3.Audit Evidence

Question 1

How is evidence gathered?

Answer 1

To express opinion in the audit report, the auditor needs to obtain reasonable assurance.
Reasonable assurance is obtained by obtaining sufficient audit evidence.
Audit evidence is obtained by performing audit procedures.

Question 2

what is sufficient evidence? How is it affected?

Answer 2

It relates to the quantity of evidence.
Sufficiency is affected by:
Assessed risk of material misstatement
Materiality and complexity of an item
Auditor’s knowledge and experience
Quality of audit evidence
Strength of internal control systems of the client

Question 3

Tell about Appropriate Evidence?

Answer 3

Appropriateness is the measure of quality of evidence

it is affected by Relevance and Reliability of the information on which it is based.

Question 4

What is relevance in audit evidence?

Answer 4

It is the logical connection between the claim and audit procedures.

Question 5

What is reliable evidence?

Answer 5

Reliability of the evidence depends on its nature, source and circumstances under which it was obtained.
Remember by CODED.

Question 6

Explain inquiry in audit procedures?

Answer 6

Inquiry means seeking information from knowledgeable persons from inside or outside the entity. Inquiry alone is not sufficient appropriate evidence.
During inquiry, the reliability of management’s response is affected by the integrity of the management and consistency of responses with the evidence provided.

Question 7

Explain Observation of procedures?

Answer 7

Observation means to look at a process or a procedure being performed by others.
The evidence obtained by observation is limited to the time of observation and it may also be affected by people knowing they are being observed.

Question 8

Explain Inspection?

Answer 8

Inspection includes examining accounting records or documents
or physical examination of tangible assets.

Question 9

What is external evidence?

Answer 9

External evidence is a process of obtaining information directly from a third party by the auditor in a written form.
Other information than closing balances may also be confirmed through external evidence.

Question 10

Explain Recalculation?

Answer 10

Recalculation means checking the mathematical accuracy of documents or records. It can be performed manually or electronically.

Question 11

What is reperformance in audit procedures?

Answer 11

Reperformance means the auditor independently performs the procedures that were originally performed by the entity as part of their internal controls.

Question 12

What are analytical procedures?

Answer 12

Analytical procedures means the evaluation of financial information through comparisons and analysis of plausible relationships with other financial and non-financial information.
It also includes investigations if the actual values are significantly different from expected values.

Question 13

What are the audit procedures performed for?

Answer 13

Audit procedures can be performed for different purposes:
Risk assessment procedures
Test of Controls
Substantive Procedures

Question 14

Enlist the audit procedures?

Answer 14

The following are audit procedures: 
Inquiry
Observation
Inspection
External confirmation
Recalculation
Reperformance
Analytical Procedures

Question 15

What is risk assessment procedure?

Answer 15

Risk assessment procedures are the auditor’s procedures to obtain the understanding of an entity and its internal controls to assess the risk of material misstatement at financial statement level and at assertion level.
For Example:
inquiries of management and others within the entity,
observation and inspection
analytical procedures

Question 16

What are the levels of risk?

Answer 16

There are 2 levels of risk:
Risk at financial statement
Risk at assertion level

Question 17

Explain Test of Controls?

Answer 17

It is also known as compliance test. Its objective is to confirm the operating effectiveness of internal controls, in preventing detecting and correcting material misstatements at assertion level.
Examples:
inspecting approval of transactions and reconciliations, observing segregation of duties.

Question 18

What is substantive procedures?

Answer 18

The objective of the substantive procedure is to detect material misstatement in financial statements at assertion level.
Examples:
Analytical procedures and test of details.

Question 19

When are test of controls required?

Answer 19

They are required only when:
controls are operating effectively and auditor plans to rely on internal controls in his risk assessment
or
substantive procedures alone don’t provide sufficient appropriate audit evidence.

Question 20

Define Assertion?

Answer 20

An assertion is a representation by management that is embodied in financial statements. They are used by the auditor to assess different types of misstatement that may occur and to obtain evidence.

Question 21

What the the types of assertions?

Answer 21

Assertions about account balance at period end

Assertions about classes of transactions and events for the period

Question 22

Explain directional testing?

Answer 22

Directional testing means directly testing the debit items for overstatement and credit items for understatement.