Standard On Auditing SA 500 Audit Evidence Summary Notes PDF. In the previous articles, we have given SA 299 Responsibility Of Joint Auditors and SA 300 Planning in an Audit of Financial Statements. Today we are providing the complete details of auditing standard (SA) 500 audit evidence I;e scope, objective, definitions, types of audit evidence, factors from which reliability of audit evidence is increased, what is sufficiency and appropriateness of the audit evidence?. Read below.
SA 500 Audit Evidence
This Standard on Auditing (SA) explains what constitutes audit evidence in an audit of financial statements, and deals with the auditor’s responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.This SA is effective for audits of financial statements for periods beginning on or after April 1, 2009.
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.
Thus, in brief, the evidence can be
- Internal Evidence.
- Internal- External evidence
- External Evidence.
- External-internal evidence.
However, it is important to know that external evidence which is obtained by the third party directly from the third party is a more reliable audit evidence. The simple reason behind this is clients involvement is absent. Hence, chances of manipulation in this type of evidence by the client is not there.
For purposes of the SA s, 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 worksheets 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.
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.
Types of Audit Evidence based on the means of collection:
Inspection is done by the auditor of books of accounts and other relevant records. Inspection can be done internally or externally and types of evidence may be in paper form, electronic form etc. Even auditor may prefer to do a physical examination of an asset for getting conclusive view about the asset appearing on the balance sheet. In this case, it is said to be more reliable audit evidence. Its reliability depends on the nature and source of audit evidence.
The auditor when watches the internal processes being performed within the organization of the client, it is said to be observation. It is the close verification of the processes performed by the client. We can take the example of inventory counting in these case. Auditor observes the inventory counting performed by the client and forms his conclusion about the control activities performed. By observation auditor can know about the internal control in the organization is strong or weak.
3. External confirmation
To check the genuineness of the transactions appearing in the books of accounts, auditor prefers to obtain external confirmation directly from the third party. It is always said that external evidence is more reliable than internal evidence because it is obtained externally without clients involvement and hence more reliable. We can take the instance of balance confirmation in this case, for example, debtors balance confirmation, creditors balance confirmation.
Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically.
Reperformance involves the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control.
6. Analytical Procedures
Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. Analytical procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts.
Inquiry consists of seeking information of knowledgeable persons, both financial and non-financial, within the entity or outside the entity. Inquiry is used extensively throughout the audit in addition to other audit procedures
Factors from which reliability of audit evidence is increased
- Evidence if the source is from outside the entity.
- Internal evidence reliability increases when internal control is effective.
- External evidence is more reliable than internal evidence as of the absence of the involvement of the client.
- Written form evidence is more reliable
- If the audit evidence is obtained from original documents then they are more reliable rather than photocopies of it.
The nature, timing, and extent of audit procedures in relation to the requirement of this SA, may be affected by such matters as:
- The nature and complexity of the matter to which the management’s expert relates.
- The risks of material misstatement in the matter.
- The availability of alternative sources of audit evidence.
- The nature, scope and objectives of the management’s expert’s work
- Whether the management’s expert is employed by the entity, or is a party engaged by it to provide relevant services.
- The extent to which management can exercise control or influence over the work of the management’s expert.
- Whether the management’s expert is subject to technical performance standards or other professional or industry requirements.
- The nature and extent of any control within the entity over the management’s expert’s work.
- The auditor’s knowledge and experience of the management’s expert’s field of expertise.
- The auditor’s previous experience of the work of that expert.
What is sufficiency and appropriateness of the audit evidence?
Sufficient Audit evidence represents quantum of audit evidence obtained by the auditor and its appropriateness tells about its relevance. These two terms are interrelated. Auditor decides to obtain more quantity of audit evidence is when there are chances of the risk of material misstatement as per auditors assessment. Appropriateness refers to the reliability and relevance. Its reliability, in turn, depends upon the source and nature of audit evidence. Also, the quantum of evidence depends upon the quality of evidence, the higher the quality of audit evidence obtained the less it is required. There can be different factors which influence sufficiency and appropriateness of audit evidence, it may be affected by the nature of the evidence, whether the internal control is sufficient or not etc. Also, auditor is required to know about the materiality of the item. Other factors affecting sufficiency and appropriateness are the size of the business, Previous audit experience.
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