Chapter - 3 Audit Evidence

Question 1

What is audit evidence?

Answer 1

audit evidence is the information used by the auditor in arriving at the conclusion on which the auditors report is based audit evidence should be sufficient and appropriate

Question 2

What is meant by sufficient evidence?

Answer 2

Sufficiency is a measure of the quantity of audit evidence sufficiency or without audit evidence is affected by
1. Assist risk of material misstatement
2. Materiality and complexity of item
3. Auditors knowledge and experience of business
4. Quality of audit evidence
5. strength of internal controls of right.
6. sampling methods used by auditor

Question 3

What is meant by appropriate evidence?

Answer 3

Appropriateness is the measure of the quality of audit evidence. Quality of audit evidence is affected by relevance and reliability of the information on which it is based.

Question 4

what is the relevant procedure to test occurrence assertion?

Answer 4

If auditor wants to test Occurrence (i.e. no overstatement), relevant procedure will
be to test recorded amounts.

Question 5

what is the relevant procedure if returns to test completeness assertion?

Answer 5

if auditor wants to test Completeness (i.e. no understatement), relevant
procedure will be to test information outside accounting system.
(For example, selecting GDN and checking their recording in sales account, or selecting subsequent
payments and checking their recording as payable at year end.)

Question 6

what is the procedure to check internal controls?

Answer 6

If we want to check internal controls, relevant evidence will be obtained by tests of
controls which will identify conditions indicating performance of or deviation from
controls.

Question 7

what will be the relevant evidence to check financial statements?

Answer 7

If we want to check financial statements, relevant evidence will be obtained by
substantive procedures which will identify misstatements

Question 8

What are the factors on which reliability of the evidence depends?

Answer 8

Reliability of the evidence depends on its source, nature and circumstances under which it is obtained.

Question 9

Which one is more reliable original document or photocopy or fax

Answer 9

Evidence in the form of Original document is more reliable than photocopy or fax.

Question 10

Is, evidence from independent External source is more reliable than internal evidence?

Answer 10

YES, Evidence from independent External source is more reliable than internal evidence
(e.g. confirmation from customer is more reliable than a sales invoice).

Question 11

Which evidence is more reliable? evidence obtained directly or evidence obtained in directly ?

Answer 11

Evidence obtained Directly by the auditor is more reliable than evidence obtained
indirectly or by inference (e.g. observation of a control is more reliable than inquiry of a control).

Question 12

What is meant by audit procedure?

Answer 12

How do procedures are the method and techniques used by the auditor to gather audit evidence.

Question 13

List the type of audit procedures.

Answer 13

1. Enquiry number two
2. observation
3. inspection
4. external confirmation
5. recalculation
6. reperformance
7. Analytical procedures.

Question 14

What is meant by analytical Procedures?

Answer 14

Analytical procedures means evaluation of financial information through analysis of
plausible relationships, with other financial and non-financial information and
comparisons.
Analytical procedures also include investigation if actual values are significantly different
from expected values.
Examples:
 Making comparisons (e.g. comparing income/expense for current year with last
year).
 Calculating plausible relationships (e.g. relationship of payroll expenses with
number of employees, or selling expense with sales).

Question 15

What are the three phases of obtaining evidence?

Answer 15

1. Risk assessment procedure.
2. test of control.
   3.substantive procedures.

Question 16

What is risk assessment procedure?

Answer 16

Risk Assessment Procedures are auditor’s procedures to obtain understanding of the entity
and its internal control to assess the 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.

Question 17

How to respond at risks on financial statement level?

Answer 17

To address risk at financial statement level, auditor designs and implements overall responses,
for example:
1. Increased level of professional skepticism specially during audit of judgmental areas.
2. Adequate planning, and reduced materiality level.
3. Assigning more experienced and specialized staff e.g. use of experts if necessary.
4. Increased supervision and review of the audit work performed (e.g. quality control review
of the engagement).
5. Incorporating unpredictability in nature, timing and extent of audit procedures.
6. Making changes to audit procedures.
7. More audit procedures at period end rather than at interim date.
8. Obtaining more reliable audit evidence (e.g. from external sources).
9. Evaluate whether selection and application of accounting policies is appropriate, and
significant estimates are reasonable

Question 18

What is risk at financial statement level?

Answer 18

Risk at the financial statement level refers to risk that affect financial statements pervasively and
potentially affect many assertions.

Question 19

What are the examples of risk at financial statement level?

Answer 19

Examples of risks at financial statement level:
1. Risk of fraud.
2. Risk of management override of control.
3. Lack of Competence and Integrity of management.
4. Going concern Issues.

Question 20

Increased level of professional skepticism specially during audit of judgmental areas is response to ?

Answer 20

Risk at Financial Statement Level

Question 21

How many levels of risk there are?

Answer 21

There are two levels of risk i.e. Risks at Financial Statement Level and Risks at Assertion Level.

Question 22

What is meant by risk and assertion level ?

Answer 22

Risk at assertion level refers to risk that do not affect financial statements pervasively and affect
only specific identifiable assertion.

Question 23

Give examples of risks at assertion level?

Answer 23

Examples of risks at assertion level:
1. Risk that precious and portable assets may be misappropriated.
2. Risk that complex transactions (e.g. deferred tax, lease), and non-routine transactions (e.g.
purchase or disposal of fixed assets) may not be accurately recorded.
3. Risk that large transactions at year end my be incorrectly recorded.

Question 24

How do you response to assertion level?

Answer 24

To address risk at assertion level, auditor shall perform following audit procedures:
 Tests of Controls, and
 Substantive Procedures

Question 25

What are the objectives of tests of control?

Answer 25

Objective of tests of controls is to confirm the operating effectiveness of internal control in
preventing, detecting and correcting misstatements at assertion level.

Question 26

Give some examples of test of controls.

Answer 26

Examples of Tests of Controls:
 Inspecting approval of transactions.
 Inspecting reconciliations.
 Observing segregation of duties.

Question 27

What is the objective of substantive procedures?

Answer 27

Objective of Substantive Procedures is to detect material misstatements in financial
statements at assertion level.

Question 28

What are the examples of substantive procedures?

Answer 28

Examples of Substantive Procedures:
 Analytical Procedures, and
 Tests of Details

Question 29

What are assertions?

Answer 29

Assertions are representations by management that are embodied in the financial statements.
These are used by auditor to assess different types of misstatement that may occur and to obtain
evidence.

Question 30

How many types of assertion’s there are?

Answer 30

There are two broad types/categories of assertions i.e.
① Assertions about account balances at the period end
② Assertions about classes of transactions and events for the period

Question 31

List the assertions about account balances at the period.

Answer 31

1. Existence
2. Rights and obligations
3. Completeness
4. accuracy, valuation and allocation
5. classification
6. presentation.

Question 32

List the assertions about classes of transition and events for the period.

Answer 32

1. Occurrence
2. Accuracy
3. presentation
4. cut off
5. completeness
6. classification presentation.

Question 33

What are the procedures that the auditor will perform if he has doubt over reliability of evidence?

Answer 33

If there are doubts over reliability of evidence (e.g. there is inconsistency between evidence, or
evidence is not from reliable source), auditor shall:
 perform additional audit procedures to resolve the matter.
 also consider effect on other aspects of audit (e.g. risk, procedures).

Question 34

What are the procedures that the auditor will perform? if work of management’s expertise is used by the auditor?

Answer 34

If auditor uses work of management’s expert, auditor shall:
1. Evaluate the competence, capabilities and objectivity of that expert.
2. Obtain an understanding of the work of that expert, and
3. Evaluate the appropriateness of that expert’s work as audit evidence for the relevant
assertion