Audit Evidence.pptx audit and assurance slide
- 2. Audit Evidence Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence consists of both information that supports and verifies management's assertions regarding the financial statements or internal control over financial reporting and information that contradicts such assertions. 2
- 3. Audit Evidence Audit evidence (inspection, confirmation) must support the audit assertions (completeness, accuracy) in order to form an opinion. E.g. assertion=ownership; evidence=title deed Assertion = existence; evidence=physical examination 3
- 4. Audit Evidence According to ISA 500’ “the objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient and appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. “ 4
- 6. Audit Evidence - Sufficiency Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence depends on the following factors: i. Risk of material misstatement. As the risk increases, the amount of evidence that the auditor should obtain also increases. For example, ordinarily more evidence is needed to respond to significant risks. ii. Quality of the audit evidence obtained. As the quality of the evidence increases, the need for additional supporting evidence decreases. 6
- 7. Audit Evidence - Appropriateness Appropriateness is the measure of the quality of audit evidence, i.e., its relevance and reliability. To be appropriate, audit evidence must be both relevant and reliable in providing support for the conclusions on which the auditor's opinion is based. 7
- 8. Audit Evidence - Appropriateness Relevance The relevance of audit evidence refers to its relationship to the assertion or to the objective of the control being tested. It means how useful the evidence is in testing what the auditor wants to check (the "assertion" or "control"). The relevance of audit evidence depends on: A) The design of the audit procedure used to test the assertion or control, B) The timing of the audit procedure used to test the assertion or control. 8
- 9. Design of the Audit Procedure: This means the way the auditor plans and performs the test. For example, if the goal is to check whether payments are approved (a control), the procedure might be to review payment records for signatures or approvals. If the procedure matches the goal, the evidence is relevant. Timing of the Audit Procedure: This refers to when the auditor performs the test. For example, if you’re testing whether year-end balances are accurate, it’s more relevant to test closer to the end of the financial year, not months before or after. In summary: • Design = Making sure the test is suitable for the goal. • Timing = Testing at the right time for accurate results. 9
- 10. Audit Evidence - Appropriateness Reliability Reliability is influenced by the source and nature of the evidence. For example, in general: Evidence obtained from a knowledgeable source that is independent of the company is more reliable than evidence obtained only from internal company sources. The reliability of information generated internally by the company is increased when the company's controls over that information are effective. 10
- 11. Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly. Documentary evidence is more reliable, whether paper, electronic or other medium (for example, a written record of a meeting is more reliable than a subsequent oral representation of the matters discussed) Original documents are more reliable than photocopies or faxes. 11
- 12. Audit Procedure -ICORRIA Inspection Confirmation Observation Recalculation Re-performance Inquiry Analytical procedures 12
- 13. Inspection Inspection involves examining documents or records in paper form, electronic form, or other media. Whether internal or external, an inspection of documents and records may give evidence of ownership (for example, title deeds). This evidence can confirm value and purchase costs. Inspection of tangible assets usually gives evidence of existence or valuation. 13
- 14. Confirmation Important source of relevant and reliable audit evidence. External confirmation is audit evidence that is obtained as a direct written response to the auditor from a third party (the confirming party) in paper form, electronic medium or other medium. For example, verify account balances through sending letter or email to banks and suppliers. 14
- 15. Observation Observation consists of looking at processes or procedures. It either confirms or denies that control was operating at the time of the observation, keeping in mind that the auditor’s presence may have had an influence on behaviors. Examples include an auditor’s observation of inventory counting or of the performance of control activities. 15
- 16. Recalculation Checking the mathematical accuracy of documents or records and that can be used to verify the accuracy of the recording of transactions or of the application of accounting policies, for example by recalculating depreciation of tangible assets. Recalculation however does not provide evidence of the accuracy of the estimated rate of depreciation charged in relation to each class of assets. 16
- 17. Re-performance Re-performance is an audit procedure where the auditor independently carries out a process or control that the organization originally performed. The purpose is to verify whether the control is functioning as intended and free from deficiencies. Examples of Re-performance: Examining payroll to ensure employees are paid correctly based on hours worked and approved rates. Verifying the accuracy of a bank reconciliation prepared by the entity’s accountant. 17
- 18. Inquiry Audit procedure that is used extensively during the performance of an audit in addition to other procedures. It consists of seeking both financial and non-financial information of knowledgeable persons within or outside the entity. Example: The auditor may ask the warehouse manager, “How often do you conduct physical inventory counts?” The manager might state that counts are conducted quarterly and discrepancies are reconciled immediately. 18
- 19. Analytical procedures Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. Analytical procedures also encompass the investigation of significant differences from expected amounts. 19
- 20. Audit evidence is persuasive rather than conclusive Due to inherent limitation of audit, auditor is only able to get persuasive evidence instead of conclusive evidence. Persuasive evidence is evidence that has the power to influence or persuade someone to believe in its truth. For example: Your job is to check the receivable account balance, to accomplish this you send confirmation mail to the big clients and the sum of these clients is almost 75 % of the total percentage, if all customer replies with positive responses then you have enough persuasive evidence to issue an opinion on the accuracy of overall receivable account. 20
- 21. Conclusive evidence is a solid evidence after which no further proof or inquiry is required & evidence, itself is complete. Conclusive evidence would be if you sent confirmation letter to all customer and pursued all customer until they respond. 21