2018

Chapter 5

AUDIT EVIDENCE

Prescribed AUDITING & ASSURANCE SERVICES IN

textbook AUSTRALIA 7TH - Grant Gay& Roger Simnett

Chapter 4, 9

KIỂM TOÁN (2017), 7th - Bộ môn Kiểm toán

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ISA/VSA 315 Identifying and Assessing the Risks of Material Misstatement

Relevant through Understanding the Entity and Its Environment
guidance ISA/VSA 330 The Auditor’s Responses to Assessed Risks

ISA/VSA 500 Audit Evidence

ISA/VSA 501 Audit Evidence – Specific Considerations for Selected Items

ISA/VSA 505 External Confirmations

ISA/VSA 520 Analytical procedures

LEARNING 1. Define audit evidence

OBJECTIVES 2. Describe factors that affect the
appropriateness and sufficiency of audit
evidence
3. Identify and understand basic audit
procedures for gathering audit evidence

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CONTENT 1. Overview of audit evidence

2. The appropriateness and sufficiency of audit
evidence
3. Audit procedures for obtaining audit
evidence

1.
OVERVIEW
OF AUDIT
EVIDENCE
Let’s start with the
first set of slides

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WHAT IS
AUDIT Audit evidence is all
EVIDENCE? the information •Information
used by auditors in contained in the
arriving at the accounting
conclusions on records
which the audit •Other
opinion is based information

Knowledge of the Client Outside information

SOURCES Gathered through: Gathered through:
OF AUDIT -Previous audit work -Work of the audit team
EVIDENCE -Engagement risk using market data
analysis -Independent analyses by
specialists

Accounting systems Quality of internal control

Gathered through: Gathered through:
-Direct tests of account -Evaluation of the design of
balances and internal control
transactions -Evaluation of the operation
-Analytical analysis of controls

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2.
APPROPRIATE
-NESS AND
SUFFICIENCY
OF AUDIT
EVIDENCE
Let’s move on the
second set of slides

o Appropriateness
 Relevance
THE
 Reliability
APPROPRIATE o Sufficiency
-NESS AND  Risk of material
SUFFICIENCY misstatements
OF AUDIT  Quality of audit
evidence
EVIDENCE

ISA 500: The auditor shall design and perform audit

procedures that are appropriate in the circumstances for the
purpose of obtaining sufficient appropriate audit evidence.
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Appropriateness is :
APPROPRIATENESS • the measure of the quality of audit evidence
OF AUDIT EVIDENCE • affected by the relevance and reliability of the
information upon which it is based

Relevance to the purpose of Reliability is influenced by:

the audit procedure and, its source and its nature,
where appropriate, the and
assertion under  the circumstances under
consideration. which it is obtained,
Relevance may be affected including the controls over
by the direction of testing. its preparation and
maintenance where relevant

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When testing for No, it’s not relevant to

understatement of completeness
Appropriateness: accounts payable, assertion of accounts
testing the recorded payble.
Relevance of accounts payable
audit evidence would be relevant?

But testing such

information as
subsequent
disbursements,
unpaid invoices,
suppliers’
statements, and
unmatched
receiving reports
may be relevant

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1. Evidence obtained directly by the auditor OR that

Which
obtained indirectly.
Appropriateness: one is
2. Evidence from well-controlled information
more
Reliability of reliable? systems OR that from poorly controlled systems.
audit evidence 3. Independent third-party evidence obtained from
knowledgeable individuals with adequate time
and motivation to respond to audit inquiries OR
internally generated information from the client.
4. Evidence supported by original documents OR
photocopied documents.
5. Observable evidence OR oral evidence.

The reliability of audit evidence is judged by its ability to

provide convincing evidence related to the audit objective
being evaluated
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Reliability of Reliability varies with:

Internal  Independence of source of evidence
Documentation  Nature of evidence
 Quality of client’s internal controls
 Management’s motivation to misstate (fraud
potential)

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Paper vs. ▪ Major challenge for auditors to determine which

electronic data is reliable
Electronic
▪ Computer systems can be designed to provide
Documentation safeguards similar to paper-based systems
▪ If auditor is going to rely on electronic data, he/she
must develop an understanding of the
- Client’s computer system
- Controls used to safeguard electronic data from
manipulation or destruction

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SUFFICIENCY Sufficiency is :
OF AUDIT • the measure of the quantity of audit evidence.
EVIDENCE • affected by the risk of material misstatement
and by the quality of such audit evidence.
• is a matter of professional judgment based on
- Nature of audit procedures
- Timeliness of financial reporting
- Cost and benefit analysis

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3.
AUDIT
PROCEDURES
Let’s finish the final
set of slides

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AUDIT The auditor obtains audit evidence to draw reasonable

conclusions on which to base the audit opinion by
PROCEDURES performing audit procedures to:
- Obtain an understanding of the entity and its
environment, including its internal control;
- Test the operating effectiveness of controls when
necessary or when the auditor has determined to do
so;
- Detect material misstatements at the assertion level.

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HOW TO OBTAIN
AUDIT AUDIT
PROCEDURES EVIDENCE? ▪Inspection of records and
documents
▪Inspection of tangible assets
▪Observation
▪Inquiry
▪Confirmation
▪Recalculation
▪Reperformance
▪Analytical procedures
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Inspection of ▪ Examine records or documents, whether internal or

records and external, in paper form, electronic form, or other
media.
documents
▪ Provide audit evidence of varying degrees of
reliability, depending on their nature and source and,
in the case of internal records and documents, on the
effectiveness of the controls over their production.
▪ There are two main types: vouching and tracing

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VOUCHING
Inspection of
existence (of account balance components)/
records and occurrence (of transactions in accounting records)
documents Source Accounting
Documents Records
Completeness (of accounts balance components or
transactions in accounting records)

TRACING

Note that the direction of testing determines whether

existence/occurrence or completeness assertion is
tested.

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Physical examination of the assets

Inspection of
Useful in verifying existence of tangible assets
tangible May be useful in identifying potential obsolescence or
assets / wear and tear
Physical Does not provide evidence on completeness,
examination ownership, or proper valuation (except as in item
of assets above)

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Look at a process or
Observation
procedure being performed by
others.
 Provide 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.

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Inquiry ▪ Seek information of knowledgeable persons, both

financial and non-financial, throughout the entity or
outside the entity.
▪Used extensively, especially early in the audit to gain
an understanding.
▪Not considered persuasive, should be corroborated by
other sources of evidence.
▪Formal written inquiries or informal oral inquiries
▪Evaluating responses to inquiries is an integral part of
the inquiry process
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▪The process of obtaining a representation of

Confirmation
information or of an existing condition directly from a
third party.
▪Usually send a confirmation to:
- Customers/Clients
- Suppliers
- The bank and other creditors
- Consignee
- Lawyers, legal consultants
▪ Considered as an appropriate evidence on existence,
occurrence, right and obligation assertions.

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Recalculation
Recalculation &
▪Check the mathematical accuracy of documents or
Reperformance records.
▪ Can be performed through the use of information
technology

Reperformance
▪ The auditor’s independent execution of procedures or
controls that were originally performed as part of the
entity’s internal control

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▪ Evaluate financial information made by a study of

Analytical
plausible relationships among both financial and non-
procedures financial data.
▪ Investigate identified fluctuations and relationships
that are inconsistent with other relevant information
or deviate significantly from predicted amounts.

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Analytical Compare client data with:

procedures 1. Industry data
2. Similar prior-period data
3. Client-determined expected results
4. Auditor-determined expected results
5. Expected results using nonfinancial data.

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Analytical ISA 520 - Analytical Procedures, Para.2

procedures in "The auditor should apply analytical procedures at the
planning and overall review stages of the audit.
audit process
Analytical procedures may also be applied at other
stages.”

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Analytical In planning the audit, analytical procedures are

performed to:
procedures in
audit process ▪ obtain an understanding of the business and its
environment (eg financial performance relative to
prior years and relevant industry and comparison
groups),
▪ help assess the risk of material misstatement 
determine the nature, timing and extent of audit
procedures.
 preliminary analytical review

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Analytical In fieldwork, analytical procedures are used as

substantive procedures when the auditor considers
procedures in that the use of analytical procedures can be more
audit process effective or efficient than tests of details in reducing the
risk of material misstatements at the assertion level to
an acceptably low level.
 substantive analytical procedures

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Analytical In completion phase, analytical procedures are

performed as an overall review of the financial
procedures in statements at the end of the audit to assess whether
audit process they are consistent with the auditor’s understanding of
the entity.
If irregularities are found, risk assessment should be
performed again to consider any additional audit
procedures are necessary.
 final analytical review

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Steps 1. Develop an expectation

involved in 2. Define significant differences
analytical 3. Compare the actuals with the expectation
procedures 4. Investigate any significant differences between
actuals and expectation
5. Document the first four steps and make an audit
conclusion as to whether assurance can be drawn

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Types of 1. Trend analysis: analysis of changes in an account

over time
analytical
procedures 2. Ratio analysis: comparison, across time or to a
benchmark, of relationships between financial
statement accounts and between an account and
non-financial data.
3. Reasonableness analysis: analysis of accounts, or
changes in accounts between accounting periods,
that involves the development of a model to form
an expectation based on financial data, non -
financial data, or both.

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Trend 500

analysis 400

300
20x1
200 20x2
100

0
1 2 3 4 5 6 7 8 9 10 11 12

Identify the fluctuations in monthly sales in 20x2?

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Ratio X is a merchandising company. This year, the

analysis company’s gross profit ratio declined from 20% to
14%.
▪Identify all possible causes of such situation?
▪Suggest the audit procedures that should be
performed?

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Reasonable Items Analytical procedures

ness
analysis A hotel’s sales Number of rooms occupied x
revenue Average room price
Revenues of a Number of students x Average
university tuition fees
Salary cost Average number of employees x
average wage

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IT’S THE END OF THE CHAPTER

We did it!
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