STANDARD ON AUDITING 500
This standard deals with the auditor’s responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.
Audit evidences are the defined as information obtained by auditor in deriving conclusions based upon which opinion on financial statements is framed.
This SA is effective for audits of financial statements for periods beginning on or after April 1, 2009.
The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.
Definitions of certain terms: –
Accounting records – The records of initial accounting entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations and disclosures.
Appropriateness (of audit evidence) – The measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based.
Audit evidence – Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information.
Management’s expert – An individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements.
Sufficiency (of audit evidence) – The measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence.
Information to be used as Audit Evidence
When designing and performing audit procedures, the auditor shall consider the relevance and reliability of the information to be used as audit evidence. The reliability of evidence can be ascertained by considering following points: –
1 Reliability of evidence will be more if such evidences are directly obtained by auditor.
2 If evidences are obtained based on original documents, it will be more reliable instead of obtaining evidences based on photostate documents.
3 If internal controls in an entity are good then the reliability of evidences is increased.
4 Written evidences are more reliable than oral evidences.
5 The external source of evidence is more reliable than internal source of evidence.
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Method to obtain Audit Evidences
There are many methods which are used by auditor in obtaining audit evidences which are specified in this Standard on Auditing 500: –
Inspection: – Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset. Inspection of records and documents provides audit evidence of varying degrees of reliability, depending on their nature and source and, in the case of internal records and documents, on the effectiveness of the controls over their production. An example of inspection used as a test of controls is inspection of records for evidence of authorization.
Observation: –Observation consists of looking at a process or procedure being performed by others, for example, the auditor’s observation of inventory counting by the entity’s personnel, or of the performance of control activities. Observation provides audit evidence about the performance of
a process or procedure, but is limited to the point in time at which the observation takes place,
and by the fact that the act of being observed may affect how the process or procedure is
performed. See Proposed SA 501 (Revised) for further guidance on observation of the counting
Recalculation: – Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically.
Reperformance: – Reperformance involves the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control.
Analytical Procedures: – Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. Analytical procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with
other relevant information or deviate significantly from predicted amounts.
Inquiry: – Inquiry consists of seeking information of knowledgeable persons, both financial and nonfinancial, within the entity or outside the entity. Inquiry is used extensively throughout the audit
in addition to other audit procedures. Inquiries may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process.
Responses to inquiries may provide the auditor with information not previously possessed or with corroborative audit evidence. Alternatively, responses might provide information that differs significantly from other information that the auditor has obtained, for example, information regarding the possibility of management override of controls. In some cases, responses to inquiries provide a basis for the auditor to modify or perform additional audit procedures.
a. audit evidence obtained from one source is inconsistent with that obtained from another; or
b. the auditor has doubts over the reliability of information to be used as audit evidence,
the auditor shall determine what modifications or additions to audit procedures are necessary to resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the audit.
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-Geetika Goyal (Team Itslyf)
STANDARD ON AUDITING 500