BBAA 22033 :Audit and Taxation

Audit Evidence -Tutorial

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 QUESTION.01

Describe the meaning of audit

evidence & main decisions taken by
auditors in the process of audit
evidence accumulation.

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Audit evidence is the information obtained by the auditors in arriving at
the conclusions on which the audit opinion is based. Audit evidence
comprises source documents, accounting records and corroborating
information from both internal and external sources.
Audit In deciding which audit procedures are to be used, it is common to put them down
procedure in sufficiently specific terms to be used as instructions during the audit.
Sample Once the audit procedure is selected, it is possible to vary the sample size from one
size to all the items in the population being tested. The sample size for any given
procedure is likely to vary from different audit assignments.

Items to be After the sample size has been determined for an audit procedure, it is still
selected necessary to decide which items in the population are to be tested.

An audit of financial statements usually covers a period such as a year, and an audit
Timing is usually not completed until several weeks or months after the end of the period.
The timing of audit procedures can therefore vary from early in the accounting
period to long after it has ended.
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 QUESTION.02

Explain the two main characteristics

of quality of audit evidence.

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• The auditor should obtain “sufficient and
appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit
opinion”.
• Sufficiency is the measure of the quantity of audit
evidence.
• Appropriateness is the measure of the quality or
reliability of the audit evidence.

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 QUESTION.03
State the important factors that
the auditor needs to consider
while obtaining audit evidence?

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Competence of Competence or reliability of evidence refers to the degree to which

evidence evidence can be considered believable.

Relevance to the Audit evidence must be relevant to the audit objective that the auditor

audit objective is testing before it can be reliable. Relevance should be considered in

terms of specific audit objectives.

For example, evidence obtained from physical inventory count is

Timeliness usually more reliable for balance sheet value when it is obtained as
close to the balance sheet date as possible.

It is measured primarily by:

(i) adequate sample size
(ii) appropriate sampling method – samples containing large
Sufficiency of
value items, high likelihood of misstatements, and
evidence
representative to the population are usually considered to
be sufficient.
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 QUESTION.04

Explain the factors affecting the

quality of audit evidence.

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• The quality of audit evidence is dependent mainly
on the form and source of the evidence.
– 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.

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• 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 entity: The level of reliability of

evidence that obtains from clients are depending
on the reliability of client internal control

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• Written form: The audit evidence that forms in
writing is 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.

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 QUESTION 05

Explain the audit procedures to

obtain audit evidence.

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Risk assessment procedures
Obtain an understanding of the entity and its environment to
assess the risks of material misstatement, whether due to fraud or
error, at the financial statement and assertion levels
Tests of controls
Test the operating effectiveness of controls in preventing, or
detecting and correcting, material misstatements at the assertion
level
Substantive procedures
Detect material misstatements at the assertion level.
• There are three types of substantive procedures.
• Substantive test of transactions
• Test of details of balances
• Analytical procedures
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 QUESTION 06

What factors should be consider when

applying analytical procedures.

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The auditor should consider the following factors:
• Plausibility and predictability of the relationship identified for
comparison and evaluation;
• Objectives of analytical procedures and the extent to which their
results can be relied upon;
• Nature of the entity and the degree to which information can be
decomposed;
• Availability of information, both financial and non-financial;
• Reliability of the information available;
• Relevance of the information available;
• Comparability of the information available;
• Source of information available;
• Knowledge gained during previous audits, together with the auditor’s
understanding of the effectiveness of the accounting and internal
control systems and the types of problems that in prior periods have
given rise to accounting adjustments.
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 QUESTION 07

What are the Advantages and

limitations of analytical procedures.

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Advantages:
• It can address several financial statements assertions at once.
• It can corroborate with other audit evidence. By using analytical
procedures auditors identify unusual items that can then be
further investigated to ensure that a misstatement doesn’t exist
in the balance.
Limitations:
• It will be difficult to create an expectation if operations are
significantly different from last year.
• It will be difficult to use analytical procedures if there have been
lots of one-off events in the year as there will be nothing to
compare with them.

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 QUESTION.08

Briefly explain the methods of

collecting audit evidence.

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• Physical Examination: Physical examination means physical verification of an
asset, such as stocks, investment certificates and fixed assets, as an evidence
of its existence and its condition.

• Third party confirmation: Confirmation of an amount or other information

shown in the client’s records by an independent third party provides a
reliable evidence of the existence of the amount and correctness of the
information, as the case may be. For example, receivables, payable,
contingent liabilities, stock with third parties etc.

• Examination of original records: Original records like ownership documents,

bills, notices etc. provide a reliable and conclusive evidence of the legal
claims, transactions, balances etc.

• Re-computation: Re computation technique is applied to prove arithmetical

accuracy of a transaction and to verify that the computation is in accordance
with the rules, procedures and acceptable practices. The areas where re-
computation techniques are generally applied include depreciation
computations, bonus calculations, provisions etc.
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• Enquiry: Enquiry consists of seeking information from
knowledgeable persons, both financial and non-financial, within
the entity or outside the entity. The enquiry may not provide
conclusive audit evidence but it may give some form of clue
which may lead to further verification.

• Analytical Procedures: Analytical procedures consist of

evaluations of financial information through analysis of plausible
relationships among financial as well as non-financial data.
Analytical procedures also encompass investigation of identified
fluctuations or relationships that are inconsistent with other
relevant information or that differ from expected values by a
significant amount.

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1. Which of the following is not one of the major
types of analytical procedures?

a) Compare client with industry averages.

b) Compare client with prior year.
c) Compare client with budget.
d) Compare client with SEC averages.

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2. To be considered reliable evidence,
confirmations must be controlled by:

a) client employee responsible for accounts

receivable.
b) financial statement auditor.
c) a client’s internal audit department.
d) a client’s controller or CFO

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3. Which of the following is the most objective type of
evidence?
a) A letter written by the client’s attorney discussing
the likely outcome of outstanding lawsuits.
b) The physical count of securities and cash.
c) Inquiries of the credit manager about the
collectability of noncurrent accounts receivable.
d) Observation of cobwebs on some inventory bins

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4. Which of the following is not a purpose of
analytical procedures?
a) Understand the client’s industry.
b) Assess the client’s ability to continue as a going
concern.
c) Evaluate internal controls.
d) Reduce detailed audit tests.

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5. Two determinants of the persuasiveness of
evidence are:
a) competence and sufficiency.
b) relevance and reliability.
c) appropriateness and sufficiency.
d) independence and effectiveness.

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