Audit Evidence and Specific Considerations For Certain Items - ACCA Global

05/07/2023, 14:25 Audit evidence and specific considerations for certain items | ACCA Global
Menu 
CPD technical article

01 March 2015
Audit evidence and

specific considerations for
certain items
 CPD technical article

Multiple-choice questions 1 Unit
Home / Members / CPD online
Obtaining and documenting sufficient

appropriate evidence on which to base
the auditor’s opinion is one of the main
objectives of an audit of financial
statements.
https://www.accaglobal.com/gb/en/member/discover/cpd-articles/audit-assurance/specific-considerations.html 1/19
It is also an aspect in respect of which audit regulators in various jurisdictions find common
problems when inspecting completed audit engagements. Massimo Laudato, technical adviser at
ACCA, explains.
Audit evidence and the objectives of an audit
The main objective of the work performed by the auditor in an audit engagement is that of
obtaining reasonable assurance as to whether the financial statements, as a whole, are free from
material misstatement, so that the auditor is able to express an opinion on the financial
statements and report accordingly in the auditor’s report.
To obtain reasonable assurance about the financial statements, which is a high but not absolute
level of assurance, the auditor needs to design and perform audit procedures to obtain sufficient
appropriate audit evidence to be able to draw reasonable conclusions on which to base the
auditor’s opinion.
ISA (UK and Ireland) 500, Audit Evidence, explains what are the auditor’s responsibilities in
obtaining audit evidence that can underpin the auditor’s opinion and what constitutes sufficient
appropriate audit evidence for such purpose.
Sufficient appropriate audit evidence
A large part of the work involved in the performance of an audit consists of obtaining and
evaluating audit evidence, which is primarily derived from audit procedures carried out during the
course of the engagement, but that can also be gained from other sources. For example
sources like previous audits; provided that changes occurred in the meantime have been
carefully taken into account; or the firm’s quality control procedures, especially around client
acceptance and continuance.
Audit procedures that are used to obtain audit evidence are various and are often applied in
combination. They can include inspection, observation, confirmation, recalculation,
reperformance and analytical procedures, in addition to inquiry, as the latter does not normally
provide sufficient audit evidence on its own.
However, audit evidence obtained will only be useful in reducing to an acceptably low level the
risk that the auditor could express an inappropriate opinion when the financial statements are
materially misstated and, therefore, allow the auditor to draw reasonable conclusions, when it is
sufficient and appropriate to the circumstances.
Sufficiency and appropriateness of audit evidence are two qualities that are interrelated.
Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence
needed is affected by the risks of misstatement assessed by the auditor, whereby the higher the
risks the more audit evidence required, and by the quality of the evidence, where the higher the
quality the less evidence perhaps required. A large amount of audit evidence may, however, not
compensate for its poor quality.
Appropriateness is the measure of the quality of audit evidence. The quality of audit evidence
depends on whether it is relevant and reliable in providing support to the conclusions on which
the auditor’s opinion is based. Whether evidence is reliable also depends on its source; for
instance, whether it is generated by the client, a third party or the auditor; and also from its
nature, whereby documentary evidence is normally more reliable than verbal evidence.
Whether the audit evidence obtained in the course of an engagement is sufficient and
appropriate to support the auditor’s opinion is a matter of professional judgment that the auditor
needs to establish. Professional judgment is not, however, an abstract and subjective category of
the auditor’s frame of mind, and should be informed by a structured approach to gathering
evidence that is based on the assessed risks of material misstatement of the financial
statements.
Designing and performing audit procedures for obtaining

audit evidence
A number of ISAs (UK and Ireland), namely ISA 300, ISA 315 and ISA 330, require and explain
that audit evidence should be obtained by performing risk assessment procedures and further
audit procedures. Further audit procedures include tests of controls and substantive procedures,
including tests of details and substantive analytical procedures.
In particular, alongside an overall audit strategy that indicates the scope of the work, the
resources of staff allocated to specific areas and the timing of the engagement, a more detailed
audit plan should indicate the audit procedures to be performed in respect of specific assertions
in the financial statements and their timing.
The results of the initial risk assessment procedures, like the entity’s business risk assessment
or the assessment of internal controls, are the basis on which to design the nature, timing and
extent of further audit procedures to be performed in respect of the risks identified.
Further audit procedures should respond to the assessed risks of material misstatement at the
assertion level, so that sufficient appropriate evidence can be obtained in respect of those risks.
The detailed audit plan records the risk assessment procedures and the further audit procedures
at the assertion level in response to the assessed risks. The audit plan describes the nature,
extent and timing of the audit procedures to be performed by team members in respect of
specific classes of transactions, account balances and disclosures. In the case of an audit of a
small entity, the audit plan would normally be included in standard audit programmes and
schedules used for the various transactions and account balances. In any case, the standard
programmes need to be tailored so that the approach to an item, in terms of the use of
substantive procedures, tests of controls or both, is proportional to the risk assessed for that item
and is directed at obtaining audit evidence capable of verifying the underlying assertions.
The audit evidence generated by the planned audit procedures should be sufficient and
appropriate to support and corroborate, or to contradict, the management’s assertions in respect
of specific classes of transactions, account balances or disclosures in the financial statements.
Audit procedures in respect of specific items in the financial statements should be designed with
the objective of providing evidence capable of verifying the assertions embodied in an item, so
that the auditor can draw a reasonable conclusion about that item. Audit evidence and the
auditor’s conclusions in respect of the various assertions tested contribute to the overall audit
evidence on which the auditor’s opinion is based.
The audit objectives in respect of the various assertions embodied in the financial statements,
which need to be met by sufficient appropriate evidence provided by audit procedures, can be
summarised as follows:
Assertions about classes of transactions and events for

the period under audit  (usually profit or loss account
assertions):
Financial statement
Audit objective
assertion
Occurrence To form an opinion as to whether transactions and events that have been
recorded have occurred and pertain to the entity.
Completeness To form an opinion as to whether all transactions and events that should
have been recorded have been recorded.
Accuracy To form an opinion as to whether amounts and other data relating to

recorded transactions and events have been recorded appropriately.
Financial statement
Audit objective
assertion
Cut-off To form an opinion as to whether transactions and events have been

recorded in the correct accounting period.
Classification To form an opinion as to whether transactions and events have been

recorded in the proper accounts.
Assertions about account balances at the period end

(usually balance sheet assertions):
Financial
statement Audit objective
assertion
Existence To form an opinion as to whether assets, liabilities, and equity interests exist.
Rights and To form an opinion as to whether the entity holds or controls the rights to
obligations assets, and liabilities are the obligations of the entity.
(Ownership)
Completeness To form an opinion as to whether all assets, liabilities and equity interests that
should have been recorded have been recorded.
Valuation and To form an opinion as to whether assets, liabilities, and equity interests are
allocation included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded.
Assertions about presentation and disclosure (covering

both the profit and loss account and balance sheet):
Financial statement
Audit objective
assertion
Occurrence and rights and To form an opinion as to whether disclosed events, transactions, and
obligations other matters have occurred and pertain to the entity.
Completeness To form an opinion as to whether all disclosures that should have been
included in the financial statements have been included.
Classification and To form an opinion as to whether financial information is appropriately

understandability presented and described, and disclosures are clearly expressed.
Accuracy and valuation To form an opinion as to whether financial and other information are
disclosed fairly and at appropriate amounts.
When designing and performing audit procedures to verify specific financial statements
assertions, the auditor needs to consider whether the procedures are suitable to meet the audit
objective and should select those that either in isolation or combination can provide sufficient
appropriate evidence.
In fact, out of the various procedures that can be performed by auditors, some are more suited to
verify certain assertions in respect of specific classes of transactions, account balances and
disclosures, while they may not produce relevant results in respect of the other assertions
relating to the same financial statements items. In many cases a single type of procedure may
not verify an assertion relating to an item and a combination of procedures will be needed to that
affect.
Inspection is an audit procedure based on the examination of records or documents,

whether internal or external, that could be held in various forms, ie paper, electronic or
similar, or on the physical assessment of an asset. The inspection of records and
documents provides audit evidence whose reliability depends on their nature and source.
Inspecting certain documents may provide direct audit evidence of the existence of an
asset, for instance a financial instrument like a share or a bond where the document itself
constitutes the asset. At the same time the inspection of the document may not provide
evidence in respect of the assertions of ownership and valuation of the asset. Similarly the
inspection of tangible assets may provide reliable audit evidence about their existence but
not about the entity’s rights and obligations or the valuation of the assets. Another example
may be the inspection of an executed contract that may provide evidence in respect of the
entity’s application of accounting policies like revenue recognition.
Observation is instead an audit procedure that consists of looking at a process or

procedure being performed by others so that evidence about the actual performance is
obtained. However observation provides evidence that is limited to the point in time when
it takes place and by the fact that being observed may influence how the process or
procedure is performed on such occasion. Examples of observation are the auditor’s
attendance at the inventory counting by the entity’s staff and observing the performance of
control activities.
External confirmation procedures may be an important source of relevant and reliable
audit evidence. External confirmation is audit evidence that is obtained as a direct written
response to the auditor from a third party (the confirming party) in paper form, electronic
medium or other medium. External confirmations are normally used when confirming
assertions relating to account balances, like payables and receivables, but should not be
restricted to such items only. The auditor may ask confirmation of the terms of agreements
and transactions with third parties, whether any changes to existing agreements has
occurred or whether no additional conditions are attached to an agreement, perhaps in a
separate document.
Recalculation is a procedure that consists of checking the mathematical accuracy of
documents or records and that can be used to verify the accuracy of the recording of
transactions or of the application of accounting policies, for example by recalculating
depreciation of tangible assets. Recalculation however does not provide evidence of the
accuracy of the estimated rate of depreciation charged in relation to each class of assets.
Reperformance instead involves the independent execution by the auditor of procedures
or controls that were originally performed as part of the entity’s internal control.
Analytical procedures can or should be used at various stages of an audit engagement:
at the risk-assessment stage, as substantive audit procedures to verify financial
statements assertions and towards the end of the audit to corroborate whether the
financial statements are consistent with the auditor’s understanding of the entity. Analytical
procedures involve evaluations of financial information through analysis of plausible
relationships among both financial and non-financial data. They also include investigation
of fluctuations and relationships that are inconsistent with other relevant information or that
differ from expected values by a significant amount. At the assertion level, analytical
procedures may be used as substantive procedures either on their own or in conjunction
with tests of details. Substantive analytical procedures are generally more applicable to
large volumes of transactions that tend to be predictable over time and for which there is
an expectation that the relationships among data exist and will continue in the absence of
indications to the contrary. Sometimes a simple model may work out as effective analytical
procedures. For instance if an entity has a stable number of employees at fixed rates of
pay during a period, then the auditor may estimate the total payroll costs for the period
with a high level of accuracy, therefore obtaining audit evidence for a significant item in the
accounts and reducing the need to perform tests of details on the payroll. In other cases
analytical procedures may provide less persuasive evidence, for instance when gross
margin percentages are calculated and compared in order to confirm a revenue amount,
that may in any case be relevant if used with other procedures. An example of effective
combination of substantive analytical procedures and tests of details could be in respect of

the valuation assertion for accounts receivable, where the auditor may perform analytical
procedures on an aged list of debtors in addition to tests of detail on subsequent cash
receipts to verify collectability of the receivables.
Inquiry is a type of audit procedure that is used extensively during the performance of an
audit in addition to other procedures. It consists of seeking both financial and non-financial
information of knowledgeable persons within or outside the entity. Inquiries are important
as they may provide new information to the auditor or corroborative audit evidence or, on
the contrary, information that differs significantly from other information obtained by the
auditor.
What information can be used as audit evidence?
When designing and performing audit procedures to verify assertions in the financial statements,
the auditor should consider whether the outcome of the procedures would constitute relevant and
reliable audit evidence.
Audit evidence would be relevant if it is capable of meeting the purpose of the audit procedure,
which is normally that of verifying an assertion in respect of a financial statements item. The
relevance of evidence produced in respect of a specific audit objective may also depend on the
direction of testing. For instance when an audit objective of a procedure is that of testing for
existence or valuation of accounts payable, testing the recorded accounts payable may produce
relevant audit evidence. However when the audit objective is that of testing completeness (ie
understatement) of accounts payable, testing the accounts payable already recorded would not
be relevant, as it could be, for instance, testing information like subsequent disbursements,
unpaid invoices and suppliers’ statements. Audit procedures may provide evidence that is
relevant to certain assertions but not others. For example the inspection of documents in respect
of the collection of receivables after the year end may provide relevant evidence about existence
and valuation but not cut-off. However audit evidence from different sources or of a different
nature may be relevant to the same assertion.
As already mentioned, the reliability of information to be used as audit evidence depends on its
source and nature and the circumstances under which it is obtained. However in respect of audit
evidence reliability, ISA 500 outlines a number of generalisations, some of which are:
The reliability of audit evidence is increased when it is obtained from independent sources
outside the entity.
Audit evidence obtained directly by the auditor (for example, observation of the application
of a control) is more reliable than audit evidence obtained indirectly or by inference (for
example, inquiry about the application of a control).
Audit evidence in documentary form, whether paper, electronic, or other medium, is more
reliable than evidence obtained orally.
Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles, or documents that have been filmed, digitised or
otherwise transformed into electronic form.
The generalisations above are however subject to relevant exceptions. For instance information
obtained from an independent source outside the entity may not be reliable if the source is not
knowledgeable. Similarly a management’s expert may lack objectivity.
Selection of Items to obtain audit evidence
When designing tests of controls and tests of details in respect of specific assertions the auditor
needs to use methods for selecting the items to be tested that are effective in meeting the
purpose of the audit procedures.
A test is effective if it provides audit evidence that is relevant and reliable and that, taken together
with other audit evidence obtained, will be sufficient for the auditor’s purposes.
The methods available to the auditor for selecting items for testing are:
1. Selecting all items (100% examination)

2. Selecting specific items; and
3. Audit sampling.
The application of one or a combination of the above methods may be effective depending on
the specific circumstances, like the risks of material misstatement in respect of the assertion
tested and the efficiency of the different methods.
Sometimes it may be appropriate to test all the items that make up a class of transactions or an
account balance, or a sub-class within a class. 100% examination is more common for tests of
details and less suitable for tests of controls and may be appropriate when for instance:
The population is made up of a small number of large value items;

There is significant risk of misstatement and other methods do not provide sufficient
appropriate evidence; or
Calculation or other process performed automatically by an information system make
100% examination cost effective.
Alternatively an auditor may make a judgemental selection of specific items from a population
that make up a class of transactions or account balance. Being a judgemental selection it will be
based on the auditor’s understanding of the entity, the assessed risks of material misstatement
and the characteristics of the population being tested. Specific items that may be selected
include:
High value or key items. The auditor may select items because of their value within a
population or because they reveal some specific feature, ie items that could be suspicious,
unusual, more subject to risk or that have a history of error.
All items over a certain amount. The auditor may decide to test items with carrying values
above a level established to verify a large proportion of the total amount of a class of
transactions or account balance.
Items to obtain information. The auditor may select certain items to obtain information
about general matters like the nature of the entity or the nature of transactions.
Albeit the selection of specific items is often an efficient method of obtaining audit evidence, it
does not constitute audit sampling, ie the results of procedures applied to the selected items do
not provide evidence in respect of the rest of the population.
Audit sampling is a method of selecting a sample of items to be tested, which covers less than
the total of the population, but that provides the chance for all items to be selected, so that the
auditor may have a reasonable basis to draw a conclusion about the whole population. In order
to have statistical relevance, a sampling approach should be determined either using a random
selection method or probability theory to evaluate a sample result. Audit programmes often
include schedules for determining sample sizes that reduce the risk of erroneous conclusions to
an acceptably low level.
Documentation of procedures and audit evidence
Audit procedures designed and performed by the auditor should clearly document the audit
objective that they intend to achieve (in terms of assertions relating to a specific class of
transactions, account balance or disclosure), the actual work performed, the results obtained,
their evaluation and a conclusion as to whether the audit evidence obtained is sufficient and
appropriate to verify or not the assertion and is capable of supporting the auditor’s opinion.
The documentation of the design and performance of audit procedures may take place by using
free form working papers, especially when documenting uncommon procedures or procedures in
respect of specialist items, like defined benefit pension plans, or by using structured working
papers like those included in audit programmes, which also suggest audit objectives and
standard procedures in respect of the most common financial statements items. As ever when
using audit programmes, the auditor should only select relevant procedures and documentation
according to the risk assessment in that area of the financial statements, the materiality
assessment, and the extent to which the auditor wishes to rely on directional testing. Additionally
standard audit tests may need to be varied or substituted by more efficient non-standard tests
that are better suited to the nature of the client and the systems employed.
Obtaining Audit Evidence in respect of some specific

Items
Audit regulators in various jurisdictions find a number of common problems when conducting
external inspections of completed audit engagements.
A general problem encountered is that audit files fail to meet the ISAs requirements as they fail to
record sufficient appropriate audit evidence to support the auditor’s conclusions and opinion. It
may happen that the audit working papers do not record adequate details of the audit procedures
performed and of the conclusions drawn from the audit work carried out. In such a case it would
not be possible to determine from the documentation what audit objective was to be achieved by
the work done, what procedures were performed and what results were actually obtained.
The problem in respect of audit evidence normally stems from the fact that either the work set
out in the audit plan has not been completed or that the auditor has not recorded the work
undertaken in an effective manner. Therefore, in the first case the auditor would have failed to
meet the requirements of ISA 500 in respect of obtaining sufficient appropriate audit evidence on
which to base the auditor’s opinion, while in the second case the requirements of ISA (UK and
Ireland) 230, Audit Documentation, would not be met as the documentation does not record all
the matters which are significant in supporting the auditor’s opinion.
It goes without saying that if the auditor has not performed the work planned, there would be no
grounds to express an opinion on the financial statements. If on the other hand the auditor has
been unable to produce effective documentation of procedures and audit evidence, the
recommendations above as to the form and content of effective documentation should be
followed.
Apart from the general problem relating to recording sufficient appropriate audit evidence, which
could imply a systematic failure across the whole audit engagement in obtaining and recording
audit evidence, the audit regulators commonly come across issues relating to the inappropriate
approach to the audit of specific items in the financial statements, which may be unsuitable to
generate sufficient appropriate audit evidence and for which guidance may be derived from the
ISAs and established audit practice.
Inventory
The main assertions in the financial statements relating to inventory are existence, ownership,
completeness and valuation and audit procedures should be designed and performed with the
objectives of verifying such assertions.
ISA (UK and Ireland) 501, Audit Evidence – Specific Considerations for Selected Items, deals
with inventory and specifically requires that, if inventory is material to the financial statements,
the auditor shall obtain sufficient appropriate audit evidence regarding the existence and
condition of inventory by, in addition to other procedures, attendance at physical inventory
counting unless impracticable.
ISA 501 therefore focuses on the existence assertion, ie testing for overstatement of inventory,
and on the condition of inventory, which is relevant to its valuation by identifying obsolete,
damaged and slow moving items, both of which should invariably be verified by attending and
performing audit procedures at the inventory counting (stocktake).
Attendance at the inventory counting is in any case also relevant in providing evidence in respect
of the completeness and valuation of inventory and in respect of the cut-off for recording
inventory inwards and outwards movements, and the connected impact on revenues and costs.

The directors of a company, ie those charged with its governance, have the responsibility of
preparing financial statements that are free from material misstatement and of ensuring that the
amount at which inventory is recorded in the financial statements represents inventory physically
in existence and includes all inventories of the entity. To achieve this, entities may maintain
detailed records of inventory and check these by regular test counts, a perpetual inventory
system. In some entities where the accounting records are less detailed, the amount of inventory
may be determined by way of a full physical count at a date close to the entity’s financial year
end.
Where an entity maintains a perpetual inventory system, checked by regular test counts, the
auditor should perform procedures to confirm whether adequate records of inventory are
maintained and kept up to date, procedures for inventory recording and test-counting are
satisfactory and all material differences between the book records of inventory and the physical
counts are investigated and corrected. The auditor attending a physical inventory counting for
such an entity will need to consider whether the checking of stocks as a whole is effective in
confirming that accurate records of inventory are maintained.
For entities that do not maintain detailed records of inventory and rely on a full physical count
around the financial year end, the auditor’s attendance at the inventory counting is more
important for the purpose of obtaining audit evidence in respect of inventories.
When the auditor attends an inventory count in compliance with ISA 501, the auditor is required
to:
1. Evaluate management’s instructions and procedures for recording and controlling the
results of the entity’s physical inventory counting;
2. Observe the performance of management’s count procedures;
3. Inspect the inventory; and
4. Perform test counts.
The auditor should examine the way the inventory count is organised and evaluate the adequacy
of management’s instructions; for example as to whether they address the accurate identification
of slow-moving, obsolete or damaged items or control over the shipping and receipt of inventory
before and after the cut-off date. Such instructions should be preferably in writing and should
cover all phases of the inventory counting procedures.
During the inventory counting the auditor should observe whether the entity’s staff are carrying
out management’s instructions and count procedures properly, and if that is not the case, any
issues identified should be brought to the attention of the management supervising the counting,
including a request to re-perform partly or completely the count.
The inspection of the inventory and the performance of test counts assists the auditor in
ascertaining the existence of inventory and in identifying obsolete, damaged or ageing items.
Test counts should also be designed to provide audit evidence in respect of completeness of
inventory and intrinsically provide evidence about the accuracy of the inventory count records.
Common problems encountered by audit regulators in respect of the audit of inventory include
the fact that the inventory count is not attended or that the evidence of the work done during
attendance at the inventory count is poor. Frequently attendance notes do not provide sufficient
detail of what happened on the day.
To rectify the latter issue, there should be adequate notes that provide a reasonable outline of
the procedures performed. In particular it is important to record clearly which lines of inventory
have been counted during the test counts and to indicate the direction of the test.
In respect of the direction of the testing, when carrying out test counts the auditor should select
items from the count records and trace them back to the physical inventory. Such procedure,
coupled with inspection of the selected items, has the objective of verifying the existence of
inventory and its physical condition. When using a judgmental approach to the selection of items,
the auditor should give particular consideration to those inventories which the auditor believes to
have a high value, either individually or as a category, and to those that are susceptible to
misappropriation.
Conversely the auditor should select items from the physical inventory and count them back to
the inventory count records. In this case the direction of the testing will have the objective of
verifying completeness of inventory, ie that inventory is not understated.
Apart from relying on inspection of selected items during test counts, the auditor may verify the
condition of inventory also by observing whether the management’s procedures for identifying
damaged, obsolete and slow-moving items operate properly.
The work performed to corroborate that inventory is correctly valued will normally involve
verification of the cost of inventory and of its net realisable value. When testing cost it will
normally be necessary to look at suppliers’ invoices and similar documentation. In particular a
sample of items from the count records may be selected and agreed to purchase invoices from
suppliers to verify the cost. If standard costs have been used then the standard costing
calculations will need to be reviewed and tested. Net realisable value testing will involve looking
at the after date sales invoices and, if necessary, testing the number of units sold at such price.
The test that may be performed in this case would involve selecting items from the count records
and agreeing them to the sales invoices.
During attendance at the inventory count the auditor may obtain cut-off information, such as
details of the movement of inventory, to assist the auditor in performing audit procedures over
the accounting for such movements at a later date. Where possible, cut-off testing for inventory
can be combined with the same testing for sales and purchases.
When the physical inventory counting takes place at a date which is not the financial statements
date, the auditor will also need to perform procedures to obtain audit evidence about whether
changes in inventory between the count date and the date of the financial statements are
properly recorded. In such a case the auditor evaluates the effectiveness of controls over
changes in inventory to determine whether the conduct of inventory counting at a different date is
appropriate for audit purposes. The observation of entity’s cut-off procedures and cut-off testing
performed by the auditor will be relevant in these circumstances.
If the auditor is unable to attend physical inventory counting due to unforeseen circumstances,
the auditor shall make or observe some physical counts on an alternative date, and perform audit
procedures on intervening transactions.
If attendance at physical inventory counting is impracticable, ISA 501 requires the auditor to
perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the
existence and condition of inventory. If it is not possible to do so, the auditor shall modify the
opinion in the auditor’s report in accordance with ISA (UK and Ireland) 705.
It has to be noted that ISA 501 contemplates only limited circumstances when the auditor’s
attendance at inventory counting may be considered impracticable, mainly relating to the fact
that the nature and location of the inventory may pose threats to the safety of the auditor. If
attendance is just generally inconvenient for the auditor that would not make it impracticable.
Therefore, as explained in ISA (UK and Ireland) 200, question of difficulty, time or cost involved
would not in itself be a valid basis for the auditor to omit an audit procedure for which there is no
alternative or to be satisfied with audit evidence that is less than persuasive, as it might be the
case if the inventory counting is not attended.
In the limited cases where attendance at inventory counting is impracticable, alternative audit
procedures, like inspection of documentation of the subsequent sale of specific inventory items,
acquired or purchased prior to the inventory counting, may provide sufficient appropriate audit
evidence about the existence and condition of inventory. However, when performing alternative
procedures would not be suitable in providing sufficient appropriate audit evidence in respect of
inventory, the auditor should, in accordance with ISA 705, modify the opinion in the auditor’s
report as a result of the scope limitation.
In the circumstances in which the entity does not undertake any physical inventory counting and
does not maintains a perpetual inventory system, ie when it does not have any meaningful
internal control on inventory that is necessary for the preparation of financial statements that are
free from material misstatement, the preconditions for an audit indicated in ISA (UK and Ireland)
210, Agreeing the terms of audit engagements, may not be present. In such a case the auditor
should consider whether it is appropriate to accept or continue the audit engagement for such an
entity.
Receivables
The main audit objectives that should be addressed when auditing assertions in respect of
receivables are:
Verifying that the receivables exist at the financial statements date;

Verifying that receivables are accurately recorded at the correct value and provisions are
made for bad and doubtful debts;
Verifying completeness of receivables and cut-off.
It will normally be necessary to test a sample of sales ledger balances to verify their existence
and this could be done by using a variety of procedures. A common and effective procedure is
that of tracing and agreeing the balances selected to after date cash received. When a
judgemental method of selection is used older and larger balances should be covered.
When the auditor knows that the amount of after date cash received will be limited due to the
level of receivable days, which may stretch beyond the audit engagement completion date, other
procedures should be considered, like circularisation of balances on an earlier period with roll
forward of the amounts, substantive analytical procedures or obtaining evidence that goods sold
were received by or dispatched to the customer before the year end.
It is also important to appreciate that a debt that has been confirmed to exist will not necessarily
be recovered, and therefore the valuation objective is not met simply by a debtor confirming to
the auditor that the debt existed at the year end. Testing selected items against after date cash
receipts is a procedure that is also relevant in verifying recoverability of receivables; however the
objective is normally achieved by using a combination of procedures. In particular the use of
analytical procedures can provide evidence to compound the results of the tests on after date
cash receipts. For example, comparing the bad debt expense as a percentage of sales and the
provisions for unrecoverable accounts as a percentage of receivables to the data of the previous
year may corroborate the receivables’ valuation. Similar evidence may be derived by comparing
receivables’ turnover and receivables’ days to the previous year or by examining large customer
accounts individually and comparing them to the previous year’s balances. Another procedure to
verify valuation of receivables is the examination of credit notes issued after the year end for
provisions that should be made against current year balances.
Completeness and cut-off of receivables is normally tested in conjunction with sales and
inventory. The objective is to verify that sales and receivables are completely and accurately
recorded and are accounted for in the correct period, and that the inventory treatment is
consistent with the timing of the sale. A procedure for verifying completeness is that of tracing a
sample of dispatch documentation to sales invoices and into the sales and receivables ledgers.
Cut-off testing may be performed by selecting a sample of sales invoices around the year end
(before and after), inspecting the dates and comparing them with the dates of dispatch of goods
in the relevant documentation and with the dates recorded in the ledger for application of correct
cut-off. Another cut-off procedure is that of reviewing material after-date invoices and credit notes
and ensuring that they are recorded in the correct period. It has to be noted that cut-off testing
should not be performed by reference to invoices only, as sales should be recognised in
accordance with the applicable revenue recognition policies that would often refer to the date
when goods are dispatched; there could be in fact a discrepancy between the date of the invoice
and the date the sale should be recognised. Analytical procedures, for instance comparing the
gross profit percentage by product line to the previous year, may also provide evidence of
completeness and cut-off for sales and receivables.
Payables
The audit objectives that should be addressed when auditing assertions in respect of payables
are verifying the completeness, accuracy and valuation of liabilities as often there is a specific
risk that payables are not completely recorded in the accounts, particularly where there is doubt
about the entity’s ability to continue trading or when there are pressures on the entity to meet
certain profit targets.
Addressing the completeness objective for payables is not easy and should be approached from
two angles: assessing whether the list of creditor balances includes all payables existing at the
year end, and assessing whether each creditor balance recorded is complete in respect of all
transactions up to the year end.
An effective procedure to verify completeness and valuation is that of reconciling a sample of

accounts payables with suppliers’ statements. Many suppliers provide monthly statements to
their customers and these may therefore be available for examination. Such statements are
documentary evidence originating from outside the entity and therefore are an independent and
reliable source of evidence. In any case the auditor should be aware that such statements may
have been tampered with by the entity and, in case of doubt, the auditor should request a copy
directly from the supplier.
The use of direct confirmation using a payables circularisation is also an option to confirm
completeness and valuation, although it is less commonly utilised in practice given that it yields
levels of returns, and therefore evidence, that is lower than that obtainable from suppliers’
statements.
The use of analytical procedures can also be very relevant for the objective of verifying
completeness and valuation, for example the auditor’s background knowledge of the client may
indicate the major suppliers that would be expected to be present in the list of payables at the
year end. The auditor may therefore compare the list of balances with those outstanding at the
previous year end and also consider the main suppliers during the year (by reviewing an activity
report), and ensure that there is a realistic balance outstanding at the year end for each of them.

Income
The main objectives when auditing income are those of verifying completeness, ie that income is
not understated, accuracy and cut-off, ie that all items are recorded in the correct period.
As mentioned above, income should be recorded in accordance with the applicable and
appropriate revenue recognition policy of the entity, which would often result in recognition of
sales when goods are dispatched or services supplied to customers.
Effective auditing of income requires a satisfactory understanding of the entity’s systems, ie what
systems are in place and what documentation is produced to control the dispatch of goods or the
provision of services. When the entity has in place a sales system that includes controls to
ensure that all sales have been recorded, the auditor could perform tests of controls to obtain
evidence about its effectiveness in detecting and correcting material misstatement. The sales
system should be documented by the auditor and, if judged effective following tests of controls, it
may enable a reduction in the performance of substantive procedures.
Tests of controls are never sufficient on their own to provide sufficient appropriate evidence in
respect of material balances or classes of transactions and therefore substantive procedures are
necessary when auditing income.
Analytical procedures are important in testing completeness of income and may be used in place
or in combination with tests of details. For such purpose the auditor may compare the level of
sales over the year, on a month-by-month basis, with the previous year or reconcile the total
quantities of goods bought and sold. The auditor may also analyse the effect on sales value of
changes in quantities sold, or of changes in products or prices. The auditor should also record
reasons for changes in gross profit margin, ideally broken down by product area and month or
quarter, as that would provide relevant evidence of completeness of income.
In addition to analytical procedures, the auditor may carry out a directional test on completeness
of recording of individual sales in the accounting records. For such purpose the test should start
with a sample taken from the evidence that the supply has taken place, rather than a sample
taken from sales invoices. The documents that first record that a supply has taken place, like
goods dispatched notes or till rolls, should be traced back, also via intermediate documents, to
the sales ledger. The completeness of the documents that first record a supply should also be
verified by, for instance, checking the sequence of goods dispatched notes.
The direction of the test, ie verifying completeness of recording in the sales ledger, dictates that
selecting a sample from the ledger or from the sales invoices would not be relevant to the
objective as the sample would not include what has not been recorded. It follows that verifying
income by reconciling nominal ledger balances to VAT returns does not yield evidence in respect
of completeness.
Related topics Audit and assurance
 CPD technical article

1 Unit
Our sites Useful links
myACCA Make a payment
ACCA mail Our qualifications
ACCA Careers Find an accountant
ACCA Career Navigator ACCA Rulebook
ACCA Learning Community Contact us
Your Future Help & support
ACCA-X online courses Work for us
News
Supporting Ukraine
Using this site
Accessibility
Legal & copyright
Advertising
   
Contact us
 Send us a message
Planned system updates

 View our maintenance windows

Audit Evidence and Specific Considerations For Certain Items - ACCA Global

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Audit Evidence and Specific Considerations For Certain Items - ACCA Global

Uploaded by

Copyright:

Available Formats

05/07/2023, 14:25 Audit evidence and specific considerations for certain items | ACCA Global

CPD technical article

Audit evidence and

 CPD technical article

Home / Members / CPD online

Obtaining and documenting sufficient

Audit evidence and the objectives of an audit

Sufficient appropriate audit evidence

Designing and performing audit procedures for obtaining

Assertions about classes of transactions and events for

Accuracy To form an opinion as to whether amounts and other data relating to

Cut-off To form an opinion as to whether transactions and events have been

Classification To form an opinion as to whether transactions and events have been

Assertions about account balances at the period end

Assertions about presentation and disclosure (covering

Classification and To form an opinion as to whether financial information is appropriately

Inspection is an audit procedure based on the examination of records or documents,

Observation is instead an audit procedure that consists of looking at a process or

combination of substantive analytical procedures and tests of details could be in respect of

What information can be used as audit evidence?

Selection of Items to obtain audit evidence

1. Selecting all items (100% examination)

The population is made up of a small number of large value items;

Documentation of procedures and audit evidence

Obtaining Audit Evidence in respect of some specific

4. Perform test counts.

Verifying that the receivables exist at the financial statements date;

An effective procedure to verify completeness and valuation is that of reconciling a sample of

Related topics Audit and assurance

 CPD technical article

Our sites Useful links

myACCA Make a payment

ACCA mail Our qualifications

ACCA Careers Find an accountant

ACCA Career Navigator ACCA Rulebook

ACCA Learning Community Contact us

Your Future Help & support

ACCA-X online courses Work for us

Legal & copyright

Planned system updates

You might also like