1. Audit Evidence
Week 11

2. Audit evidence What evidence is required?
Auditors should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion (SAS 400.1)
Audit evidence is obtained in a number of ways
Including an appropriate mix of tests of control and substantive procedures

3. Assertions in Financial statements
The auditor is making an opinion on the assertions made in the financial statements
These then must be
The evidence collected and evaluated must therefore be
Sufficient
Appropriate

4. Assertions
Assertions and the implications of those assertions are as shown
These can be evidenced by substantive testing

5. Sufficiency & Appropriateness
is the measure of the quantity of evidence
Appropriateness
is the measure of the quality of reliability of audit evidence and its relevance to a particular assertion
Whilst sufficiency and appropriateness are interrelated, various factors including risk of misstatement and materiality need to be considered when judging as to what is sufficient appropriate audit evidence
But there are two major constraining factors in seeking evidence
Time: an audit timetable is normally agreed with the management of the entity giving a deadline date for the conclusion of the audit.
Cost: the fee for an audit assignment is normally agreed in advance. Thus, effective use of audit resources is crucial if commercial viability is to be maintained

6. Quantity Quantity of evidence
Is a function of the methods adopted to collect evidence from the population of a class of transactions
This relates
to an assessment of risk and
The employment of sampling techniques

7. Reliability
Reliability of audit evidence is influenced by individual circumstances, but
Audit evidence from external sources is more reliable than that obtained from the entity’s records
Evidence from entity’s records is more reliable when internal controls work effectively
Direct evidence by auditors is more reliable than that obtained from entity
Written evidence is more reliable than oral
Original documents are more reliable then photocopies,etc
SAS

8. Obtaining evidence Evidence may be obtained by Inspection Observation
Enquiry and confirmation
Computation
Analytical procedures

9. Analytical procedures
Identification of relationships
Between items of financial data in the same period
Between comparable financial data from different periods
In order to
Identify consistencies and predicted patterns of significant fluctuations and
The results of investigations thereof.

10. The role of analytical procedures
Analytical procedures can themselves provide sufficient audit evidence where an item can be verified directly by reference to another item
Eg commission on sales or bank interest receivable
Analytical procedures may also be effective in testing for understatement (i.e., completeness)
Eg in predicting sales from purchases and known margins
But sufficient substantive evidence is not obtained by analytical procedures alone, some tests of detail will also be required

11. Circumstances where appropriate
Analytical procedures are most likely used
With existing well-established clients
In well-known, stable industries
Where predictive information is readily available
Where accounting and internal control systems are effective

12. Audit of accounting estimates
These are such items as
Adjustments for stock and debtors to net realisable value
Depreciation
Accrued income
Provision for deferred taxation
General provisions made

13. Accounting Estimates Frequently complex Business specific
Maybe based on formula
Subject to certain internal controls
May require specialist knowledge

14. Accounting Estimates Collection of evidence
Confirmation of estimates by combination of
Review and test of process used to develop estimate
Evaluation of data & consideration of the assumptions
Testing calculations
Comparison of estimates made for prior periods
Consideration of directors’ review procedures
Use of independent estimate
Review of subsequent events

15. Opening balances and comparatives
Auditors need to obtain sufficient audit evidence that
Opening balances have been appropriately brought forward
Opening balances do not contain errors or misstatements
Appropriate accounting policies have been consistently applied
Changes in accounting policies have been correctly applied

16. Comparatives Same rules apply Comparatives must be free from error
Comparatives must incorporate correctly applied accounting policies
If a new auditor
May require substantive testing to provide adequate assurance of opening balances and comparatives

17. Confirmation as evidence
There are instances where knowledgeable third parties may be asked to provide corroborative evidence of assertions
This generally relates to requesting written evidence in relation to account balances
This sort of evidence is a confirmation

18. Situations where appropriate
Confirmation used where there exists:
knowledgeable party
independent of the entity
where alternative reliable evidence is not readily available
Knowledgeable parties usually in a commercial relationship with the entity holding reciprocal information as to entity balances
Debtors
Creditors
Banks
Lenders, etc
It is in the interest for such parties to maintain reliable records of their relationship with the entity

19. Extent of evidence by confirmation
Where confirmations relate to reciprocal balances they provide persuasive evidence as to rights and obligations
Confirmations also provide strong evidence of ownership where the other party is acting as custodian
But confirmations may not provide persuasive evidence of accuracy where the entity’s balance is in error in the other party’s favour
an understatement of debtors
an overstatement of creditors
Confirmations provide reliable evidence of the valuation of assets
Where the other party is a debtor or borrower
further evidence is required of their ability to pay

20. Interpretation Reliability is high when
There is assurance of responsibility and sound internal controls on the part of the third party
Can provide useful evidence where
Entity’s internal controls are weak
It is supportive of material misstatement