Gathering Appropriate Audit Evidence: by Laura Morgan, Examiner - Professional 2 Audit Practice

Gathering Appropriate Audit Evidence
By Laura Morgan, Examiner - Professional 2 Audit Practice
The main purpose of an audit is for the auditor to issue an audit opinion on the financial
statements. The auditor must gain evidence that supports each of the balances, transactions
and disclosures in the financial statements.
ISA 500, paragraph 6, requires the auditor to “design and perform audit procedures that are
appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit
evidence”.
Sufficient appropriate audit evidence:
- Sufficient – is the measure of the quantity of audit evidence. E.g. the sample
chosen should be large enough to be representative.
- Appropriateness – is the measure of the quality of audit evidence. To be of good
quality it should be relevant and reliable.
SUFFICIENT & APPROPRIATE
SUFFICIENT APPROPRIATE
RELEVANT RELIABLE
Quantity – Sufficient to
support the audit opinion. The
quantity required will depend
The relevance of audit - External evidence
on the following factors:
evidence refers to the is better than
- Risk assessment (high “logical connection” internal evidence
(ISA 500, paragraph (E.g. bank
risk – larger quantity)
A27) of the evidence or confirmation)
- Nature of Account
test with the - Internal is more
- Materiality of item
assertion/audit reliable if controls
- Experience gained in
objective that the are effective.
previous audits
auditor is trying to - Auditor
- Results of audit
address. generated is
procedures
better than client
- Source & reliability of
The evidence gathered generated.
information
must cover the financial - Documentary
statement assertions rather than verbal
(see below). form.
- Original
Page 1 of 4 than
documents
copies.
Financial Statement Assertions
ISA 315, states that the auditor must use assertions for classes of transactions and related
disclosures and account balances and related disclosures in sufficient detail to form the
basis for the assessment of risks of material misstatement and the design and performance
of further audit procedures.
Assertions used by the auditor
Classes of transactions Account balances

(e.g. revenue, expenses, bank (e.g. asset, liability and equity
transactions, fixed asset additions, balances in the statement of
etc.) financial position)
Occurrence Existence
Completeness Completeness
Accuracy Valuation
Cut-off Rights and Obligations
Presentation/Classification and Disclosure
Assertions about classes of transactions and events and related disclosures for the
period under audit
Transactions and events that have been recorded or disclosed
Occurrence have occurred, and such transactions pertain to the entity.
All transactions have events that should have been recorded
Completeness have been recorded, and all related disclosures that should
have been included in the financial statements have been
included.
Amounts and other data relating to recorded transactions and
Accuracy events have been recorded appropriately, and related
disclosures have been appropriately measured and described
Cut-off Transactions and events have been recorded in the correct
reporting period.
Classification Transactions and events have been recorded in the proper
accounts.
Presentation Transactions and events are appropriately aggregated or
disaggregated and are clearly described, and related
disclosures are relevant and understandable in the context of
the requirements of the applicable financial reporting
framework.
Page 2 of 4
Assertions about account balances and related disclosures
at the period end
Existence Assets, liabilities and equity interests exist.
Completeness All assets, liabilities and equity interests that should have been
recorded have been recorded, and all related disclosures that
should have been included in the financial statements have
been included.
Valuation Assets, liabilities and equity interests have been included in the
financial statements at appropriate amounts and any resulting
valuation or allocation adjustments have been appropriately
measured and described.
Rights & Obligations The entity holds or controls the rights to assets, and liabilities
are the obligations of the entity.
Classification Assets, liabilities and equity interests have been recorded in the
proper accounts.
Presentation Assets, liabilities and equity interests are appropriately
aggregated or disaggregated, and clearly described, and related
disclosures are relevant and understandable in the context of
the requirements of the applicable financial reporting
framework.
Audit procedures to obtain audit evidence
Auditors may obtain evidence by one of more of the following procedures:
- Analytical Procedures – Evaluating financial and non-financial information and

comparing actual results to expectations. It is important to investigate identified
fluctuations and relationships that are inconsistent with other relevant information or
deviate significantly from predicted amounts.
- Enquiry and External confirmation – Enquiry involves seeking information from
client staff or external sources. External confirmation is the process of obtaining a
representation of information or of an existing condition directly fro a third party e.g.
confirmation from bank of bank balances, confirmation from customer of aged
receivable balance at period end.
- Inspection - Inspection involves examining, vouching, tracing or verifying records or
other documents, processes, conditions or transactions.
- Observation – Observation consists of looking at a process or procedure being
performed by others.
- RecalcUlation and reperformance – Recalculation consists of verifying the
mathematical accuracy of documents and accounting records and re-computing
financial statements amounts or supporting details, including client schedules.
Reperformance is the auditor’s independent execution of procedures of controls.
Remember AEIOU!
Page 3 of 4
Gathering appropriate audit evidence – Example:
A&B Limited have motor vehicles in the financial statements at the year end of £680,000.
The audit junior obtained a list of all motor vehicles and physically inspected them. The audit
junior is happy that all motor vehicles exist at the year end.
The above audit test only ensured the motor vehicles actually exist.
Consider the following:
- Rights and obligations: Does A&B Limited actually own the motor vehicles?
- Completeness: Could A&B Limited have more motor vehicles than we are aware of?
- Valuation/Accuracy: Is the net book value of £680,000 appropriate at the year end?
Are the motor vehicles being depreciated appropriately?
- Classification/Presentation: Have the motor vehicles been classified correctly?
Have they been presented accurately in the disclosure notes in the financial
statements?
Conclusion:
Gathering sufficient and appropriate audit evidence is very important. This is a key syllabus
area, and you must be very comfortable with the assertions.
When designing audit plans and procedures for specific areas, you must focus on the
financial statement assertions that you are trying to find evidence to support.
If a question asks for audit procedures relating to a particular assertion, make sure your
answer addresses only the assertion required by the question.
Page 4 of 4

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Gathering Appropriate Audit Evidence

By Laura Morgan, Examiner - Professional 2 Audit Practice

Sufficient appropriate audit evidence:

SUFFICIENT & APPROPRIATE

Assertions used by the auditor

Classes of transactions Account balances

Audit procedures to obtain audit evidence

Auditors may obtain evidence by one of more of the following procedures:

- Analytical Procedures – Evaluating financial and non-financial information and

Consider the following:

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