Chapter 15

Audit Evidence

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Key to chapter content ICONS

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CHAPTER 15:
Audit Evidence

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Audit Objective

The auditor must design and perform audit procedures to

obtain sufficient appropriate audit evidence from which
reasonable conclusions can be drawn on which to base the
audit opinion.

§ Sufficiency relates to the quantity of evidence required.

§ Appropriateness relates to the quality of that evidence.

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Sources

§ Internal or external to the entity

§ Oral or written
§ Direct or indirect
§ Generated by the auditor

Documentary evidence may be:

§ generated and provided to auditors by a third party
§ generated by a third party and held by the entity
§ generated and held by the entity.
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Activity: Sources of Evidence for Tangible Assets

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Answer to activity: Sources of Evidence

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 Sufficiency of Audit Evidence
Factors that influence sufficiency:

§ Audit risk
§ Nature of internal control
§ Reliance on effective controls
§ Cumulative Audit Knowledge and Experience (CAKE)
§ Materiality
§ Audit findings
§ Source and reliability of information – how persuasive is the
evidence? Does all the evidence point to the same conclusion?

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Interrelationship of Sufficiency to Appropriateness

If evidence is not appropriate, sufficiency cannot be

achieved.

§ the higher the risk, the more audit evidence required

§ the higher the quality of the evidence, the less that may
be required to confirm an objective.

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Appropriateness of Audit Evidence

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Relevance

Evidence is required to support management’s assertions

(explicit or otherwise) regarding:

§ recognition
§ measurement
§ presentation and disclosure

of the various elements of the financial statements

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Assertions

Categories:

§ Account balances and related disclosures at the period

end (i.e. mainly SoFP);

§ Classes of transactions and events and related

disclosures for the period under audit (i.e. mainly SoPL
and OCI).

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Assertions: Account Balances and Disclosures

Existence

Rights and
Presentation obligations

Classification Completeness

Accuracy, valuation
and allocation
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Assertions: Classes of Transactions and Events
and Disclosures
Occurrence

Presentation Completeness

Classification Accuracy

Cut-off
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Assertions Mnemonics

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Assertions Mnemonics

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Reliability

Completeness and accuracy of audit evidence

§ External is more reliable than internal

§ Directly obtained by auditor is more reliable than indirectly

§ Written is more reliable than oral

§ Original is more reliable than a copy

§ Consistency increases persuasiveness

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 Activity: Reliability of Evidence
Rank the following items of audit evidence concerning land ownership using a scale
of 1 (for worst) to 4 (for best).

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Answer to activity: Reliability of Evidence

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Direction of Testing

§ Overstatement

§ Understatement

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Test
Objectives

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Obtaining Audit Evidence

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Procedures to Obtain Audit Evidence (“AEIOU”)

Inspection Observation Inquiry

Confirmation Recalculation Reperformance

Analytical
Procedures

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Exam Techniques

Use assertions

Use direction of testing

Use accounting entries

Use AEIOU
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Activity: Assertions – Plant and Equipment Additions

Suggest substantive audit evidence for additions to plant

and equipment for each of the following assertions:
(i) Completeness
(ii) Occurrence
(iii) Classification
(iv) Cut-off
(v) Accuracy
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Answer to activity: Assertions – Plant and Equipment

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Activity: Direction of
Testing –
Payroll Overstatement

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Answer to activity: Direction of Testing – Payroll

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Accounting Entries

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Activity: Audit Procedures – Trade Receivables

Suggest audit procedures for trade receivables.

A–
E–
I –
O–
U–

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Answer to activity: Trade Receivables

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Substantive Procedures
§ Are performed to detect material misstatements at the assertion
level. They include:
- tests of details (of classes of transactions, account balances and
disclosures); and
- substantive analytical procedures.

§ Full (100%) substantive procedures must be considered when:

- it will be more effective;
- the effectiveness of internal controls is not to be tested; or
- tests of controls show controls to be ineffective.

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Nature, Timing, Extent of Audit Procedures

Nature
• What type?

Extent Timing
• How
• When?
much?

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Nature of Audit Procedures

Auditor's response to an assessed risk may be to perform:

§ Only substantive analytical procedures;

§ Only tests of details; or
§ A combination of both.

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Timing of Audit Procedures

§ Substantive procedures are generally performed at the

year-end and during the final audit.

§ If substantive procedures on transactions are carried out

at an interim date, perform further tests to cover remaining
period.

§ Cannot rely on prior-year substantive evidence.

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Extent of Audit Procedures

The greater the risk of material misstatement, the

greater the extent of substantive procedures.

Affects:
§ Sample size
§ Selection of large (material) or unusual items from
population
§ Stratifying population

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Hybrid Approach

A single test approach can be used as a test of control and

a substantive procedure at the same time.

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Technical article: The audit of assertions

Click the link below to open

the articles on accaglobal

Technical articles

The audit of assertions

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Chapter 15: Summary
§ Audit evidence must be sufficient and appropriate. It may be internal or external,
oral or written, direct or indirect, or auditor-generated.
§ Sufficiency (concerns quantity) depends on the level of audit risk, effectiveness
of controls, the auditor's experience, materiality and audit findings.
§ Appropriate evidence is relevant to assertions and reliable.
§ Assertions for transactions and “COCO AP”
§ Assertions for account balances are “CARE PC”.
§ Reliability is influenced by source and consistency with other sources.
§ To test for overstatement: financial statements Þ supporting evidence.
§ To test for understatement: source Þ financial statements.
§ Procedures to obtain evidence include “AEIOU”.
§ Substantive procedures are performed to detect material misstatement at the
assertion level and include tests of details substantive analytical procedures.
§ Substantive procedures are reduced when internal controls operate effectively.
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 Chapter 15: Practice questions

Study Question Bank

Sources of Audit Evidence 30 mins

Bearsworld 40 mins

For AA
ØAttempt the Study Question Bank questions listed above after studying this chapter
ØAttempt Revision Question Bank questions in your revision phase, after studying all chapters

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Thank you

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