Learning objectives of Topic 5

Course tittle: Principles of Auditing

5.1 Define audit evidence.

Topic 5 5.2 Describe factors that affect the appropriateness
Audit Evidence and sufficiency of audit evidence.
5. Identify and understand the audit procedures for
gathering audit evidence.

Lecturer: Nguyễn Hoàng Tố Loan

Auditing Department, School of Accounting, UEH 3

Prescribed Reading
Session Topic 5 Materials Exercises Notes
Contents of Topic 5
9 Audit Textbook (1): Chapter 4,5,8,10 Textbook (1): Chapter
Evidence • Ch 4: p.142,147 (audit evidence) 4,5,8,10
• Ch 5: p. 210 (analytical procedures)
• Ch 8: p. 324,366,369 (Suf. & App.E)
Workbook: Chapter 4
1 Overview of Audit Evidence and Audit Procedures
• Ch 10: p. 424 (means of gathering AE)
Textbook (2): Chapter 4
The Appropriateness and Sufficiency
Relevant Guidance (Quy định có liên quan) 2 of Audit Evidence
ISA/VAS315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment
ISA/VAS330 The Auditor's Responses to Assessed Risks
3 Audit Procedures for Obtaining Audit Evidence
ISA/VAS500 Audit Evidence
ISA/VAS501 Audit Evidence – Specific Considerations for Selected Items
ISA/VAS505 External Confirmation
ISA/VAS520 Analytical Procedures
2
 1.1. Definition of Audit Evidence ISA 500 Audit evidence obtained from audit procedures

What is Audit Evidence? Tests of

controls Accounting
information Audit
evidence
Other information
ISA 500.5 defines audit evidence as all of the information Substantive
tests
used by the auditor in arriving at the conclusions on which
the audit opinion is based.

Does audit evidence only include data and information underlying the financial report or
accounting data and information?
5 7

1.2 What are Audit procedures? Audit evidence obtained from audit procedures

v Audit procedures can be defined as the actions that

an auditor takes in acquiring evidence.

v Audit evidence includes, although is not limited to,

evidence obtained from audit procedures performed
during the audit.

Audit evidence includes all data and information underlying the financial report and
6 corroborating information. 8

(thông tin chứng thực)

2. Sufficiency and Appropriateness of audit evidence 2.1. Appropriateness

v Appropriateness refers to the quality of audit evidence

à Two dimensions of appropriate AE:

Ø Relevance — evidence relates to the financial report assertion of interest.

APPROPRIATENESS SUFFICIENCY • Eg 1: If the related assertion concerns the existence of an asset

à Audit evidence: physically examination or confirmation of items. (chứng kiến kiểm kê/TXN)
• Eg 2: If the related assertion concerns the completeness of an asset
v Audit procedures selected should provide sufficient appropriate audit à Audit evidence: inspecting documents indicating that an item included in the account
evidence for the auditor to form conclusions concerning the validity of balance and see whether it is included. (kiểm tra chứng từ mua tài sản và việc ghi nhận của các TS này)

individual assertions embodied in the components of the financial report and to Ø Reliability — influenced by the source, nature of the evidence, and individual
give an audit opinion (ISA 200 and ISA 500). circumstances. (nguồn gốc, nội dung & hoàn cảnh)
11
9

Two determinants of audit evidence Reliability of audit evidence

Appropriateness (thích hợp) 1. Evidence obtained directly by the auditor is more reliable than evidence
• Reliability (độ tin cậy): influenced by nature of evidence, its source, and obtained from the client.
individual circumstances. 2. Evidence generated internally is more reliable when the internal control
• Relevance (sự phù hợp với mục tiêu kiểm toán): connection between the
structures are effective.
audit procedure and the assertion being considered
3. Evidence from sources outside an entity is more reliable than evidence
Sufficiency (đầy đủ)
obtained solely from within the entity.
• Risk of material misstatements
4. Evidence in the form of documents or written representations (văn bản) is
• Quality of audit evidence
more reliable than oral representations.
5. Evidence provided by original documents is more reliable than evidence
Auditor should design and perform audit procedures that are appropriate in the
provided by photocopies or facsimiles (ASA 500.A31/ISA 500.A31).
circumstances for the purpose of obtaining sufficient appropriate audit evidence. 12
10
ISA 500
Exercises: Other issues (2)
Compare the reliability of these audit evidences: Paper or Electronic Documentation (Tài liệu điện tử)
1. “a written confirmation directly from a customer” Vs “sales invoices indicating v An major challenge for auditors is to determine which electronic data is reliable.
that a sale was billed” è Computer system can be designed to provide safeguards similar to paper-based
2. “pre-numbered documents or a sequence of check” Vs “un-numbered systems.
documents” è If auditor is going to rely on electronic data, s/he must develop a
3. “a confirmation obtained directly from the bank” Vs “ a copy of bank statement understanding of:
held by the client” Ø Client’s computer system
4. “a written confirmation from debtors” Vs “ telephone confirmation from debtors” Ø Controls used to safeguard electronic data from manipulation/destruction
5. “original documents” Vs “photocopies, facsimiles (bản sao), electronic
documents/scanned files”
13 15

Other issues (1) 2.2. Sufficiency

Reliability of internal documentation (Xem xét tài liệu của đơn vị được kiểm toán) v Sufficiency relates to quantity of audit evidence necessary to provide

v Reliability varies with: the auditor with a reasonable basis for an opinion on the financial report.

Ø Independence if source of evidence v The quantity of audit evidence required is affected by the:
Ø Nature of evidence v Risk of material misstatements
Ø Quality of client’s internal controls v The quality of Audit evidence
Ø Management’s motivation to misstatement (potential occurrence of frauds)
v Sufficiency is a matter of professional judgment based on:
Ø Nature of audit procedures
ØTimeliness of financial reporting
Ø Cost and benefit analysis

14 v Quite often determined by reference to sampling (chapter 10). 16

 3. Audit procedures 3.1. Physical Examination
v It is the physical inspection or count by the auditor of a tangible
8 Common audit procedures (ISA 500.A14-25)
asset.
• Inspection of tangible assets
v This type of evidence is most often associated with inventory and
• Inspection of documents
cash è be useful in identifying potential obsolescence or wear/tear
• Observation
(hao mòn)
• Inquiry
v Does NOT provide evidence on completeness, ownership, or proper
• Confirmation
valuation (except for potential obsolescence or wear/tear as above)
• Recalculation
• Re-performance è Reliability: It provides a HIGH Reliable AE concerning the
existence (baèng chöùng vaät chaát coù ñoä tin caäy raát cao, ñaëïc bieät laø
• Analytical procedures ñoái vôùi muïc tieâu hieän höõu) 19
Reading more in p. 144, Textbook 1
17

8 Types of Audit Evidence How to physically inspect?

Inspection of tangible assets
Completeness
1. Physical “Floor to sheet” test for
Examination 2. Inspection of understatement
3. Observation documentation (khai thiếu)
Accounting Records in books
Tangible Assets
(cash,
Audit 4. Inquiry inventories,
fixed assets)
6. Recalculation Evidence

5. Confirmation Existence
7. Re-performance 8. Analytical “Sheet to floor” test for
procedures overstatement
(khai khống)
18 20
 3.2. Inspection of documentation 3.3. Observation
v It is the auditor’s inspection of the client’s documents and records. v Use one’s senses to assess client activities.
v Documents and records may be internal or external. Eg.: Look at a process or procedure being performed by others.
Tour plant to obtain a general impression of client’s facilities.

v Note that: the direction of testing determines whether
existence/occurrence or completeness assertion is tested.
v Observation is rarely sufficient by itself because it provides AE
about the performance at the point in time at which the observation
takes place or the action being observed
vOften need to corroborate with another kind of evidence.

è Reliability: It depends of the nature and source, and on the

effectiveness internal control over their processing. è Reliability: Observation is rarely sufficient
21 23

compare sales invoice and shipping notes and bills (bills : commercialized, listed price

How to inspect documentation? 3.4. Inquiry

tracing helps w khai thieu
v It is the obtaining of written or oral information from the
Completeness
Test for understatement client in response to questions from the auditor.
co' chung tu (khai thiếu)
-> k toán v The question-and-answer process includes interviewing
ghi so Original documents Accounting Records in books
and obtaining written statements from management and
-> vd :
chung tu ve employees.
viec mua
hang
Existence
(Occurrence)/
Test for overstatement
Valuation and (khai khống) è Reliability is not high, auditor needs to obtain support for the
24
Allocation reasonableness of the answers given
22
 3.5. Confirmations
v The process of obtaining a presentation of information or
of an existing condition directly from a third party.
v Confirmations are usually sent to:
Ø Customers/clients (Accounts receivables)
Ø Suppliers (Accounts payables)
Ø Banks and other creditors
Ø Consignee, legal consultants, lawyers, etc.
è Reliability is HIGH for assertions relating to existence,
occurrence, right & obligation.
3.6. Recalculation and Re-performance
v Recalculation: It involves rechecking a sample of calculations made
by the client.
Ø Check the mathematical accuracy of documents/records, eg. Depreciation check
Ø Can be performed through the use of information technology
v Re-performance: It is the auditor’s independent tests of client
accounting procedures or controls that were originally done.
è Recalculation is mathematically reliable.
3.7 Analytical procedures
v What is AP?
Analytical procedures is the investigation and analysis of fluctuations and
relationships to determine whether there are inconsistencies with other
relevant information or deviation from the predicted amounts.
Eg. evaluations of financial information through analysis of plausible
relationships among both financial and non-financial data.
v When is AP used? è Can be used at all stages of the audit.
v How is AP used?
Analytical procedures involve the use of ratios, trend analysis and operating
25 statistics for comparison with internal and external data. 27
The application of Analytical procedures in Audit (1)
v Analytical procedures are used throughout the audit process and are
conducted for three primary purposes:
1. Preliminary analytical review – risk assessment (required by ISA 315)
v In audit planning, preliminary analytical reviews are performed to obtain
an understanding of the business and its environment (eg. financial
performance relative to prior years and relevant industry and comparison
groups)
v To help assess the risk of material misstatement in order to determine the
nature, timing and extent of audit procedures, ie to help the auditor
26 develop the audit strategy and programme. 28
 The application of Analytical procedures in Audit (2)
2. Substantive analytical procedures
v In audit fieldwork, analytical procedures are used as
substantive procedures when the auditor considers that
the use of analytical procedures can be more effective or
efficient than tests of details in reducing the risk of material
misstatements at the assertion level to an acceptably low
level.
29
Types of Analytical procedures
Three types of analytical procedures commonly used by auditors are
v Trend analysis: The analysis of changes in an account
Eg: Comparison of current balances in the financial report with balances of prior periods, and budgeted
amounts.
v Ratio analysis: comparison across time, or compare to a benchmark to identify
the the relationships between FSs accounts, or relationships between financial
and non- financial information.
Eg.: Computation of ratios and percentage relationships for comparison with prior years, budgets and industry
averages (ratio analysis).
v Reasonableness analysis: analysis of accounts or changes in accounts that
relating to the development of a model to form an expectation based on financial,
non- financial information, or both. 31

Trend analysis:
The application of Analytical procedures in Audit (3) Consider the
fluctuation of an
Trend Analysis
600
account
3. Final analytical review (required by ISA 520) (occurred 540

amounts/ 480

v In completion phase, analytical procedures are performed as balances) over a 420

relatively long 360

an overall review of the financial statements at the end of the period / period to 300

audit to assess whether they are consistent with the auditor’s see the 240

reasonableness 180
understanding of the entity. of that data. 120

60
v If irregularities are found, risk assessment should be performed 0
1 2 3 4 5 6 7 8 9 10 11 12
again to consider any additional audit procedures are necessary. 20x1 20x2

Analyzing the monthly fluctuation of selling expenses of the year 20X1 and
20X2.
32
30
Example: Relationship between assertions, objectives and Ratio Analysis
procedures for inventory X is a corporation.
This year, the rate of rice crop decreased from 30% to 17%.
What are the reasons? What are the audit procedures?

35
33

Ratio Analysis Reasonableness analysis

Information of FSs
Assets 20X4 20X3
Account Analytical procedures
Sales 2.514 3.126
Openning balance of Inventories 441 426 A hotel’s sales revenue
Purchases 2.067 2.214
Total 2.508 2.640
Ending balance of Inventories 412 441
Cost of Goods sold 2.096 2.199 Revenue of a university
Gross margin 418 927
Gross profit rate 16,6% 29,7%

A is the production and sales company. In the current year, gross profit rate drops Salary of a company
significantly.
è What are the reasons for reducing gross interest rate, identifying possible 34
misstatements?
36