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.
Evidence, is described in ISA 500 as:

'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.’
 Types of audit evidence;
Audit evidence must be of the following types:
1. Sufficiency relates to the quantity of
evidence.
2. Appropriateness relates to the:
 quality or relevance and
 reliability of evidence.
Sufficient evidence:
When determining whether there is enough evidence the
auditor must consider:
• the risk of material misstatement
• the materiality of the item
• the nature of accounting and internal control systems
• the auditor's knowledge and experience of the business
• the results of controls tests
• the size of a population being tested
• the size of the sample selected to test
• the reliability of the evidence obtained.
Reliability:
Auditors should always attempt to obtain
evidence from the most trustworthy and
dependable source possible. Evidence is
considered more reliable when it is:
• obtained from an independent external source
• generated internally but subject to effective
control
• obtained directly by the auditor
• in documentary form
• in original form.
Reliability:
Auditors should always attempt to obtain
evidence from the most trustworthy and
dependable source possible. Evidence is
considered more reliable when it is:
• obtained from an independent external source
• generated internally but subject to effective
control
• obtained directly by the auditor
• in documentary form
• in original form.
 financial statements assertions:
Auditors perform a range of tests on the significant
classes of transaction, account balances and
disclosures. These tests focus on what are known
as financial statements assertions:

Occurrence – the transactions and events recorded

actually occured and pertain to the entity.
Completeness – all transactions, assets, liabilities
and equity interests have been recorded that should
have been recorded.
Accuracy – amounts, data and other information
have been recorded and disclosed appropriately.
Cutoff – transactions and events have been recorded
in the correct accounting period.
Classification and understandability – transactions
and events have been recorded in the proper
accounts, and described and disclosed clearly.
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.
Valuation and allocation – assets, liabilities and equity
interests are included in the financial statements at
appropriate values.
Types of Audit Porcedures / procedures for obtaining evidence
The procedures for obtaining audit evidence are:
• Analytical procedures. Analytical procedures consist of looking at
amounts in the financial statements, calculating ratios and then
comparing the amounts and ratios to:
• Last year’s results
• Budgets
• Industry standards
• Enquiry and confirmation. For example, asking client staff if what
checks they do when goods are received or asking third parties (such
as a bank) to confirm a balance.
• Inspection. For example, the physical condition of inventories or
non-current assets
• Observation. For example, watch what staff do in the warehouse as
deliveries are received.
• RecalcUlation and re-performance. For example, recalculate the
wage calculations to check they have been correctly carried out.
Audit Sampling

The definition of sampling, as described in ISA 530

Audit Sampling is:
'The application of audit procedures to less than 100%
of items within a population of audit relevance 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

• It will usually be impossible to test every item in an accounting

population because of the costs involved. Consider a
manufacturer of fasteners (i.e. nuts, bolts, nails and screws); they
will have many thousands, maybe millions, of items of inventory.
It would simply be impossible to test the
valuation of every single one.

• It is also important to remember that auditors give reasonable

not absolute assurance and are therefore not certifying that the
financial statements are 100% accurate.

• Audit evidence is gathered on a test basis. Auditors therefore

need to understand the implications and effective use of
sampling.
Methods of Sample Selection

The principal methods of sample selection are:

• 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) and the first item is
selected randomly.
• Monetary unit selection – selecting items based upon
monetary values (usually focusing on higher value items).
• 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 rarely appropriate.
Computer assisted audit techniques (CAATs)

The use of computers as a tool to perform audit procedures is

often referred to as a 'computer assisted audit techniques' or
CAAT for short.

There are two broad categories of CAAT:

(1) Audit software
(2) Test data
Audit software
Audit software is used to interrogate a client's system.
Specific procedures they can perform include:

• calculating ratios and select indicators that fail to meet

certain predefined criteria (i.e. benchmarking)
• check arithmetical accuracy (for example additions)
• preparing reports (budget vs actual)
• stratification of data (such as invoices by customer or
age)
• produce letters to send out to customers and suppliers
• tracing transactions through the computerised system.
Test data
Test data involves the auditor submitting 'dummy' data
into the client's system to ensure that the system
correctly processes it and that it prevents or detects
and corrects misstatements. The objective of this is to
test the operation of application controls within the
system.
• Data maybe processed during a normal
operational cycle (‘live’ test data) or
• During a special run at a point in time outside
the normal operational cycle
(‘dead’ test data).