Audit Evidence

AUDIT EVIDENCE (ISA 500)
Audit evidence is information obtained by the auditor to draw conclusions to support opinion on the FS.
Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based, and includes the information contained in the accounting records underlying the financial statements and other information.
ISA 500’ the objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.
Examples of audit evidence
Physical observation, accounting records, internal and external documents, results of test of controls and substantive tests, confirmation letters (Debtor’s circularization), analytical procedures.
The auditor needs sufficient, relevant and reliable evidence so that he can formulate an opinion.
Audit evidence is proofs, facts, information about something. It convinces external auditor that something is true and fair or false. It gives external auditor reasonable assurance (as auditor do a sample test) and NOT absolute assurance about something, enable EA to draw reasonable conclusion and support the audit opinion.
Note: obtained audit evidence (inspection, confirmation) to support the audit assertions (completeness, accuracy) in order to form an opinion.
Audit assertions=characteristics/feature of an item
E.g. one assertion=ownership=evidence=title deed
Assertion = existence=evidence=physical examination
This means that to support the assertion existence we need to obtain audit evidence that’s inspection e.g. Inventory count at year end.
Sufficient and appropriate evidence.
Sufficiency and appropriateness are interrelated and apply to audit evidence obtained from both tests of controls and substantive tests.
Sufficient relates to quantity of evidence
Appropriate relates to quality of reliability and relevance of evidence.
Sufficient and appropriate evidence is influenced by:
• Materiality of the item.
• Assessment of the inherent risk of the FS, individual balance and class of transactions.
• Control risk- poor, cannot rely-more quantity and more quality.
• Internal control system.
• Previous audit experience.
• The results of audit test carried out.
• Source of information/ evidence available.
• Sources and reliability of information provided.
Note: assessment of risk affects the amount of evidence required. The higher the risk, the higher the amount of evidence required to assure the auditor.
Sources of evidence
• Internally generated- physical inventory count
• Externally generated- confirmation of balance
• Self generated- test of controls, substantive procedures
The auditor will obtain and CORROBORATE evidences from the different sources to reach a conclusion.
Reliability of audit evidence.
It depends on source, where held and type.
More reliable- documentary evidence, external evidence, self generated by auditor, external sources evidence (3rd party direct confirmation of receivable balance to auditors) , documentary created by 3rd parties and held by auditor.
Less reliable- oral evidence, internally generated, entity records, documentary evidence created and held by the client.
Important
Where risk is high:
o Reduced reliance on internally generated evidence
o Increased focus on externally evidence.
o If senior mgmt is involved: cannot rely on mgmt representations.
Techniques of gathering audit evidence
• Inspection: physical review or examination of records and tangible assets. It may include examination of records for evidence of controls in the form of compliance test. E.g. test of control: examine sales invoice for authorization. E.g. substantive procedure: check physical existence of an asset and inventory.
• Observation: looking at a process or procedure being performed to ensure that the process actually works as documented e.g. distribution of wages packet, physical inventory, cash collection.
• Enquiry and confirmation: seeking relevant information (both financial and non financial) from knowledgeable persons inside or outside the entity whether formally or informally, orally or in writing. The reliability of this technique depends on the qualification and integrity of the source e.g. letter of representation. Confirmation consist of seeking to corroborate responses to information in the accounting records e.g. direct confirmation of receivable balances or payables balances.
• Recalculation/computation: checking the arithmetical accuracy of source documents and accounting records or performing independent calculations e.g. checking the addition of the trial balance, additions in cash book.
• Analytical procedures: analyze significant ratios and investigate material fluctuations and variances. Analyze trends and relationships in financial and non financial data by means of plausible relationships.
Why audit evidence is likely to be persuasive rather than conclusive?
o The auditor gathers evidence on a test basis (the sample may or may not be representative).
o People make mistakes-both client and auditor.
o Documents could be forged- increasingly easily with digital technology.
o The client’s personnel may not always tell the truth.