The search for evidence explained

Chapter 6
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LEARNING OBJECTIVES
After studying this chapter you should be
able to:
Explain why the audit evidence search is a
central concept of auditing.
Identify the stages of the audit process and
show that evidence has to be collected in
different ways at each stage.

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LEARNING OBJECTIVES CONT'D

Explain the relationship between audit
evidence and audit risk.
Show that there are different grades of audit
evidence and that evidence may be up graded
or downgraded.
Explain the relationship between audit
evidence and the application of audit
judgement.

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LEARNING OBJECTIVES CONT'D

Show to what extent the evidence-gathering
process might be affected by a decision by the
auditor to rely on the directors and the control
environment they have introduced.
Form conclusions on the basis of evidence
available in selected scenarios.

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LEARNING OBJECTIVES CONT'D

Explain the difference between an audit, a
limited assurance engagement, a compilation
engagement and an engagement involving
agreed-upon procedures, and suggest how
the evidence-gathering process may differ
between them.

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KEY POINTS p.222

The audit process is a search for evidence to form
an opinion, based on a whole series of conclusions
with regard to:
(a) accuracy and dependability of the accounting
records;
(b) validity of figures in financial statements;
(c) compliance with legislation and accounting and
reporting standards.

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KEY POINTS p.222 CONT'D

Relevant ISAs in the area are:

ISA 500 Audit evidence and

ISA 501 Audit evidence: additional
considerations for specific items.

The purpose of these standards is to establish standards and

to provide guidance on what constitutes audit evidence in an
audit of financial statements, the quantity and quality of audit
evidence to be obtained, and the audit procedures that
auditors use for obtaining that audit evidence.

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Figure 6.1

Evidence supporting reasonable conclusions

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KEY POINTS p.223

The words sufficient and appropriate are
interrelated, appropriate having two further
elements:
(a) Relevant, that is, pertinent to the matter in
hand;
(b) Reliable, that is, trustworthy, with some grades
of evidence more reliable than others.

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KEY POINTS p.224

Evidence is persuasive rather than conclusive
and auditors seek evidence from different sources
to support the same assertion (that is, to
corroborate it). There is a link between
persuasiveness and quantity as auditors seek to
be persuaded that objectives have been met by
accumulating evidence.

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KEY POINTS p.224 CONT'D

Evidence is the cornerstone of the audit process
a prerequisite for forming an opinion.
Collecting and assessing it needs considerable
imagination; the relevant evidence is frequently
difficult to find, being often concealed (whether
intentionally or unintentionally).

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KEY POINTS p.225

Management assertions may be classified in the
following three ways:
(1) genuine;
(2) accurate; and
(3) complete.

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KEY POINTS pp.225226

Trade debtors exist and owe the amounts stated in
the debtors ledger to the company.
Trade debtors balances are fully collectible.
All amounts owed by the trade debtors are included
in the amount attributed to trade debtors in the
financial statements and relate to the correct
period.

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KEY POINTS pp.227232

This approach enables auditors to set objectives
and place evidence search in a suitable context.
Guidelines for assessing evidence are as follows:
(a) Audit evidence is more reliable when it is
obtained from independent sources outside the
entity;
(b) Audit evidence that is generated internally is
more reliable when the related controls
imposed by the entity are effective;

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KEY POINTS pp.227232 CONT'D

(c) audit evidence obtained directly by the auditor is
more reliable than audit evidence obtained
indirectly or by inference;
(d) audit evidence is more reliable when it exists in
documentary form;
(e) audit evidence provided by original documents
is more reliable than audit evidence provided by
photocopies or facsimiles;

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KEY POINTS pp.227232 CONT'D

(f) evidence created in the normal course of
business is better than evidence specially
created to satisfy the auditor;
(g) the best informed source of audit evidence will
normally be management of the company but
managements lack of independence reduces
its value as a source of such evidence;
(h) Evidence may be upgraded by the skilful use of
corroborative evidence;

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KEY POINTS p.234

Business risk approaches have resulted in greater
reliance on management. As auditors align themselves more with management, they begin to feel
that they can judge individuals integrity.
This trust can result in a reduction in substantive
testing, with a consequent reduction in audit cost
to counterbalance the increased cost of time spent
at the planning stage.

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ACTIVITY 6.1

Think about these matters and decide if it is wise

to trust management in the way that the
protagonists of the business risk approach to
auditing believe is possible. Before you do this,
go back to Chapter 1 and reread what we had to
say about agency theory on pages 911.

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KEY POINTS p.236

This approach might not be justified in the light of
Enron and WorldCom, and the agency theorists
may be right that it would be unwise for auditors to
accept the word of management, without obtaining
considerable corroborative evidence from
elsewhere.

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KEY POINTS p.236 CONT'D

But auditors do not start from a presumption
that managements lack integrity. A major issue
is that business risk may bring the auditor so
close to management that independence may
be threatened.

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KEY POINTS p.240

Professional accountants carry out many kinds of
engagement in relation to financial information.
Many engagements may result in lower levels of
evidence being collected, so that a true and fair
form of opinion cannot be given.
Such audits are likely to be of value to users
nonetheless.

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KEY POINTS p.240 CONT'D

Examples of such engagements are:

compilation engagement;

limited assurance engagement;

agreed-upon procedures engagement.

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KEY POINTS p.240 CONT'D

Compilation engagement is when professional
accountants prepare financial statements using
data and information provided by management
and a compilation report is issued that gives no
assurance as to truth and fairness, nor compliance
with CA 1985 and accounting standards.

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KEY POINTS pp.240241 CONT'D

Limited assurance engagement is not a full audit
but the professional accountant forms an opinion
on the reasonableness of financial statements and
obtains limited assurance that the financial
statements comply with the CA 1985 and
accounting standards. The review report contains
a negative form of opinion.

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KEY POINTS p.241

Agreed upon procedures engagement is similar to
a review except that certain detailed procedures
would be performed, as agreed with management,
requiring the accountant to seek evidence that the
items subject to the agreed procedures have been
stated appropriately.

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ACTIVITY 6.2

Now that we have introduced you to the above

engagements, do you believe that they will be of
value to users?

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CHAPTER SUMMARY
This chapter has attempted to show that:
Evidence is the cornerstone of the whole audit
process and the audit is an evidence-gathering
process;
Evidence is required to give the auditors
assurance that they are forming proper
conclusions;

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CHAPTER SUMMARY CONT'D

Evidence-gathering does not take place in a
vacuum, but in real organizations and with the
participation of real people;
Sufficiency and appropriateness (relevance and
reliability) with regard to audit evidence;
Different factors that might affect reliability;
Consistent audit evidence can affect the
conclusions of the auditor.
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FURTHER READING

The ISAs in the area, ISA 500 Audit evidence,

and ISA 501 Audit evidence additional
considerations for specific items, are essential
reading.

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