Standard of Auditing (SA)- 500: Audit Evidence (Revised)
This article describes the standard of auditing used by the auditor while performing audit.It also explains the methods through which an auditor obtains audit evidence.When Auditor performs audit all things with respects to audit evidence he needs to know is briefly summarized in this article.
Introduction
standard of Auditing 500 was revised in 1.04.2009 by the Institute of Chartered Accountants of India. Auditor needs to form an opinion after checking books of accounts. For the purpose of examining books auditor should obtain audit evidence to form a conclusion and to support his examination. As of the aim of reporting and forming conclusions on the financial statements different audit evidences are obtained by the auditor. Audit evidence helps to draw reasonable audit conclusions. Audit evidence should be obtained for both accounting information contained in the financial statements and also for other information. Auditor may obtain an internal evidence for example when sales are made by the client to the customers, sales invoices are issued to the customer, which forms an internal evidence which are further evidenced by receipt of money from the customers. Other examples of internal evidences are material issued note, goods received note or any other evidence generated internally by the client. There can also be internal external evidences prepared by the clients and later on issued to their customers for further processing and payment. For example any invoice which is prepared internally and issued to the customer for further processing and payment. There can also be other evidences that are not generated by the client and obtained by the auditor directly from third party. For instance, auditor can obtain balance confirmation certificates from the third party , may be debtors balance confirmation , creditors balance confirmation and other such evidence obtained from the third party without dealing with the client. There can also be external internal evidence flowing from outside the clients organization into the clients organization, We can give here example of a purchase invoice.
Thus in brief, the evidence can be
1. Internal Evidence
2. Internal- External evidence
3. External Evidence
4. 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.Types of Audit Evidence based on the means of collection.
1. Inspection
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 physical examination of an asset for getting conclusive view about the asset appearing in the balance sheet. In this case it is said to be more reliable audit evidence. Its reliability depends upon the nature and source of audit evidence. Auditor may inspect the information in the books of accounts and to obtain reasonable reliability of what is appearing in the books of accounts , auditor may cross check with other evidence and for in-depth examination and inspection decide to physical examine the asset.
2.observation
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 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. He can also check by observing authorization procedures whether it is done properly and genuinely or not by the management.
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 obtain externally without clients involvement and hence more reliable. We can take instance of balance confirmation in this case, for example debtors balance confirmation, creditors balance confirmation.
Other audit evidences are recalculation, reperformance, inquiry , Analytical procedures .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 inter related. Auditor decides to obtain more quantity of audit evidence is when there are chances of 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 size of the business, Previous audit experience, Compliance and substantive audit procedures
Compliance procedures are the tests of internal control. This is for the purpose to check whether there is internal control operating within the organization, whether it is operating effectively or not, whether the operation throughout the period was effective or not.
Substantive evidence is about whether the evidence obtained is complete, accurate , valid as to the information produced by the accounting system.Factors from which reliability of audit evidence is increased
1. Evidence if the source is from outside the entity.
2. Internal evidence reliability increases when internal control is effective.
3. External evidence is more reliable than internal evidence as of the absence of the involvement of the client.
4. Written form evidence is more reliable
5. If the audit evidence is obtained from original documents then they are more reliable rather than photocopies of it.While using the work of Management expert, what care needs to be taken by the auditor?
1. Alternative sources of audit evidence available or not is to be checked.
2. The nature, Complexity and risk of material misstatement involved should be kept in mind.
3. the nature , scope and objective of the expert work should be verified.
4. Management expert is from within or outside the organization should be checked because of the chances of biased opinion.
5. Whether the work of the management expert is being influenced by the exercise of control by the management should be verified
6. Whether Management expert follows technical performance standards or other professional and industry requirements should be checked.
7. The nature and extent of control on the Management Experts work should be kept in mind.
8. Previous experience if any with the management expert of the auditor should also be taken into consideration.
9. knowledge and experience of the management expert should also be counted. Conclusion
Auditor for the purpose of performing audit and forming reasonable conclusion on the financial statement obtains audit evidence, which thus supports his conclusive opinion.