Lecture 9 Audit Evidence Auditing 1 Lecture 9 Audit Evidence

Audit Evidence Auditors must design and perform audit procedures to obtain sufficient appropriate audit evidence. Audit evidence is all of the information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based.

Audit Evidence Audit evidence includes the information contained in the accounting records underlying the financial statements and other information gathered by the auditors, such as confirmations from third parties. Auditors are not expected to look at all the information that might exist. They will often select samples to test.

ISA 500 ISA 500 Audit evidence requires auditors to ‘design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence’. ‘Sufficiency’ and ‘appropriateness’ are interrelated and apply to both tests of controls and substantive procedures.

Sufficient audit evidence The sufficiency of audit evidence is the measure of the quantity of audit evidence. The quantity of audit evidence required is affected by the auditor’s assessment of the level of risks of material misstatement in the area being audited and also by the quality of such audit evidence. If the evidence is high quality, the auditor may need less than if it were poor quality.

Sufficient audit evidence For evidence to be sufficient, auditors must assert the following; P Presentation/Disclosure R Records (especially completeness) O Ownership (& Obligation) V Valuation E Existence (& Occurrence)

Appropriateness of audit evidence The appropriateness of audit evidence is the measure of the quality of it, that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based. Relevance deals with the logical connection with the purpose of the audit procedure and the assertion under consideration. Relevance may be affected by the direction of testing. Reliability is influenced by the source and nature of the information, including the controls its preparation and maintenance

Quality of evidence External More reliable because it is from independent source Auditor More reliable than from indirect source or by inference Entity Reliable when related control system operates effectively Written Document (paper or electronic) or written representations are more reliable than oral Originals Original documents are more reliable than photocopies or facsimiles. These can be altered.

Management’s expert A management’s expert is an individual or organisation possessing expertise in a field other than auditing or accounting, whose work is used by the entity to assist in the preparation of the financial statements. Where information has been prepared by management’s expert, the auditor must evaluate the competence, capabilities and objectivity of the expert, obtain an understanding of the work done, and evaluate the appropriateness of the work done as audit evidence.

Information produced by the entity If information produced by the entity is to be used by the auditor, the auditor needs to evaluate whether it is sufficiently reliable for the auditor’s purposes, including obtaining audit evidence regarding its accuracy and completeness, and evaluating whether it is sufficiently precise and detailed.

Selecting items to test ISA 500 states that the auditor must determine the means of selecting items for testing that are effective in meeting the purpose of the procedure. The auditor could either select all items, select specific items or use audit sampling.

Inconsistencies and doubts over reliability If audit evidence from one source is inconsistent with that from another, or the auditor has doubts over the reliability of information, the auditor must determine what modifications or additions to audit procedures are necessary to resolve the issues and must consider the effect on other aspects of the audit.

Audit procedures to obtain audit evidence Audit evidence can be obtained by inspection, observation, inquiry and confirmation, recalculation, reperformance and analytical procedures. The auditor obtains evidence by undertaking procedures to do the following; Risk assessment procedures Test of controls Substantive procedures

Test of controls and substantive procedures Test of controls are performed to obtain audit evidence about the operating effectiveness of controls preventing, or detecting and correcting, material misstatements at the assertion level. Substantive procedures are audit procedures performed to detect material misstatements at the assertion level. They are generally of two types; Substantive analytical procedures Tests of detail of classes of transactions, account balances and disclosures.

Audit procedures Inspection of tangible assets This confirms existence and completeness Inspection of documentation or records May confirm existence but not necessarily ownership or value Observation Confirms procedure taking place Inquiry Its strength depends on integrity of the source Confirmation Representation from a third party Recalculation Mathematical accuracy of documents Reperformance Its about independent execution of procedures Analytical procedures Evaluating and comparing financial and/or non financial data for plausible relationships