AA – Nov 2018 – L2 – Q6 – Audit Evidence

Explains the factors auditors consider for sufficient evidence, reliability principles, and steps to take when audit evidence is insufficient.

Question

The auditor is required by ISA 500 to design and perform appropriate audit procedures for obtaining sufficient and appropriate audit evidence.

Required:
a. Identify five factors that an auditor will consider in determining what constitutes sufficient audit evidence.
(5 Marks)

b. Explain five principles that would assist the auditor in assessing the reliability of audit evidence.
(5 Marks)

c. What steps must the auditor take if he discovers that the evidence obtained is insufficient to form an opinion?
(5 Marks)

Answer

a) Factors an Auditor Considers in Determining Sufficient Audit Evidence

The Quality of Evidence: The auditor assesses the reliability of the evidence obtained, based on its source and method of collection.
The Risk of Material Misstatement: The higher the risk that financial statements may be misstated, the more evidence the auditor must gather.
The Materiality of Items: More significant or material items require more comprehensive evidence.
Strength of Internal Controls: If the entity’s internal controls are strong, less extensive substantive testing might be necessary.
Sampling Methods Used: The method of sampling and the size of the audit sample directly influence the sufficiency of evidence.

b) Principles of Assessing the Reliability of Audit Evidence

Independence of Source: Evidence obtained from external, independent sources is more reliable.
Effective Internal Controls: Internally generated evidence is more reliable when related controls are functioning effectively.
Direct Observation: Evidence obtained directly by the auditor (e.g., observing inventory) is more reliable than indirect or inferred evidence.
Documentary Form: Written or documentary evidence is more reliable than verbal representations.
Original Documents: Original documents are considered more reliable than photocopies or digital representations, as they are less prone to tampering.

c) Steps to Take When Audit Evidence is Insufficient

Obtain Additional Evidence: The auditor should gather further audit evidence by performing additional tests or inquiries.
Expand Tests of Control: Additional control testing may reveal that the controls are functioning better than expected.
Perform More Substantive Procedures: If controls are found ineffective, more substantive procedures should be conducted.
Discuss Findings with Management: Communicate with senior management or the audit committee to discuss issues and obtain more insights.
Modify or Qualify Audit Opinion: If evidence remains insufficient, the auditor may need to qualify or modify the audit opinion.