SA 500 - Audit Evidence (Nature, Sufficiency, Appropriateness, Procedures)

# SA 500 — Audit Evidence

## 1. What is Audit Evidence?

Audit evidence is information used by the auditor in arriving at conclusions on which the auditor's opinion is based. It includes:

• Information contained in the accounting records — journal entries, invoices, contracts, ledgers; and
• Other information that authenticates accounting records — minutes of meetings, written confirmations, industry data, etc.

### Types of Audit Evidence

## 2. Obtaining SAAE — Key Characteristics

• Audit evidence is cumulative — built up over the course of the audit.
• It includes both corroborating and contradicting information.
• Absence of information (e.g., management refusing a representation) is itself audit evidence.
• Most of the auditor's work in forming an opinion consists of obtaining and evaluating audit evidence.

## 3. Relevance and Reliability

### Relevance

Logical connection between the evidence and the purpose of the audit procedure (and the assertion being tested).

### Reliability — generalisations

Reliability is influenced by source, nature, and circumstances. Evidence is more reliable when:

1. Obtained from independent sources outside the entity.

2. Internally generated evidence is more reliable if related controls are effective.

3. Obtained directly by the auditor (e.g., physical observation) rather than indirectly.

4. In documentary form (paper or electronic) rather than oral.

5. Obtained as original documents rather than photocopies, faxes, scans, or filmed/digitised versions.

## 4. Sufficiency and Appropriateness

### Factors affecting auditor's judgement of sufficiency

• Materiality — less evidence needed for less material assertions.
• ROMM — less evidence needed for assertions with lower ROMM.
• Size & characteristics of population — smaller, more homogeneous populations need less evidence.
• (Inverse holds for higher materiality / higher ROMM / larger heterogeneous populations.)

## 5. Audit Procedures to Obtain Evidence

Evidence is obtained by performing:

• Risk Assessment Procedures (RAP), and
• Further Audit Procedures (FAP) — Tests of Controls (TOC) and Substantive Procedures.

### The 7 Procedures (mnemonic: I-O-E-R-R-A-I)

1. Inspection — Examining records/documents (internal or external, paper or electronic) or physical examination of an asset.

• Inspecting documents may give evidence of existence but not ownership or valuation.
• Physical inspection gives evidence of existence but not rights & obligations or valuation.

2. Observation — Looking at a process performed by others. Limitation: only valid at the point in time observed, and the act of observation may itself influence behaviour.

3. External Confirmation — Direct written response from a 3rd party (see SA 505).

4. Recalculation — Checking the mathematical accuracy of documents/records.

5. Reperformance — Auditor's independent execution of procedures originally performed as part of the entity's internal control.

6. Analytical Procedures (AP) — See SA 520.

7. Inquiry — Seeking information from knowledgeable persons (financial/non-financial, inside/outside the entity). Used extensively. However, inquiry alone is NOT sufficient evidence of absence of MM at the assertion level, nor of operating effectiveness of controls.

## 6. Management Assertions (Critical for Linking Procedures to Risk)

### A. Assertions about Classes of Transactions and Events (T&E) — for the period

• Occurrence — Recorded T&E occurred and pertain to the entity.
• Completeness — All T&E that should be recorded have been recorded.
• Accuracy — Amounts are recorded appropriately.
• Cut-off — Recorded in the correct accounting period.
• Classification — Recorded in the proper account.

### B. Assertions about Account Balances at Period End

• Existence — Assets, liabilities, equity actually exist.
• Rights and Obligations — Entity holds the rights / liabilities are obligations.
• Completeness — All assets/liabilities/equity that should be recorded are recorded.
• Valuation and Allocation — Included at appropriate amounts.

### C. Assertions about Presentation and Disclosure

• Occurrence and Rights & Obligations — Disclosed T&E occurred and pertain to the entity.
• Completeness — All disclosures included.
• Classification and Understandability — Information appropriately presented; disclosures clearly expressed.
• Accuracy and Valuation — Disclosed fairly and at appropriate amounts.

### Negative Assertions

• Expressed — e.g., the FS state "there is no contingent liability."
• Implied — e.g., the absence of a line item in the Balance Sheet implies no such asset exists (e.g., no 'Building' line means no buildings).

## 7. Audit Trail

A documented flow of a transaction showing how a source document was transformed into an accounting entry and inserted into the FS.

• Helps verify whether controls were operating effectively.
• Helps verify that authorised persons performed transactions.
• Enhances data security and reliability of evidence.

## 8. Nature and Timing — When Data is Electronic

• Some data may only be available electronically or only for certain periods (e.g., source docs discarded after scanning).
• The auditor may need to request retention of information, or perform procedures when the information is still available.

## 9. Using the Work of a Management's Expert

Management's Expert = an individual/organisation with expertise in a field other than accounting or auditing, whose work is used by the entity in preparing FS.

### Factors affecting NTE of audit procedures when relying on a mgt expert

• Nature, scope, and objectives of the expert's work.
• Whether subject to technical/industry standards.
• Whether employed or engaged externally.
• Extent of mgt's control over the expert's work.
• Internal controls over the expert's work.
• Auditor's knowledge/experience of the field and the expert.
• Nature and complexity of the matter.
• ROMM in the matter.
• Availability of alternative sources of evidence.

### When using a Mgt Expert, the Auditor shall:

1. Evaluate competence, capabilities, and objectivity of the expert:

• Employment status (employed by entity vs. outside party).
• Independence from the entity.
• Auditor's previous experience with the expert.
• Qualifications, membership of professional bodies.

2. Obtain an understanding of the expert's work:

• Whether auditor has expertise to evaluate the work.
• Assumptions and methods used.
• Nature of internal/external data used.

3. Evaluate appropriateness of the expert's work as audit evidence:

• Relevance and reasonableness of findings.
• Relevance, completeness, accuracy of source data used.

## 10. Information Produced by the Entity

When using such information as evidence, the auditor shall evaluate its reliability:

• Obtain audit evidence about its accuracy and completeness.
• Evaluate whether it is sufficiently precise and detailed for the auditor's purpose.

## 11. Selecting Items for Testing — Three Means

### A. Selecting All Items (100% examination)

• Unlikely in TOC; more common in TOD.
• Appropriate when:
• Population has a small number of large-value items.
• There is a significant risk and other procedures don't give SAAE.
• Calculations are repetitive and automated by an IS.

### B. Selecting Specific Items

• Based on auditor's understanding of the entity, assessed ROMM, characteristics of population.
• Subject to non-sampling risk (results cannot be projected to the population).
• Includes: high-value/key items, items over a certain amount, items selected to obtain info.

### C. Audit Sampling

See SA 530.

## 12. Inconsistency or Doubt over Reliability

If evidence is inconsistent or its reliability is doubted, the auditor shall consider the effect of the matter and modify audit procedures as necessary.