Audit Evidence and Procedures
Fieldwork
Audit Evidence and Procedures
Syllabus tag: KASNEB CPA | Intermediate Level | CA24 Auditing and Assurance | Topic 6 Audit Evidence and Procedures
Lesson objectives
By the end of this topic, you will be able to:
- Explain what makes evidence sufficient and appropriate
- Rank sources of evidence by reliability
- Name and apply the financial statement assertions
- Select procedures suited to a given assertion
- Explain the limits of written representations
Why this matters
An audit opinion is a conclusion drawn from evidence. Everything in the file exists to support an assertion, and a candidate who cannot link a procedure to the assertion it tests will lose marks even where the procedure is sensible.
Sufficient and appropriate
Sufficiency is about quantity. How much evidence is needed depends on the assessed risk and on how good the evidence is — higher risk needs more, better evidence needs less.
Appropriateness is about quality, and has two dimensions:
- Relevance — does it address the assertion being tested?
- Reliability — can it be trusted?
Quantity cannot compensate for quality. A hundred weak items do not add up to one reliable one, and an examiner will penalise a candidate who proposes a larger sample as the answer to unreliable evidence.
Reliability, from strongest to weakest
- Auditor-generated — the auditor's own recalculation, physical inspection or observation
- External, received directly by the auditor — a bank confirmation, a receivable circularisation
- External, held by the client — a supplier invoice on the client's file
- Internal, where controls are effective
- Internal, where controls are weak
- Oral — weakest of all
Two principles run through the list. Independent sources beat the client, and written beats oral. Note that an external document held by the client ranks below one received directly, because the client had the opportunity to alter or select it.
The assertions
These are the claims management makes by presenting the financial statements. Every procedure tests one of them.
For transactions during the period:
- Occurrence — it happened, and relates to the entity
- Completeness — everything that should be recorded is recorded
- Accuracy — amounts recorded correctly
- Cut-off — recorded in the right period
- Classification — recorded in the right accounts
For balances at the period end:
- Existence — the asset or liability exists
- Rights and obligations — the entity owns the asset or owes the liability
- Completeness — nothing omitted
- Valuation and allocation — carried at the appropriate amount
Existence and completeness point in opposite directions, and this is where candidates go wrong. To test existence, start from the recorded figure and trace to the asset. To test completeness, start from the source and trace into the records. A procedure that begins with the ledger can never test completeness, because anything omitted is not in the ledger to start with.
:::checkpoint An auditor selects fifty invoices from the sales ledger and traces each to a despatch note. State which assertion this tests, and describe the procedure that would test the opposite assertion. :::
Types of procedure
A memory aid covering all of them: AEIOU.
| Procedure | What it involves | Best for |
|---|---|---|
| Analytical | Comparing relationships and investigating variances | Overall reasonableness |
| Enquiry | Asking management or staff | Background, direction; weak alone |
| Inspection | Examining records or physical assets | Existence, valuation |
| Observation | Watching a process being performed | Whether a control operates |
| U — recalculation and reperformance | Checking arithmetic; redoing a control | Accuracy |
Add external confirmation — the strongest routine evidence available, because it is written, independent and received directly.
Enquiry alone is never sufficient. It must be corroborated. An examiner awards no marks for "ask management" as a standalone procedure.
Observation has a limitation worth stating: it tells you the control operated while you were watching. It says nothing about the rest of the year.
Matching procedure to assertion
| Assertion | Suitable procedure |
|---|---|
| Existence of inventory | Attend the count; inspect the goods |
| Completeness of liabilities | Review payments after the year end for unrecorded invoices |
| Rights over property | Inspect the title deed |
| Valuation of receivables | Review the ageing and subsequent cash received |
| Cut-off of revenue | Test despatches either side of the year end |
| Occurrence of revenue | Trace from the ledger to the order and despatch note |
The search for unrecorded liabilities is the classic completeness test. Reviewing cash paid after the year end catches invoices that arrived late and were never recorded — precisely the items a ledger-based test would miss.
Written representations
A written representation is a statement by management confirming a matter to the auditor, obtained near the date of the report.
They are necessary but not sufficient. They support other evidence; they do not replace it. Where a representation is the only evidence available for a material matter, the auditor has an evidence problem and should consider the effect on the opinion.
Where management refuses to provide a required representation, the auditor must consider the effect on reliance placed on other representations, and a disclaimer of opinion may be appropriate.
Documentation
The working paper standard: an experienced auditor with no prior connection to the engagement should be able to understand the work performed, the evidence obtained, and the conclusions reached.
That test is the reason files record who performed the work, who reviewed it, what was tested, and what was concluded. A file that makes sense only to the person who wrote it fails the standard.
:::checkpoint A junior concludes that trade payables are complete because the finance director confirmed there were no unrecorded invoices. Explain what is wrong with the conclusion and set out the procedure that should have been performed. :::