Chapter 4B Audit Evidence

Auditing Study Notes Chapter 4B Audit Evidence

CHAPTER FOUR (B) AUDIT EVIDENCE,

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PART A AUDIT EVIDENCE

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44..11..11

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LLOO 55 AASSSSEERRTTIIOONNSS TTOO BBEE VVEERRIIFFIIEEDD 44..11..66 88..11..22 *Explanation of Reference: First digit in Study Texts Reference represents chapter number, second and third digits represents section and sub-section number. Contents in brackets (if any) represent part of the sub-section which is covered by the learning objective. Coverage from Question Bank: After completion of this chapter, you will be able to attempt following questions in ICAP's Question Bank:

76c

1 By: Muhammad Asif, ACA


To obtain reasonable assurance, auditor shall: obtain sufficient and appropriate audit evidence by performing audit procedures at assertion level and shall retain documentation of procedures performed as evidence.

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The higher the risk, the more evidence required. The higher the quality, the less evidence required.

LLOO 33:: WWHHAATT IISS MMEEAANNTT BBYY AAPPPPRROOPPRRIIAATTEE EEVVIIDDEENNCCEE:: Relevance: Relevance of evidence means there should be logical connection of audit procedure and evidence with the objective of auditor. Further, a specific audit procedures may be relevant for one assertion but not relevant for other assertion. For example in case of fixed asset:

Objective of auditor Audit Procedure to obtain relevant Evidence Whether fixed assets appearing in financial statements exist.

Select sample of fixed assets and physically verify them.

Whether fixed assets appearing in financial statements are owned by entity.

Select sample of fixed assets and inspect their title documents.

Reliability: Reliability refers to the extent of trust that auditor can place on audit evidence. The reliability of evidence is influenced by its source, nature, and the circumstances under which it is obtained. Accordingly, following general rules are established to determine reliability i.e.

Audit Evidence: Audit Evidence is the information used by the auditor in arriving at the conclusions on which the auditors opinion is based.

Sufficiency of Evidence: Sufficiency is a measure of quantity of audit evidence and is affected by Risk Assessment and Quality of evidence.

Appropriateness of Evidence: Appropriateness is a measure of quality of audit evidence and is affected by its Relevance and Reliability.



Evidence from independent external source is more reliable than internal evidence (e.g. confirmation from customer is more reliable than a sales invoice)

Documentary evidence is more reliable than oral (e.g. a written confirmation from a debtor is more reliable than a telephone confirmation)

Evidence in the form of original document is more reliable than photocopy/fax Evidence obtained directly by the auditor is more reliable than evidence obtained from the

client (e.g. a confirmation obtained directly from the bank is more reliable than inspecting a copy of a bank statement held by the client)

Evidence generated internally is more reliable when internal control is effective (e.g. pre-numbered documents are more reliable than unnumbered documents because sequence check can be verified.)

LLOO 44:: DDOOUUBBTTSS OOVVEERR RREELLIIAABBIILLIITTYY OOFF EEVVIIDDEENNCCEE:: If auditor has doubts over reliability of evidence (e.g. when evidence from one source is inconsistence with evidence from other source):

1. Auditor should apply professional skepticism and should not ignore inconsistency. 2. Auditor should perform further specific procedures to resolve the inconsistency and to

determine which source of evidence is reliable (these procedures will depend on situation). 3. This inconsistency may also affect others aspects of audit e.g. auditors assessment of risk of

material misstatement may be increased if management is proved wrong (because managements competence or integrity will be questioned).

LLOO 55:: AASSSSEERRTTIIOONNSS TTOO BBEE VVEERRIIFFIIEEDD IINN PPEERRFFOORRMMIINNGG PPRROOCCEEDDUURREESS:: Following are 3 categories of assertions used by auditor to consider whether an area of financial statement is free from material misstatement: Assertions about classes of transactions and events for the period Occurrence All Transactions (that have been recorded) have actually been occurred. Completeness All transactions (that have occurred) have been recorded. Accuracy Amounts and other data relating to transactions have been recorded

appropriately. Cutoff Transactions have been recorded in correct accounting period. Classification Transactions have been recorded in the proper accounts.

Exam Tip A mnemonic to remember the reliability criteria of evidence is that evidence should be CODED i.e. Controlled, Original, Documentary, External and Direct.

Assertions/Management Assertions/Financial Statement Assertions: Assertions are representations by management, explicit or otherwise, that are embodied in the financial statements. These are used by the auditor :

to consider different types of misstatements that may occur and to perform procedures and obtain evidence.



Assertions about account balances at the period end: Existence Assets, liabilities, and equity exist. Completeness All assets, liabilities and equity have been recorded. Rights and obligations Entity holds the rights to assets, and liabilities are obligations of entity. Valuation and allocation

Assets, liabilities, and equity are included in the financial statements at appropriate amounts.

Assertions about Presentation and Disclosures: Occurrence and rights and obligations

Disclosed events, transactions, and other matters have occurred and pertain to the entity.

Completeness All disclosures have been included in financial statements. Classification and understandability

Financial information is appropriately presented and described, and disclosures are clearly expressed.

Accuracy and valuation Financial and other information are disclosed fairly and at appropriate amounts.


Documents

Chapter 4B Audit Evidence