Audit Evidence Reviewer
Audit Evidence Reviewer
Definition
Audit evidence pertains to all information used by the auditor in arriving at the conclusions on which
the auditor’s opinion is based. Audit evidence includes both information contained in the accounting
records underlying the financial statements and other information.
From the above definition, two major concepts can be drawn. These are (1) objective of auditor when
gathering evidence, and (2) the two classification of audit evidence.
1. Objective of auditor when gathering evidence.
The auditor designs and performs audit procedures in order to gather audit evidence. Such evidence
will enable the auditor to have a basis in arriving at the conclusions on which the audit opinion is
based.
2. The two classification of audit evidence.
Audit evidence pertains to all the information used by the auditor in arriving at the conclusions on
which the audit opinion is based, and includes:
Other information that the auditor may use as audit evidence includes
o Minutes of meetings;
o Confirmations from third parties;
o Analysts’ reports;
o Comparable data about competitors (benchmarking);
o Controls manuals;
o Information obtained by the auditor from such audit procedures as inquiry,
observation, and inspection;
o Other information developed by, or available to, the auditor that permits the auditor
to reach conclusions through valid reasoning.
a. Relevance of evidence
Evidence is regarded as relevant if it relates to the assertion. Relevance deals with the logical
connection with, or bearing upon, the purpose of the audit procedure and, where
appropriate, the assertion under consideration.
Moreover, a given set of audit procedures may provide audit evidence that is relevant to
certain assertions, but not others.
b. Reliability of evidence
Evidence is regarded as reliable if it is dependable to signal the true state of an assertion, it is
influenced by
0. a. its source;
a. its nature; and
b. the individual circumstances under which it is obtained.
Authentication of documentation
An audit rarely involves the authentication of documentation, nor is the auditor
trained as or expected to be an expert in such authentication.
However, when audit evidence obtained from one source is inconsistent with that obtained
from another, or the auditor has doubts over the reliability of information to be used as audit
evidence, the auditor shall determine what modifications to or additional audit procedures
are necessary to resolve the matter.
Moreover, while recognizing that exceptions may exist, the following generalizations about
the reliability of audit evidence may be useful:
o Audit evidence is more reliable when it is obtained from independent sources outside
the entity.
o Audit evidence that is generated internally is more reliable when the related controls
imposed by the entity are effective.
o Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly or by
inference (for example, inquiry about the application of a control).
o Audit evidence is more reliable when it exists in documentary form, whether paper,
electronic, or other medium (for example, a contemporaneously written record of a
meeting is more reliable than a subsequent oral representation of the matters
discussed).
o Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles.
Obtaining more audit evidence, however, may not compensate for its poor quality.
Management assertions, which were discussed in the “Introduction to Auditing” are used by the
auditor in formulating audit procedures. These assertions serve as “targets” over which audit
procedures to be formulated should be directed.
AUDIT PROCEDURES
The auditor obtains audit evidence to draw reasonable conclusions on which to base the audit
opinion by performing the following audit procedures:
A. MAJOR AUDIT PROCEDURES
ST for material classes of transactions, account balances, and disclosures are always
required to be performed to obtain sufficient appropriate audit evidence. Thus,
auditor will always perform ST when performing an audit of financial statements.
1. Persuasiveness of evidence
2. Sources of audit evidence
3. Cost-benefit consideration and level of difficulty
4. Materiality
5. Audit risk
6. Professional skepticism
A. Tests of details (of classes of transactions, account balances, and disclosures), and
B. Substantive analytical procedures (discussed on the latter part of this handout).
TESTS OF DETAILS
Tests of details are procedures performed by the auditor to gather evidence that the actual details of
balances, disclosures, and underlying transactions associated with an entity's financial statements
are fairly stated. Test of details are considered to be the auditor's primary responses to risks of
material misstatement. When performing test of details, the auditor may choose between
In summary, below is the effect of detection risk to nature, timing and extent of audit procedures
EXTERNAL CONFIRMATION
Objective
When using external confirmation procedures, the objective of the auditor is to design and perform
such procedures to obtain relevant and reliable audit evidence.
Definition
External confirmation is defined as audit evidence obtained as a direct written response to the
auditor from a third party (the confirming party), in paper form, or by electronic or other medium.
External confirmations are frequently used in relation to account balances and their components,
but need not be restricted to these items. For example, the auditor may request external
confirmation of the terms of agreements or transactions an entity has with third parties. The
confirmation request is designed to ask if any modifications have been made to the agreement, and if
so what the relevant details are. Other examples of situations where external confirmations may be
used include the following.
Property title deeds held by lawyers or financiers for safe custody or as security.
Investments purchased from stockbrokers but not delivered at the reporting date.
Bank balances and other information from bankers.
Accounts receivable balances.
Loans from lenders.
Inventories held by third parties at bonded warehouses for processing or on consignment.
Terms of agreements or transactions an entity has with third parties and details of
modifications, if any. ü Accounts payable balances.
Absence of certain conditions, such as a “side agreement”
POSITIVE NEGATIVE
As to responses from confirming party
Confirming party respond directly to the auditor
Confirming party respond directly to the auditor
indicating whether the confirming party agrees or
only if the confirming party disagrees with the
disagrees with the information in the request, or
information provided in the request.
providing the requested information.
The auditor has no reason to believe that
recipients of negative confirmation requests will
disregard such confirmation requests
a.
ANALYTICAL PROCEDURES
As previously discussed in “Audit Planning”, the auditor should apply analytical procedures at the
planning and overall review stages of the audit. Analytical procedures may also be applied at other
stages, specifically during substantive testing.
Management’s Responsibility
Management is responsible for making accounting estimates and disclosures included in
financial statements.
Auditor’s Responsibility
Risk of material misstatement is greater when accounting estimates are involved. Thus, PSA 540
requires the auditor to obtain sufficient appropriate audit evidence regarding accounting
estimates. The auditor should determine whether accounting estimates included in the financial
statements are:
Audit Procedures
To plan the nature timing and extent of the audit procedures, the auditor uses his understanding of
the procedures and methods, including the accounting and internal control systems, used by
management in making the accounting estimates.
The auditor should adopt one or a combination of the following approaches in the audit of an
accounting estimate:
a. review and test the process used by management to develop the estimate (performed as part
of risk assessment procedures and test of controls)
o evaluation of the data and consideration of assumptions on which the estimate is
based
o testing of the calculations involved in the estimate
o comparison, when possible, of estimates made for prior periods with actual results of
those periods
o consideration of management’s approval procedures
b. use an independent estimate for comparison with that prepared by management (performed
as part of substantive testing)
c. review subsequent events which confirm the estimate made
The auditor shall review the judgments and decisions made by management in the making of
accounting estimates to identify whether there are indicators of possible management bias. However,
indicators of possible management bias do not themselves constitute misstatements for the purposes
of drawing conclusions on the reasonableness of individual accounting estimates.
Written Representations
The auditor shall obtain written representations from management whether management believes
significant assumptions used by it in making accounting estimates are reasonable.
Documentation
The audit documentation shall include:
a. The basis for the auditor’s conclusions about the reasonableness of accounting estimates and
their disclosure that give rise to significant risks; and
b. Indicators of possible management bias, if any.