CA > Inter > Paper 5 – Skim Notes

Chapter : 4 Audit Evidence

Overview

  • The chapter focuses on the critical understanding of audit evidence, encompassing its types, relevance, reliability, and the related auditing standards (SA) that govern them.
  • Different types of audit evidence are explored, including internal and external evidence, as well as how they validate the auditor’s opinion on financial statements.
  • The chapter also examines the auditor’s reliance on internal auditors, audit sampling techniques, and specific considerations related to audit evidence for selected items.

Key Topics

Audit Evidence (SA 500)

  • Defined as information used by the auditor to form opinions regarding financial statements.
  • Includes both accounting records and corroborative evidence from external sources.
  • Quality of audit evidence is governed by relevance and reliability.
  • Sufficiency considers the quantity of evidence needed; appropriateness considers quality.

Deep Dive

  • The auditor must balance the quantity with the quality of evidence based on assessed risks.
  • External confirmations provide high reliability due to their independent nature.
  • Internal document sources may be less reliable due to manipulation risks.

Using the Work of Internal Auditors (SA 610)

  • Defines the scope and objectives for external auditors when utilizing internal audit work.
  • Highlights that the external auditor maintains sole responsibility over the audit opinion.
  • Evaluate the internal audit’s objectivity and competence.

Deep Dive

  • Internal auditors can enhance the audit process but their work must be carefully reviewed and cannot fully replace external audit efforts.
  • The external auditor must communicate effectively with internal auditors to streamline efforts.

Audit Sampling (SA 530)

  • Introduces audit sampling as applying procedures to a subset of items for efficiency.
  • Distinguishes between statistical and non-statistical sampling methods.
  • Discusses how sample size influences the reliability of findings.

Deep Dive

  • Statistical sampling methods reduce bias and allow for projecting results back to the population.
  • Understanding the population’s characteristics is vital for effective sample design.

Specific Considerations for Selected Items (SA 501)

  • Focuses on obtaining evidence regarding specific items like inventory and litigation.
  • Requires attendance at physical inventory counts and evaluation of management’s procedures.
  • Addresses how to handle situations involving third-party inventory.

Deep Dive

  • The presence of third-party inventory raises unique challenges for verifying existence and condition.
  • Procedures must adapt based on when physical inventory checks occurred relative to the reporting period.

External Confirmations (SA 505)

  • Defines the purpose of external confirmations in verifying balances and conditions.
  • Positive and negative confirmations are distinguished, with guidelines on their reliability.
  • Outlines the auditor’s responsibilities in managing confirmation requests.

Deep Dive

  • External confirmations often yield more reliable evidence due to third-party independence.
  • The design of the request can impact response rate and reliability significantly.

Initial Audit Engagements – Opening Balances (SA 510)

  • Explains the auditors’ responsibilities concerning prior year opening balances.
  • Focuses on ensuring previous balances are accurate and reflect appropriate accounting policies.

Deep Dive

  • Misstatements in opening balances must be addressed if they impact the current financial statements.
  • Auditors may use evidence from the prior year’s audit to substantiate opening balances.

Related Parties (SA 550)

  • Discusses implications of related party transactions for audit risks and material misstatement.
  • Necessary for auditors to understand the relationships and nature of transactions to assess risks.

Deep Dive

  • Related party transactions might complicate the detection of fraud or misstatements due to potential bias.
  • The complexity and volume of related transactions necessitate a thorough audit approach.

Analytical Procedures (SA 520)

  • Defines analytical procedures as evaluations of financial data relationships to detect anomalies.
  • Cites importance in all phases of an audit from planning to conclusion.

Deep Dive

  • Analytical procedures can identify trends that prompt deeper investigation into financial discrepancies.
  • Reliability is enhanced if data used is consistent and relevant.

Summary

The chapter comprehensively covers various aspects of audit evidence and associated auditing standards. It begins with a deep dive into the definition, types, and quality of audit evidence, highlighting the importance of both sufficiency and appropriateness. It discusses the role of internal auditors and the methodology of audit sampling, emphasizing the necessity of reliable sampling methods. Thereafter, specific considerations are provided for disputed and unique items such as inventories and related party transactions. The concept of analytical procedures is underscored for their relevance across all phases of the audit. Overall, this chapter equips auditors with essential skills and knowledge to effectively evaluate evidence, enhance audit quality, and ensure compliance with relevant auditing standards.