## SA-500: Audit Evidence
### Meaning
Audit evidence is information used by the auditor in arriving at the conclusions on which the audit opinion is based.
Audit evidence includes:
- Information in accounting records: Invoices, journal entries, electronic transfer records, general and subsidiary ledgers, cost sheets, spreadsheets
- Other information: Minutes of meetings, written confirmations from third parties (e.g., banks, debtors), internal control manuals
---
### Types of Audit Evidence
By Nature:
| Type | Example |
|---|---|
| Oral | Discussion with management |
| Documentary | Loan agreement, purchase invoice |
| Visual | Attending/observing physical verification conducted by management |
By Source:
| Type | Example |
|---|---|
| External | Purchase invoice, credit note (originates outside the entity) |
| Internal | Copies of sales invoices, employee wage sheets (originates within the entity) |
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### Rules on Reliability of Audit Evidence
(These are generalizations, not absolute rules)
1. Evidence from independent external sources is more reliable than internal evidence
2. Internal evidence is more reliable when ICS is effective
3. Directly obtained evidence is more reliable than indirectly obtained evidence (e.g., observation > inquiry)
4. Documentary evidence (paper/electronic) is more reliable than oral evidence
5. Original documents are more reliable than copies, photocopies, facsimiles, or digitized versions
---
### Inconsistency or Doubt Over Reliability
When it arises:
1. Evidence from one source is inconsistent with another (e.g., internal evidence ≠ external evidence)
2. Auditor has doubt about reliability of information (e.g., a purchase invoice appears fictitious)
Auditor shall:
a. Determine what modification is needed in audit procedures
b. Consider the effect on other matters in the audit
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### Relevance of Audit Evidence
A. Purpose of Audit Procedure:
- Examining recorded AP → relevant for testing overstatement
- Examining unrecorded AP → relevant for testing understatement
B. Assertion Under Consideration:
| Procedure | Assertion Tested |
|---|---|
| Attending PV of inventory | Existence → Relevant |
| Attending PV of inventory | Rights/Valuation → Not relevant |
---
### Selection of Items for Testing
| Method | When Appropriate |
|---|---|
| 100% Examination | Small number of high-value items; significant risk where sampling won't work; repetitive automated calculations |
| Specific Item Selection | High-value or key items; items above a specific threshold; items needed for understanding the entity |
| Audit Sampling | To draw conclusions about an entire population from testing a representative sample |
---
### Sufficiency and Appropriateness
- Sufficiency = measure of quantity of evidence
- Appropriateness = measure of quality of evidence (relevance + reliability)
- They are interrelated — more of lower-quality evidence does not compensate for lack of quality
Factors Affecting Sufficiency:
| Factor | Impact |
|---|---|
| High Materiality | More evidence required |
| High RMM (high Inherent Risk + Control Risk) | More evidence required |
| Large population size | More evidence required |
| Heterogeneous population | More evidence required |
| Homogeneous population | Less evidence required |
---
### Methods of Collecting Evidence
| Method | Key Points |
|---|---|
| Inspection (Documents) | Reliability depends on source (external > internal) and effectiveness of ICS |
| Inspection (Physical Assets) | Proves existence but NOT valuation or ownership/rights |
| Inquiry | Not S&A alone; provides corroborative evidence; formal (written) or informal (oral) |
| External Confirmation | Direct written response from third party; paper or electronic |
| ARP | Evaluates plausible relationships between financial and non-financial data |
| Re-performance | Auditor independently re-executes procedures originally done by the entity |
| Observation | Evidence about performance of a procedure (e.g., attending inventory count); direct evidence |
| Recalculation | Checks mathematical accuracy; done manually or electronically |
Critical limitation of Inspection:
- Document inspection → can prove existence (e.g., share certificate) but NOT value or ownership
- Physical asset inspection → can prove existence (e.g., inventory) but NOT rights or valuation
Critical limitation of Inquiry:
- Provides limited evidence about management's intent
- Must be corroborated by other procedures
- Written representations (WR) must be obtained to corroborate inquiry results
---
### Audit Trail
1. A record-keeper documenting evidence of events (reduces fraud and error)
2. Documents the flow of a transaction: source document → accounting entry → FS
3. Establishes authenticity and integrity of transactions
4. Maintains records of system and user activity
Benefits:
- Inspires confidence in auditors
- Allows auditor to check whether controls are operating
- Increases data security
- Increases reliability of audit evidence
- Helps analyze high-volume transactions in automated systems
Disadvantage: Involves cost of time and system implementation
---
### Using Work of Management Expert (ME)
Factors to evaluate the work of a Management Expert (mnemonic: PENETCRANI):
| Letter | Factor |
|---|---|
| P | Previous experience of auditor with this ME |
| E | Experience of auditor on ME's field of expertise |
| N | Nature, scope, and objective of ME's work |
| E | Employed within / Engaged by the entity |
| T | Technical standards / industrial regulations followed |
| C | Control or influence of management over ME |
| R | RMM in the area of ME's work |
| A | Availability of alternative source of evidence |
| N | Nature and complexity of ME's work |
| I | Internal control on area of ME's work |
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### Core Principle
- Auditor designs and performs procedures to obtain S&A Evidence
- Audit evidence is necessary to support the auditor's opinion and report
- Absence of information also constitutes audit evidence (e.g., no warranty provision may indicate an unrecorded liability)
- Most of the auditor's work in forming an opinion consists of obtaining and evaluating audit evidence