CH. 10 ESCALA

• Audit evidence


  All information used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Includes information contained in the accounting records underlying the financial statements and other information.
• Objective of the auditor when gathering evidence

  • The auditor designs and performs audit procedures in order to gather audit evidence that will enable the auditor to have a basis in arriving at the conclusions on which the audit opinion is based.
• Two classifications of audit evidence

  • Underlying Accounting Data
  • Corroborating Information
• Underlying Accounting Data


  • Records of initial accounting entries (book of accounts)
  • Supporting records (e.g. checks, invoices, contracts, general and subsidiary ledgers, journal entries, worksheets, spreadsheets)
• Corroborating Information


  • Quality control procedures
  • Minutes of meetings
  • Confirmations from third parties
  • Analysts' reports
  • Comparable data about competitors
  • Controls manuals
  • Information obtained by the auditor from inquiry, observation, and inspection
  • Other information developed by, or available to, the auditor
• An entity's accounting records cannot be considered sufficient evidence to support an opinion on the financial statements. The auditor shall obtain corroborating information to be able to express an opinion.
• Distinguishing feature of Underlying Accounting Data


  Information used in the accounting process to prepare the financial statements
• Corroborating Information


  A residual definition - information that is not classified as Underlying Accounting Data
• Factors of Persuasiveness of Audit Evidence

  • Sufficiency (Quantity of Evidence)
  • Appropriateness (Quality of Evidence)
• Sufficiency of audit evidence

  The measure of the quantity of audit evidence, affected by the auditor's assessment of risks of material misstatement and the quality of the audit evidence
• Appropriateness of audit evidence

  The measure of the quality of audit evidence, determined by its relevance and reliability
• Relevance of evidence


  Evidence is relevant if it relates to the assertion and has a logical connection with the purpose of the audit procedure and the assertion under consideration
• Relevance of evidence


  • Testing recorded accounts receivable is relevant for existence/valuation, but not completeness of accounts payable
  • Inspection of documents related to receivables collection provides evidence for existence/valuation, but not cutoff
  • Physical examination provides evidence for existence/condition, but not rights/obligations
• Reliability of evidence


  Evidence is reliable if it is dependable in signaling the true state of an assertion, influenced by its source, nature, and the circumstances under which it is obtained
• The auditor considers the reliability of information to be used as audit evidence, e.g. photocopies, facsimiles, electronic documents, and the related controls over their preparation and maintenance
• When audit evidence from different sources is inconsistent or the auditor has doubts over reliability, the auditor shall determine what modifications or additional procedures are necessary to resolve the matter
• Generalizations about reliability of audit evidence

  • Evidence from independent external sources is more reliable than internal sources
  • Evidence generated by effective internal controls is more reliable
  • Evidence obtained directly by the auditor is more reliable than indirectly obtained
  • Documentary evidence is more reliable than oral representations
  • Original documents are more reliable than reproductions
• Relationship of sufficiency and appropriateness of audit evidence

  The quantity of evidence needed is affected by the auditor's assessment of risks and the quality of the evidence. Obtaining more poor quality evidence does not compensate for it.
• The auditor concludes whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level, based on professional judgment. The auditor is not required to examine all available information.
• Management assertions


  Implicit or explicit representations made by management regarding the recognition, measurement, presentation, and disclosure in the financial statements
• Major audit procedures


  • Risk assessment procedures (RAPS)
  • Tests of controls (TOC)
  • Substantive tests (ST)
• Risk assessment procedures (RAPS)


  Procedures to obtain an understanding of the entity and its environment, including internal control, to assess risks of material misstatement
• Tests of controls (TOC)

  Procedures to evaluate the operating effectiveness of controls in preventing or detecting and correcting material misstatements
• Substantive tests (ST)


  Procedures to detect material misstatements at the assertion level, including tests of details and substantive analytical procedures
• Specific audit procedures


  • Inspection of records/documents
  • Inspection of tangible assets
  • Observation
  • Inquiry
  • Confirmation
  • Reperformance
  • Analytical procedures
  • Recalculation
• Computer-assisted auditing techniques (CAATS)

  Procedures or controls that were originally performed as part of the entity's internal control, can be performed manually or through the use of CAATS
• If properly done, the information obtained through CAATS is regarded as highly reliable
• Analytical procedures


  Evaluations of financial information made by a study of plausible relationships among both financial and non-financial data
• Reliability of analytical procedures

  • The availability and reliability of data used in the calculations
  • The plausibility and predictability of the relationship being tested
  • The precision of the expectation and rigor of the investigation
• Recalculation


  Checking the mathematical accuracy of documents or records, including footing and cross-footing
• Exhibit 10-3 shows an illustrative property, plant, and equipment schedule, and the performance of footing and cross-footing as an audit procedure
• Specific audit procedures that may be applied when performing the different major audit procedures

  • Inspection
  • Observation
  • Inquiry
  • Confirmation
  • Recalculation
  • Reperformance
  • Analytical procedures
• Audit evidence and procedures do not need to have a "one-to-one" relationship. To obtain evidence, more than one procedure may be used. Also, one procedure may secure more than one type of evidence
• External confirmation


  Audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium
• Examples of situations where external confirmations may be used

  • Investments purchased from stockbrokers but not delivered at the reporting date
  • Property title deeds held by lawyers or financiers for safe custody or as security
  • Accounts payable balances
  • Bank balances and other information from bankers
  • Accounts receivable balances
  • Loans from lenders
  • Inventories held by third parties at bonded warehouses for processing or on consignment
  • Terms of agreements or transactions an entity has with third parties and details of modifications, if any
  • Absence of certain conditions, such as a "side agreement"
• Positive confirmation request


  A request that the confirming party responds directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information
• Negative confirmation request


  A request that the confirming party responds directly to the auditor only if the confirming party disagrees with the information provided in the request
• A positive confirmation request is more effective compared with a negative confirmation request since the latter rarely provides explicit evidence in case of non-response
• Non-response pertains to a failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered
• The exception refers to a response that indicates a difference between the information requested to be confirmed, or contained in the entity's records, and information provided by the confirming party