12 Apr 2024

Gathering Audit Evidence

Introduction

What are we covering?

• In lectures:
• Principles of Gathering Audit Evidence (summary)
• Substantive Test (key aspects and Examples)
• Test of Controls (key aspects)
• Fraud (high level)

• Online content:
• Principles of gather audit evidence
• Using Management Experts
• Management Representation Letters
• Substantive analytics
• Auditing Opening Balances
• Substantive tests
• Test of controls
• Fraud

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Where are we in the audit process?

Why is gathering audit evidence important

Source: Shoprite Holdings Ltd Annual Financial statements for 2023

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So what do auditors focus on?

Risk of Material Rights and

Valuation,
Occurrence Completeness Cut-off Classification Existence allocation and Presentation
misstatement in: obligations
accuracy

Transactions, events
and related
disclosures

Balances, Assets,
Liabilities, Equity and
related disclosures

So what is audit evidence

Audit evidence is: Audit information

• Information, to which audit procedures have been applied, that the auditor uses to draw conclusions
becomes audit
that form the basis for the auditor’s opinion and report. evidence once the
auditor has
Internal sources of information
performed some
• Accounting records such as accounting entries, supporting records, ledgers, journals, journal entries procedures over the
• Management calculations for example, for impairment of assets
information.
• Reconciliations performed over balances
• Schedules that support amounts accounted for in the accounting records
This means that the
External sources of information auditor must use the
• Confirmation letters confirming balances, for example, bank confirmations confirming balances in information to
bank accounts or loan accounts.
confirm what
• Contracts entered into by the audit client prepared by counter party
• Industry reports containing economic or market analysis
management has
• Auditor’s experts accounted for or
• External management experts’ disclosed

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How do auditors obtain audit evidence?

Test of Controls

Audit procedures Test of details

Substantive
procedures
Substantive analytics

Professional scepticism

Mindset

Impediments
• Budget constraints
• Tight deadlines
• Lack of cooperation by management
• Insufficient understanding of entity and environment
• Difficulties access records or facilities
• Over-reliance on automated tools and techniques.

Beware of Bias
• Availability bias – placing reliance on what is there rather than what is not there
• Group think – making decisions as group, reducing creativity and individual responsibility
• Overconfidence bias – overestimate your own ability
• Anchoring bias – overly focusses on an initial piece of info as an anchor; weight everything against the anchor
• Automation bias – favor output from automated systems, and disregarding human error

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Audit Evidence

Sufficiency of
Appropriateness
audit evidence

Relevant Reliable
Selecting all items Target testing Sampling
information information

Appropriate Connection to
Audit Objectives
Source of
Evidence
Small number of
transactions
High value or key
items
ISA 530

and sufficient Timeliness

Nature of
Evidence
All items over
certain amount

audit Nature of the

Audit Area
Form of Evidence
Items to obtain
information

evidence Changes in the

Entity or
Effectiveness of
Internal Control
Environment

Source of Auditor’s Direct

Information Knowledge

Timing of
Level of Detail
Evidence

Specific Risks
Objectivity of
Associated with
Evidence
the Audit

Professional
Scepticism

What to with information obtained from client

• Cast and cross cast schedules (A) and compare to accounting information
being tested (C)
• Confirm the details with external parties
Ensure accuracy and • Recalculations and comparing to management
completeness of information

• Always obtain the breakdown of amounts

• Make sure the data you need for test is present
• Understand the calculations made by management
Ensure that there is sufficiently
detailed and precise

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What if there are inconsistencies?

What can go wrong when Consider:

gathering audit evidence?
• Modifying audit
procedures
• Additional audit
procedures
• Effect on other
Evidence from one source differs
Auditor doubts reliability of parts of the
information to be used as
from another
evidence audit

How do we gather
evidence?

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Audit procedures for obtaining audit evidence

Inspect Observe Recalculate Circularisation and Reperform Analytical Inquiry

• Minutes of meeting • Limited evidence • Perform over any confirmations •Most effective with procedures •Never enough
• Resolutions calculation •Debtors Controls •ISA 520 •Need to always
• Invoices • NB! Must always •Creditors •Implications for testing •Ratio’s corroborate
• Statements compare to •Banks Accounting systems • Financial vs Non-
management otherwise financial
• Industry reports
you do not have audit
• Delivery notes evidence
• Bank statements
• Financial statements
• Contracts/Agreements

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Computerised environments

1. Around the computer

Audit
2. Through the computer Evidence

3. With
the
computer

Audit Evidence

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Using automated tools and techniques

ATTs

System ATTs Data ATT’s

Substantive Uses the data

Test of controls Tests the operating
Audit through the Audit with the procedures generated they
(sometimes dual effectiveness of
system computer (sometimes test of accounting
tests) application controls
controls) application

Integrated test Embedded audit Stratification and

Test data Parallel simulation Examination of logs Exceptions Extracting samples Analytics
facilities (ITF) facilities data manipulation

Gathering Audit Evidence

Substantive procedures –
Test of detail

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Key principles of Substantive Tests

• The auditor MUST perform substantive audit procedures for every material transaction, account balance
& disclosure. (ISA 330.18)

• Significant risk assertion

• Perform substantive test of details
• If audit approach is only substantive audit procedures – must perform test of detail

• Substantive audit procedures to be performed (ISA 330.20)

• Recon AFS info with accounting records
• Agreeing \ recon information in disclosures
• Examining material journal entries & other adjustments made during preparation of AFS

• When are substantive test performed?

• Interrim
• Final

Interim substantive procedues

• Significant part of substantive procedures is performed before year

end (not more than 3 months before YE) due to time limited on
completion of audit.
• This can only be applied if:
• Reliance can be placed in internal controls
• Control environment is functioning effectively
• No significant changes in client’s circumstances since performance of early
substantive procedures
• Ability of auditor to perform audit procedures (only SP or SP & TOC) for the
remaining period

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How to formulate substantive procedures

Source Reason Substantive

Verb (How)
(What) (Why) Procedures

• Documents, eg Invoices • Risk and assertion

• Inspection (ISA 500.A18)
• Minutes of Meeting • Law or regulation
• Observation (ISA 500.A19)
• Contracts • Accounting requirement
• External confirmation (ISA 500.A22)
• Persons • Input into larger calculation
• Recalculation (ISA 500.A23)
• Calculations
• Reperformance (ISA 500.A24)
• Journal entries
• Analytical review procedures (ISA
• Opening Balances
500.A25)
• Accounting Policies
• Inquiry (ISA 500.A26)

How NOT to formulate substantive procedures

DO NOT use the following verbs UNLESS you indicate HOW this will be done:
• Ensure
• Check
• Test
• Look
• See
• Determine
• Consider

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Exam technique

Identify the classes of

transactions making up the
account.
Formulate the assertion for each Identify the relevant source
Determine the type of account • O\B NOT applicable to new entity & SoCI
class of transaction. (WHY) documentation. (WHAT) Select the procedure (VERB)
accounts!
• Identify subsidiary ledgers \ lists to agree
to account balance

So what are do you want to Where will you get the On Invoice:
do? information from?
1. Cast the invoice to
I want to make sure that I will need a sample of ensure revenue is
revenue on excludes Invoices and corresponding correct
Output Vat (Accuracy, Journal entries
valuation and allocation) 2. Recalculate VAT and
compare to amount on
Invoice

3. Compare Revenue
and VAT
(recalculated) to the
Journal

Approach to Substantive procedures – Opening

Balances

Inspect prior auditor

Inspect audit report
Written permission working papers and Compare prior year
if there were
New auditor from client to
contact prior auditor
compare closing
balance to opening
accounting policy to
current year
modifications
related to account
balance

Compare prior year

Continuance Compare prior year
closing to opening
accounting policy to
audit balances
current year
accounting policy.

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Approach to
Type of minutes

•Board minutes (where the Board approved the decision)

substantive •Shareholder meeting minutes (where shareholders approved a decision)

procedures –
Date of the meeting

•To ensure that the decision relates to the correct financial period

Minutes •Also ensure that the effective date of the decision is accounted for in the correct period

Quorum

•Board Meeting: Majority of Board must be present. MOI may determine that specific members
should be in attendance for a quorum
Minutes provide details into the •Shareholders: Majority of voting-right shareholders present. NB! For special resolutions, 75% of
voting-right shareholders must be present
decisions taken by management •Be on lookout for notices issues and quorums not met at prior meetings. Attendance at subsequent
meeting is then regarded as a quorum

Verb: Inspect Approvals given

•Board: only majority of board in attendance need to approve

•Shareholders: Special resolutions require >75% (s65(11 – 12), ordinary shareholders resolution =
NB!! >50%

• Compare the minutes to Details of approvals

relevant disclosure and •Amounts
•Payment terms (dates, amounts, increases)
calculations •Periods
•Parties to agreements

Minutes Resolution Contract Calculation

Accounting Resolutions
entry/disclosure

•Resolutions must be signed by at least 2 members in attendance at meeting

•Must agree to the minutes
•Sequentially numbered (NOCLAR)

Approach to Parties to the contract

•To ensure rights and obligations

substantive Effective date of contract (suspensive conditions)
procedures – •For transactions: to transactions accounted for in correct financial period (cut-off)

Contracts •For balances: to ensure balance is included in the correct period along with other
balances (Completeness)

Payment terms

•To ensure that payments are being accounted for correctly

Contracts give us the inputs into •Consider discounts, payment escalations, payment breaks, residual values etc
calculations and the details for •When payments must be made (beginning or end of month)
•Interest on outstanding balances or interest earned on balances (including changes)
disclosures
Performance obligations

Verb: Inspect •Leases: are underlying assets indicated? Is lease term indicated?
•Revenue: what are the performance obligations that need to be met
•Financial instruments: details of the instrument such as payment, term of instrument
NB!!
Rights and obligations
• Compare details in the
contracts Minutes of Meeting •Who carries insurance costs (risk and rewards)
•Additional costs which would have to be incurred for the contract (NB for leases and
and Resolutions Financial Instruments)

• Compare the details to the Data and signatures

inputs into calculations for •Signature of both parties to ensure legality of contract
accuracy •Date of signature to ensure event took place in the correct period.

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Approach to substantive procedures - Schedules

• Accounting schedules
provide a breakdown of
each category will be
shared as a sub-category or
a sub-schedule
• Procedures
• Cast and/or cross cast the
schedule to ensure accuracy
of totals Where a schedule has amounts allocated to
• Compare totals to General categories, the auditor should ensure that the
Ledger and TB to ensure allocations are correct. They do this by:
completeness • Selecting a sample of documents per category
• Compare the information in the document and
compare to the category to ensure accuracy

Approach to substantive procedures – Management

Calculations
• Cast and Cross cast to ensure accuracy
• Compare totals to GL/TB or amount being tested
• Evaluate the appropriateness of the calculation
• Management Experts (ISA 500.8)
• Auditors Experts (ISA 620) – Only in Auditing IV
• Reperform the calculations
• Compare to commonly applied formulae
• Test the inputs into the calculation
• Compare to the underlying data (NB – Controls reliance may be required to ensure
inputs are correct) through inspection of underlying data
• Compare to external sources for e.g. compare exchange rates to trusted sources
• NB! Compare inputs to IFRS requirements (so you must know your accounting)

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Example –
ACSE 7.15

Example ACSE 7.15

Section 44 and 45

Section 45 and 75

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ACSE 7.15

Amend: Provide the

substantive audit
procedures to test the
journal entries

Journal 8362 Section 44 and 45

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Journal 8367 Section 45 and 75

Gathering Audit Evidence

Substantive procedures –
Analytics (ISA 520)

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How do you perform a substantive analytic (ISA 520)

Step 1: Determine suitability of analytic

• Determine the formula you will use for the analytic that will be create your expectation
• The analytic needs to provide you with evidence so you will be comparing your results with the results of management
• Also determine a threshold that would indicate that differences between your expectation and managements results
would require investigation
Step 2: Ensure the reliability of the data
• Ensure the inputs into the calculation are reliable
• Can perform Test of Controls or Substantive tests on the underlying data to ensure reliability
Step 3: Perform the analytic
• You would have developed the expectation in the formula
• Now you perform the calculation and ensure that it is precise to either indicate a misstatement or identify ROMM
Step 4: Investigate differences
• Investigate all differences above the threshold

Example – Audit 4 Test 1 2019

• Purpose: The purpose of the working paper is to document the composition of the fixed deposit account in
the general ledger.

• Source: The trial balance for the year ended 31 December 2018 was obtained from Deacon Claiborne
(financial manager).

• Materiality: Performance materiality – R600 000

Schedule of Fixed Deposits

Bank Date obtained Interest per year Amount
Bluebird Bank 02-Feb-17 10.50% 10 000 000
Beverly Bank 01-Apr-18 8% 30 000 000
Scarlet Bank 01-Sep-18 9.75% 15 000 000
55 000 000

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Example – Audit 4 Test 1 2019

• Trial balance:

2018 2017
R R
Dt/(Cr) Dt/(Cr)
Interest fixed deposits (3 247 295) (960 822)
Investment fixed deposits 55 000 000 10 000 000

REQUIRED: Perform a substantive analytical procedure to obtain sufficient and appropriate audit
evidence over the Interest on fixed deposits line item contained in financial statements of Nashville
Bulk Shipping (Pty) Limited for the year ended 31 December 2018;

PLEASE NOTE:
 Your substantive analytic has to comply with ISA 520 and
 You may assume that all the input data is correct and audit evidence over all inputs has already
been obtained

Example – Audit 4 Test 1 2019 answer

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