Audit evidence (ISA 500) AUDIT EVIDENCE – SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS (ISA 501) Khawar Shahzad Jaffar ACCA, CPA
ISA 500 – Objective 4. The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.
ISA 500 – Definitions 5. For purposes of the ISAs, the following terms have the meanings attributed below: a.
Accounting records – The records of initial accounting entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations and disclosures.
b.
Appropriateness (of audit evidence) – The measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based.
ISA 500 – Definitions c.
Audit evidence – Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information.
d.
Management’s expert – An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements.
e.
Sufficiency (of audit evidence) – The measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence.
ISA 500 – Requirements Sufficient Appropriate Audit Evidence 6. The auditor shall design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence. Information to Be Used as Audit Evidence 8. When designing and performing audit procedures, the auditor shall consider the relevance and reliability of the information to be used as audit evidence. 9. If information to be used as audit evidence has been prepared using the work of a management’s expert, the auditor shall, to the extent necessary, having regard to the significance of that expert’s work for the auditor’s purposes:
ISA 500 – Requirements a.
Evaluate the competence, capabilities and objectivity of that expert;
b.
Obtain an understanding of the work of that expert; and
c.
Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.
9. When using information produced by the entity, the auditor shall evaluate whether the information is sufficiently reliable for the auditor’s purposes, including, as necessary in the circumstances: a.
Obtaining audit evidence about the accuracy and completeness of the information; and
b.
Evaluating whether the information is sufficiently precise and detailed for the auditor’s purposes.
ISA 500 – Requirements Selecting Items for Testing to Obtain Audit Evidence 10.When designing tests of controls and tests of details, the auditor shall determine means of selecting items for testing that are effective in meeting the purpose of the audit procedure. Inconsistency in, or Doubts over Reliability of, Audit Evidence 12.If: a.
audit evidence obtained from one source is inconsistent with that obtained from another; or
b.
the auditor has doubts over the reliability of information to be used as audit evidence,
the auditor shall determine what modifications or additions to audit procedures are necessary to resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the audit.
How to obtain Audit Evidence? 
Audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is obtained by performing: a.
Risk assessment procedures; and
b.
Further audit procedures, which comprise:
c.
Tests of controls, when required by the ISAs or when the auditor has chosen to do so; and
d.
Substantive procedures, including tests of details and substantive analytical procedures.
How to obtain Audit Evidence?
Inspection
Observation
External Confirmation
Re-calculation
Re-performance
Analytical Procedures
Inquiry
Relevance and Reliability of Evidence 
The quality of all audit evidence is affected by the relevance and reliability of the information upon which it is based.
Relevance and Reliability of Evidence 
Relevance deals with the logical connection with, or bearing upon, the purpose of the audit procedure and, where appropriate, the assertion under consideration. The relevance of information to be used as audit evidence may be affected by the direction of testing.
Relevance and Reliability of Evidence 
The reliability of information to be used as audit evidence, and therefore of the audit evidence itself, is influenced by its source and its nature, and the circumstances under which it is obtained, including the controls over its preparation and maintenance where relevant.
ISA 501 – Objective 3. The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the: a. Existence and condition of inventory; b. Completeness of litigation and claims involving the entity; and c. Presentation and disclosure of segment information in accordance with the applicable financial reporting framework.
ISA 501 – Requirements Inventory 4. If inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by: a.
Attendance at physical inventory counting, unless impracticable, to:
b.
Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting;
c.
Observe the performance of management’s count procedures;
d. Inspect the inventory; and e.
f.
Perform test counts; and
Performing audit procedures over the entity’s final inventory records to determine whether they accurately reflect actual inventory count results.
ISA 501 – Requirements 5. If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor shall, in addition to the procedures required by paragraph 4, perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded. 6. If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall make or observe some physical counts on an alternative date, and perform audit procedures on intervening transactions.
ISA 501 – Requirements 7. If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory. If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report in accordance with ISA 705. 8. If inventory under the custody and control of a third party is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of that inventory by performing one or both of the following: a.
Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity.
b.
Perform inspection or other audit procedures appropriate in the circumstances.
ISA 501 – Requirements Litigation and Claims 9. The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including: a.
Inquiry of management and, where applicable, others within the entity, including in-house legal counsel;
b.
Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; and
c.
Reviewing legal expense accounts.
ISA 501 – Requirements 10.If the auditor assesses a risk of material misstatement regarding litigation or claims that have been identified, or when audit procedures performed indicate that other material litigation or claims may exist, the auditor shall, in addition to the procedures required by other ISAs, seek direct communication with the entity’s external legal counsel. The auditor shall do so through a letter of inquiry, prepared by management and sent by the auditor, requesting the entity’s external legal counsel to communicate directly with the auditor. If law, regulation or the respective legal professional body prohibits the entity’s external legal counsel from communicating directly with the auditor, the auditor shall perform alternative audit procedures.
ISA 501 – Requirements 11. If: a. management refuses to give the auditor permission to communicate or meet with the entity’s external legal counsel, or the entity’s external legal counsel refuses to respond appropriately to the letter of inquiry, or is prohibited from responding; and b. the auditor is unable to obtain sufficient appropriate audit evidence by performing alternative audit procedures, the auditor shall modify the opinion in the auditor’s report in accordance with ISA 705.
ISA 501 – Requirements Written Representations 12. The auditor shall request management and, where appropriate, those charged with governance to provide written representations that all known actual or possible litigation and claims whose effects should be considered when preparing the financial statements have been disclosed to the auditor and accounted for and disclosed in accordance with the applicable financial reporting framework.
ISA 501 – Requirements Segment Information 13.The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment information in accordance with the applicable financial reporting framework by: a.
Obtaining an understanding of the methods used by management in determining segment information, and:
b.
Evaluating whether such methods are likely to result in disclosure in accordance with the applicable financial reporting framework; and
c.
Where appropriate, testing the application of such methods; and
d.
Performing analytical procedures or other audit procedures appropriate in the circumstances.