5 Audit Evidence

5.1 – SA 500 “Audit Evidence”

Scope of SA 500 • SA 500 deals with auditor’s responsibility to design and perform audit procedures to obtain
sufficient appropriate audit evidence (SAAE) to be able to draw reasonable conclusions on
which to base the auditor’s opinion.
• This SA is applicable to all the audit evidence obtained during the course of the audit.

Objective of To design and perform audit procedures in such a way as to enable the auditor to obtain SAAE
Auditor to be able to draw reasonable conclusions on which to base the auditor’s opinion.

Meaning of • Information used by the auditor in arriving at the conclusions on which the auditor’s
Audit Evidence opinion is based.
• Audit evidence includes both information contained in the accounting records underlying
the financial statements and information obtained from other sources.

Sufficient The auditor shall design and perform audit procedures that are appropriate in the
Appropriate circumstances for the purpose of obtaining sufficient appropriate audit evidence.
Audit Evidence
Sufficiency • refers to the quantity of audit evidence.
• affected by the auditor’s assessment of the risks of material
misstatement and also by the quality of such audit evidence.

Appropriate • refers to the measure of the quality of audit evidence

• that is its relevance and its reliability in providing support for the
conclusions on which the auditor’s opinion is based.

Auditor’s duties Information • Evaluate the competence, capabilities and objectivity of that expert;
when an prepared using • Obtain an understanding of the work of that expert; and
Information to the work of
• Evaluate the appropriateness of expert’s work as audit evidence for
be used as Management
the relevant assertion.
Audit Evidence Expert
Management Expert: An individual or organisation possessing expertise
in a field other than accounting or auditing, whose work in that field is
used by the entity to assist the entity in preparing the financial
statements.

Information • Obtaining audit evidence about the accuracy and completeness of the
produced by the information; and
entity • Evaluating whether the information is sufficiently precise and detailed
for the auditor’s purposes.

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Evaluation of Evaluate the • Competence: Relates to nature & level of expertise.
work of competency, • Capability: Ability to exercise that competence.
Management capability and
• Objectivity: Relates to possible effects that bias, conflict of interest or
expert Objectivity of
influence of others may have on the professional/business objectivity
Expert
of management expert.

Understanding It may include:

the Expert Work • Areas of specialty within field of expertise.
• Applicable professional or other standards, and regulatory or legal
requirements.
• Assumptions and methods used, their general acceptability within
that expert’s field and appropriateness for financial reporting
purposes.
• Nature of internal and external data or information the auditor’s
expert uses.

Evaluating • The relevance and reasonableness of that expert’s findings or

appropriate-ness conclusions;
of Expert Work • Consistency with other audit evidence;
• Whether they have been appropriately reflected in the FS;
• Relevance and reasonableness of assumptions and methods; and
• Relevance, completeness, and accuracy of the source data.

Auditor’s duties The auditor shall determine modifications or additions required in audit procedures so as to
in case of resolve the matter that arise due to following reasons:
Inconsistency • audit evidence obtained from one source is inconsistent with that obtained from another; or
in, or Doubts
• the auditor has doubts over the reliability of information to be used as audit evidence.
over Reliability
Under the circumstances auditor shall also consider the effect of the matter, if any, on other
of audit
aspects of the audit.
Evidence

Audit (a) Risk Assessment Procedures

procedures for (b) Further Audit procedures: It comprises of
obtaining audit
1. Test of Controls, and
evidence
2. Substantive Procedures: consists of -
• Tests of Details,
• Substantive Analytical Procedures.

5.2 – SA 501 “Audit Evidence — Specific Considerations for Selected Items”

Scope of SA 501 SA 501 deals with specific considerations by the auditor in obtaining sufficient and appropriate
audit evidence, with respect to certain aspects of inventory, litigation and claims, and segment
information in an audit of financial statements.

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Auditor’s The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the:
Objective (a) Existence and condition of inventory;
(b) Completeness of litigation and claims involving the entity; and
(c) Presentation and disclosure of segment information in accordance with the applicable FRF.
Audit When inventory is material to the F.S., the auditor shall obtain sufficient appropriate audit
Procedures evidence regarding the existence and condition of inventory by:
w.r.t. Inventory (a) Attendance at physical inventory counting, unless impracticable, to:
• Evaluate management instructions & procedures for recording & controlling the results
of the entity’s physical inventory counting;
• Observe the performance of management’s count procedures;
• Inspect the inventory;
• Perform test counts;
(b) Performing audit procedures over the entity’s final inventory records to determine
whether they accurately reflect actual inventory count results.

Procedures in Special Circumstances

(a) Inventory • Perform audit procedures to obtain audit evidence about whether
counting changes in inventory between the count date and the date of the F.S.
conducted at are properly recorded.
date other • Relevant matters for consideration when designing audit procedures
than B/S date to obtain audit evidence about whether changes in inventory
amounts between the count date and the final inventory records are
properly recorded include:
(a) Whether the perpetual inventory records are properly adjusted.
(b) Reliability of the entity’s perpetual inventory records.
(c) Reasons for significant differences between information
obtained during the physical count and the perpetual inventory
records.

(b) Auditor • Auditor should take or observe some physical counts on an

unable to alternative date and perform audit procedures on intervening
attend transactions to assess whether changes in inventory between date of
Inventory physical count and the period end date are correctly recorded.
Count • The auditor would also verify the procedure adopted, treatment
given for the discrepancies noticed during the physical count.
• The auditor would also ensure that appropriate cut off procedures
were followed by the management.
• He should also get written representation on
(a) completeness of information provided regarding inventory; &
(b) assurance with regard to adherence to laid down procedures
for physical inventory count.

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Audit Evidence Chapter 5
(c) Attendance at • Perform alternative audit procedures to obtain sufficient appropriate
inventory audit evidence regarding existence and condition of inventory.
count is Alternative Audit Procedure: Inspection of documentation of the
impracticable subsequent sale of specific inventory items acquired/purchased
prior to physical inventory counting.
• If it is not possible to do so, modify the opinion in the auditor’s report
in accordance with SA 705.

(d) Inventory Obtain sufficient appropriate audit evidence by performing the

under custody following:
and control of (a) Request confirmation from third party
Third Party
(b) Perform Inspection/other audit procedure.
If doubt arises over the integrity/Objectivity of third party, perform the
following:
(a) Attending/arranging for another auditor to attend, the third party’s
physical counting of inventory, if practicable.
(b) Obtaining service auditor’s report, on the adequacy of the third
party’s I.C. w.r.t. proper count and safeguard of inventory.
(c) Inspecting documentation, for example, warehouse receipts.
(d) Requesting confirmation from other parties when inventory
pledged as collateral.

Audit Auditor is required to identify litigation and claims by following procedures:

Procedures • Inquiry - of management & others within entity, including in house legal counsel.
w.r.t. Litigation
• Review – minutes of meetings of TCWG, communication between entity & external legal
and Claims
counsel.
• Review – legal expenses account.

Procedures in Special Circumstances

(a) Auditor’s Assessment • Seek Communication directly with Entity’s External legal
of Risk of material Counsel.
misstatement w.r.t. • If law/regulation or respective legal professional body
existence of Litigation prohibits entity’s external legal counsel from communicating
or Claim directly with the auditor, the auditor shall perform
alternative audit procedures.

(b) Management refuses

to permit auditor to
communicate

(c) External Legal Counsel Modify Opinion in accordance with SA 705

Refuses

(d) Auditor unable to

collect SAAE from
alternate procedures

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Written Representation: from Management and TCWG that all known actual/possible
Litigation & Claim affecting FS
(a) have been disclosed to the auditor; and
(b) appropriately accounted for and disclosed in accordance with the applicable FRF.

Audit Auditor shall obtain SAAE regarding the presentation and disclosure of segment information in
Procedures accordance with the applicable financial reporting framework by:
w.r.t. Segment (a) Obtaining an understanding of the methods used by management in determining segment
Information information, and
• evaluating whether such methods are likely to result in disclosure in accordance with
the applicable FRF; and
• where appropriate, testing the application of such methods; and
(b) Performing analytical procedures or other audit procedures appropriate in the circum-
stances.

Examples of Matters relevant in obtaining an understanding of the methods used by the

management for determining segment information

Example of matters that may be relevant when obtaining an understanding of the methods
used by management in determining segment information and whether such methods are
likely to result in disclosure in accordance with the applicable financial reporting framework
include:
(1) Sales, transfers and charges between segments, and elimination of intersegment amounts.
(2) Comparisons with budgets and other expected results, for example, operating profits as a
percentage of sales.
(3) The allocation of assets and costs among segments.
(4) Consistency with prior periods, and the adequacy of the disclosures with respect to
inconsistencies.

5.3 – SA 505 “External Confirmations”

Scope of SA SA 505 deals with the auditor’s use of external confirmation procedures to obtain audit
505 evidence in accordance with the requirements of SA 330 and SA 500.

Objective of To design and perform external confirmation procedures to obtain relevant and reliable audit
the auditor evidence.

Meaning & Audit evidence obtained as a direct written response to the auditor from a third party (the
Type of confirming party), in paper form, or by electronic or other medium. 2 types:
External
Positive A request that the confirming party respond directly to the auditor
Confirmation
confirmation indicating whether the confirming party agrees or disagrees with the
request information in the request, or providing the requested information.

Negative A request that the confirming party respond directly to the auditor only if
confirmation the confirming party disagrees with the information provided in the
request request.

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External (a) Determining Regarding:
Confirmation information to • Account balances & their elements.
Procedures be confirmed
• Terms of agreements/contracts/transactions.
or requested

(b) Selecting the Responses to confirmation requests provide more relevant and reliable
appropriate audit evidence when confirmation requests are sent to a confirming party
confirming the auditor believes is knowledgeable about the information to be
party confirmed.

(c) Designing the It also includes:

confirmation • determining that requests are properly addressed, and
requests
• contain return information for responses to be sent directly to auditor.

Factors to be considered while designing Confirmation requests

(i) Assertion being addressed.

(ii) Specific identified RMM.
(iii) Layout & presentation of request.
(iv) Prior experience on the audit of similar engagements.
(v) Method of communication.
(vi) Management authorisation/encouragement to Confirming Party to
respond to auditor.
(vii) Ability of Confirming Party to provide/confirm requested info.

(d) Sending the Including follow-up requests when applicable, to the confirming party.
requests

Audit Procedures in special circumstances

Management (a) Inquire as to reasons and seek evidence as to their validity & reasonableness;
refuses to allow (b) Evaluate the implications of refusal on the assessment of risks of material misstatement,
the auditor to including the risk of fraud and on the NTE of other audit procedures; and
send a
(c) Perform alternative audit procedures designed to obtain relevant and reliable audit
confirmation
evidence.
request
Management refusal appears to be (a) Communicate to TCWG in accordance with SA
unreasonable 260.
Or (b) Implications for the audit;
Auditor unable to obtain evidence (c) Effect on Auditor’s opinion in accordance with SA
from alternative audit procedure. 705.

Results of • Factors raising doubt over Obtain further evidence to resolve doubts.
External reliability of response
Confirmation • Response to request is not reliable Consider its effect on NTE of other procedures.
Procedure
• Confirming party do not respond Perform Alternative Audit procedure.

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• No confirmation obtained when Determine its effect on auditor’s opinion in
auditor determines that response accordance with SA 705.
is necessary and alternative
procedure will not provide the
evidence required.

Exception • Exception is a response that indicates a difference between

occurs (a) information requested to be confirmed, or contained in the entity’s records,
and
(b) information provided by confirming party.
• Auditor should investigate to determine whether or not they are indicative of
misstatements.

Limited use of Negative confirmations provide less persuasive audit evidence than positive confirmations.
Negative Accordingly, the auditor shall use negative confirmation requests as the sole substantive audit
Confirmations procedure only when all of the following conditions are present:
(a) Low Risk of material misstatement and auditor has obtained sufficient appropriate audit
evidence regarding the operating effectiveness of controls.
(b) The population comprises a large number of small, homogeneous, account balances or
transactions.
(c) A very low exception rate is expected.
(d) The auditor is not aware of circumstances or conditions that would cause recipients of
negative confirmation requests to disregard such requests.

5.4 – SA 510 “Initial Audit Engagements – Opening Balances”

Scope of SA SA 510 deals with the auditor’s responsibilities relating to opening balances when conducting an
510 initial audit engagement.

Objective of To obtain sufficient appropriate audit evidence about whether:

the Auditor (a) Opening balances contain misstatements that materially affect the current period’s F.S.; and
(b) Appropriate accounting policies reflected in the opening balances have been consistently
applied in the current period’s F.S.
or
Changes in the accounting policies are properly accounted for and adequately presented
and disclosed in accordance with the applicable FRF.

Meaning of Initial audit An engagement in which F.S. for the prior period are either:
terms used in engagement (a) not audited; or
SA
(b) were audited by a predecessor auditor.

Opening • Those account balances that exist at the beginning of the period.
balances • These are based upon the closing balances of the prior period and reflect
the effects of transactions and events of prior periods and accounting
policies applied in the prior period.

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