluctuations which
may indicate possible misstatement.
For example: An analytical procedure would be used to assess the reasonableness of the
purchases figure in total. For example, calculate the percentage change in purchases from
last year and then compare this with the percentage change in revenue to see if they move in
line with each other as expected. (comparing interrelated amounts)
 SOURCES OF AUDIT EVIDENCE

• The auditor may choose to rely solely on substantive testing where it is considered to be a
more efficient or more effective way of obtaining audit evidence, e.g. for smaller
organisations and not for profit organizations.
•  The auditor may have to rely solely on substantive testing where the client's internal
control system cannot be relied on.
 TYPES OF AUDIT PROCEDURE

The auditor can adopt the following procedures to obtain audit evidence: 
1. Inspection/review of books, records, documents.(TOC & substantive procedure)
purchases are correctly recorded ….accuracy
2. Physical inspection of assets. (Sub procedure) Existence, valuation, competeness
3. Observation of processes and procedures, e.g. inventory counts. (TOC)
4.  External/third party confirmation obtained in the form of a direct written response to the
auditor from a third party. Recievables, payables, bank, legal advisor. (Substantive
procedure)
 TYPES OF AUDIT PROCEDURE

5.  Recalculation to confirm the numerical accuracy of documents or records.

(accuracy & valuation) (Substantive procedure)
6.  Re-performance by the auditor of procedures or controls. (TOC)
7.  Analytical procedures. (Substantive procedure)
8. Enquiry of knowledgeable parties. (substantive procedures & TOC)
 Should obtain written representation
 SUBSTANTIVE ANALYTICAL PROCEDURES

• Proof in total/reasonableness test is the analytical procedure usually used at this stage, auditor
calculates an expected amount and compares it with the amount recorded in clients’ records, for
example: an auditor might create an expectation of payroll costs for the year by taking last year’s
cost and inflating for pay rises and changes in staff numbers. Rent 100*12=1200
•  Analytical procedures are useful for assessing several assertions at once as the auditor is
effectively auditing a whole account balance (B/S) or class of transaction (P or L) to see if it is
reasonable.
•  They can be used to corroborate other audit evidence obtained, such as statements by
management about changes in cost structures.
 ANALYTICAL PROCEDURES

• It would also be difficult to use analytical procedures if a business had experienced a number of
significant one-off events in the year as these would distort the year's figures making
comparison to both prior years and budgets meaningless.
 The suitability of this approach depends on four factors:
•  The availbility of the data
•  The reliability of the data
•  The degree of precision possible
•  The amount of variation which is acceptable. Auditor`s judgment
 SAMPLING

Sampling: The application of audit procedures to less than 100% of items within a
population , such that all sampling units have a chance of selection in order to provide the
auditor with a reasonable basis on which to draw conclusions about the entire population.
The need for sampling
1. It will usually be impossible to test every item in an accounting population because of
the costs & time involved.
2. Auditors give reasonable not absolute assurance and therefore do not certify that the
financial statements are 100% accurate.
 SAMPLING ISA 530

Types of Sampling: Statistical and non-statistical sampling

Statistical sampling means any approach to sampling that uses:
1. Random selection of samples, and
2. Probability theory to evaluate sample results. Total population =1000, sample=100, 10
items with errors, 10%. 900*10%= 90 items with error
•  Any approach that does not have both these characteristics is considered to be non-
statistical sampling.  The approach taken is a matter of auditor judgment.
 SAMPLING ISA 530

Statistical sampling methods

•  Random selection – this can be achieved through the use of random number generators or
tables.
•  Systematic selection – where a constant sampling interval is used (e.g. every 50th
balance/item) and the first item is selected randomly.
•  Monetary unit selection – selecting items based upon monetary values (usually focusing
on higher value items).
 
 SAMPLING ISA 530

 Non-statistical sampling methods

•  Haphazard selection – auditor does not follow a structured technique but avoids bias or
predictability.
•  Block selection – this involves selecting a block of contiguous (i.e. next to each other)
items from the population. This technique is used for cut-off testing.
• When non-statistical methods (haphazard and block) are used the auditor uses judgment
to select the items to be tested.
 SAMPLING ISA 530

Evaluating deviations and misstatements in a sample

Deviations: Any issues identified during a test of control are called deviations.
•  If the auditor tests a sample of 100 invoices for evidence of authorisation and 10 are
found not to have been authorised, there is a deviation rate of 10%.
Misstatements are differences between the amounts actually recorded and what should
have been recorded. Misstatements are identified when performing substantive tests of
detail.
 SAMPLING ISA 530

• The auditor must first consider the nature and cause of the misstatement. If the
misstatement is an anomaly (isolated), no further procedures will be performed as the
misstatement is not representative of further misstatements.
•  If the auditor believes the misstatement could be representative of further misstatements
the auditor will project the misstatement found in the sample across the population as a
whole, and evaluate the results.
Tolerable misstatement: it is the maximum amount of misstatement which the auditor is
willing to accept.