Audit Evidence – ISA 500

1. INTRODUCTION
 What constitutes audit evidence?
 The quantity and quality of audit evidence to be obtained,
 And the audit procedures that auditors use for obtaining that audit evidence.

The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion.

2. OBJECTIVE:
Design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to
draw reasonable conclusions on which to base the auditor’s opinion.

3. DEFINITIONS
"Audit evidence" is all the information used by the auditor in arriving at the conclusions. Includes the
information contained in the accounting records underlying the financial statements and other
information.

Cumulative in nature, includes Evidence obtained from audit procedures

Other sources such as previous audits and a firm's A&C procedures

‘Accounting records’ generally include

 The records of initial entries and supporting records,;
 Invoices;
 Contracts;
 The general and subsidiary ledgers, journal entries and other adjustments
 Records such as work sheets and spreadsheets supporting cost allocations, computations,
reconciliations and disclosures.
 Accounting records in electronic form.
4. REQUIREMENTS

4.1 SUFFICIENT APPROPRIATE AUDIT EVIDENCE

Sufficiency is the measure of the quantity of audit evidence.

Appropriateness is the measure of the quality (relevance and reliability).
High Risk  More quantity
High Quality  Less quantity

The sufficiency and appropriateness of audit evidence are interrelated. However, merely obtaining
more audit evidence may not compensate for its poor quality.

Sources of Audit Evidence:

The auditor obtains some audit evidence by testing the accounting records. Through the performance
of audit procedures, the auditor may determine that the accounting records are internally consistent and
agree to the financial statements and the auditor obtains other audit evidence.

Other information that the auditor may use as audit evidence includes
 minutes of meetings;
 confirmations from third parties;
 analysts' reports;
 comparable data about competitors (benchmarking);
 controls manuals;
 information obtained by the auditor from such audit procedures as inquiry, observation, and
inspection;
 Other information developed by, or available to, the auditor that permits the auditor to reach
conclusions through valid reasoning.

Audit Procedures for Obtaining Audit Evidence

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 Audit Evidence – ISA 500
a) Obtain an understanding to assess the risks of material misstatement (risk assessment
procedures)

Risk assessment procedures by themselves do not provide sufficient appropriate audit evidence and are
supplemented by further audit procedures.

b) Test the operating effectiveness of controls (tests of controls); and

When the auditor's risk assessment includes an expectation of the operating effectiveness of controls
When substantive procedures alone do not provide sufficient appropriate audit evidence

c) Detect material misstatements at the assertion level (substantive procedures - include tests of
details and substantive analytical procedures).

Substantive procedures for material classes of transactions, account balances, and disclosures are always
required to obtain sufficient appropriate audit evidence.

The nature and timing of the audit procedures may be affected by the electronic form or only at certain
points or periods in time. An entity's data retention policies may require the auditor to request retention
of some information for the auditor's review or to perform audit procedures at a time when the
information is available.

When the information is in electronic form, the auditor may carry out certain of the audit procedures
through CAATs.

Inspection of records or documents

Inspection consists of examining records or documents, whether internal or external, in paper form,
electronic form, or other media.

Some documents represent direct audit evidence of the existence of an asset, for example, a document
constituting a financial instrument such as a stock or bond.

Inspection of tangible assets

Inspection of tangible assets consists of physical examination of the assets. Inspection of individual
inventory items ordinarily accompanies the observation of inventory counting.

Observation
Observation consists of looking at a process or procedure being performed by others. It is limited to the
point in time at which the observation takes place and by the fact that the act of being observed may
affect how the process or procedure is performed.

Inquiry
Inquiry consists of seeking information of knowledgeable persons, both financial and non-financial,
throughout the entity or outside the entity. It Often is complementary to performing other audit
procedures.

It may provide: corroborative or conflicting information and may lead to modification of audit
procedures..

Inquiry alone ordinarily does not provide sufficient audit evidence.

The information available to support management's intent may be limited. In these cases, understanding
management's past history of carrying out its stated intentions with respect to assets or liabilities,
management's stated reasons for choosing a particular course of action, and management's ability to
pursue a specific course of action may provide relevant information about management's intent.

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 Audit Evidence – ISA 500
In respect of some matters, the auditor obtains written representations from management to confirm
responses to oral inquiries.

Confirmation
Confirmation, which is a specific type of inquiry, is the process of obtaining a representation of
information or of an existing condition directly from a third party.

Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records.

Reperformance
Reperformance is the auditor's independent execution of procedures or controls that were originally
performed as part of the entity's internal control, either manually or through the use of CAATs, for
example, reperforming the aging of accounts receivable.

Analytical procedures
Analytical procedures consist of evaluations of financial information made by a study of plausible
relationships among both financial and non-financial data. Analytical procedures also encompass the
investigation of identified fluctuations and relationships that are inconsistent with other relevant
information or deviate significantly from predicted amounts.

4.2 SOURCES OF INFORMATION TO BE USED

When designing and performing audit procedures, the auditor shall consider the relevance and reliability
of the information to be used as audit evidence.

Relevance:
 An audit procedure may provide evidence that is relevant to one certain assertions, but not to
another.
 Evidence may be from different sources or of a different nature that is relevant to the same
assertion.
 Evidence relating to a particular assertion, for example, the physical existence of inventory, is not
a substitute for obtaining audit evidence regarding another assertion, for example, the valuation
of inventory.

Reliability:

Influenced by source and nature and is dependent on the individual circumstances.

While recognizing that exceptions may exist, the following generalizations about the reliability of audit
evidence may be useful:

 From independent sources outside the entity.

 The related controls imposed by the entity are effective.
 Obtained directly by the auditor
 Exists in documentary form, whether paper, electronic, or other medium
 Provided by original documents is more reliable than photocopies or facsimiles.

Using the work of a management’s expert:

Expertise in a field other than accounting or auditing, such as actuarial calculations, valuations or
engineering data.

The nature, timing and extent of audit procedures may be affected by such matters as:

• The nature and complexity of the matter to

• The risks of material misstatement in the matter.
• The availability of alternative sources of audit evidence.
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 Audit Evidence – ISA 500
• The nature, scope and objectives of the management’s expert’s work.
• Whether expert is employed by the entity, or is a party engaged by it to provide relevant services.
• Management’s control or influence over the work of the management’s expert.
• Expert is subject to technical performance standards or other professional or industry requirements.
• The nature and extent of any controls within the entity over the management’s expert’s work.
• The auditor’s knowledge and experience of the management’s expert’s field of expertise.
• The auditor’s previous experience of the work of that expert.

The auditor shall, to the extent necessary, having regard to the significance of that expert’s work for the
auditor’s purposes:

(a) Evaluate the competence, capabilities and objectivity of that expert;

Competence: Level of expertise; Capability: Ability to apply competence; Objectivity: Free from
Bias

Using information from:

• Personal experience & discussions with that expert.
• Discussions with about that expert’s work.
•Expert’s qualifications, membership, license to practice, or other forms of external recognition.
• Published papers or books written by that expert.
• An auditor’s expert, if any, who assists the auditor in obtaining sufficient appropriate audit evidence
with respect to information produced by the management’s expert.

Also:
- Relevance of competence
- Competence with respect to relevant accounting requirements
- Whether indicate that it may be necessary to reconsider the initial evaluation of the competence,
capabilities and objectivity

Objectivity may be impaired by selfinterest threats, advocacy threats, familiarity threats, self-review
threats and intimidation threats. Safeguards may reduce such threats!

Interests and relationships creating threats may include:

• Financial interests.
• Business and personal relationships.
• Provision of other services.

(b) Obtain an understanding of the work of that expert;

- Understanding of the relevant field of expertise

- To determine whether we can evalutate management’s expert’s work or we have to get one of our
own

• Areas of specialty within it that are relevant to the audit.

• Professional or other standards, and regulatory or legal requirements apply.
• Assumptions and methods and whether they are generally accepted and appropriate for financial
reporting purposes.
• The nature of internal and external data or information the auditor’s expert uses.

Evaluate the agreement when obtaining an understanding of the work of the management’s expert.

(c) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.

• The relevance and reasonableness of findings or conclusions, their consistency with other audit
evidence, and whether they have been appropriately reflected in the financial statements;
• Relevance and reasonableness of assumptions and methods used; and
• Relevance, completeness, and accuracy of that source data.

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 Audit Evidence – ISA 500
Information Produced by the Entity and Used for the Auditor’s Purposes

When information produced by the entity is used by the auditor to perform audit procedures, the auditor
should obtain audit evidence about the accuracy and completeness of the information and evaluate
whether the information is sufficiently precise and detailed for the auditor’s purposes

For example, in auditing revenue by applying standard prices to records of sales volume, the auditor
considers the accuracy of the price information and the completeness and accuracy of the sales volume
data.

Concurrently with actual audit procedures or through tests of controls.

Information prepared by entity for other purposes may or may not be precise and detailed for the
auditor’s purposes.

4.3 Selecting Items for Testing to Obtain Audit Evidence

When designing audit procedures, determine appropriate means of selecting items for testing. Means
available are:
 Selecting all items (100% examination)
 Selecting specific items
 Audit sampling
Decision of approach to be used will depend on circumstances. Application of anyone or combination
of above may be appropriate in the circumstances.
Decision as to means or combination of means is made on the basis of risk of material misstatement
and audit efficiency.
Selecting all items
100% selection is unlikely in the case of tests of controls. Such approach is suitable when:
 Population constitutes small items of large values
 There is a significant risk
 Repetitive nature of a calculation or other process performed by information system makes 100%
testing cost effective.
Selecting specific items: Auditor may decide to select specific items based on such factors:
 Understanding of the entity
 Assessed risk of material misstatement
 Characteristics of the population
Judgmental selection of specific items is subject to non-sampling risk. Specific items selected may
include:
 High value or key items
 All items over a certain amount
 Items to obtain information
 Items to test control activities
Selective sampling does not constitute audit sampling so results obtained cannot be projected to the
whole of the population and audit evidence should be obtained for remainder of the population (if
material).

4.4 INCONSISTENCY IN, OR DOUBTS OVER RELIABILITY OF, AUDIT EVIDENCE

(a) audit evidence obtained from one source is inconsistent with that obtained from another; or
(b) the auditor has doubts over the reliability,

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 Audit Evidence – ISA 500
Determine what modifications or additions to audit procedures are necessary to resolve the matter, and
shall consider the effect of the matter, if any, on other aspects of the audit.

THE USE OF ASSERTIONS IN OBTAINING AUDIT EVIDENCE (ISA 315)

Management implicitly or explicitly makes assertions regarding the recognition, measurement,

presentation and disclosure of the various elements of financial statements and related disclosures.

The auditor should use assertions for classes of transactions, account balances, and presentation and
disclosures in sufficient detail to form a basis for the assessment of risks of material misstatement
and the design and performance of further audit procedures.

The auditor uses assertions in assessing risks by considering the different types of potential
misstatements that may occur, and thereby designing audit procedures that are responsive to the
assessed risks.
Assertions used by the auditor fall into the following categories:

1. Assertions about classes of transactions and events for the period under audit:
1. Occurrence - transactions and events that have been recorded have occurred and pertain
to the entity.
2. Completeness - all transactions and events that should have been recorded have been
recorded.
3. Accuracy - amounts and other data relating to recorded transactions and events have been
recorded appropriately.
4. Cutoff - transactions and events have been recorded in the correct accounting period.
5. Classification - transactions and events have been recorded in the proper accounts.
2. Assertions about account balances at the period end:
1. Existence - assets, liabilities, and equity interests exist.
2. Rights and obligations - the entity holds or controls the rights to assets, and liabilities are
the obligations of the entity.
3. Completeness - all assets, liabilities and equity interests that should have been recorded
have been recorded.
4. Valuation and allocation - assets, liabilities, and equity interests are included in the
financial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded.
3. Assertions about presentation and disclosure:
1. Occurrence and rights and obligations - disclosed events, transactions, and other matters
have occurred and pertain to the entity.
2. Completeness - all disclosures that should have been included in the financial statements
have been included.
3. Classification and understandability - financial information is appropriately presented
and described, and disclosures are clearly expressed.
4. Accuracy and valuation - financial and other information are disclosed fairly and at
appropriate amounts.
The auditor may express them differently provided all aspects described above have been covered.

C A E/O CO V RO CL
Tr+B Tr B/Tr Tr B B Tr
P&D
C A V O R&O CL U

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