AUDIT EVIDENCE

International Standard on Auditing, ISA 500- Audit evidence

“The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion”

Audit evidence refers to the information obtained by the auditor in arriving at the conclusions on
which the audit opinion on the financial statements is based. Audit evidence comprises source
documents and accounting records underlying the financial statements and corroborating
information from other sources. The sources and amount of evidence needed to achieve the
required level of assurance is determined by the auditor’s judgment. His judgment will be
influenced by the materiality of the item being examined, the relevance and reliability of
evidence available from each source and the time and cost involved in obtaining it.
Audit evidence is obtained from an appropriate mix of tests of controls and substantive
procedures. Where the internal control system is considered weak, evidence may be obtained
entirely from substantive procedures.

Tests of controls
Compliance tests are procedures performed to obtain audit evidence about the effectiveness of
the:
(a) Design of the accounting and internal control system i.e. whether it is suitably designed to
prevent and correct material misstatements.
(b) Operation of the internal controls throughout the period.

Substantive procedures
These are audit tests carried out to test the accuracy and validity of the accounting records.
Substantive procedures are mainly of two types i.e. analytical review procedures and tests of
details.
Meaning of sufficient appropriate audit evidence
Sufficiency is the measure of the quantity of audit evidence.

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Appropriateness is the measure of the quality of audit evidence and its relevance to a particular
assertion and its reliability. In forming an opinion, the auditor does not examine all the
information available but uses judgmental or statistical sampling procedures to form conclusions
on account balances, class of transactions or controls.
Factors influencing the auditor’s judgment as to what is sufficient appropriate audit evidence.

1. The degree of risk of misstatement- this may be affected by;

 The nature of the item e.g. cash has a greater degree of misstatement than fixed assets
 Strength of the internal control system, where the system is weak there is a greater risk of
misstatement.
 Nature and size of business being carried out.
 Financial position of the company.

2. Materiality of the item being examined in relation to the financial statements as a whole.
3. The auditor’s experience with the client gained during the previous audits e.g. the reliability
of management and accounting records.
4. Results of other audit procedures including fraud or error, which may have been detected.
5. Sources and reliability of information available.

Meaning of relevance of audit evidence

Relevance of audit evidence should be considered in relation to the overall audit objective of
forming an opinion and reporting on the financial statements. To achieve this objective the
auditor needs to obtain evidence to enable him to draw reasonable conclusions on various
management assertions made in preparing the financial statements. Relevance therefore refers to
the ability of the evidence to assist the auditor in testing management’s assertions.
Refer latter on in this lesson for the meaning of management’s assertions.
Reliability of audit evidence
The reliability of audit evidence refers to the credibility of the source of the evidence.

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This credibility is influenced by its source; whether from internal sources or external sources and
by its nature; whether visual, documentary or oral. Reliability of the evidence depends on
individual circumstances but we can make the following generalizations:

1. Audit evidence from external sources e.g. a third party (e.g. a debtor) confirming amount
owing to the company is more reliable than evidence generated internally.
2. Audit evidence generated internally e.g. from accounting records is more reliable when the
related accounting and internal controls are effective.
3. Evidence obtained by the auditor himself is more reliable than that obtained from the entity.
4. Evidence in the form of documents and written representations is more reliable than oral
representations.
The auditor seeks evidence from different sources. Evidence is more persuasive when evidence
from different sources is consistent. Conversely, when audit evidence obtained from one source
is inconsistent with that obtained from another, the auditor should perform further procedures to
resolve the inconsistency.

When in doubt as to any assertion of material significance, the auditor should attempt to obtain
sufficient appropriate evidence to remove such doubt. If he is unable to obtain sufficient
appropriate evidence, he should express a qualified or a disclaimer of opinion.

Obtaining audit evidence

Audit evidence is obtained by carrying out compliance (tests of control) and substantive tests. In
carrying out compliance tests (tests of controls), the auditor is concerned with;
a. Whether controls exist.
b. The effectiveness of those controls.
Substantive procedures are defined as those tests of transactions and account balances, which
seek to provide audit evidence as to the completeness, accuracy and validity of information
contained in the accounting records or in the financial statements. Substantive tests sre of two
types;
c. Tests of details- these are designed to substantiate individual items in the accounts and to
gain assurance about their validity or the details that underlies the account balances.

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 d. Analytical review procedures
Management assertions
When preparing financial statements, the management is making certain explicit or implicit as-
sertions about the financial affairs of the company. Consequently, when the auditor is obtaining
evidence from substantive procedures, he is concerned about testing or substantiating the truth of
these assertions. These assertions are categorized as follows;

i. Existence- that an asset or liability exists at a given date. E.g. that closing stock physically
exists.
ii. Rights and obligations- an asset is a right of the entity and a liability is an obligation of the
entity. E.g. land belongs to the company and the title documents are in the name of the
company.
iii. Occurrence- that a transaction or event took place which pertains to the entity during the
period.
iv. Completeness- there are no unrecorded assets, liabilities, transactions or undisclosed items.
v. Valuation- that a transaction is recorded at an appropriate carrying value. E.g. that land and
buildings are carried at an appropriate value.
vi. Measurement- that a transaction is recorded at the proper amount and revenue and expenses
allocated to the proper period.
vii. Presentation and disclosure- an item is disclosed classified and described in accordance
with the applicable with the applicable financial reporting framework.
The auditor seeks to obtain audit evidence to prove each financial statement assertion. The
nature, timing and extent of substantive procedures to be carried out to prove the financial
assertions varies. One substantive procedure can prove evidence about more than one assertion.
E.g. collection of an amount owed by debtors may provide evidence as to both existence and
valuation of the debt.

METHODS OF OBTAINING EVIDENCE

The auditor may rely on sufficient appropriate evidence obtained by substantive testing to form
his opinion. Alternatively, he may be able to obtain assurance from the presence of a reliable

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internal control system and therefore reduce the extent of substantive testing. The auditor obtains
evidence in performing compliance and substantive procedures using the following methods;

 Inspection
This consists of examining records, documents or tangible assets. The reliability of the
evidence obtained from inspection of records and documents depends on the nature, source
and effectiveness of the internal control system. Inspection of tangible assets provides
evidence with respect to their existence but not as to their value and ownership.
 Observation
This involves looking at procedures being performed by others. E.g. observing the counting
of stock by the client’s personnel.
 Inquiry and confirmation
Inquiry consists of seeking information of knowledgeable persons inside or outside the
entity. This ranges from formal written inquiries addressed to 3rd parties to oral inquiries
addressed to persons within the entity. The information may be new to the auditor or may
corroborate evidence from other sources. Confirmation is the response to an enquiry to
corroborate information contained in the accounting records.
 Computation
This involves checking the arithmetical accuracy of source documents and accounting
records or performing independent computations. E.g. re-computing the amount of provision
for depreciation and comparing this against that computed by the client.
 Analytical procedures
The analysis of relationships such as between items of financial data to identify consistencies
and predicted patterns or significant fluctuations and unexpected relationships and the results
of investigations thereof.

Refer to ISA 520 on the nature and purpose of analytical review.