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1 Audit Evidence Week 11. 2 Audit evidence What evidence is required? Auditors should obtain sufficient appropriate audit evidence to be able to draw.

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Presentation on theme: "1 Audit Evidence Week 11. 2 Audit evidence What evidence is required? Auditors should obtain sufficient appropriate audit evidence to be able to draw."— Presentation transcript:

1 1 Audit Evidence Week 11

2 2 Audit evidence What evidence is required? Auditors should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion (SAS 400.1) Audit evidence is obtained in a number of ways Including an appropriate mix of tests of control and substantive procedures

3 3 Assertions in Financial statements The auditor is making an opinion on the assertions made in the financial statements These then must be The evidence collected and evaluated must therefore be Sufficient Appropriate

4 4 Assertions Assertions and the implications of those assertions are as shown These can be evidenced by substantive testing

5 5 Sufficiency & Appropriateness Sufficiency is the measure of the quantity of evidence Appropriateness is the measure of the quality of reliability of audit evidence and its relevance to a particular assertion Whilst sufficiency and appropriateness are interrelated, various factors including risk of misstatement and materiality need to be considered when judging as to what is sufficient appropriate audit evidence But there are two major constraining factors in seeking evidence Time: an audit timetable is normally agreed with the management of the entity giving a deadline date for the conclusion of the audit. Cost: the fee for an audit assignment is normally agreed in advance. Thus, effective use of audit resources is crucial if commercial viability is to be maintained

6 6 Quantity Quantity of evidence Is a function of the methods adopted to collect evidence from the population of a class of transactions This relates to an assessment of risk and The employment of sampling techniques

7 7 Reliability Reliability of audit evidence is influenced by individual circumstances, but Audit evidence from external sources is more reliable than that obtained from the entitys records Evidence from entitys records is more reliable when internal controls work effectively Direct evidence by auditors is more reliable than that obtained from entity Written evidence is more reliable than oral Original documents are more reliable then photocopies,etc SAS

8 8 Obtaining evidence Evidence may be obtained by Inspection Observation Enquiry and confirmation Computation Analytical procedures

9 9 Identification of relationships Between items of financial data in the same period Between comparable financial data from different periods In order to Identify consistencies and predicted patterns of significant fluctuations and The results of investigations thereof.

10 10 The role of analytical procedures Analytical procedures can themselves provide sufficient audit evidence where an item can be verified directly by reference to another item Eg commission on sales or bank interest receivable Analytical procedures may also be effective in testing for understatement (i.e., completeness) Eg in predicting sales from purchases and known margins But sufficient substantive evidence is not obtained by analytical procedures alone, some tests of detail will also be required

11 11 Circumstances where appropriate Analytical procedures are most likely used With existing well-established clients In well-known, stable industries Where predictive information is readily available Where accounting and internal control systems are effective

12 12 Audit of accounting estimates These are such items as Adjustments for stock and debtors to net realisable value Depreciation Accrued income Provision for deferred taxation General provisions made

13 13 Accounting Estimates Frequently complex Business specific Maybe based on formula Subject to certain internal controls May require specialist knowledge

14 14 Accounting Estimates Collection of evidence Confirmation of estimates by combination of Review and test of process used to develop estimate Evaluation of data & consideration of the assumptions Testing calculations Comparison of estimates made for prior periods Consideration of directors review procedures Use of independent estimate Review of subsequent events

15 15 Opening balances and comparatives Auditors need to obtain sufficient audit evidence that Opening balances have been appropriately brought forward Opening balances do not contain errors or misstatements Appropriate accounting policies have been consistently applied Changes in accounting policies have been correctly applied

16 16 Comparatives Same rules apply Comparatives must be free from error Comparatives must incorporate correctly applied accounting policies If a new auditor May require substantive testing to provide adequate assurance of opening balances and comparatives

17 17 Confirmation as evidence There are instances where knowledgeable third parties may be asked to provide corroborative evidence of assertions This generally relates to requesting written evidence in relation to account balances This sort of evidence is a confirmation

18 18 Situations where appropriate Confirmation used where there exists: knowledgeable party independent of the entity where alternative reliable evidence is not readily available Knowledgeable parties usually in a commercial relationship with the entity holding reciprocal information as to entity balances Debtors Creditors Banks Lenders, etc It is in the interest for such parties to maintain reliable records of their relationship with the entity

19 19 Extent of evidence by confirmation Where confirmations relate to reciprocal balances they provide persuasive evidence as to rights and obligations Confirmations also provide strong evidence of ownership where the other party is acting as custodian But confirmations may not provide persuasive evidence of accuracy where the entitys balance is in error in the other partys favour an understatement of debtors an overstatement of creditors Confirmations provide reliable evidence of the valuation of assets Where the other party is a debtor or borrower further evidence is required of their ability to pay

20 20 Interpretation Reliability is high when There is assurance of responsibility and sound internal controls on the part of the third party Can provide useful evidence where Entitys internal controls are weak It is supportive of material misstatement

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