LECTURE 7:

AUDIT EVIDENCE

Learning objectives
After studying this lecture, students should be able to:
 Define audit evidence
 Describe the components of and the meaning of ‘sufficient
appropriate audit evidence’
 Identify the common management assertions for classes of
transactions, account balances and disclosure
 Understand the seven evidence-gathering techniques
 Obtain evidence that management acknowledges its responsibility
for the fair presentation of the financial statements in a
management representation letter

1
 CONTENT
 7.1. The Basis of Evidence
 7.2. Financial Statement Assertions
 7.3. Sufficient Appropriate Audit evidence
 7.4. Audit Procedures for Obtaining Audit Evidence
 7.5. Written Representations
 7.6. Documentations

7.1. THE BASIS OF EVIDENCE

 Definition

• Audit evidence is information used by the auditor in

arriving at the conclusions on which the auditor’s opinion is
based.
• It includes the accounting records and other information

2
 7.1. THE BASIS OF EVIDENCE
 Audit evidence & legal evidence

Audit evidence needs only to prove reasonable assurance,

whereas in a legal environment there is a more rigorous
standard of proof and documentation
5

7.1. THE BASIS OF EVIDENCE

 Electronic evidence

• Some of the entity’s accounting data and other information

may be available only in electronic form.
• The electronic nature of the accounting documentation
usually requires that the auditor use computer-assisted audit
techniques (CAATs)

3
 7.2. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

 The audit starts with the financial statements prepared by the

client and the claims or “assertions” that the client makes about
these numbers.
 It is the auditor's job to validate management's assertions. In
order to do so, the auditor will identify audit objectives, which
can be regarded as the auditor's counterpart of management
assertions.

7.2. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

 Management assertions

Management assertions are

implied or expressed
representations by
management about classes of
transactions and related
accounts in the financial
statements.

4
 7.2. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

Assertions may fall into the following categories:

 Assertions about classes of transactions and events,

and related disclosures, for the period under audit
 Assertions about account balances, and related
disclosures, at the period end

7.2. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

 Assertions about classes of transactions and events,

and related disclosures:
• Occurrence—transactions and events that have been
recorded or disclosed have occurred, and such transactions
and events pertain to the entity.
• Completeness—all transactions and events that should have
been recorded have been recorded, and all related
disclosures that should have been included in the financial
statements have been included.
• Accuracy—amounts and other data relating to recorded
transactions and events have been recorded appropriately,
and related disclosures have been appropriately measured
and described. 10

10

5
 7.2. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

Assertions about classes of transactions and events, and

related disclosures (Cont.)

• Cutoff—transactions and events have been recorded in the

correct accounting period.
• Classification—transactions and events have been
recorded in the proper accounts.
• Presentation—transactions and events are appropriately
aggregated or disaggregated and clearly described, and
related disclosures are relevant and understandable in the
context of the requirements of the applicable financial
reporting framework.

11

11

7.2. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

Assertions about account balances, and related disclosures:

• Existence—assets, liabilities and equity interests exist.

• Rights and obligations—the entity holds or controls the
rights to assets, and liabilities are the obligations of the
entity.
• Completeness—all assets, liabilities and equity interests
that should have been recorded have been recorded, and
all related disclosures that should have been included in
the financial statements have been included.

12

12

6
 7.2. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

Assertions about account balances, and related

disclosures (Cont.)
• Accuracy, valuation and allocation—assets, liabilities and
equity interests have been included in the FSs at appropriate
amounts and any resulting valuation or allocation adjustments
have been appropriately recorded, and related disclosures have
been appropriately measured and described.
• Classification—assets, liabilities and equity interests have
been recorded in the proper accounts.
• Presentation—assets, liabilities and equity interests are
appropriately aggregated or disaggregated and clearly
described, and related disclosures are relevant and
understandable in the context of the requirements of the
applicable financial reporting framework. 13

13

Management Assertions for

Each Category of Assertions
Transactions and Events Account Balances
Occurrence Existence
Completeness Completeness
Accuracy Accuracy, valuation and
allocation
Cutoff
Classification Classification
Rights and obligations
Presentation Presentation

14

14

7
 For example, we have some misstatements:
1. Over-stating $400 of cost of goods sold due to incorrect application of
method of calculating inventory price.
2. Omitting a sale transaction with $200 cost of goods sold and $300 of
sales.
3. Recording $200 of inventory into fixed assets account.
4. On 28/12/2022, the company signed a contract to sell goods to
customer and delivered goods to customer on 3/1/2023. However,
accountant recorded this transaction in accounting book of Year 2022.
5. Accountant record a sale transaction to a fictitious customer to
increase sales and profit of financial year.

Require: Identify each of above misstatements will violate which

management assertion?
15

15

7.3. SUFFICIENT APPROPRIATE AUDIT EVIDENCE

• The objective of the auditor is to design and perform audit

procedures in such a way as to enable the auditor to obtain
sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s
opinion. – ISA 500
• Reasonable assurance is obtained when the auditor has
obtained sufficient appropriate audit evidence to reduce audit
risk to an acceptably low level. – ISA 200

16

16

8
 Persuasiveness of Evidence
Two determinants:

Appropriateness Sufficiency
(relevance and reliability) (quantity)

The persuasiveness of evidence can be evaluated only after

considering the combination of appropriateness and sufficiency
17

17

ISA 500 Audit

Sufficient Appropriate (Quality)
Evidence

Quantity – Sufficient Relevance Reliability

to support the audit The evidence • External better than
opinion gathered must internal
Factors to consider are: cover the FS • Internal more reliable
• Risk assessment assertions when control
• Nature of accounting effective
and internal control • Auditor obtained
systems directly better than
• Materiality of the Quality of indirectly or by
item evidence will also inference
• Experience gained affect the Quantity • Documentary better
during previous audits of evidence than oral
• Source and reliability • Original documents
of information more reliable than 18
available copies/faxes

18

9
 7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Evidence Gathering Techniques

Analytical Inquiries
procedures

Audit
Confirmation Observation
Evidence

Reperformance Inspection
Recalculation

19

19

7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inquiry

 Definition:
Consists of seeking information of knowledgeable persons
inside or outside the entity.

 Examples

Obtaining written or oral information from the client in

response to specific questions during the audit.

20

20

10
 7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inquiry (cont.)

 Corroboration:
 In a typical audit, the largest amount of audit evidence is
obtained from client inquiry, but it cannot be regarded
as conclusive because it is not from an independent
source and might be biased in the client’s favour.
 The auditor must gather evidence to corroborate inquiry
evidence by doing other alternative procedures.

21

21

7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Observation

 Definition:
Consists of looking at a process or procedure being
performed by others.

 Examples

Observation by the auditor of the counting of inventories

by entity’s personnel, site visit at the client’s facilities.

22

22

11
 7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Observation (cont.)

• Observation provides audit evidence about the performance

of a process or procedure but is limited to the point in time
at which the observation takes place and by the fact that the
act of being observed may affect how the process or
procedure is performed.
• Sufficient evidence is rarely obtained through observation
alone. Observation techniques should be followed up by
other types of evidence gathering procedures.

23

23

7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Observation (cont.)
 Observation of Physical Inventory Procedures:
The attendance by the auditor will enable him to:
• evaluate management’s instructions and procedures for
recording and controlling the results of the entity’s physical
inventory counting;
• observe the performance of management’s count procedures;
• inspect the inventory;
• perform test counts; and
• perform audit procedures over the entity’s final inventory
records to determine whether they accurately reflect actual
inventory count results
24

24

12
 7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inspection (of Tangible Assets, Records or Documents)

 Definition:
Consists of examining records, documents or tangible
assets.

 Examples

Reviewing sales orders, sales invoices, shipping

documents, bank statements, customer return documents,
customer complaint letters, etc.

25

25

7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inspection (of Tangible Assets, Records or Documents)

 Inspection of tangible assets:

• consists of physical examination of the assets.

• Inspection of tangible assets may provide reliable audit
evidence with respect to their existence, but not necessarily
as to the entity’s rights and obligations or the valuation of the
assets.
• Inspection of individual inventory items ordinarily
accompanies the observation of inventory counting.

26

26

13
 7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inspection (of Tangible Assets, Records or Documents)

 Inspection of Documents:
Inspection of records and documents provides audit evidence of
varying degrees of reliability depending on their nature, source and
the effectiveness of internal controls over their processing:
• The nature of documents includes quantity of information
contained, the difficulty of access to them, and who has custody.
• The source of the documents may be from inside or outside the
firm.
• The source outside the firm may or may not be independent of the
client.
• The source may be competent or incompetent.
• The controls over the recording process may be effective or
ineffective. 27

27

7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inspection (of Tangible Assets, Records or Documents)

 External and Internal Documents:

 An internal document is one that has been prepared and
used within the client’s organisation and is retained without
ever going to an outside party
 An external document is one that has been in the hands of
someone outside the client’s organisation who is a party to
the transaction being documented

28

28

14
 7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inspection (of Tangible Assets, Records or Documents)

 Vouching and Tracing:

 Vouching is an audit process whereby the auditor selects
sample items from an account and goes backwards through
the accounting system to find the source documentation that
supports the item selected (e.g. a sales invoice)
 Tracing is an audit procedure whereby the auditor selects
sample items from basic source documents and proceeds
forward through the accounting system to find the final
recording of the transaction (e.g. in the ledger)

29

29

7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Inspection (of Tangible Assets, Records or Documents)

 Vouching and Tracing:

Tracing (completeness)
Source
Ledger and journal
document
Vouching (Occurrence)

30

30

15
 7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Recalculation

 Recalculation consists of checking the arithmetical accuracy

of source documents and accounting records or of performing
independent calculations
 Computation evidence is relatively reliable because the
auditor performs it. Recalculation may be performed through
the use of CAATs (e.g. ACL), for instance to check the
accuracy of totals in a file

31

31

7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Recalculation (cont.)

Examples:
• Extending sales invoices
• Adding journals and subsidiary records
• Checking calculations of depreciation
• Checking mechanical accuracy of records and ledgers.

32

32

16
 7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Re-performance

• Re-performance is the auditor’s independent execution of

procedures or controls that were originally performed as part
of the entity’s internal control, either manually or through the
use of CAATs, for example, re-performing the ageing of
accounts receivable

33

33

7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Analytical procedures

• Analytical procedures consist of the analysis of significant

ratios and trends including the resulting investigation of
fluctuations and relationships that are inconsistent with other
relevant information or that deviate from predictable amounts

34

34

17
 7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Analytical procedures (cont.)

Analytical Procedures are performed in 3 stages (ISA 520) :

Preliminary Analytical procedures in

1 planning (compulsory) (ISA 315)

Substantive Analytical procedures as

2 substantive procedures (optional)

3 Review Analytical procedures at the overall

review stage (compulsory) of an audit
35

35

7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Confirmation

• Confirmation consists of response to an inquiry to

corroborate information contained in the accounting records.
• Confirmation is the act of obtaining audit evidence from a
third party in support of a fact or condition
• Because confirmations from independent third parties are
usually in writing, and are requested directly by the auditor,
they are highly persuasive evidence. The main disadvantage
of confirmations is that they are costly, time-consuming and
an inconvenience to those asked to supply them

36

36

18
 7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Confirmation (cont.)

 Types of confirmation:
 Positive confirmation: A request that the confirming party
respond directly to the auditor indicating whether the
confirming party agrees or disagrees with the information in
the request, or providing the requested information.
• Reliable evidence
 Negative confirmation: A request that the confirming party
respond directly to the auditor only if the confirming party
disagrees with the information provided in the request.
• Use for large number small balances, low control risk,
response is expected.
37

37

7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Reliability of procedures

1. Recalculation (most reliable)

2. Inspection
3. Re-performance
4. Observation
5. Confirmation
6. Analytical procedures
7. Inquiry (least reliable)

38

38

19
 7.4. AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

 Cost of procedures

1. Confirmation (most costly)

2. Inspection
3. Recalculation
4. Re-performance
5. Observation
6. Analytical procedures
7. Inquiry (least costly)

 The auditor considers the relationship between the cost of

obtaining audit evidence and the usefulness of the
information obtained.
39

39

Which one of the following procedures would give

the most persuasive evidence that a control operated
as the assurance providers had been advised?
A. Inspection of the controls handbook
B. Inquiry of the staff operating the control
C. Observation of the staff operating the control
D. Reperformance of the control by audit staff

40

40

20
 For each of the following tests, select the type of procedure which is
being used.
1. The assurance provider writes to a sample of customers asking
them to inform him of the balance they owe the company at the year
end.
A Inspection
B Observation
C Confirmation
2. The assurance provider looks at a share certificate to confirm that
the company has an investment in Company A.
D Inspection
E Observation
F Confirmation
3. The assurance provider attends the inventory count and ensures
that it is being carried out in accordance with the issued instructions.
G Inspection
H Observation
I Confirmation
41

41

For each of the following pieces of evidence, select whether

it is more reliable or less reliable than the piece of evidence it
is paired with.
1. A sales invoice is more reliable/less reliable than a
purchase invoice.
A More reliable
B Less reliable
2. An original copy of a lease agreement is more reliable/less
reliable than a photocopy.
C More reliable
D Less reliable
3. A bank statement is more reliable/less reliable than the
cash at bank nominal ledger account.
E More reliable
F Less reliable
42

42

21
 Case study
For each of following audit procedures, indicate which type of evidence is
being gathered:
1. Sending a written request to the client’s customers requesting that they
report the amount owned to the client.
2. Examining large sales invoices for period of two days before and after
year- end to determine sales recorded in the proper period
3. Agreeing the total of account receivable subsidiary ledger to account
receivable gerneral ledger account
4. Comparing the current year gross profit percentage with the gross
profit percentage for the last year.
5. Watching the client’s warehouse personel count of the raw material
inventory
6. Performing test count of the warehouse personel count the raw
material inventory
43

43

7.5. WRITTEN REPRESENTATIONS

 Written Representation (WRs) are required by ISA 580

 WRs deals with the auditors’ responsibility to obtain written
representation from management, those charged with
governance
 Written confirmation of oral representation avoids confusion
and disagreement.
 Written confirmation are normally required of senior
management.

44

44

22
 7.5. WRITTEN REPRESENTATIONS

 Written representation - Contents

A number of elements are required auditors to confirms

in writing, management (usually the directors in UK) has
statutory duties in respect of FS:
- Fulfilled its responsibility for the preparation of the
financial statement in accordance with the applicable
financial reporting framework
- Provided the auditor with all relevant information and
access
- Recorded and reflected all transactions in the financial
statements
45

45

7.5. WRITTEN REPRESENTATIONS

 Written representation – Contents (cont.)

Other matters of WRs may contain:
 Whether the selection and application of accounting policies are
appropriate
 Whether matters as the following, where relevant under the
applicable financial reporting framework, have been recognized,
measured, presented or disclosed in accordance with that
framework.
 Whether all deficiencies in internal control of which management
is aware have been communicated to auditors.
 Specific written representation required by other ISAs
 Support for management’s judgement or intent in relation to a
specific assertion
46

46

23
 7.5. WRITTEN REPRESENTATIONS

 The confirmation is are normally done when the auditors

receive a signed copy of FS.

 Written representations are dated as near as possible, but

not after, the date of the auditor’s report on the financial
statement.

 Written representation cannot be used instead of other

(better) evidences which the auditors expect to exist

47

47

According to ISA 580, Written Representations which

three of the following is an auditor required to
confirm in writing with management?
A. Management’s belief that it has fulfilled its
responsibility for the preparation of financial
statements.
B. All transactions have been reflected in the
financial statements.
C. The fact that management has provided the
auditor with all relevant information.
D. Management’s agreement of the level of
materiality used during the audit

48

48

24
 For each of the following statements concerning written
representations, select whether they are true or false.
1. The auditor should evaluate whether the representations
appear reliable and are consistent with other evidence
obtained before they are relied on as audit evidence.
A True
B False
2. Written representations are appropriate evidence when
evidence the auditors expected to be available is unavailable.
C True
D False
3. If written representations given do not agree with other
evidence, auditors should not trust any other representations
made by management during the course of the audit.
E True
F False 49

49

Auditors seek written representations from management to support

oral representations that have been made during the course of the
audit.
For each of the following in relation to a statutory audit, select
whether a written representation is required or not required.
1. The directors have fulfilled their responsibility for the
preparation of the financial statements.
A Required
B Not required
2. The accounting policies selected and applied by management
are appropriate.
C Required
D Not required
3. A material item, subject to management judgement, for which
no other evidence could reasonably be expected to exist.
E Required
F Not required 50

50

25
 Written representations may be sought as audit evidence.
Which two of the following are valid circumstances in
which written representations may be required?
A. To support other evidence about the suitability of
accounting policies
B. Where information which would normally be expected
to be available is unavailable
C. To support inspection of a board minute introducing
the directors’ intention to sell a material investment
D. When the alternative audit procedure would be too
time consuming

51

51

7.6. DOCUMENTATION

Provides evidence:
 of the basis for the auditor’s conclusion
 that the audit was planned and performed in accordance with ISAs
and legal and regulators requirements

52

52

26
 Objective of the Auditor

The auditor must prepare documentation on a timely basis that

provides:

 A sufficient and appropriate record of the basis for the auditor's

report

and

 Evidence that the audit was planned and performed in accordance

with ISAs and applicable legal and regulatory requirements

53

53

Content

Permanent Audit File Current Audit File

Documents of a permanent
nature that are of continuing
importance to the audit process Documents that are of direct
and provide a history of significant relevance to current audit
audit related matters Examples:
Examples:  External confirmations
 Company Registration and  Control checklists
legal structure
 Audit Plan
 Articles of Association
 Analysis of business
environment

54

54

27
 Activity: Working Papers

55

55

Audit Section Structure

 A "lead" schedule
 A section summary and conclusion
 Basis of accounting and accounting policy used
 A work programme of audit procedures
 A test lead schedule:
̶ objective of the test
̶ sampling approach
̶ work done
̶ conclusion
 Supporting schedules showing the work done, how it was done and
the matters arising

56

56

28
 Working Paper Information

57

57

Assembly of Working Papers

All matters that support the audit opinion must be filed and the file
reviewed and signed off before signing the auditor's report

Remainder, within 60 days

After final assembly, the auditor should not delete audit documentation
until the completion of the retention period

58

58

29
 Quality Management

Review of
Working Papers

Audit Partner’s
Documentation
Review

59

59

Confidentiality and Ownership

Confidentiality

Safe
Ownership
custody

60

60

30
 Technical article: Documentation

Click the link below to open

the articles on accaglobal

Technical articles

Audit working papers

61

61

Homework:

ACCA Study Hub – Foundation in Audit (FA)

– Chapter 4

62

62

31