8/17/2023

Audit Evidence

B3: AUDITING PRINCIPLES To be covered:

• Overview of Sufficient and Appropriate Audit Evidence (SAAE)
AND PRACTICE • Procedures for obtaining evidence
• Major audit evidence decisions
Topic 8 • Use of assertions in obtaining evidence
• Relying on the work of others
Audit Evidence – Experts
– Internal auditors
• Review Questions

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1. Overview of SAAE 1. Overview of SAAE

• Audit evidence is the information obtained by the auditor in
Sufficiency: The measure of the amount of evidence
arriving at the conclusion in which audit opinion is based.
gathered (quantity)
• ISA 500: the auditor should obtain sufficient appropriate
Factors to consider in determining sufficiency are:
audit evidence to be able to draw reasonable conclusions on
which to base the audit opinion. i. Risk assessment
• The extract from ISA 500 tells us TWO things: ii. Nature of accounting and internal control systems
1. Evidence has to be sufficient and appropriate. iii. Materiality of the item
2. That the auditors do not have to audit everything because their iv. Experience gained during previous audits
conclusion have only to be reasonable not absolute.
v. Results of audit procedures
• If the auditor is unable to obtain sufficient appropriate
vi. Sources and reliability of information available
evidence, then he should consider the implications of the
audit report
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1. Overview of SAAE 1. Overview of SAAE

Appropriateness: The measure of the quality of evidence, Sources of audit evidence:
its fitness for purpose. (quality) Can be derived from within the org or ouside
Appropriateness is a function of relevance and reliability • Sources of audit evidence include that derived from
Relevance - The evidence gathered must cover the financial within the organisation’s
statement assertions – Accounting systems
Reliable (if it is not in writing it doesn’t exist) – Accounting records
 External better than internal evidence – Documents
 Internal evidence more reliable when controls are effective – Management and staff
 Auditor generated evidence is better than client generated • And from outside the organisation through:
 Documentary evidence is better than oral – Customers, Suppliers
 Original documents more reliable than copies/faxes – Lenders
– Professional advisers, etc
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2. Procedures for obtaining evidence 2. Procedures for obtaining evidence

Audit evidence is obtained from appropriate mix of the following overall
Audit evidence is obtained from appropriate mix of the following
procedures:
specific procedures: (AEIOU)
1. Risk assessment procedures 1. Analytical procedures - Evaluation of financial information made by a
Procedures to obtain an understanding of the entity and its study of plausible relationships among financial and non financial data and
environment, including its ICs to assess the RoMM at the FS and the investigation of identified fluctuations and relationships inconsistent
assertion levels with other information:
2. Test of controls 2. Enquiry and confirmation directly - seeking information of
knowledgeable persons throughout the entity or outside the entity and
Procedures to test the operating effectiveness of controls in
obtaining representations from a third party
preventing and correcting material misstatements at the assertion
3. Inspection - Examining records, documents and tangible assets
levels
4. Observation - Looking at a process or procedure being performed by
3. Substantive procedures
others
Procedures to detect material misstatements at the assertion level and 5. RecalcUlation - Checking the arithmetical accuracy of documents or
include test of details of classes of transactions, account balances and records.
disclosures and analytical procedures
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3. Major audit evidence decisions 4. Use of assertions in obtaining evidence

Definition of Assertions
The four major audit evidence decisions are: • Implicit statements made by management in preparing financial
statements which state that the financial statements do not contain any
1. Which audit procedures to use. material error or misstatements with regard to assets and transactions.
2. What sample size to select for a given procedure.
3. Which items to select from the population. • The Assertions in ISA 315 are a series of statements which deal with
the underlying bases on which the financial statements are prepared
4. When to perform the procedure. and deal with the measurement, presentation and disclosure of the
various elements of financial statements and related disclosures.

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4. Use of assertions in obtaining evidence 4. Use of assertions in obtaining evidence

• ISA 315 splits the assertions into three (3) Categories as follows:
2. Assertions about account balances at the period end:
1. Assertions about classes of transaction and events for the period
(Statement of financial position)
under review ( Statement of profit or loss and other comprehensive
income) i. Existence- Assets , liabilities and equity interest
i. Occurrence- Transactions and events that have been recorded relate to (shareholders) exist.
the company being audited and not to another organisation. ii. Rights and obligations -The company holds or controls
ii. Completeness - All transactions that should have been recorded have the rights to assets, and all liabilities are those of the coy
been recorded
iii. Completeness - All assets , liabilities and equity interest that
iii. Accuracy - Amounts and all other data relating to recorded
transactions have been recorded appropriately
should have been recorded have been recorded
iv. Cut- Off - Transactions and events have been recorded in the correct iv. Valuation and allocation-Assets ,liabilities, and equity
accounting period interests are included in the financial statements at
v. Classification- Transactions and events have been recorded in the appropriate amounts and any resulting valuation or allocation
proper accounts (in the books and records) adjustments are properly recorded
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4. Use of assertions in obtaining evidence 5. Relying on the work of others

Relying on the work of an Expert ISA 620
3. Assertions about presentation and disclosure
• ISA 620 states: The auditor has sole responsibility for the audit opinion
i. Occurrence and rights and obligations- Disclosed expressed and that responsibility is not reduced by the auditor’s use of the
events, transactions and other matters have occurred and work of an auditors expert.
pertain to the company. • Nonetheless if the auditor using the work of an auditor’s expert concludes
that the work of that expert is adequate for the auditor’s purpose, the
ii. Completeness- All disclosures that should have been auditor may accept that experts findings or conclusions in the experts field
included in the financial statements have been included as appropriate audit evidence.
iii. Classification and understandability- Financial Who is an Expert?
information is appropriately presented and described and • ISA 620 defines an expert as: An individual or organisation possessing
disclosures are clearly expressed expertise in a field other than accounting or auditing, whose work in that
field is used by the auditor to assist the auditor in obtaining sufficient
iv. Accuracy and valuation- Financial and other information is appropriate audit evidence.
disclosed fairly and at appropriate amounts • An auditor’s expert may be either an auditor’s internal expert (who is a
partner or staff including temporary staff of the auditors firm or network
firm) or an auditor’s external expert.
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5. Relying on the work of others 5. Relying on the work of others

1. Using the work of an Expert ISA 620
In deciding whether to engage an expert consider:
• ISA 620 states: The auditor has sole responsibility for the audit opinion
• Knowledge and ability of audit team
expressed and that responsibility is not reduced by the auditor’s use of the
work of an auditors expert. • The risk of material misstatement
• Nonetheless if the auditor using the work of an auditor’s expert concludes • The quantity and quality of other audit evidence which can be
that the work of that expert is adequate for the auditor’s purpose, the obtained
auditor may accept that experts findings or conclusions in the experts field Factors Which May Influence Auditor To Rely Upon The Expert
as appropriate audit evidence.
• The competence of the expert
Who is an Expert?
• ISA 620 defines an expert as: An individual or organisation possessing • The Experience of the expert
expertise in a field other than accounting or auditing, whose work in that • Independence of the expert
field is used by the auditor to assist the auditor in obtaining SAAE. Eg • The auditor also needs to
Valuers, Quantity surveyors, Actuaries, Geologists, Stock brokers, Lawyers – Determine nature, scope and objective of experts work for audit purposes
 An auditor’s expert may be either an auditor’s internal expert (who is a – Evaluate adequacy of that work for audit purposes
partner or staff including temporary staff of the auditors firm or network
In evaluating expert’s work, the auditor should consider:
firm) or an auditor’s external expert.
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5. Relying on the work of others 5. Relying on the work of others

In evaluating expert’s work, the auditor should consider: 2. Using the Work of Internal Auditors ISA 610
• The reasonableness of the findings and their consistency with other In evaluating internal audit function consider:
evidence • The extent to which the internal audit function’s organizational status and
• The significant assumptions made relevant policies and procedures support the objectivity of the internal
auditors
• The use and accuracy of source data
• The level of competence of the function
Auditor must agree on the following issues in writing with the
• Whether the function applies a systematic and disciplined approach,
expert:
including quality control
• The nature, scope and objectives of expert’s work
Considerations when evaluating the work of an internal auditor
• Roles and responsibilities of auditor and the expert • The work was properly planned, performed, supervised, reviewed and
• NTE of communication between the two parties documented.
• The need for an expert to observe confidentiality • Sufficient appropriate evidence had been obtained
• Conclusions reached are appropriate in the circumstances
• Reports prepared by the function are consistent with the results of the work
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6. Sampling techniques in Audit (ISA 530) 6. Sampling techniques in Audit (ISA 530)
Audit sampling: is the application of audit procedures to less than Methods of sampling in accordance with ISA 530:
100% of items within a population such that all sampling units have a • Random selection -Ensures each item in a population has an equal
chance of selection in order to provide the basis of conclusions about chance of selection
the entire population. • Systematic selection- A number of sampling units in the population is
divided by the sample size to give a sampling interval.
1. Statistical sampling - is the one that allows each sampling unit to • Haphazard selection- The auditor selects the sample without
stand an equal chance of selection. following a structured technique – the auditor would avoid any
2. Non-statistical sampling – does not consider the probability theory conscious bias or predictability
and is wholly dependent on the auditor's judgment. • Sequence or block selection - Involves selecting a block(s) of
continuous items from within a population
• Monetary Unit Sampling selection - this selection method ensures
that each individual $1 in the population has an equal chance of being
selected
• Judgemental selection – selecting items based on the skill and
judgement of the auditor
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Question 01
ISA 500: Audit Evidence states that: “The auditor should
obtain sufficient appropriate evidence to be able to draw
reasonable conclusions on which to base the audit
opinion”.
Review Questions on Required:
Audit Evidence (a) Define ‘audit evidence’
(b) Explain four sources of audit evidence.
(c) Provide explanation on the following terms in relation
to audit evidence:
(i) Sufficiency of audit evidence
(ii) Reliability of audit evidence
(iii) External confirmation
(iv) Analytical Procedures
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Question 02 Question 03
Audit standards requires an auditor to obtain The auditor has a responsibility to design audit
sufficient appropriate evidence to be able to draw procedures to obtain sufficient and appropriate
reasonable conclusions on which to base the audit evidence. There are various audit procedures for
opinion”. obtaining evidence, such as external confirmation.
Required:
a. Explain five factors which determines sufficiency Required: Apart from external confirmation:
of audit evidence (5 marks) • State and explain FOUR procedures for obtaining
b. Explain FOUR factors which influence the evidence and; for each procedure, describe one
reliability of audit evidence. (4 marks) assertion that is being addressed and one that is not
being addressed by the procedure.
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Question 04 Question 05
The auditor should obtain sufficient appropriate audit evidence to be able Auditors may seek information of knowledgeable persons
to draw reasonable conclusions on which to base the audit opinion. throughout the entity or outside the entity and obtaining
“Sufficiency is the measure of the quantity of audit evidence; representations from a third party. This procedure is commonly
appropriateness is the measure of the quality of audit evidence and its referred as audit confirmation.
relevance to a particular assertion and its reliability.” Required
Required a. What characteristics should an audit confirmation possess
Discuss the extent to which each of the following sources of audit if an auditor is to consider it as sufficient appropriate audit
evidence is appropriate and sufficient: evidence?
i. oral management representations in respect of the completeness of b. Distinguish between a positive and a negative accounts
sales where the majority of transactions are conducted on a cash basis receivable confirmation.
ii. flowcharts of the accounting and control system prepared by a
c. In confirming a client’s accounts receivable, what
company’s internal audit department characteristics should be present in the accounts if the
iii. Yearend suppliers statement-presentation? auditor is to use negative confirmations?
iv. Physical inspection of a tangible non-current asset by an auditor
d. In which areas of audit may an auditor seek confirmation?
v. Comparison of items of income and expenditure for the current
period with corresponding information for prior periods
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Question 06
Question 05 a. The examination of evidence is fundamental to the audit process. ISA
500: Audit Evidence states that: “The auditor should obtain szfJicien1
• ISA 620 using the work of an Auditor’s Expert appropriate evidence to be able to draw reasonable conclusions on which to base the
deals with the auditor’s responsibilities relating to audit opinion “. Audit Evidence will comprise source documents and
accounting records underlying the financial statements’ assertions and
the work of an individual or organization in a field corroborative information from other sources.
Each of these sources presents the auditors with differing considerations
of expertise other than accounting or auditing, as to the quality of the evidence so produced.
Required:
when that work is used to assist the auditor in i. Define ‘audit evidence’ (2 marks)
obtaining sufficient appropriate audit evidence. ii. Explain four sources of audit evidence. (8 marks)

• Required b. Provide explanation on the following terms in relation to audit evidence:

i. Sufficiency of audit evidence
• What key issues must an auditor consider before ii. Reliability of audit evidence
relying on the work of an expert? iii.
iv.
External confirmation
Analytical Procedures (10 marks)
• [5 marks]
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Question 07 NBAA Adopted

• ISA 500: Audit Evidence, requires an auditor to
obtain relevant, reliable and appropriate audit
evidence sufficient to enable him/her to draw
reasonable conclusions there from or thereafter. THE END
•
• REQUIRED:
a. Describe the types and categories of audit
evidence. (6 marks)
b. How does the auditor use the evidence obtained?
(4 marks) (Total: 20 marks)

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