Methods / Procedures for Obtaining Audit Evidence (SA 500)
## Methods of Obtaining Audit Evidence
Auditors use seven core procedures to gather evidence. Each has distinct characteristics regarding reliability and limitations.
### 1. Inspection
Examining records, documents, or physical assets (internal or third-party)
Physical inspection of tangible assets gives evidence of existence but NOT necessarily rights and obligations
Inspecting an executed contract can provide evidence on accounting policy application (e.g., revenue recognition)
Inspecting inventory items may accompany observation of inventory counting
### 2. Observation
Watching a process or procedure being performed by others
Key limitation: Evidence is valid only at the point in time of observation; being observed may alter the behaviour of those being watched
### 3. External Confirmation
A direct written response from a third party (confirming party) to the auditor
Can be paper-based or electronic
Highly reliable because it bypasses entity management
### 4. Recalculation
Checking the mathematical accuracy of documents or records
Can be performed manually or electronically
### 5. Reperformance
The auditor independently re-executes procedures or controls originally performed as part of internal control
Distinct from recalculation — involves re-doing the whole procedure, not just the arithmetic
### 6. Analytical Procedures
Evaluating financial information by studying plausible relationships between financial and non-financial data
Includes investigating fluctuations and relationships inconsistent with other information
### 7. Inquiry
Seeking information from knowledgeable persons (financial or non-financial; internal or external)
May be formal (written) or informal (oral)
Evaluating responses is an integral part of inquiry
Responses may provide new information, corroboration, or contradictory information
May provide a basis for modifying or performing additional audit procedures
> Critical Limitation of Inquiry: Inquiry alone ordinarily does not provide sufficient audit evidence of the absence of material misstatement or of the operating effectiveness of controls. Corroboration is almost always required.
> Written representations: For management intent matters, corroboration may be limited — written representations may be necessary.
Worked example
### Example 1
An auditor watches the stockroom staff conduct a physical inventory count on 31st March. This is Observation. The auditor must note that the evidence is valid only for that date, and staff may behave differently because they are being watched.
### Example 2
An auditor sends a letter directly to the bank asking for confirmation of a client's outstanding loan balance as at year end. This is External Confirmation — the response comes directly from the bank to the auditor, bypassing the client.
### Example 3
An auditor re-adds a column of figures in an invoice register to verify the total. This is Recalculation.
### Example 4
An auditor independently applies the same three-way match procedure (Purchase Order → GRN → Invoice) that the accounts payable control requires. This is Reperformance — the entire control is re-executed, not just the arithmetic.
### Example 5
An auditor asks the CFO whether any litigation is pending. The CFO says no. This is Inquiry. The auditor cannot rely on this alone — corroboration by reviewing legal correspondence and obtaining a lawyer's letter is required.
⚠️ Common exam mistakes
Confusing Reperformance with Recalculation — Reperformance means re-executing the entire procedure/control; Recalculation only checks mathematical accuracy.
Treating Inquiry as sufficient standalone evidence — it is not; it must be corroborated by other procedures, especially for assertions about absence of misstatements.
Thinking Observation provides ongoing or continuous assurance — it is strictly limited to the specific point in time when the auditor observed.
Confusing External Confirmation with Inspection of external documents — Confirmation is a direct response TO the auditor from the third party; Inspection involves the auditor examining an already-existing document.
Bare-Act text Para 6 – Audit Procedures for Obtaining Audit Evidence · SA 500 – Audit Evidence · click to expand
Observation consists of looking at a process or procedure being performed by others. 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.
An external confirmation represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.
Although inquiry may provide important audit evidence, and may even produce evidence of a misstatement, inquiry alone ordinarily does not provide sufficient audit evidence of the absence of a material misstatement at the assertion level, nor of the operating effectiveness of controls.