CA Inter Auditing & Ethics

Chapter 4 – Audit Evidence (SA 500)

Detailed Exam Notes – Part 1

SA 500 – AUDIT EVIDENCE

Meaning

Audit Evidence means the information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based.

It includes:

1. Information contained in accounting records.
2. Other information supporting the financial statements.

Definition (ICAI Keyword)

Audit evidence is the information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based.

Relationship between Audit Evidence & Audit Opinion

Accounting Records
        +
 Other Supporting Information
        ↓
   Audit Evidence
        ↓
Audit Procedures Performed
        ↓
Auditor's Conclusions
        ↓
Audit Opinion

Remember

No Audit Evidence → No Reasonable Conclusion → No Audit Opinion

Components of Audit Evidence

(A) Accounting Records

Includes

• Journal entries
• General Ledger
• Subsidiary Ledger
• Invoices
• Contracts
• Cheques
• Electronic Fund Transfer records
• Worksheets
• Reconciliations
• Cost Sheets
• Spreadsheets

(B) Other Information

Includes

• Minutes of meetings
• External confirmations
• Internal control manuals
• Management reports
• Legal correspondence
• Policies
• Board resolutions

Types of Audit Evidence

1. Based on Nature

2. Based on Source

Internal Evidence

Evidence generated inside the organization.

Examples

• Sales Invoice
• Goods Received Note
• Debit Note
• Credit Note
• Cash Memo
• Inspection Report

External Evidence

Evidence obtained from outside the organization.

Examples

• Supplier Invoice
• Bank Confirmation
• Customer Confirmation
• Purchase Invoice
• Legal Confirmation

Internal vs External Evidence

Exam Point

External Evidence is generally more reliable than Internal Evidence because it is obtained from independent third parties.

Relevance of Audit Evidence

Meaning

Relevance means logical connection between audit evidence and audit objective.

Example

Checking recorded purchases helps verify:

✔ Occurrence

But does NOT verify

✔ Completeness

For completeness, auditor checks:

• Supplier Statements
• Unrecorded liabilities
• Subsequent payments

Reliability of Audit Evidence

Reliability depends upon

• Source
• Nature
• Circumstances

Reliability Hierarchy (Very Important)

Most Reliable

↓

Obtained directly by Auditor

↓

External Evidence

↓

Internal Evidence with Good Controls

↓

Documentary Evidence

↓

Original Documents

↓

Photocopies

↓

Oral Evidence

Least Reliable

Rules for Reliability

✔ External evidence > Internal evidence

✔ Auditor obtained > Management supplied

✔ Documentary > Oral

✔ Original > Photocopy

✔ Strong internal controls increase reliability

Sufficient Appropriate Audit Evidence

This is one of the most asked ICAI questions.

Sufficiency

Means

Quantity

Question asked

“How much evidence?”

Depends upon

• Risk
• Materiality
• Population

Appropriateness

Means

Quality

Depends upon

• Relevance
• Reliability

Memory Trick

S = Size

(Sufficiency = Quantity)

A = Accuracy

(Appropriateness = Quality)

Difference

Relationship

Both are interrelated.

Higher Quality

↓

Less Quantity required

Lower Quality

↓

More Quantity required

Factors Affecting Sufficiency

1. Materiality

Higher materiality

↓

More evidence required

2. Risk of Material Misstatement

Higher Risk

↓

More evidence

Lower Risk

↓

Less evidence

3. Size & Characteristics of Population

Large population

↓

More evidence

Small population

↓

Less evidence

Source of Audit Evidence

Obtained from

• Accounting Records
• Previous Audits
• External Sources
• Management Expert
• Audit Procedures

Audit Procedures (SA 500)

There are 7 audit procedures.

1. Inspection

Meaning

Examination of documents or physical assets.

Examples

• Invoice
• Contract
• Share Certificate
• Inventory

Provides evidence about

✔ Existence

✔ Authorization

2. Observation

Meaning

Watching others perform procedures.

Example

Observing stock count.

Limitation

Only provides evidence at that point in time.

3. External Confirmation

Meaning

Written response received directly from third party.

Examples

• Bank Confirmation
• Debtor Confirmation
• Creditor Confirmation

Highly Reliable

4. Recalculation

Meaning

Checking mathematical accuracy.

Example

• Depreciation
• Interest
• GST
• Discount

5. Reperformance

Meaning

Auditor independently performs client’s procedure again.

Example

• Bank Reconciliation
• Ageing of Debtors

6. Analytical Procedures

Meaning

Evaluation of relationships among financial and non-financial data.

Example

• GP Ratio
• Current Ratio
• Trend Analysis
• Comparison with Previous Year

7. Inquiry

Meaning

Seeking information from knowledgeable persons.

Example

Discussion with

• CFO
• Accountant
• Production Manager

Limitation

Inquiry alone is not sufficient audit evidence.

Always needs corroboration.

Audit Procedures Classification

Audit Procedures
      │
      ├── Risk Assessment Procedures
      │
      └── Further Audit Procedures
               │
               ├── Tests of Controls
               │
               └── Substantive Procedures
                         │
                         ├── Test of Details
                         └── Analytical Procedures

Risk Assessment Procedures

Purpose

Understand

• Entity
• Internal Control
• Business Environment

To identify

Risk of Material Misstatement

Tests of Controls

Purpose

To evaluate operating effectiveness of controls.

Question answered

“Are controls working properly?”

Substantive Procedures

Purpose

Detect material misstatements.

Includes

• Test of Details
• Substantive Analytical Procedures

Assertions (Very Important)

Assertions are representations made by management in the financial statements.

Assertions for Transactions

Memory Trick

OCACC

(Occurrence, Completeness, Accuracy, Cut-off, Classification)

Assertions for Account Balances

Memory Trick

ERCV

Assertions for Presentation & Disclosure

Memory Trick

OCCA

Audit Trail

Meaning

A step-by-step documented record of a transaction from source document to financial statements.

Benefits

• Detects fraud
• Fixes responsibility
• Strengthens internal control
• Improves data security
• Helps auditor verify transactions

Management’s Expert

Meaning

Person having expertise in a field other than accounting or auditing.

Examples

• Actuary
• Engineer
• Lawyer
• Valuer

Before relying on expert, auditor evaluates

• Competence
• Capability
• Objectivity
• Appropriateness of work

Selection of Items for Testing

Three methods

1. 100% Examination

Suitable when

• Small population
• High risk
• Automated calculations

2. Specific Selection

Examples

• High-value items
• Suspicious transactions
• Unusual transactions

3. Audit Sampling

Testing only selected items to draw conclusion about entire population.

Inconsistency in Audit Evidence

If evidence from two sources conflicts,

Auditor should

• Perform additional procedures
• Investigate inconsistency
• Consider impact on audit opinion

Evaluation of Audit Evidence

Auditor should conclude whether:

✔ Evidence is sufficient

✔ Evidence is appropriate

✔ Audit risk reduced to acceptable level

Only then can the auditor express an opinion.

ICAI One-Mark Revision

• Audit Evidence = Information used to form audit opinion.
• External evidence is more reliable than internal evidence.
• Sufficiency = Quantity.
• Appropriateness = Quality.
• Documentary evidence is more reliable than oral evidence.
• Inquiry alone is not sufficient audit evidence.
• There are 7 audit procedures.
• Assertions are representations made by management.
• Audit Trail traces transactions from source document to financial statements.
• Management’s Expert is an expert other than an accountant or auditor.
• Testing methods: 100% Examination, Specific Selection, Audit Sampling.

Memory Tricks

• Sufficiency = Size (Quantity)
• Appropriateness = Accuracy (Quality)
• OCACC = Assertions for Transactions
• ERCV = Assertions for Balances
• OCCA = Assertions for Presentation & Disclosure
• I O C R R A I = Inspection, Observation, Confirmation, Recalculation, Reperformance, Analytical Procedures, Inquiry

These notes cover the complete SA 500 – Audit Evidence portion in an exam-focused format. The next part will cover SA 610 – Using the Work of Internal Auditors in the same detailed style.