PSA 500

AUDIT EVIDENCE
A) AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE.
Inquiry- seeking information within or outside the entity
External confirmation- direct written response from a third party
Inspection- involves examining records or documents or a physical examination of an
asset
Observation- looking at a process or procedure being performed by others
or the performance of control activities
Recalculation- checking the mathematical accuracy of documents or records
Reperformance- independent execution of procedure or controls that were
originally performed as part of the entity’s internal control
Analytical procedures- evaluation of financial information made by a study of
plausible relationships among both financial and non-financial data
B) INFORMATION TO BE USED AS AUDIT EVIDENCE
Audit evidence includes
a. Information contained in the accounting records -records of initial accounting
entries and supporting records, such as checks; invoices; contracts; books; and records
such as worksheets supporting cost allocations, computations, reconciliations and
disclosures
b. Other information -such as minutes of meetings, confirmation from 3rd parties,
and other information obtained from audit procedures

Audit evidences comprises both

 Information that supports and corroborates management’s assertion
 Information that contradicts such assertions

Sufficient appropriate audit evidence

Reasonable assurance is obtained when the auditor has obtained sufficient appropriate
evidence to reduce risk to an acceptably low level
 Sufficiency- measure of quantity of audit evidence
- affected by auditor’s assessment of risk of misstatements
- affected by the quality of such evidence
 Appropriateness- measure of the quality of audit evidence
-relevance and reliability in providing support for the conclusions on which the
auditor’s opinion is based
Relevance and reliability
Relevance
- Whether the evidence provides insight on the validity of the assertion being tested
- Logical connection of the purpose of the audit procedure and the assertion
Relevance maybe affected by the direction of testing
 Tracing- for completeness or understatement (from source documents to financial
statements)
 Vouching- for existence or overstatement (from financial statement to source
documents)

Reliability
- Ability to provide convincing evidence related to the assertion being tested
- It is influenced by its source and nature, and the circumstances under which it is
obtained

Purpose of audit procedures

Risk assessment- assess risk of material misstatements
Test of control- evaluate the operating effectiveness of controls at the assertion level
Substantive test- detect material misstatements at the assertion level

C) GENERAL RULES ON THE RELIABILITY OF AUDIT EVIDENCE

 Reliability of evidence is increased when it is obtained from independent sources
outside the entity
 Reliability of internally generated evidence is increased when related controls are
effective
 Evidence obtained directly by the auditor is more reliable than evidence obtained
indirectly or by inference
 Evidence in documentary form is more reliable than evidence obtained orally
 Evidence provided by original documents is more reliable than evidence provided
by photocopies
D) SELECTING ITEMS FOR TESTING TO OBTAIN AUDIT EVIDENCE
Means of selecting items
A. Selecting all items
-Small number of large value items
-There is a significant risk
-100% examination is cost effective
B. Selecting specific items
- High-value or key items
- All items over a certain amount
- Items to obtain information
C. Audit sampling- making inference from testing the sample

PSA 501
AUDIT EVIDENCE - Specific considerations for
specific items

A) INVENTORY.
Management ordinarily establishes procedures under which inventory is physically
counted at least once a year to serve as a basis for the preparation of the financial
statements and, if applicable, to ascertain the reliability of the entity’s perpetual
inventory system.
Attendance at physical inventory counting involves:
• Inspecting the inventory to ascertain its existence and evaluate its condition, and
performing test counts;
• Observing compliance with management’s instructions and the performance of
procedures for recording and controlling the results of the physical inventory count;
and
• Obtaining audit evidence as to the reliability of management’s count procedures.
In some cases where attendance is impracticable, alternative audit procedures,
for example, inspection of documentation of the subsequent sale of specific inventory
items acquired or purchased prior to the physical inventory counting, may provide
sufficient appropriate audit evidence about the existence and condition of inventory.
The auditor considers the relationship between the cost of obtaining audit
evidence and the usefulness of the information obtained. However, the matter of
difficulty or expense involved is NOT IN ITSELF a valid basis for omitting an audit
procedures for which there is no alternative.

B) LITIGATION AND CLAIMS.

Litigation and claims involving the entity may have a material effect on the financial
statements and thus may be required to be disclosed or accounted for in the financial
statements.
The auditor shall design and perform audit procedures in order to identify litigation
and claims involving the entity which may give rise to a risk of material misstatement,
including:
 Inquiry of management and, where applicable, others within the entity, including
in-house legal counsel;
 Reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel; and
 Reviewing legal expense accounts
 PSA 505
EXTERNAL CONFIRMATION

A) EXTERNAL CONFIRMATION PROCEDURES TO OBTAIN AUDIT

EVIDENCE.
PSA 500 (Redrafted) indicates that the reliability of audit evidence is influenced by its
source and by its nature, and is dependent on the individual circumstances under
which it is obtained. That PSA also includes the following generalizations applicable
to audit evidence:
 Audit evidence is more reliable when it is obtained from independent sources
outside the entity.
 Audit evidence is obtained directly by the auditor is more reliable than audit
evidence obtained indirectly or by inference.
 Audit evidence is more reliable when it exists in documentary form, whether
paper, electronic form or other medium.

B) NON-RESPONSES OF CONFIRMATION
If management refuses to allow the auditor to send a confirmation request, the auditor
shall:
(a) Inquire as to management’s reasons for the refusal, and seek audit evidence as to
their validity and reasonableness;
(b) Evaluate the implications of management’s refusal on the auditor’s assessment of
the relevant risks of material misstatement, including the risk of fraud, and on the
nature, timing and extent of other audit procedures; and
(c) Perform alternative audit procedures designed to obtain relevant and reliable audit
evidence.
If the auditor concludes that management’s refusal to allow the auditor to send
a confirmation request is unreasonable, or the auditor is unable to obtain relevant and
reliable audit evidence from alternative audit procedures, the auditor shall
communicate with those charged with governance in accordance with PSA 260
(Revised and Redrafted).
C) NEGATIVE CONFIRMATIONS
Negative confirmations provide less persuasive audit evidence than positive
confirmations. Accordingly, the auditor shall not use negative confirmation requests
as the sole substantive audit procedure to address an assessed risk of material
misstatement at the assertion level unless all of the following are present:
 The auditor has assessed the risk of material misstatement as low and has
obtained sufficient appropriate audit evidence regarding the operating
effectiveness of controls relevant to the assertion;
 The population of items subject to negative confirmation procedures comprises a
large number of small, homogeneous, account balances, transactions or
conditions;
 A very low exception rate is expected; and
 The auditor is not aware of circumstances or conditions that would cause
recipients of negative confirmation requests to disregard such requests.

D) EVALUATING THE EVIDENCE OBTAINED

When evaluating the results of individual external confirmation requests, the auditor
may categorize such results as follows:
a) A response by the appropriate confirming party indicating agreement with the
information provided in the confirmation request, or providing requested
information without exception;
b) A response deemed unreliable;
c) A non-response; or
d) A response indicating an exception.
The auditor’s evaluation, when taken into account with other audit procedures
the auditor may have performed, may assist the auditor in concluding whether
sufficient appropriate audit evidence has been obtained or whether performing further
audit procedures is necessary, as required by PSA 330 (Redrafted).