Chapter 6: Audit Evidence & Audit Procedures

CHAPTER 6:
AUDIT
EVIDENCE &
AUDIT
PROCEDURE
S (ISA 500)

Learning outcomes:

Introduction

Definition of audit
evidence – ISA 500

ISA 500
defines - Audit
Evidence (AE)

❑ The large part of the work involved in the performance of an audit is
obtaining and evaluating audit evidence.

❑ Audit evidence is cumulative in nature and is primarily obtained from
audit procedures performed during the course of an audit.

❑ This evidence is then used to draw conclusions to form the basis of
the auditor’s opinion for audited FS.

❑ Audit evidence is necessary to support the auditor’s opinion and
report.

❑ Audit evidence comprises information that supports and
corroborates management’s assertions, the absence of information
(for example; management’s refusal to provide a requested
representation) is used by the auditor.

❑ Particularly, AE includes information contained in the accounting
records underlying the FS and other information.

❑ Other information consists of information from other sources such
as previous audits, a firm’s quality control procedures for client
acceptance and continuance, work of management’s expert, MOM,
control manuals, analyst report and third-party confirmations.

❑ Accounting records also important source of AE.

❑ Accounting records are record of initial accounting entries and
supporting record (cheque, electronics fund transfer, invoices,
contracts, general and subsidiary ledgers, journal entries, other
adjustments to the FS that are not reflected in journal entries,
worksheets, spreadsheet supporting cost allocations, computations,
reconciliation and disclosures) – ISA 500.

❑ Companies Act 2016 (para 245) provides a provision that the
management and directors of a company are required to keep proper
accounting records.

❑ Accounting records should be kept in such a manner that they are
available for the auditing process.

Overall process of auditing

Perform Plan the audit Perform risk Design overall Implement Evaluate the Prepare the
preliminary assessment responses and responses to audit evidence auditor’s
engagement procedures further audit assessed risk report
of material obtained
activities procedures misstatements

Sufficient and Appropriate Audit
Evidence

Sufficiency Appropriateness

The quantity of AE needed is affected by the following factors:

Factor influencing auditor’s judgement of sufficiency

FACTOR EXAMPLE

Relevance

Relevance

Example:

Reliability

Circumstances that affect reliability of audit (ISA 500)

Circumstance Example

Audit evidence is more reliable when: ❑ A letter from a bank manager
confirming bank balances and
❑ It is obtained from independent overdraft limit.The confirmation letter
sources outside the entity, particularly is received directly from the bank.
when received from persons acting in
a professional capacity ❖ Property, plant and equipment register
is used to verify the existence of PPE
❖ It is generated internally through an stated at cost.A person who prepares
effective control system, including the PPE register is separated from a
those over its audit evidence person who has custody of the PPE.
preparation and maintenance imposed
by the entity. ➢ Evidence from observations of the
application of a control is more
➢ It is obtained directly by the auditor reliable than evidence from inquiries
rather than indirectly or by inference. about the application of a control. For
instance, counting inventories to
confirm their existence and compare
them with inventory record.

Circumstances that affect reliability of audit (ISA 500)

Circumstance Example

Audit evidence is more reliable when:

❑ It is in documentary form (paper, ❑ A letter to confirm an employment of
electronic or other media) rather than a client’s employee is more reliable
in the form of an oral presentation than a verbal confirmation. However,
auditor is required to record any oral
evidence immediately in the MOM
with a client.

❖ It is provided by original documents ❖ An auditor should request for an
rather than photocopies or facsimiles, original title deed to confirm the
or documents that have been filmed, rights over a price of land.The auditor
digitized or otherwise transformed should not accept a photocopy title
into electronic form, the reliability of deed.
which may depend on the controls
over their preparation and
maintenance.

Types of Audit
Procedures

Types of Audit
Procedures

Inspection of records, documents or tangible assets
Observation
Enquiry
Confirmation
Recalculation
Reperformance
Analytical procedures

Inspection of records, documents or tangible assets