KnS School of Business Studies

Audit & Assurance

ISA 500

Expected questions on Audit Evidence – ISA 500

1. Define audit evidence and what are the 02 MAIN types of

audit evidence / methods to obtain audit evidence?

2. Briefly explain the financial statements assertions for

balance sheet, profit & loss and P&D?

3. List and explain the audit procedures to obtain audit

evidence?
4. What procedures / techniques are performed by an
external auditor to obtain Audit evidence?

5. What are the factors that influence the reliability of audit

evidence?

6. What are the factors that influence the auditor’s judgment

concerning the sufficiency of Audit evidence obtained?
7. Explain the term “Sufficient and Appropriate Audit
Evidence”?
8. Explain the terms Relevance and Reliability in the context
of Audit evidence?
9. Explain the course of action by the auditor when the audit
evidence is not sufficient and appropriate?
10. Audit evidence is persuasive rather than conclusive?

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KnS School of Business Studies
Audit & Assurance
ISA 500

Concept of Audit Evidence (ISA 500 )

Definition of Audit Evidence:

Audit evidence is all the information used/gathered by the External auditor in arriving at
the conclusions on which the audit opinion is based, and includes information contained in
the accounting records (G.L,Trial balance and other records) underlying the financial
statements and other information.

Audit evidence, which is cumulative in nature, includes audit evidence obtained from audit
procedures performed during the course of the audit and may include audit evidence
obtained from other sources such as previous years audit working papers of the same client.

Audit evidence in simple words can be defined as any piece of information which assists
the auditor to reach a conclusion on the truth and fairness of the financial statements of the
company.
Audit evidence is obtained from: (might include information other than below mentioned
list)
 Documents / supporting documents such as purchase orders, payment and
receipt vouchers, invoices, receipts, employee time sheets, customer orders,
letters, bank statements, contracts and other legal documents (Memorandum ,
Articles etc )

 Entries in accounting records. ( Journal Entries )

 Entries / postings in Cash Book, Profit and Loss account, Balance Sheet etc.

 Answers/Replies from management to questions raised by the auditor.

 Information or confirmations received from external parties such as debtors,

creditors, banks, legal advisors, tax consultants and other stake holders.

 Computations produced by the client or by the auditor himself, for example

depreciation calculations, reconciliations, computations of accruals and
prepayments etc.

Page 2 of 9 Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies
Audit & Assurance
ISA 500

 Evidence gained from the auditors physical counting of stock at the balance sheet
data ( stock counting of Raw Material / W.I.P / Finished Goods )

Important thing to note:

Audit evidence requires that the auditor obtains Sufficient Appropriate Audit
Evidence to be able to draw reasonable conclusions on which to base the audit opinion.

Sufficient Appropriate Audit Evidence ……… IMP

Sufficiency relates to the QUANTITY of audit evidence and appropriateness relates to the
QUALITY of Audit Evidence which includes BOTH Relevance AND Reliability of evidence.

Appropriateness = Quality

Relevance Reliability

Appropriateness is the measure of quality of audit evidence which has 2 elements:

Relevance and Reliability.

RELEVANCE

(To be discussed Later after substantive procedures)

Factors which influence the sufficiency and appropriateness of audit evidence (both
quantity and quality factors covered)

 The assessment of audit risk involved.( more risk = more evidence required )
 The nature of the accounting and internal control systems.( Weak Controls = More
evidence required )
 The materiality of the item involved.(E.g. Stock ,fixed assets and debtors are
material items in the F/S)
 The auditor’s past and current knowledge and experience of the business.
 The source and reliability of the information available (from 3rd parties or M.I.S of
the company )
 Size of the organization (a small company is less likely to have as tight control as a
large organization) = more evidence

Page 3 of 9 Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

 KnS School of Business Studies
Audit & Assurance
ISA 500

 The sampling method that the auditor will use to obtain the audit evidence because
the chosen method will also affect the size of the audit sample.

Reliability Factors…….. ( IMP )

1. Evidence is more reliable when it is obtained from independent sources

outside the entity.(i.e. 3rd party confirmations )
2. Evidence that is generated internally is more reliable when the related
controls imposed by the entity are effective (e.g. Evidence obtained from
Unilever, Siemens).
3. Written evidence (documented) is more reliable than verbal evidence
4. Evidence obtained directly by E. Auditors is more reliable.
5. Original documents are more reliable than photocopies etc
Quantity of audit evidence is effected by the auditors assessment of risk i.e. The higher the
risk the more the evidence will be gathered, similarly the higher the quality ,the less may be
required ,obtaining more audit evidence ,however may not compensate for its poor quality.
(Professional judgment is exercised by the External Auditor)

There are 02 methods to obtain audit evidence or say that Audit evidence can be gathered
by the following two methods:

 Test of control (T.O.C):

Tests performed to obtain evidence about the operating effectiveness of controls in
preventing, detecting and correcting material misstatements.TOC should be designed to
check that the control procedures/ S.O.P are being applied and that the objectives are being
achieved. Test of control includes two things:

 Design: Design test means to ensure that the system is properly designed i.e. proper
accounting system is designed or in place or that proper internal controls
are designed to ensure that material misstatements will be detected.

 Operation: This test means to check that whether the controls were operating
effectively throughout the period or not

Page 4 of 9 Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies
Audit & Assurance
ISA 500

 Substantive Procedures S.P( also called Detailed Testing / Verification of F/S)

These tests are to obtain audit evidence to detect material misstatements in the financial
statements.

Definition of S.P:

Substantive procedures (or substantive tests) are procedures performed by the auditor to
detect material misstatement (either via fraud or error) at the assertion level.

Assertion Level
P&L , B/S and P&D items.

They are generally of two types:

 Substantive Analytical procedures ( ratio analysis and comparison analysis from last
year to the current year ) to be discussed in detail in ISA 520

 Other substantive procedures (Tests of Details) such as tests of detail of transactions

and balances e.g.
(Verification of documents such as purchase orders, invoices, receipts, employee time
sheets, customer orders, letters, bank statements, contracts and other legal documents,
review of minutes of director meetings and other committees)

Audit Procedures
1. Inspection of Assets:
By inspection of assets we mean that External Auditor verifies/ inspects the Inventory
(Raw Material / W.I.P / Finished Goods) and tangible assets of the Company.
External Auditor also verifies / counts cash in hand at the Balance Sheet date.

Normally External Auditor physically counts the inventory / Fixed Assets and cash in
hand at the end of Financial Year (Balance Sheet Date)

2. Inspection of Records:
By inspection of records we mean verifying or inspecting the following documents of
the Audit client.
Page 5 of 9 Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)
KnS School of Business Studies
Audit & Assurance
ISA 500

 Invoices
 Purchase Orders
 Bank Reconciliations
 General Ledger
 Good Receive Note (GRN)
 Bank Statements
 Cash book
 Supplier statements
 Delivery Challan etc.

3. Inquiry:
By inquiry we mean verifying / obtaining information from client personally e.g.
obtaining information from senior Management (e.g. GM finance, Internal Auditor,
CEO, CFO & other relevant personnel), as the External Auditor thinks appropriate.
This inquiry can be done from people outside the organization e.g. external lawyer /
consultants & other experts.

4. Re-performance:
By re-performance we mean performing the procedures / calculation by External
Auditor’s own methodologies (E.g. re-performing the calculation of depreciation &
amortization & re-performing the Provision for doubtful debt for the year).

5. Re-calculation:
By re-calculation we mean simply re-calculation / rechecking the calculations done by
the client e.g. re-checking the totaling of depreciation & amortization and re-calculating
the total of bank reconciliation.

6. Observation:
In this procedure, External Auditor simply observes a process being performed by
others (E.g. Observing the inventory counting process and cash counting process and
observing the process of inspection of inventory on arrival in the factory.

7. External Confirmation: (To be discussed in detail in ISA 505)

External confirmation is a process by which an auditor verifies a balance directly from a

3RDparty e.g. Verification of debtor and creditor balance of Audit Client directly from a
3rd party.
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KnS School of Business Studies
Audit & Assurance
ISA 500

There are various types of 3rd party confirmations and commonly 2 methods of external
confirmation. (Positive and Negative method)

Examples of third party confirmations Please

Learn…!
 Debtor confirmation
 Creditor confirmation
 Tax confirmation
 Lawyer confirmation
 Loan confirmation
 Third party stock confirmation
 Bank confirmation
 Any other third-party confirmation to verify the terms & conditions of an agreement
/ contract.

8. Analytical Procedures:

Definition and explanation will be covered when covering ISA 520 separately

Examples of Analytical Procedures:

1. Comparison from last year’s numbers

2. All kinds of ratio analysis
3. Comparison of actual numbers with budgets/Forecasts.
4. Comparison of actual numbers with predicted / expected amounts (this is
called predictive test)
5. Comparison of Financial information with Financial information
6. Comparison of Non-Financial with Financial information.
7. Comparison with industry norms (similar industry).
8. Comparison with overall economic growth of the country. ( for that
particular sector or industry )

Page 7 of 9 Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies
Audit & Assurance
ISA 500

FINANCIAL STATEMENT ASSERTIONS

Assertions used by the auditor fall into the following categories:

 Assertions about classes of transactions and events for the period under
audit ( P&L Assertions)

1. Occurrence: transactions and events that have been recorded have occurred
and pertain to the entity.( Sales and Purchases occurred during the year)

2. Completeness: all transactions and events that should have been recorded
have been recorded. ( 1000 Transactions in a year-----all should be recorded
in the F/S)

3. Accuracy: amounts relating to recorded transactions and events have been

recorded appropriately. ( Amounts are recorded with correct amounts )

4. Cutoff: transactions and events have been recorded in the correct accounting
period. ( 20016 Sales are recorded in 2016 and not 2017)

5. Classification: transactions and events have been recorded in the proper

accounts i.e. Correct General ledger ( Classification of sales btw various
products )

 Assertions about account balances at the period end ( B/S Assertions)

1. Existence: Assets, liabilities and equity interests exist at the B/S date.

2. Rights and obligations: the entity holds or controls the right to asset, and
liabilities are the obligations of the entity. (Cash exists and Debtors are
genuine and company has the right to receive these ...)

Page 8 of 9 Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies
Audit & Assurance
ISA 500

3. Completeness: all assets, liabilities and equity interests that should have
been recorded have been completely recorded.

4. Valuation and Allocation: Assets, liabilities and equity interests are

included in the financial statements at appropriate carrying amounts.i.e Are
correctly valued.

 Assertions about Presentation and Disclosure :

1. Occurrence and Rights & Obligations: disclosed events, transactions and

other matters have occurred and pertain to the entity.

2. Completeness: all disclosures that should have been included in the financial
statements have been included.

3. Classification and Understandability: financial information is appropriately

presented and described and disclosures are clearly expressed.

4. Accuracy and Valuation: Financial and other information are disclosed

fairly and at appropriate amounts.

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