ISA 500 – Audit Evidence

1 Audit Evidence

The auditor is required to express his opinion on the financial statements prepared by the management of the entity. But auditor cannot express an opinion on his own without any basis or reasons or evidence to back up his opinion.

Therefore, he is required to gather sufficient appropriate audit evidence. And for this we have iISA 500 that defines audit evidence, what it consists of and what auditor has to do to gather audit evidence including the quantity and quality of evidence.

2 Objective – ISA 500

Auditor’s objective is to design and perform audit procedures in a way that helps the auditor in obtaining sufficient appropriate audit evidence.

This ultimately helps auditor in drawing reasonable conclusions and on the basis of such conclusions he expresses his opinion

Some of the above terms need explanation as it is important to understand them before starting discussion in detail.

Audit procedures mean any or the combination of the following:

  • Risk assessment procedures
  • Further audit procedures
  • Other audit procedures

Sufficiency (of audit evidence) is a measure of quantity of audit evidence.

Appropriateness (of audit evidence) is a measure of quality of audit evidence.

Audit evidence means all such information that auditor used to draw conclusions and on such conclusions opinion is formed.  Audit evidence is primarily extracted from the audit procedures applied by the auditor. However there are other sources as well which are as follows:

  • Previous audits
  • Accounting records
  • Information prepared using the work of management’s expert
  • Absence of information

Audit evidence may comprise of information that:

  • either corroborates management’s assertions;
  • or contradicts management’s assertions

Why so much emphasis on sufficient appropriate evidence and not just evidence?

Auditor is required to obtain a reasonable assurance that the audit risk has been reduced to an appropriate level. Such reasonable assurance is obtained only when sufficient appropriate audit evidence is gathered.

2.1 The relationship between sufficiency and appropriateness

Sufficiency of audit evidence or simply quantity of audit evidence depends on two factors:

  • Risk of material misstatement as assessed by the auditor; If risk is high, more audit evidence may be required
  • Appropriateness of audit evidence; if quality is high; less audit evidence may be required.

However, large quantity of audit evidence cannot resolve inappropriateness of evidence i.e. by getting more and more evidence auditor cannot compensate for its poor quality.

Appropriateness on the other hand depends on information’s:

  • Relevance i.e. whether it is supporting auditor in his decisions; and
  • Reliability  i.e. whether it can be trusted and depends on the nature, source of information and circumstances under which information was produced

2.1.1 Relevance

Relevance is the ability of information to be useful in relation to the matter at hand.

Relevance of audit procedures and audit evidence obtained depends on many factors such as direction of testing. For example, if auditor intends to test overstatement in payables then relevant audit procedure is testing account payables. On the contrary if understatement is to be checked then testing account payables is not a relevant audit procedure rather requesting statement of accounts from creditors would be more relevant.

Also, audit procedures may provide relevant audit evidence to certain assertions but not others. Due to the same reason, gathering evidence in respect of particular assertion may not substitute for evidence related to other assertions. On the contrary, evidence from different sources or of different nature may be relevant to a single assertion.

2.1.2 Reliability

Reliability is the quality of information that makes it trustworthy. Reliability of information is affected by its source, nature and circumstances under which it was produced or obtained. Although exceptions are always present but following generalizations can be made regarding reliability of audit evidence:

Audit evidence is more reliable if:

  • it is obtained from independent sources outside the entity
  • the controls over its preparation and maintenance are effective
  • it is obtained by auditor directly
  • it is in documented form instead of verbal or oral evidence
  • it is original rather than photocopies etc.

Who determines whether sufficient appropriate evidence has been obtained?

It is a matter of auditor’s professional judgment and therefore left on auditor to decide. However, auditor’s judgement is influenced by number of factors such as:

  1. Timeliness of reporting
  2. Cost-benefit analysis
  3. Nature of audit procedures