ICAI Notes: Audit Evidence | Auditing and Ethics for CA Intermediate PDF Download

 Page 1


a   
 
CHAPTER 
4 
 
LEARNING OUTCOMES 
 
  
AUDIT EVIDENCE 
 
 
 
After studying this chapter, you would be able to understand- 
? Audit Evidence (SA 500)- Meaning, types, relevance and reliability, sufficiency 
and appropriateness and sources of audit evidence, audit procedures, nature 
and timing of audit procedures, Assertions, selecting items for testing, relying 
on the work of management expert and evaluation of audit evidence. 
? Using the work of internal Auditors (SA 610)- Meaning, scope and objective, 
nature and extent of work of internal audit function, their activities, external 
auditor’s responsibility for audit and objective having internal audit function, 
coordination between external auditor and internal auditor.  
? Audit Sampling (SA 530)- Meaning of Sample, sampling unit, sampling 
process, approaches and methods of sampling.   
? Audit Evidence- Specific Considerations for Selected Items (SA 501)- 
inventory, litigation and claims involving the entity, and segment information. 
? External Con?rmations (SA 505)- meaning, definition of external, positive and 
negative confirmations. 
? Initial Audit Engagements-Opening Balances (SA 510) - meaning and 
objective, sufficient appropriate audit evidence, audit procedures, and 
reporting regarding opening balances. 
? Related Parties (SA 550)- Definition, meaning and nature of related parties 
relationship and transactions. 
? Analytical Procedures SA (520)- meaning, scope, nature, timing, purpose, 
objective and forming overall conclusion based on analytical procedures. 
? Practicality of above concepts by studying through examples and case studies  
© The Institute of Chartered Accountants of India
Page 2


a   
 
CHAPTER 
4 
 
LEARNING OUTCOMES 
 
  
AUDIT EVIDENCE 
 
 
 
After studying this chapter, you would be able to understand- 
? Audit Evidence (SA 500)- Meaning, types, relevance and reliability, sufficiency 
and appropriateness and sources of audit evidence, audit procedures, nature 
and timing of audit procedures, Assertions, selecting items for testing, relying 
on the work of management expert and evaluation of audit evidence. 
? Using the work of internal Auditors (SA 610)- Meaning, scope and objective, 
nature and extent of work of internal audit function, their activities, external 
auditor’s responsibility for audit and objective having internal audit function, 
coordination between external auditor and internal auditor.  
? Audit Sampling (SA 530)- Meaning of Sample, sampling unit, sampling 
process, approaches and methods of sampling.   
? Audit Evidence- Specific Considerations for Selected Items (SA 501)- 
inventory, litigation and claims involving the entity, and segment information. 
? External Con?rmations (SA 505)- meaning, definition of external, positive and 
negative confirmations. 
? Initial Audit Engagements-Opening Balances (SA 510) - meaning and 
objective, sufficient appropriate audit evidence, audit procedures, and 
reporting regarding opening balances. 
? Related Parties (SA 550)- Definition, meaning and nature of related parties 
relationship and transactions. 
? Analytical Procedures SA (520)- meaning, scope, nature, timing, purpose, 
objective and forming overall conclusion based on analytical procedures. 
? Practicality of above concepts by studying through examples and case studies  
© The Institute of Chartered Accountants of India
a
 
 
AUDITING AND ETHICS  
 
4.2 
 
 
  
CHAPTER OVERVIEW W
© The Institute of Chartered Accountants of India
Page 3


a   
 
CHAPTER 
4 
 
LEARNING OUTCOMES 
 
  
AUDIT EVIDENCE 
 
 
 
After studying this chapter, you would be able to understand- 
? Audit Evidence (SA 500)- Meaning, types, relevance and reliability, sufficiency 
and appropriateness and sources of audit evidence, audit procedures, nature 
and timing of audit procedures, Assertions, selecting items for testing, relying 
on the work of management expert and evaluation of audit evidence. 
? Using the work of internal Auditors (SA 610)- Meaning, scope and objective, 
nature and extent of work of internal audit function, their activities, external 
auditor’s responsibility for audit and objective having internal audit function, 
coordination between external auditor and internal auditor.  
? Audit Sampling (SA 530)- Meaning of Sample, sampling unit, sampling 
process, approaches and methods of sampling.   
? Audit Evidence- Specific Considerations for Selected Items (SA 501)- 
inventory, litigation and claims involving the entity, and segment information. 
? External Con?rmations (SA 505)- meaning, definition of external, positive and 
negative confirmations. 
? Initial Audit Engagements-Opening Balances (SA 510) - meaning and 
objective, sufficient appropriate audit evidence, audit procedures, and 
reporting regarding opening balances. 
? Related Parties (SA 550)- Definition, meaning and nature of related parties 
relationship and transactions. 
? Analytical Procedures SA (520)- meaning, scope, nature, timing, purpose, 
objective and forming overall conclusion based on analytical procedures. 
? Practicality of above concepts by studying through examples and case studies  
© The Institute of Chartered Accountants of India
a
 
 
AUDITING AND ETHICS  
 
4.2 
 
 
  
CHAPTER OVERVIEW W
© The Institute of Chartered Accountants of India
 
AUDIT EVIDENCE 
a
 
 
4.3 
“Audit evidence” is the very core on the basis of which conclusions are drawn and 
opinion is formed by an auditor. In fact, it is the foundation upon which edifice of 
auditing is built. On a Sunday evening, Sameer was interacting with one of his 
friends, Shekhar, who had joined articleship and was part of an engagement team 
conducting audit of a company engaged in manufacturing activities. He got to 
know that Shekhar was part of team attending physical count process of inventories 
of the company as at year end. Besides, he was also responsible for going through 
sales of the company, checking few sales invoices and tracing those entries in 
books. 
After some days, both of them had a chance to meet again.  Informal conversations 
between them drifted towards audit of that company. Sameer was visibly excited 
to know that his friend was helping seniors in designing and sending confirmation 
requests to the entities to whom this company had sold goods.  “Such a process 
must be providing sufficient appropriate evidence for the purpose of audit”- He 
murmured in between. 
He had an inkling that evidence should provide satisfaction to the auditor. What 
are the contours of it?  Whether a piece of evidence coming from outside the 
company can only provide comfort to the auditor? What about company’s internal 
documents and records? Aren’t these also pieces of information which form part of 
audit evidence? His inquisitiveness was prompting him to know whether audit 
evidence has only to be in writing. Or can it take some other forms? Whether 
evidence in other forms can suffice for purpose of audit? 
Besides, he was also trying to understand about nuances of inventory counting 
process which had cropped up in their previous discussion. Such procedures help 
auditor to obtain audit evidence. He precisely wanted to understand what such 
procedures are called as. Are there other procedures also? 
He also recalled his earlier discussion where Shekhar had told him regarding his 
responsibility of checking “few sales invoices”. How the team wou ld have arrived at 
the decision to check those sample invoices? Are some methods or techniques 
involved in it? How does team ensure that items being selected for checking are 
truly representative? Recapitulating that choosing of inappropriate sampling 
methods can lead to increase in detection risk and consequent rise in audit risk, 
significance of selecting appropriate samples was not lost on him. 
  
© The Institute of Chartered Accountants of India
Page 4


a   
 
CHAPTER 
4 
 
LEARNING OUTCOMES 
 
  
AUDIT EVIDENCE 
 
 
 
After studying this chapter, you would be able to understand- 
? Audit Evidence (SA 500)- Meaning, types, relevance and reliability, sufficiency 
and appropriateness and sources of audit evidence, audit procedures, nature 
and timing of audit procedures, Assertions, selecting items for testing, relying 
on the work of management expert and evaluation of audit evidence. 
? Using the work of internal Auditors (SA 610)- Meaning, scope and objective, 
nature and extent of work of internal audit function, their activities, external 
auditor’s responsibility for audit and objective having internal audit function, 
coordination between external auditor and internal auditor.  
? Audit Sampling (SA 530)- Meaning of Sample, sampling unit, sampling 
process, approaches and methods of sampling.   
? Audit Evidence- Specific Considerations for Selected Items (SA 501)- 
inventory, litigation and claims involving the entity, and segment information. 
? External Con?rmations (SA 505)- meaning, definition of external, positive and 
negative confirmations. 
? Initial Audit Engagements-Opening Balances (SA 510) - meaning and 
objective, sufficient appropriate audit evidence, audit procedures, and 
reporting regarding opening balances. 
? Related Parties (SA 550)- Definition, meaning and nature of related parties 
relationship and transactions. 
? Analytical Procedures SA (520)- meaning, scope, nature, timing, purpose, 
objective and forming overall conclusion based on analytical procedures. 
? Practicality of above concepts by studying through examples and case studies  
© The Institute of Chartered Accountants of India
a
 
 
AUDITING AND ETHICS  
 
4.2 
 
 
  
CHAPTER OVERVIEW W
© The Institute of Chartered Accountants of India
 
AUDIT EVIDENCE 
a
 
 
4.3 
“Audit evidence” is the very core on the basis of which conclusions are drawn and 
opinion is formed by an auditor. In fact, it is the foundation upon which edifice of 
auditing is built. On a Sunday evening, Sameer was interacting with one of his 
friends, Shekhar, who had joined articleship and was part of an engagement team 
conducting audit of a company engaged in manufacturing activities. He got to 
know that Shekhar was part of team attending physical count process of inventories 
of the company as at year end. Besides, he was also responsible for going through 
sales of the company, checking few sales invoices and tracing those entries in 
books. 
After some days, both of them had a chance to meet again.  Informal conversations 
between them drifted towards audit of that company. Sameer was visibly excited 
to know that his friend was helping seniors in designing and sending confirmation 
requests to the entities to whom this company had sold goods.  “Such a process 
must be providing sufficient appropriate evidence for the purpose of audit”- He 
murmured in between. 
He had an inkling that evidence should provide satisfaction to the auditor. What 
are the contours of it?  Whether a piece of evidence coming from outside the 
company can only provide comfort to the auditor? What about company’s internal 
documents and records? Aren’t these also pieces of information which form part of 
audit evidence? His inquisitiveness was prompting him to know whether audit 
evidence has only to be in writing. Or can it take some other forms? Whether 
evidence in other forms can suffice for purpose of audit? 
Besides, he was also trying to understand about nuances of inventory counting 
process which had cropped up in their previous discussion. Such procedures help 
auditor to obtain audit evidence. He precisely wanted to understand what such 
procedures are called as. Are there other procedures also? 
He also recalled his earlier discussion where Shekhar had told him regarding his 
responsibility of checking “few sales invoices”. How the team wou ld have arrived at 
the decision to check those sample invoices? Are some methods or techniques 
involved in it? How does team ensure that items being selected for checking are 
truly representative? Recapitulating that choosing of inappropriate sampling 
methods can lead to increase in detection risk and consequent rise in audit risk, 
significance of selecting appropriate samples was not lost on him. 
  
© The Institute of Chartered Accountants of India
a
 
 
AUDITING AND ETHICS  
 
4.4 
 
 1. AUDIT EVIDENCE 
1.1  Introduction 
Auditing is a logical process. An auditor is called upon to assess the actualities of 
the situation, review the statements of account and give an expert opinion about 
the truth and fairness of such accounts. This he cannot do unless he has examined 
the ?nancial statements objectively. 
Objective examination connotes critical examination and scrutiny of the accounting 
statements of the undertaking with a view to assessing how far the statements 
present the actual state of a?airs in the correct context and whether they give a 
true and fair view about the ?nancial results and state of a?airs. An opinion founded 
on a rather reckless and negligent examination and evaluation may expose the 
auditor to legal action with consequential loss of professional standing and 
prestige. 
He needs evidence to obtain information for arriving at his judgement. 
In accordance with SA 500, the objective of the auditor is to design and perform 
audit procedures in such a way as to enable the auditor to obtain sufficient 
Audit 
evidence
meaning
relevance 
and 
reliability
sufficiency and 
appropriateness
sources
Audit 
procedures
evaluation
© The Institute of Chartered Accountants of India
Page 5


a   
 
CHAPTER 
4 
 
LEARNING OUTCOMES 
 
  
AUDIT EVIDENCE 
 
 
 
After studying this chapter, you would be able to understand- 
? Audit Evidence (SA 500)- Meaning, types, relevance and reliability, sufficiency 
and appropriateness and sources of audit evidence, audit procedures, nature 
and timing of audit procedures, Assertions, selecting items for testing, relying 
on the work of management expert and evaluation of audit evidence. 
? Using the work of internal Auditors (SA 610)- Meaning, scope and objective, 
nature and extent of work of internal audit function, their activities, external 
auditor’s responsibility for audit and objective having internal audit function, 
coordination between external auditor and internal auditor.  
? Audit Sampling (SA 530)- Meaning of Sample, sampling unit, sampling 
process, approaches and methods of sampling.   
? Audit Evidence- Specific Considerations for Selected Items (SA 501)- 
inventory, litigation and claims involving the entity, and segment information. 
? External Con?rmations (SA 505)- meaning, definition of external, positive and 
negative confirmations. 
? Initial Audit Engagements-Opening Balances (SA 510) - meaning and 
objective, sufficient appropriate audit evidence, audit procedures, and 
reporting regarding opening balances. 
? Related Parties (SA 550)- Definition, meaning and nature of related parties 
relationship and transactions. 
? Analytical Procedures SA (520)- meaning, scope, nature, timing, purpose, 
objective and forming overall conclusion based on analytical procedures. 
? Practicality of above concepts by studying through examples and case studies  
© The Institute of Chartered Accountants of India
a
 
 
AUDITING AND ETHICS  
 
4.2 
 
 
  
CHAPTER OVERVIEW W
© The Institute of Chartered Accountants of India
 
AUDIT EVIDENCE 
a
 
 
4.3 
“Audit evidence” is the very core on the basis of which conclusions are drawn and 
opinion is formed by an auditor. In fact, it is the foundation upon which edifice of 
auditing is built. On a Sunday evening, Sameer was interacting with one of his 
friends, Shekhar, who had joined articleship and was part of an engagement team 
conducting audit of a company engaged in manufacturing activities. He got to 
know that Shekhar was part of team attending physical count process of inventories 
of the company as at year end. Besides, he was also responsible for going through 
sales of the company, checking few sales invoices and tracing those entries in 
books. 
After some days, both of them had a chance to meet again.  Informal conversations 
between them drifted towards audit of that company. Sameer was visibly excited 
to know that his friend was helping seniors in designing and sending confirmation 
requests to the entities to whom this company had sold goods.  “Such a process 
must be providing sufficient appropriate evidence for the purpose of audit”- He 
murmured in between. 
He had an inkling that evidence should provide satisfaction to the auditor. What 
are the contours of it?  Whether a piece of evidence coming from outside the 
company can only provide comfort to the auditor? What about company’s internal 
documents and records? Aren’t these also pieces of information which form part of 
audit evidence? His inquisitiveness was prompting him to know whether audit 
evidence has only to be in writing. Or can it take some other forms? Whether 
evidence in other forms can suffice for purpose of audit? 
Besides, he was also trying to understand about nuances of inventory counting 
process which had cropped up in their previous discussion. Such procedures help 
auditor to obtain audit evidence. He precisely wanted to understand what such 
procedures are called as. Are there other procedures also? 
He also recalled his earlier discussion where Shekhar had told him regarding his 
responsibility of checking “few sales invoices”. How the team wou ld have arrived at 
the decision to check those sample invoices? Are some methods or techniques 
involved in it? How does team ensure that items being selected for checking are 
truly representative? Recapitulating that choosing of inappropriate sampling 
methods can lead to increase in detection risk and consequent rise in audit risk, 
significance of selecting appropriate samples was not lost on him. 
  
© The Institute of Chartered Accountants of India
a
 
 
AUDITING AND ETHICS  
 
4.4 
 
 1. AUDIT EVIDENCE 
1.1  Introduction 
Auditing is a logical process. An auditor is called upon to assess the actualities of 
the situation, review the statements of account and give an expert opinion about 
the truth and fairness of such accounts. This he cannot do unless he has examined 
the ?nancial statements objectively. 
Objective examination connotes critical examination and scrutiny of the accounting 
statements of the undertaking with a view to assessing how far the statements 
present the actual state of a?airs in the correct context and whether they give a 
true and fair view about the ?nancial results and state of a?airs. An opinion founded 
on a rather reckless and negligent examination and evaluation may expose the 
auditor to legal action with consequential loss of professional standing and 
prestige. 
He needs evidence to obtain information for arriving at his judgement. 
In accordance with SA 500, the objective of the auditor is to design and perform 
audit procedures in such a way as to enable the auditor to obtain sufficient 
Audit 
evidence
meaning
relevance 
and 
reliability
sufficiency and 
appropriateness
sources
Audit 
procedures
evaluation
© The Institute of Chartered Accountants of India
 
AUDIT EVIDENCE 
a
 
 
4.5 
appropriate audit evidence to draw reasonable conclusions on which to base the 
auditor’s opinion. 
1.2 Meaning of Audit Evidence as per SA 500 
Audit evidence may be de?ned as the 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 ?nancial 
statements and other information. 
 
ILLUSTRATION 1 
The auditor of JPJ Limited explained to the audit team members about the 
relationship between Audit Evidence and Opinion of Auditor. Explain what 
relationship exists between Audit Evidence and Opinion of Auditor. 
SOLUTION 
There exists a very important relationship between Audit Evidence and opinion of 
the Auditor. While conducting an audit of a company, the auditor obtains audit 
evidence and with the help of that audit evidence obtained, the auditor forms an 
audit opinion on the financial statements of that company. 
Explaining this further, audit evidence includes:- 
(1) Information contained in the accounting records 
 Accounting records include  
• the records of initial accounting entries and supporting records, such 
as cheques and records of electronic fund transfers;  
• invoices;  
• contracts;  
Audit evidence is Information used by the auditor
in arriving at the conclusions on which the
auditor's opinion is based
It includes both information contained in the
accounting records underlying the financial
statements and other information
© The Institute of Chartered Accountants of India