AUDIT EVIDENCE AND AUDIT

TESTING
EPPA 3013 AUDITING
SEMESTER 2
SESSION 2019/2020

ARZIM NAIM CA(M). CPA(M). FCCA. CPIF. ACPA. Ph.D (INCEIF)

 CONTENTS
1. Nature of audit evidences
2. Persuasiveness of audit evidence
3. Evaluation of Audit Evidence
4. Types of audit evidence
5. Audit procedures
a) Test of controls
b) Substantive test
c) Dual-Purpose Test
1. Nature of audit evidence
 Auditor gathers evidence to draw conclusions.
 A major decision facing every auditor is determining the

‘appropriate types and amounts of evidence to

accumulate to be satisfied that the components of the
client’s financial statements and the overall statements
are fairly stated, or that the client maintained effective
internal control over financial reporting’.
1. Nature of audit evidence
 Audit evidence is all information used by the auditor in
arriving conclusions on which audit opinion is based,
and this includes information contained in the accounting
records underlying the financial statements and other
information.
 Accounting data that can be used to test audit objectives
include the books of original entry, related accounting
manuals, and records such as worksheets and
spreadsheets that support amounts in the financial
statements. Many times these data are in electronic
form.
1. Nature of audit evidence
 Co. Act [ Section 167(1)], mgmt and directors of co. is
required to keep proper accounting and other records
that sufficiently explain the transactions and financial
position of the co.
 Co. Act also require the records must be kept in a
manner so as to enable them to be conveniently and
properly audited.
 Although accounting records are as important source of
audit evidence, records alone are NOT SUFFICIENT to
base an audit opinion on the Financial Statements =>
need to obtain other evidence.
 Eg. Confirmations from third parties, comparable data

from external sources

1. Nature of audit evidence
 Corroborating audit evidence includes both written and
electronic information such as cheques, records of
electronic transfers, invoices, contracts, minutes,
confirmations, and written representations.
 Audit evidence which is cumulative in nature, may
include information obtained from previous audits.
 Corroborating audit evidence also includes information
obtained by the auditor through inquiry, observation,
inspection and physical examination.
1. Nature of audit evidence
 Audit evidence is obtained regarding each financial
statement assertion.

 Auditors rely on PERSUASIVE rather than

CONCLUSIVE audit evidence and usually obtain
evidence from different sources or of a different nature
to support the SAME ASSERTION.
2. Persuasiveness of audit evidence
 ISA 500 Audit Evidence requires the auditor to accumulate
sufficient appropriate evidence to support opinion issued.
Appropriateness is a measure of the QUALITY OF AUDIT
EVIDENCE.
 Evidence, regardless of its form, is considered appropriate
when it provides info that is both RELEVANT AND
RELIABLE. Again, as explain by ISA 500, appropriateness of
audit evidence relates to its relevance to a particular
assertion and to its reliability.
 Because of the nature of audit evidence & cost
considerations of doing audit, it is unlikely that the auditor will
be completely convinced that the opinion is correct.
2. Persuasiveness of audit evidence
 The auditor relies on evidence that is persuasive rather
than convincing in forming an opinion on a set of
financial statements. This occurs for two reasons:
 Because of cost considerations, the auditor only
examines a sample of the transactions that
compose the account balance or class of
transactions.
 Due to the nature of evidence, the auditor must
often rely on evidence that is not perfectly
reliable.
2. Persuasiveness of audit evidence
 Because of the nature of audit evidence & cost
considerations of doing audit, it is unlikely that the
auditor will be completely convinced that the opinion is
correct.

 However, auditor must be persuaded that the opinion is

correct with a HIGH LEVEL OF ASSURANCE.
 By combining all evidence from the entire audit, the
auditor is able to decide when he or she is persuaded to
issue an audit report.
2. Persuasiveness of audit evidence
 The followings are determinants of the
PERSUASIVENESS OF EVIDENCE;

1. Appropriateness  QUALITY

2. Sufficiency  QUANTITY

3. Combined effect
2. Persuasiveness of audit evidence
(a) Relevance
1. Appropriateness Quality
(b) Reliability

(c) Qualifications of
2. Sufficiency Quantity
info provider

(d) Degree of
objectivity
(a) Auditor’s (b)
expectations of Effectiveness of (e) Timeliness
misstatements Internal Control
(f) Documentary
3. Combined effect evidence

(g) Original
documents
2. Persuasiveness of audit evidence
1. Appropriateness of evidence
 Refers to the degree to which evidence can be
considered believable or worthy of trust.
 If it is highly appropriate 

it would be great in persuading auditor that Financial

Statements are fairly stated eg. If auditor do the
stock-take, that evidence would be more appropriate
than management give the auditor its own figures.
2. Persuasiveness of audit evidence
Quality
2. Persuasiveness of audit evidence
1. Appropriateness of evidence

 Appropriateness of evidence deals only with the audit procedures

selected (not by selecting larger sample size or diff. population
item!!).

 General understanding, evidence is considered appropriate when

it is both relevant and reliable
 Relevance - The evidence must be relevant to the audit
objective being tested.
 Reliability - Reliability refers to whether the type of evidence
can be relied upon to signal the true state of an assertion or
audit objective.
2. Persuasiveness of audit evidence
1. Appropriateness of evidence…Cont’d

(a) Relevance
 The evidence must be relevant to the audit objective being tested.

 Evidence must pertain to or be relevant to the audit objective that

the auditor is testing before it can be reliable.

 Relevance can be considered only in terms of specific audit

objectives eg. It may be relevant to ‘existence objective, but not
for all audit objectives’.
2. Persuasiveness of audit evidence
1. Appropriateness of evidence…Cont’d

(b) Reliability
 Reliability refers to whether the type of evidence can be relied
upon to signal the true state of an assertion or audit objective.

 REMEMBER THAT, types of audit evidence have DIFFERENT

DEGREES of reliability, even highly reliable evidence has
weaknesses.

 Eg. Auditor can physically examine inventory, but such

evidence will not ensure obsolescence is not a problem.
2. Persuasiveness of audit evidence
1. Appropriateness of evidence…Cont’d
GENERAL FACTORS FOR ASSESSING
THE RELIABILITY OF EVIDENCE

(b)(i) Independence (b)(iii) Auditor’s

of provider direct knowledge

(b)(ii) Effectiveness of
INTERNAL CONTROL
2. Persuasiveness of audit evidence
1. Appropriateness of evidence…Cont’d

(b) (i) Independence of the source of the evidence.

 Evidence obtained from a source outside the entity is more
reliable that that obtained from within.

 Confirmation of balance received directly from 3rd party (eg.

Bank, debtors, creditors) would be viewed as more reliable than
examination of balance as recorded in GL.

 But if evidence is obtained from entity but subjected to

verification by independent source, is viewed as more reliable
than evidence obtained solely from w/in entity.
2. Persuasiveness of audit evidence
1. Appropriateness of evidence…Cont’d

(b) (ii) Effectiveness of Internal Control

 When client’s IC are effective, evidence obtained is more
reliable than when they are weak.

 If entity’s IC effective (that is, low risk), evidence generated by

that accounting system is viewed as reliable.

 If IC is weak (that is, high control risk), evidence from the

accounting system would not be considered reliable.
2. Persuasiveness of audit evidence
1. Appropriateness of evidence…Cont’d

(b) (iii) Auditor’s Direct Knowledge

 Evidence obtained directly by the auditor thru physical
examination, observation, computation and inspection is more
appropriate than information obtained directly.

 eg. Auditor calculates the gross margin or other ratios and

compares it with previous period, more reliable than if auditor
relied on calculations of clients.

 Eg. Auditor’s physical examination of entity’s inventory, more

reliable.
2. Persuasiveness of audit evidence
1. Appropriateness of evidence…Cont’d

(c) Qualifications of Info. Provider

 Info can from independent source but doesn’t mean that it is
reliable. Evidence will not be reliable unless individual providing
it is qualified to do so eg. Correspondences from attorneys,
bank confirmations.
2. Persuasiveness of audit evidence
1. Appropriateness of evidence…Cont’d

(d) Degree of Objectivity

 Objective evidence is more reliable than evidence that requires
considerable judgment to determine whether it is correct.

 Subjective evidence eg. Legal letter discussing the likely

outcome of outstanding lawsuits, observation of obselescence
of inventory, discussion with credit mgr about the collectibility of
non-current accounts receivable.
2. Persuasiveness of audit evidence
1. Appropriateness of evidence…Cont’d

(e) Timeliness
 Timeliness of audit evidence can refer either to when it is
accumulated or to the period covered by the audit.

 Eg. Evidence is usually more reliable for balance sheet

accounts when itbis obtained as close to the balance sheet date
as possible.

 Eg. For income statement, evidence is more reliable if there is a

sample from the entire period under audit review period rather
than from only a part of the period, say, a random sales
transactions for entire year more reliable than sample from only
6 months.
2. Persuasiveness of audit evidence
1. Appropriateness of evidence…Cont’d

(f) Documentary evidence

 Audit evidence is more reliable when it exists in documentary
form, whether paper, electronic or other medium.

 Thus, a written record of BOD’s meeting is more reliable than a

subsequent oral representation of the matters discussed.

(g) Original documents

 Audit evidence provided by original documents is more reliable
than audit evidence provided by photocopies or facsimiles.

 An auditor’s examination of an original signed copy of a lease

agreement is more reliable than a photocopy.
2. Persuasiveness of audit evidence
2. Sufficiency

 Sufficiency is the measure of the quantity of audit evidence.

 Quantity of audit evidence needed is affected by the assessed

risks of material misstatement and by the Quality of the audit
evidence gathered.

 Sufficiency is measured primarily by the sample size the auditor

selects eg. Sample of 100 more sufficient than sample of 50.

 Thus, the greater the assessed risk, the more audit evidence is
likely to be required to meet audit objective. And the higher the
quality of evidence, less evidence may be required to meet audit
test  INVERSE RELATIONSHIP between sufficiency &
appropriateness of audit evidence.
2. Persuasiveness of audit evidence
2. Sufficiency….Cont’d

 The auditor relies on evidence that is persuasive rather than

convincing in forming an opinion on a set of financial
statements.

 This occurs for 2 reasons:

 Because of cost considerations, the auditor only examines a
sample of the transactions that compose the account balance
or class of transactions  audit must be performed in
reasonable of time and at reasonable cost.
 Due to the nature of evidence, the auditor must often rely on
evidence that is not perfectly reliable.
2. Persuasiveness of audit evidence
2. Sufficiency….Cont’d

 Quantity of audit evidence is determined by auditor’s

professional judgment and is affected by risk of material
misstatement for the account balance or class of transactions.

 Several factors determine the appropriateness of sample size. 2

most important ones;
1. Auditor’s expectation of misstatements.
 If risk is high, sample more, vice versa.

2. Effectiveness of Internal Control.

 If IC good, smaller size of audit acquisitions is warranted,
vice versa
2. Persuasiveness of audit evidence
3. Combined Effect

 Persuasiveness of audit evidence can be evaluated only after

considering the combination of Appropriateness and Sufficiency
 including the effects of the factors influencing
appropriateness and sufficiency.

 Large sample of evidence provided by independent party is not

persuasive unless it is relevant to audit objective being tested.

 Large sample of evidence is relevant but not objective is also

not persuasive.
3. Evaluation of Audit Evidence
 Auditor should to be thorough in searching for evidence and
unbiased in its evaluation.

 Proper evaluation of evidence requires that the auditor

understand the types of evidence that are available and their
relative reliability.

 Professional Judgment  sufficiency and appropriateness of

evidence to determine reasonableness of mgmt’s assertions

 In deciding which audit procedures to use, auditor can choose 7

BROAD CATEGORIES of evidence.

 These categories, called types of evidence (or sometimes known

as the ‘types of audit procedures to obtain audit evidence’ ).
4. Types of Audit Evidence
1. Physical Examination - HR
2. Confirmation - HR
3. Documentation - MR
4. Observation - LR
5. Inquiries Of The Client - LR
6. Reperformance & Recomputation - HR
7. Analytical Procedures – MR

HR – Highly of Reliability
MR – Medium of Reliability
LR – Low of Reliability
RELIABILITY OF THE
TYPES OF EVIDENCE

Level of Reliability Type of Evidence

High Physical examination

Reperformance
Confirmation
Medium Documentation
Analytical procedures

Low Enquiries of client personnel

or management
Observation
 Physical Examination

Examine records, documents @ tangible asset – depend on

sources and effectiveness

to ensure assets really exist

Normally for;
inventories
cash
securities
Tangible assets

High reliability – auditor’s direct knowledge

 CONFIRMATION
 Confirmation describes the receipt of a written or oral response from
independent third party verifying the accuracy of information that was
requested by the auditor.

 The reliability of evidence obtained through confirmations is directly

affected by factors such as
 The form of the confirmation.

 Prior experience with the entity.

 The nature of the information being confirmed.

 The intended respondent.

Confirmation

High Reliability – because of the independence of third

party BUT depending on;
The form of the confirmation
Prior experience with the entity
Nature of the information being confirmed
The intended respondent

Positive Confirmation Negative Confirmation

Types of confirmation requests
 ISA 501  2 common types of confirmation requests,
positive confirmations and negative confirmations.
 Positive confirmation; recipient to respond in all
circumstances.
 Negative confirmation; recipient is asked to respond
only when the info. is incorrect.
 Because confirmations are considered significant
evidence only when returned, negative confirmations
are less appropriate than positive confirmations.
DOCUMENTATION
 Documentation is the auditor’s examination of
client’s documents and records to substantiate
the information that is or should be included in
the financial statements.
DOCUMENTATION

 Reliability of documentary evidence.

 Internal versus external evidence

 Documentary evidence related to audit

objectives.
 Vouching versus tracing
Documentation

Documentation & accounting records (ledger, journals,

cheques, invoces,) – supported the recorded transactions

3 categories
documentary audit evidence created & held by
third parties
documentary audit evidence created by third
parties but held by the entity; &
documentary audit evidence created & held by
the entity
 Documentation

 Internal vs External
 If good internal controls;
 internal documentations can be used  high reliability
Observation
Observe process and procedures
sight, hear, touch & smell

Low reliability, but still important

Requires additional evidences
Inquiry

Inquiry is the obtaining of written or oral information

from the client in response from the auditor.
Although considerable evidence is obtained from the
client through inquiry, it usually cannot be regarded as
conclusive because it is not from an independent source
and may be biased in the client’s favour.
Low reliability, bias, but still important.
Requires additional evidences.
Recalculation @ Reperformance

Reperformance involves rechecking a sample of the

computations and transfers of information made by client
during the period under audit.
Eg.Checking client’s arithmetical accuracy, calculation of
depreciation expense
 Recalculation @ Reperformance

involve recalculation of clients information (sampling) –

Highly Reliability

Recomputation: Repeformace:

Arithmetic accuracy ‘tracing amount’

depreciation, prepayment, Reconciliation of account

provn for doubtful debts balance with subsidiary’s
ledger & testing of journal
entries to ledger
Analytical Procedures (AP)

ISA 520 – AP use comparisons and relationships to

assess whether account balance or other data appear
reasonable.
An example is comparing the gross margin percent in
the current year with the preceding’s year.
AP has been used extensively, and their use has
increased with the availability of computers to perform
calculations.
Analytical Procedures (AP)

ISA 520 – the analysis of significant ratios and trends including

the resulting investigation of fluctuation and relationships that
are inconsistent with other relevant information or which
deviate from predicted amounts.
Using – comparison & association to determine the accounts
balances & other related data are reasonable

If account is not material– use AP only

If its material, AP helps to reduce for other evidences
Analytical Procedures
ISA 520 – AP at planning & audit assessment

Objectives
Understand Client’s Industry & Business
Assess the Entity’s Ability to Continue as Going Concern
Indicate Possible Misstatements (Attention Directing)
Eg. Unusual fluctuations occur when significant differences are
not expected but do exist or when significant differences are
expected but do not exist.
If the fluctuation is large, must determine the reason that the
cause is valid economic reason not misstatement.
Reduce Detailed Tests
If AP reveals no fluctuations, implication is that possible
material missatement is minimised.
ANALYTICAL PROCEDURES
5 TYPES OF ANALYTICAL PROCEDURES
Compare client’s info with industry
Compare client’s current years info with previous year.
Compare with auditor’s projections
Compare with other non-financial information

Reliance on Analytical Procedure Results Depended Upon:

Objective can be achieved by using the AP

Materiality of the Item Involved
Other Audit Procedures Directed toward the same Audit Objectives
Accuracy with which the Expected Results of AP can be Predicted
Assessment of Inherent Risk & Control Risk
5. Audit Procedures
 Audit procedures are specific acts performed by the
auditor to gather evidence to draw conclusions on
which to base the audit opinion.

 Audit procedures are performed for the following

purposes;
a) Risk assessment procedures
b) Test of controls
c) Substantive procedures
5. Audit Procedures
(a) Risk assessment procedures
 ISA 315, requires auditor to perform risk assessment
procedures in order to obtain an understanding of the
entity and its environment, including IC in order to
assess its risks of material misstatement at the
financial statement and assertion levels.

 However, risk assessment procedures by themselves

do not provide sufficient appropriate audit evidence,
must be supplemented with test of controls and
substantive procedures.
5. Audit Procedures
(a) Risk assessment procedures ….Cont’d
 Auditor obtains an understanding of the entity and its
environment by performing the following risk
assessment procedures;

I. Inquiries of mgmt and others,

II. Analytical Procedures,
III. Observation and inspection.
5. Audit Procedures
(a) Risk assessment procedures ….cont’d
(I) Inquiries of Mgmt and Others
 Depending on circumstances, auditor might make
inquiries of;
i. Internal auditors  design & effectiveness of ICs
ii. In-house legal counsel  Pending litigations,
compliance with laws and regulations, legal terms
iii. Production, marketing, sales and other personnel
iv. Employees with different levels of authority,
v. Employees involved in initiating, processing or
recording complex or unusual transactions.
vi. People outside the entity
5. Audit Procedures
(a) Risk assessment procedures ….cont’d
(I) Inquiries of Mgmt and Others ….cont’d

 WHY people outside the entity??  customers,

suppliers or valuation specialists
 Fraud is typically perpetrated by small no. of people
in top mgmt and/or in finance dept. Thus, discussion
with people outside those areas may provide info that
will assist the auditor for info in uncovering fraud
Eg. Customers may report that they received large
quantities of unordered products from the entity just
before year-end  indication of overstated revenues
5. Audit Procedures
(a) Risk assessment procedures ….cont’d
(I) Inquiries of Mgmt and Others ….cont’d

 REMEMBER: SOMETIMES THE MOST

IMPORTANT EVIDENCE IS NOT FOUND IN
THE ACCOUNTING RECORDS !!!
5. Audit Procedures
(a) Risk assessment procedures ….cont’d
(II) Analytical procedures

 Conducting preliminary AP  will assist in

understanding the entity and its environment &
identifying areas that may represent specific risks
relevant to audit.
 AP  unusual transactions or events and amounts,
ratios and trends that might have implications for
audit planning.
5. Audit Procedures
(a) Risk assessment procedures ….cont’d
(III) Observation and Inspection

 Observation and inspection include audit procedures

such as;
I. Observation of entity activities and operations,
II. Review or inspection of documents, records and
control manuals,
III. Visits to the entity’s premises and plant facilities,
IV. Reviewing written business plans and strategies,
V. Tracking transactions thru information system
relevant to financial reporting (walkthroughs).
5. Audit Procedures
(a) Risk assessment procedures ….cont’d
(III) Observation and Inspection

 When the auditor’s risk assessment includes an

expectation of the operating effectiveness of controls,
the auditor is required to test those controls to
support the risk assessment.
5. Audit Procedures
(b) Test of Controls
 Procedures directed toward testing the operating
effectiveness of controls, include obtaining audit
evidence about;
 how controls were applied,
 consistency with which they are applied,
 and by whom or by what means they were applied.

 Types of audit procedures;

 Inquiries  mgmt, supervisory and staff personnel
5. Audit Procedures
(c) Substantive Procedures
(II) Substantive Analytical Procedures

 AP are required for use in planning and

overall review stages of all audit in financial
statements. However, auditor should consider
applying AP for all 3 stages (planning,
operational, finalizing) because such
procedures have been shown effectively
detect errors.
ANALYTICAL PROCEDURES USED
IN PLANNING AN AUDIT

 To enhance the auditor's understanding

of the client's business and the
transactions and events that have
occurred since the last audit and
 To identify areas that may represent
risks relevant to the audit.
 ANALYTICAL PROCEDURES AS A
SUBSTANTIVE TEST
 The auditor develops an expectation for the account.
 The expectation is compared to the recorded amount.
 If the difference is material, the auditor makes inquiries
of management and obtains corroborative evidence.
 If the client’s explanation and the corroborative
evidence are not adequate, conduct additional audit
procedures.
 If the explanation and evidence are adequate, accept
amount.
 FACTORS AFFECTING THE
EFFECTIVENESS AND EFFICIENCY OF
ANALYTICAL PROCEDURES
 The effectiveness and efficiency of analytical
procedures in identifying material misstatement
depend on;
 The nature of the assertion or audit objective.
 The plausibility and predictability of the relationship.
 The availability and reliability of the data used.
 The precision of the expectation.
5. Audit Procedures
(c) Dual-Purpose Tests

 If “Test of Controls” look for errors in the application

of controls and “Substantive Tests of Transactions”
concerned with monetary errors.

 However, for some audit tests, it is difficult to

determine whether the audit procedure is a “Test of
Controls” or “Substantive Tests of Transactions”.
5. Audit Procedures
(c) Dual-Purpose Tests

 If “Test of Controls” look for errors in the application

of controls and “Substantive Tests of Transactions”
concerned with monetary errors.

 However, for some audit tests, it is difficult to

determine whether the audit procedure is a “Test of
Controls” or “Substantive Tests of Transactions”.
5. Audit Procedures
(c) Dual-Purpose Tests
 Examples of Internal Controls and Test of Controls
Internal Controls Test of Controls
 Agree sales invoices to shipping Re-compute the information on a
document and customer order for sample of sales invoices.
product types, price and quantity.

 While this test primarily checks the effectiveness of the

control, it also provides evidence on whether the sales
invoice contains wrong quantity, product type, or price.

 Dual-purpose tests can also improve the efficiency of the

audit.
Thank You