AUDIT EVIDENCE AND MANAGEMENT

ASSERTION
 Contents

The concept of audit evidence

The following concepts of audit evidence are important to understand

1. The nature of audit evidence.

2. The sufficiency and appropriateness of audit
evidence.
3. The evaluation of audit evidence.
4. Audit procedure for obtaining audit
evidences.
5. Management assertions

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 1. The concept of audit evidence
Audit evidence is all the information used by the auditor in arriving at the
conclusion on which audit opinion is based.

1. The nature of audit evidence

2. The sufficiency and appropriateness of audit evidence
3. The evaluation of audit evidence.

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 i. The nature of audit evidence
 Evidence is the information gathered or used by the auditor to support his
or her opinion.
 The nature of the evidence refers to the form or type of information, which
include accounting records and other available information.
Accounting records Other information
Accounting records include:
• Record of initial entries and supporting records •Minutes of the meeting
•such as checks and records of electronic fund •Confirmation from third party
transfers •Industry analysis
• invoices; contracts •Comparable data(benchmarking)
• the general and subsidiary ledgers
• journal entries
•other adjustments to the financial statements
that are not reflected in formal journal entries
•records such as work sheets and spreadsheets
supporting cost allocations
•computations
•reconciliations, and disclosures.

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 ii. The Sufficiency & Appropriateness
of Audit Evidence
Sufficiency is the measure of the quantity of audit
evidence. Appropriateness is a measure of the quality
of audit evidence. Sufficiency and appropriateness of
audit evidence are interrelated. The auditor must
consider both concepts when assessing risks and
designing audit procedures.

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 1. Relevance
2. Reliability
3. Knowledgeable independent source of the
evidence.
4. Effectiveness of internal control.
5. Auditor’s direct personal knowledge.
6. Documentary evidence.
7. Original documents.

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 iii. The Evaluation of Audit Evidence

The ability to evaluate evidence appropriately is another important

skill an auditor must develop. Proper evaluation of evidence
requires that the auditor understand the types of evidence that are
available and their relative reliability of diagnostic.

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 Audit Procedures for
Obtaining Audit Evidences
Inspection
Observation
Inquiry
Confirmation
Recalculation
Re-performance
Analytical procedures

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 i. Inspection
 Inspection consists of examining internal or external records
or documents that are in paper form, electronic form, or other
media.

 On most audit engagements, inspection of records or

documents makes up the bulk of the evidence gathered by the
auditor.

 Two issues are important in discussing inspection of records

or documents: the reliability of such evidence and its
relationship to specific assertions.

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 ii. Observation

Observation consists of looking at a process or procedure being performed by others.

The actions being observed typically do not leave an audit trail that can be tested by examining
records or documents.
Examples include observation of the counting of inventories by the entity’s personnel and
observation of the performance of control activities.
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. It is also limited by the fact that
the client personnel may act differently when the auditor is not observing them.
Observation is useful helping auditors understand client processes, but is generally not considered
very reliable and thus generally requires additional corroboration by the auditor.
 iii. Inquiry

Inquiry consists of seeking information of knowledgeable

persons (both financial and nonfinancial) throughout the entity
or outside the entity. Inquiry is an important audit procedure
that is used extensively throughout the audit and often is
complementary to performing other audit procedures. For
example, much of the audit work conducted to understand the
entity and its environment including internal control involves
inquiry.
 iv. Confirmation

Confirmation is a specific type of inquiry. It is the

process of obtaining a representation of information
or of an existing condition directly from a third party.
Confirmations also are used to obtain audit evidence
about the absence of certain conditions, for example,
the absence of a “side agreement” that may influence
revenue recognition
 v. Recalculation

Recalculation consists of checking the mathematical accuracy of

documents or records. Recalculation can be performed through
the use of information technology(e.g., by obtaining an
electronic file from the entity and using computer-assisted audit
techniques, or CAATs, to check the accuracy of the
summarization of the file).
 vii. Analytical procedure

Analytical procedures are an important

type of evidence on an audit. They consist
of evaluations of financial information
made by a study of plausible relationships
among both financial and nonfinancial
data.
 2. Management Assertion

Management responsible for presentation of the financial

statements.

“…management…makes assertions regarding the

recognition, measurement, presentation and disclosure
of the various elements of financial statements and
related disclosures”
 Definition of Management Assertions by category
Assertions about classes of transactions and events for the period under audit:

 Occurrence—transactions and events that have been recorded have occurred and pertain to the entity (sometimes referred to as validity).

 Completeness—all transactions and events that should have been recorded have been recorded.

 Authorization—all transactions and events have been properly authorized.

 Accuracy—amounts and other data relating to recorded transactions and events have been recorded appropriately.

 Cutoff—transactions and events have been recorded in the correct accounting period.

 Classification—transactions and events have been recorded in the proper accounts

Assertions about account balances at the period end:

 Existence—assets, liabilities, and equity interests exist.

 Rights and obligations—the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

 Completeness—all assets, liabilities and equity interests that should have been recorded have been recorded.

 Valuation and allocation—assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any
resulting valuation or allocation adjustments are appropriately recorded.

Assertions about presentation and disclosure:

 Occurrence and rights and obligations—disclosed events, transactions, and other matters have occurred and pertain to the entity.

 Completeness—all disclosures that should have been included in the financial statements have been included.

 Classification and understandability—financial information is appropriately presented and described, and disclosures are clearly expressed.

 Accuracy and valuation—financial and other information are disclosed fairly and at appropriate amounts.
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 Thank you for your kind attention

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