Ch 3 ISA 500 Flashcards
What is Audit Evidence?
Audit evidence is the information used by auditor in arriving a conclusion on which auditor’s report is based.
Audit evidence should be Sufficient and Appropriate
What is meant by SUFFICIENT evidence?
Sufficiency is the measure of quantity of the audit evidence, sufficiency of audit evidence is affected by
* Assessed risk of material misstatement.
* Materiality and complexity of item. .
* Auditor’s knowledge and experience of business.
* Quality of audit evidence
* Strength of internal control system of client.
What is meant by APPROPRIATE evidence?
Appropriateness is the measure of quality of audit evidence. Appropriateness of evidence is affected by relevance and reliability of information on which it is based.
What is RELEVANCE?
Relevance deals with logical connection between assertion and audit procedures.
For example:
* If auditor wants to test Occurence (e.g. when there is risk that an account is overstated), relevant procedures will be to select and test recorded amounts (e.g. selecting transactions from t accounts and checking their supporting documents) However if auditor wants to test Completeness (e.g. when there is a risk that an amount is understated) relevant procedures will be to select and test information outside accounting system.(e.g, selecting supporting documents and checking their recording in T accounts or selecting subsequent payments and checin their recording as payable at year end.)
* A procedure may provide evidence which is relevant for one assertion but not relevant for the others ( e.g. inspection of tangible assets may provide evidence for existence but not for rights and obligations)
* If we want to check internal controls, relevant evidence will be obtained by test of controls which will identify conditions indicating performance or of deviation from controls.
* If we want to check F/S relevant evidence will be obtained by substantive procedures which will identify misstatements.
What is RELIABILITY?
Reliability of evidence depends on its source, nature, and circumstances under which it is obtained.
For example:
1. Evidence in the form of Original document is more reliable than photocopy or fax.
2. Evidence in Documentary form is more reliable than evidence in oral form (eg. written minutes of a meeting are more reliable than oral representation).
3. Evidence from independent External source is more reliable than internal evidence (e.g. confirmation from customer is more reliable than a sales invoice).
4. Evidence generated internally is more reliable when internal Controls are strong
(eg. pre-numbered documents are more reliable than unnumbered documents because their numerical sequence can be checked),
5. Evidence obtained Directly by the auditor is more reliable than evidence obtained indirectly (e.g. observation of a control is more reliable than inquiry of a control).
A shortcut to remember the reliability criteria of evidence is that evidence should be “CODED” i.e. Controlled, Original, Documentary, External and Direct.
What are Audit Procedures?
Audit procedures are methods and techniques used by the auditor to gather audit evidence,
1. Inquiry (of a person)
2. Observation (of a procedure)
3. Inspection (of an item)
4. External Confirmation
5. Recalculation
6. Reperformance
7. Analytical Procedures
Above audit procedures are performed for different purposes , for
* Risk Assessment Procedures
* Test of Controls
* Substantive Procedures
What is INQUIRY?
- Inquiry means seeking information from knowledgeable persons within the entity or outside the entity
- Inquiry alone is not sufficient appropriate audit evidence. Auditor should always do further procedures.
What is Observation?
- Observation consists of looking at a process or procedure (e.g. controls) being formed by others
- Evidence from observation is limited to the time of observation, and is also affected when people know that they are being observed.
What is inspection?
- Inspection involves: examining accounting records or documents (whether internal or external); or
- physical examination of a tangible asset.
What is External Confirmation ?
External party confirmation is a process of obtaining evidence by auditor directly from in written form a third party (e.g. on paper, electronic or other medium).
What is Recalculation ?
- Recalculation consists of checking mathematical accuracy of documents or records.
- Recalculation may be performed manually or electronically,
What is Reperformance ?
Reperformance means auditor independently performing procedures or cntrols that were originally performed by the entity as parts of its internal control
What is Analytical Procedures ?
Analytical Procedures means evaluation of financial information through comparisons and analysis of plausible relationships with other financial and non financial informations
What is Risk Assessment Procedures?
Risk Assessment Procedures are auditor’s procedures to obtain understanding of entity and its internal control to assess risk of material misstatement at financial statement level and at assertion level.
Examples of Risk Assessment Procedures:
* Inquiries of management and others within the entity (e.g. internal audit function).
* Observation and Inspection (e.g. observation of entity’s operations and inspection of internal audit reports).
* Analytical Procedures
What is Risk at F/S level?
Risk at the financial statement level refers to risk that affects financial statements pervasively, and potentially affect many assertions,
Examples of risks at financial statement level
* Risk of fraud by management.
* Risk of management override of control.
* Lack of Competence and Integrity of management.
* Going concern Issues.
