HIMACHAL PRADESH NATIONAL LAW UNIVERSITY

SHIMLA

AUDIT EVIDENCE

Submitted by:
Submitted to:
Vipasa Rana
DR. Deepika Gautam
B.B.A. LL.B.

3rd Semester
1120181914
ACKNOWLEDGEMENT

“Knowledge is in the end based on acknowledgement.”

– Ludwig Wittgenstein

Every project big or small is successful largely due to the effort of many people who have
always helped from behind for every successful work. This project has been completed not only
by my efforts but several others who have timely helped me at every step I moved forward. I
would like to thank my module tutor DR. Deepika Gautam for giving this opportunity to
work on such an enlightening topic. I would also like to thank my family and friends for
providing me with full support, help, and motivation at the time when I needed it the most.

Date: Nov 4, 2019 Name: vipasa rana

AUDIT EVIDENCE

An auditor applies various audit procedure to obtain audit evidence which enables him to form
an opinion whether the financial statements of an entity are free from material misstatement and
state a true and fair view or not.

Audit Evidence is the information that the auditor uses in arriving at a conclusion on the basis of
which he forms his opinion.

The auditor should obtain sufficient and appropriate evidence which enables the auditor to arrive
at a conclusion and supports his opinion. Audit evidence forms the basis for forming an opinion
whether the financial statements of an entity state true and fair view or not.

Evidence collected by the auditor should support the contents of its audit report. Sufficiency of
audit evidence is the measure of the quantity of audit evidence. Appropriateness of evidence is
the quality of the evidence, i.e., its relevance and reliability to support the auditor’s opinion.

Audit evidence includes information provided in books of accounts as well as information from
other sources. For Example – Purchase invoice and material received note prepared by the
store’s department are evidence to support the purchase.

Essentials of good audit evidence

1. Sufficient: Sufficiency is the measure of quantity. Audit evidence is sufficient when they are
available in adequate quantity. An auditor applies different audit procedures to obtain sufficient
audit evidence like test checking.
2. Reliable: Evidence obtained by the auditor is persuasive rather than conclusive. We cannot
consider such evidence 100% reliable for forming an opinion. Reliability of audit evidence
depends on its source and nature of such evidence.
3. Source: Audit evidence obtained within the enterprise is known as the internal source. Evidence
obtained from an outside enterprise like confirmation from the third party is known as the
external source. We consider the external source to be more reliable.
4. Nature: Can be documentary (like bills, vouchers), visual (like the physical verification of fixed
assets), or oral (confirmation from employees)
5. Relevant: Whether the audit evidence obtained by the auditor is relevant or not depends on the
purpose of audit procedures.

There are some thumb rules which helps in identifying the appropriateness of evidence

1. Written (documentary) evidence is better than testimonial evidence.

2. Evidence from external sources is more reliable.
3. Original documents are preferable over their photocopies.
4. The auditor should have a good understanding of internal control of the organization as it
enables him to obtain relevant evidence.
 5. Evidence obtained by auditor through direct observation, inspection, physical verification, and
computations are better than the evidence obtained indirectly.

Quality of Audit Evidence:

The quality of audit evidence is very important to make sure that the conclusion that makes by
the auditor is correct.

If the information is not strong or low quality, the audit risks of making incorrect audit opinion
are high.

The Quality of audit evidence is dependent mainly on the form and source of the evidences. Here
is the detail:

 External Source: The evidence that obtains directly from external parties like customers,
suppliers, or banks are more reliable than obtaining from clients. For example, accounts
receivable confirmations that obtain from client’s customers are more reliable than the records
that prepare by clients.
 Prepare by Auditor: The evidence that prepares by auditors themselves are more reliable than
the one that prepares by or obtains from the client. For example, the bank reconciliation that
prepares by the auditor is more reliable than the bank reconciliation prepared by the
accountant.
 Prepare by client: The level of reliability of evidence that obtains from clients are depending on
the reliability of client internal control.
 Written form: The audit evidence that forms in written are more reliable than the one that
forms in verbal. For example, management confirmation in the form of email is more reliable
than the confirmation by verbal.
 Original Form: Original invoices that use to support the payments transactions are more reliable
than the copy invoices.

The Use of Assertions in Obtaining Audit Evidence:

Auditors should prepare audit procedures to confirms and verify the financial statements’
assertion as part of their materiality assessment in the financial statements.

And auditors could tailor the procedures to obtain the audit evidence to support their verification
and confirmation of financial statements’ assertion.

Here is the list of financial statements’ assertions that auditors could use to obtain the evidence:

Classes of transactions and events’ Assertion:

Sometimes it is called the income statement’s assertions. These are the assertions that use by
management to confirm the accuracy and completeness of the financial transactions and event in
the income statement.
These assertions including:

 Occurrence: This assertion is used for assuring that the financial transactions that recording the
in financial statements, especially in the income statement, are occurred in the entity.
 Completeness: all transactions and event that should be recorded in the period have recorded.
 Accuracy: amounts and other data relating to recorded transactions and events have been
recorded appropriately
 Cut-off: transactions and events have been recorded in the correct accounting period
 Classification: transactions and events have been recorded in the proper accounts.

Account balances:

Account balance assertion or balance sheet items’ assertion. These assertions are used by
management to confirm the existence and completeness of accounts in balance items.

These balance sheet’s assertions are:

 Existence: assets, liabilities, and equity interests exist

 Right and Obligation: 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
 Valuation and Allocation:

Presentation and disclosure:

Occurrence and rights and obligations: disclosed events, transactions, and other matters have
occurred and pertain to the entity.

Completeness: all disclosures that should have been included in the financial statements have
been included.

Classification and understandability: financial information is appropriately presented and

described, and disclosures are clearly expressed.

Accuracy and valuation: This assertion concerning the accuracy of the information disclosed in
or noted to the financial statements. It is also concerning the valuation of the disclosed accounts
balance. There should be procedures for obtaining this evidence.

This assertion concerning the accuracy of the information disclosed in or noted to the financial
statements. It is also concerning the valuation of the disclosed accounts balance. There should be
procedures for obtaining this evidence.
 Statement of the problem and hypothesis

Audit evidence is all the information used by the auditor in arriving at the conclusions on which
the audit opinion is based and includes the information contained in the accounting records
underlying the financial statements and other information. Auditors are not expected to
examine all information that may exist.

Aims and objectives:

The main objective of the work performed by the auditor in an audit engagement is that of
obtaining reasonable assurance as to whether the financial statements, as a whole, are free from
material misstatement, so that the auditor is able to express an opinion on the financial
statements and report accordingly in the auditor’s report.

To obtain reasonable assurance about the financial statements, which is a high but not absolute
level of assurance, the auditor needs to design and perform audit procedures to obtain sufficient
appropriate audit evidence to be able to draw reasonable conclusions on which to base the
auditor’s opinion.

Audit Evidence, explains what are the auditor’s responsibilities in obtaining audit evidence that
can underpin the auditor’s opinion and what constitutes sufficient appropriate audit evidence for
such purpose.

Sufficient appropriate audit evidence

A large part of the work involved in the performance of an audit consists of obtaining and
evaluating audit evidence, which is primarily derived from audit procedures carried out during
the course of the engagement, but that can also be gained from other sources. For example
sources like previous audits; provided that changes occurred in the meantime have been
carefully taken into account; or the firm’s quality control procedures, especially around client
acceptance and continuance.

Audit procedures that are used to obtain audit evidence are various and are often applied in
combination. They can include inspection, observation, confirmation, recalculation,
reperformance and analytical procedures, in addition to inquiry, as the latter does not normally
provide sufficient audit evidence on its own.

However, audit evidence obtained will only be useful in reducing to an acceptably low level the
risk that the auditor could express an inappropriate opinion when the financial statements are
materially misstated and, therefore, allow the auditor to draw reasonable conclusions, when it is
sufficient and appropriate to the circumstances.

Sufficiency and appropriateness of audit evidence are two qualities that are interrelated.
Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence
needed is affected by the risks of misstatement assessed by the auditor, whereby the higher the
risks the more audit evidence required, and by the quality of the evidence, where the higher the
quality the less evidence perhaps required. A large amount of audit evidence may, however, not
compensate for its poor quality.

Assertions about classes of transactions and events for the period under audit
(usually profit or loss account assertions):

Financial statement
Audit objective
assertion
To form an opinion as to whether transactions and events that have been
Occurrence
recorded have occurred and pertain to the entity.
To form an opinion as to whether all transactions and events that should
Completeness
have been recorded have been recorded.
To form an opinion as to whether amounts and other data relating to
Accuracy
recorded transactions and events have been recorded appropriately.
To form an opinion as to whether transactions and events have been
Cut-off
recorded in the correct accounting period.
To form an opinion as to whether transactions and events have been
Classification
recorded in the proper accounts.

Assertions about account balances at the period end (usually balance sheet
assertions):

Financial
statement Audit objective
assertion

Existence To form an opinion as to whether assets, liabilities, and equity interests exist.

Rights and
obligations To form an opinion as to whether the entity holds or controls the rights to
assets, and liabilities are the obligations of the entity.
(Ownership)

To form an opinion as to whether all assets, liabilities and equity interests

Completeness
that should have been recorded have been recorded.

To form an opinion as to whether assets, liabilities, and equity interests are

Valuation and
included in the financial statements at appropriate amounts and any resulting
allocation
valuation or allocation adjustments are appropriately recorded.
Assertions about presentation and disclosure (covering both the profit and loss
account and balance sheet):

Financial statement
Audit objective
assertion
Occurrence and rights and To form an opinion as to whether disclosed events, transactions, and
obligations other matters have occurred and pertain to the entity.
To form an opinion as to whether all disclosures that should have
Completeness
been included in the financial statements have been included.
To form an opinion as to whether financial information is
Classification and
appropriately presented and described and disclosures are clearly
understandability
expressed.
To form an opinion as to whether financial and other information are
Accuracy and valuation
disclosed fairly and at appropriate amounts.

When designing and performing audit procedures to verify specific financial statements
assertions, the auditor needs to consider whether the procedures are suitable to meet the audit
objective and should select those that either in isolation or combination can provide sufficient
appropriate evidence.

In fact, out of the various procedures that can be performed by auditors, some are more suited to
verify certain assertions in respect of specific classes of transactions, account balances and
disclosures, while they may not produce relevant results in respect of the other assertions relating
to the same financial statements items. In many cases a single type of procedure may not verify
an assertion relating to an item and a combination of procedures will be needed to that affect.

 Inspection is an audit procedure based on the examination of records or documents,

whether internal or external, that could be held in various forms, ie paper, electronic or
similar, or on the physical assessment of an asset. The inspection of records and
documents provides audit evidence whose reliability depends on their nature and source.
Inspecting certain documents may provide direct audit evidence of the existence of an
asset, for instance a financial instrument like a share or a bond where the document itself
constitutes the asset. At the same time the inspection of the document may not provide
evidence in respect of the assertions of ownership and valuation of the asset. Similarly
the inspection of tangible assets may provide reliable audit evidence about their existence
but not about the entity’s rights and obligations or the valuation of the assets. Another
example may be the inspection of an executed contract that may provide evidence in
respect of the entity’s application of accounting policies like revenue recognition.
 Observation is instead an audit procedure that consists of looking at a process or
procedure being performed by others so that evidence about the actual performance is
obtained. However observation provides evidence that is limited to the point in time
when it takes place and by the fact that being observed may influence how the process or
procedure is performed on such occasion. Examples of observation are the auditor’s
attendance at the inventory counting by the entity’s staff and observing the performance
of control activities.
 External confirmation procedures may be an 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. External confirmations are normally used when confirming
assertions relating to account balances, like payables and receivables, but should not be
restricted to such items only. The auditor may ask confirmation of the terms of
agreements and transactions with third parties, whether any changes to existing
agreements has occurred or whether no additional conditions are attached to an
agreement, perhaps in a separate document.
 Recalculation is a procedure that consists of 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.
 Reperformance instead involves the independent execution by the auditor of procedures
or controls that were originally performed as part of the entity’s internal control.
 Analytical procedures can or should be used at various stages of an audit engagement:
at the risk-assessment stage, as substantive audit procedures to verify financial statements
assertions and towards the end of the audit to corroborate whether the financial
statements are consistent with the auditor’s understanding of the entity. Analytical
procedures involve evaluations of financial information through analysis of plausible
relationships among both financial and non-financial data. They also include
investigation of fluctuations and relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount. At the assertion
level, analytical procedures may be used as substantive procedures either on their own or
in conjunction with tests of details. Substantive analytical procedures are generally more
applicable to large volumes of transactions that tend to be predictable over time and for
which there is an expectation that the relationships among data exist and will continue in
the absence of indications to the contrary. Sometimes a simple model may work out as
effective analytical procedures. For instance if an entity has a stable number of
employees at fixed rates of pay during a period, then the auditor may estimate the total
payroll costs for the period with a high level of accuracy, therefore obtaining audit
evidence for a significant item in the accounts and reducing the need to perform tests of
details on the payroll. In other cases analytical procedures may provide less persuasive
evidence, for instance when gross margin percentages are calculated and compared in
order to confirm a revenue amount, that may in any case be relevant if used with other
procedures. An example of effective combination of substantive analytical procedures
and tests of details could be in respect of the valuation assertion for accounts receivable,
where the auditor may perform analytical procedures on an aged list of debtors in
addition to tests of detail on subsequent cash receipts to verify collectability of the
receivables.
 Inquiry is a type of 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. Inquiries are
important as they may provide new information to the auditor or corroborative audit
 evidence or, on the contrary, information that differs significantly from other information
obtained by the auditor.

Documentation of procedures and audit evidence

Audit procedures designed and performed by the auditor should clearly document the audit
objective that they intend to achieve (in terms of assertions relating to a specific class of
transactions, account balance or disclosure), the actual work performed, the results obtained,
their evaluation and a conclusion as to whether the audit evidence obtained is sufficient and
appropriate to verify or not the assertion and is capable of supporting the auditor’s opinion.

The documentation of the design and performance of audit procedures may take place by using
free form working papers, especially when documenting uncommon procedures or procedures in
respect of specialist items, like defined benefit pension plans, or by using structured working
papers like those included in audit programmers’, which also suggest audit objectives and
standard procedures in respect of the most common financial statements items. As ever when
using audit programmers’, the auditor should only select relevant procedures and documentation
according to the risk assessment in that area of the financial statements, the materiality
assessment, and the extent to which the auditor wishes to rely on directional testing. Additionally
standard audit tests may need to be varied or substituted by more efficient non-standard tests that
are better suited to the nature of the client and the systems employed.

Sources of Audit Evidence:

Some audit evidence is obtained by performing audit procedures to test the accounting records (for
example, through analysis and review, by reperforming procedures followed in the financial reporting
process, and by reconciling related types and applications of the same information). Through the
performance of such audit procedures, the auditor may determine that the accounting records are
internally consistent and agree to the financial statements. How-ever, accounting records alone do not
provide sufficient appropriate audit evidence on which to base an audit opinion on the financial
statements.

More assurance is ordinarily obtained from consistent audit evidence obtained from different sources or
of a different nature than from items of audit evidence considered individually. For example,
corroborating information obtained from a source independent of the entity may increase the assurance
that the auditor obtains from audit evidence that is generated internally, such as evidence existing within
the accounting records, minutes of meetings, or a management representation.

Information from sources independent of the entity that the auditor may use as audit evidence include
confirmations from third parties, analysts' reports, and comparable data about competitors (benchmarking
data).
Information to Be Used as Audit Evidence (Relevance and Reliability)
The quality of all audit evidence is affected by the relevance and reliability of the information upon
which it is based on Relevance relates to the logical connection with, or bearing upon, the purpose of the
audit procedure and, when appropriate, the assertion under consideration. The relevance of information to
be used as audit evidence may be affected by the direction of testing. For example, if the purpose of an
audit procedure is to test for overstatement in the existence or valuation of accounts payable, testing the
recorded accounts payable may be a relevant audit procedure. On the other hand, when testing for
understatement in the existence or valuation of accounts payable, testing the recorded accounts payable
would not be relevant, but testing such information as subsequent disbursements, un-paid invoices,
suppliers' statements, and unmatched receiving reports may be relevant. A given set of audit procedures
may provide audit evidence that is relevant to certain assertions but not others. For example, inspection of
documents related to the collection of receivables after the period-end may provide
Audit Evidence audit evidence regarding existence and valuation but not necessarily cut off. Similarly,
obtaining audit evidence regarding a particular assertion (for example, the existence of inventory) is not a
substitute for obtaining audit evidence regarding another assertion (for example, the valuation of that
inventory). On the other hand, audit evidence from different sources or of a different nature may often be
relevant to the same assertion.
Tests of controls are designed to evaluate the operating effectiveness of controls in preventing, or
detecting and correcting, material misstatements at the assertion level. Designing tests of controls to
obtain relevant audit evidence includes identifying conditions (characteristics or attributes) that indicate
performance of a control and identifying deviation conditions that indicate departures from adequate
performance. The presence or absence of those conditions can then be tested by the auditor.
Substantive procedures are designed to detect material misstatements at the assertion level. They
comprise tests of details and substantive analytical procedures. Designing substantive procedures includes
identifying conditions relevant to the purpose of the test that constitute a misstatement in the relevant
assertion.
The reliability of information to be used as audit evidence and, there-fore, of the audit evidence itself is
influenced by its source and nature and the circumstances under which it is obtained, including the
controls over its preparation and maintenance, when relevant. Therefore, generalizations about the
reliability of various kinds of audit evidence are subject to important exceptions. Even when information
to be used as audit evidence is obtained from sources external to the entity, circumstances may exist that
could affect its re-liability. Information obtained from an independent external source may not be reliable,
for example, if the source is not knowledgeable or a management specialist lacks objectivity. While
recognizing that exceptions may exist, the following generalizations about the reliability of audit evidence
may be useful:
•The reliability of audit evidence is increased when it is obtained from independent sources outside the
entity.
•The reliability of audit evidence that is generated internally is in-creased when the related controls,
including those over its preparation and maintenance, imposed by the entity are effective.
•Audit evidence obtained directly by the auditor (for example, observation of the application of a
control) is more reliable than audit evidence obtained indirectly or by inference (for example, in query
about the application of a control).
•Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than
evidence obtained orally(for example, a contemporaneously written record of a meeting ismore reliable
than a subsequent oral representation of the matters discussed).
•Audit evidence provided by original documents is more reliable than audit evidence provided by
photocopies, facsimiles, or documents that have been filmed, digitized, or otherwise transformed into
electronic form, the reliability of which may depend on the controls over their preparation and
maintenance.

Methods of obtaining Audit Evidence

Audit evidence is one of the basic principles that govern an audit. There are various methods that
can be adopted to obtain audit evidence. The most common ones include:

 Inspection

This is the most efficient method of obtaining audit evidence. Inspection refers to checking all
the documents, records, and physical assets. The reliability of these documents and records
depends upon the nature and effectiveness of internal control.

 Observation

Another important method of obtaining audit evidence is observation. This method involves the
auditor to look at a process of procedure being executed by others. This method can be
exemplified by the auditors’ presence at the clients’ physical stock count.

 Inquiry and confirmation

The two aspects of this method include searching about the info from a knowledgeable person
inside or outside the company, and responding to any inquiry to substantiate information in the
accounting records. These responses might provide the auditor with info which is not previously
possessed by him or even with corroborative evidence.

 Computation

This method of obtaining evidence involves the examination of arithmetical accuracy of source
documents and accounting records. The method might also involve performing individual
calculations.

 Analytical review

This method involves conducting a study of important ratios and trends and examining unusual
fluctuations and items.

EXPRESSION OF OPINION

The auditor discusses his observations with those charged with governance, such as the audit
committee of the company, before finalizing the report. The auditor should be firm in his
opinion, and exercise his independence at this level. This part of the audit is critical, and calls for
resilience on the part of the auditor. An audit report, being a public document, should be drafted
skillfully. The code of conduct prohibits an auditor from divulging any information received by
him in the course of his professional assignment, unless legally required so to do. Therefore, the
auditor shouldn't hesitate to take the help of a legal expert on whether to include certain
comments in his report.

References:

"Audit evidence".abrema.net. n.d. Archived from the original on 29 August 2007. Retrieved 2007-
08-07.