ASSURANCE PRINCIPLES

Norma Dy Lopez-Mariano, Ph. D. FRIEDr

AUDIT OBJECTIVES, TECHNIQUES, ASSERTIONS, PROCEDURES, AND TESTS

The goal of auditing is to express an opinion on the fairness of the preparation and presentation of the
financial statements. Being an investigative process, auditing has to have a sufficient basis to support the
audit opinion expressed in the audit report. In order to substantiate the audit process, the auditor has to
consider the audit assertions implicitly or explicitly represented y management in its financial statements
and set specific audit objectives for each in the audit examination. Audit procedures have to be conducted
to gather and evaluate audit evidence that will either support or contradict those assertions. Finally, the
auditor has to document (audit documentation) the work he has performed as proof of the conduct of the
audit.
The Audit Hierarchy

Audit Assertions - - - - - - - - - - - - - Representations made by management which are

embodied either implicitly or explicitly in the financial
statements. Audit assertions are the subject matter
information of an audit of financial statements

Audit Objectives - - - - - - - - - - - - - - The goal of the auditor in an audit in respect of the

particular financial statement assertion that involves a
particular account balance or class of transactions

Audit Procedures - - - - - - - - - - - - - The specific procedures to be conducted by the auditor in

order to obtain and evaluate audit evidence to support or
contradict the representations made by management

Audit Evidence - - - - - - - - - - - - - - -
All the information needed by the auditor which either
support or contradicts the representations made by
management in the financial statements. Obtaining and
evaluating audit evidence constitute the bulk of the work
of the auditor in an audit o financial statement in order to
enable him to express an opinion on the financial
statement based on the evidence gathered and evaluated.

Audit Documentation - - - - - - - - - - Proof of all the evidence obtained y the auditor as well as
proof that the auditor really conducted the audit

Audit Techniques

Audit techniques are the basic tools or means employed to obtain audit evidence. The application of these
techniques constitutes the audit procedures. The relationship between audit techniques, audit procedures,
and audit assertions are shown on the next page.
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Illustrative Application of
Audit Techniques Audit Procedures Assertion Substantiated

Count Count of inventory, marketable securities Physical existence

Unmatured promissory notes (to establish
Existence and, where applicable, ownership
and condition of assets

Confirm Obtain confirmation directly of details of Existence, rights, and

Account balances (to verify validity and obligations
accuracy of balances and other information
with outside parties)

Inquire Obtaining client’s representation letter, Completeness

explanations to many diverse questions
raised during the audit (to obtain knowledge)

Examine, Inspect, Examine/vouch paid checks, vendor’s Occurrences

Review, Trace, invoices, approved client documents Measurement
Verify, Vouch (vouchers, purchase orders, receiving reports)
titles, contracts, and other documentary
evidence (to verify the validity and propriety
of accounting treatment of transactions and
account balances and compliance with
prescribed procedures

Observe, Test Observing the taking of physical inventories Existence

Verify by client personnel; of actual operation of
internal control (to determine compliance
with prescribed procedures)

Extend Rechecking clerical determination by client Measurement

Foot (to verify the accuracy of computations and
transfer of information made by client)

Compare, Comparing current period account balances Completeness

Trace or operating data with similar information
for prior periods and investigation of unusual
data relationship (to disclose and determine
the reasons for significant changes

Analytical Review Compare sales with sales budget Completeness

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Audit Assertions

Assertions are implied or expressed representations of management reflected in the financial statements.
The task of the auditor is to test the fairness or reasonableness of these assertions and determine whether
they comply with the provision of the Philippine Financial Reporting Standards (PFRSs). The general
financial statement assertions in an audit of financial statements include:

1) Existence
2) Occurrence
3) Completeness
4) Rights and obligations
5) Valuation or allocation
6) Accuracy
7) Cut-off
8) Classification
9) Presentation and disclosure

ASSERTIONS ABOUT CLASSES OF TRANSACTIONS AND EVENTS

FOR THE PERIOD UNDER AUDIT

1) Occurrence – occurrence assertion relates to whether recorded transactions and events actually
occurred and pertains to the entity. For example, if the income statement states P1,000,000 in
sales for the period, management asserts that all the sales transactions totalling P1,000,000 have
actually occurred during the period and were valid transactions.
2) Completeness – relates to whether all transactions and events that occurred during the period which
should have been recorded were actually recorded. Therefore, if a client fails to record a valid revenue
transaction, the revenue account will be understated. On the other hand, if a company records an
invalid transaction or a transaction which did not actually occur, the result is an overstatement.
3) Accuracy – relates to whether amounts and other data relating to recorded transactions and events
have been recorded appropriately. Appropriate methods for recording a transaction or event are
established by GAAP. For example, if a company records the acquisition of a new equipment, its cost
should include its purchase price plus all reasonable costs to have it ready for use, like installation
costs, transportation costs, fees and permits, etc. to conclude that the item has been recorded
accurately.
4) Cut-off –relates to whether transactions and events have been recorded in the correct accounting
period. To support this assertion, the auditor’s procedures must ensure that transactions occurring
near year-end are recorded in the financial statements for the current period and that there are no
transactions that occurred in the succeeding period is recorded currently. If the auditor wants to test
proper cut-off of sales on December 31, 20X1, the audit objective is to determine that all 20X1 sales
have been recorded in 20X1, that no 20X1 sales are recorded in 20X2, and that no 20X2 sales are
recorded in 20X1.
5) Classification – related to whether transactions and events have been recorded in the proper
accounts. For example, management asserts that all direct cost transactions related to inventory have
been properly classified in either inventory or part of cost of sales, e.g., freight-in. and not
transportation expense (part of operating expenses).
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ASSERTIONS ABOUT ACCOUNT BALANCES AT PERIOD END

1) Existence – relates to whether assets, liabilities, and equity interests exist at the date of the financial
statements. For example, management asserts that inventory shown on the balance sheet exists and is
available for sale.
2) Rights and obligations – relates to whether the entity holds or controls the right to assets and
obligations to pay the liabilities of the company. For example, management asserts that the entity has
legal title or ownership to the machinery shown in the balance sheet. Similarly, amounts recorded for
loans payable reflect assertions that the entity has an obligation to pay the loan to the bank.
3) Completeness – whether all assets, liabilities, and equity interests that should have been recorded are
recorded. For example, management implicitly asserts that the amount shown for accounts receivable
in the balance sheet includes all such rights of the entity against its customers as of balance sheet date.
4) Valuation and Allocation – relates to whether assets, liabilities, and equity interests are included in the
financial statements at appropriate amounts and any resulting valuation or allocation adjustments are
appropriately recorded. For example, management asserts that the inventory on the balance sheet is
properly carried at the lower of cost or market value, or that the accounts receivable are presented in
net realizable value (net of allowance for doubtful accounts). Similarly, management asserts that the
cost of building and items of property, plant, and equipment is systematically allocated to appropriate
accounting periods through the recognition of depreciation expense, in the same way that intangibles
are properly amortized.

ASSERTIONSA ABOUT PRESENTATION AND DISCLOSURE

1) Occurrence and Rights and Obligations – relate to whether disclosed events, transactions, and other
matters have occurred and pertain to the entity. For example, when management presents capitalized
lease transactions on the balance sheet as leased assets, the related liabilities as long-term debt, and
the related footnote, it is asserting that a lease transaction occurred, it has a right to the leased asset,
and it owes the related lease obligation to the lessor. Additionally there is a footnote disclosure that
provides additional information on the lease, such as future payments.
2) Completeness – relates to whether all disclosures that should have been included in the financial
statements are included. For example, management asserts that no material disclosures have been
omitted from the footnotes and other disclosures accompanying the financial statements.
3) Classification and Understandability – relates to whether financial information is appropriately
present and described, and disclosures are clearly expressed. For example, management asserts that
the portion of a long-term note payable shown as a current liability will mature in the current year.
Similarly, management asserts, through footnote disclosure, that all major restrictions on the entity
resulting from debt covenants are disclosed.
4) Accuracy and Valuation – relates to whether financial and other information are disclosed fairly and at
appropriate amounts. For example, when management discloses the fair value of financial instruments,
it is asserting that these financial instruments are properly valued in accordance with applicable
financial reporting framework. In addition, management may disclose in a footnote other information
related to financial instruments.
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AUDIT ASSERTIONS AND AUDIT OBJECTIVES

Audit assertions and audit objectives should be congruent with one another. This means that in an audit of

financial statements, audit assertions serve as the starting point of the auditor to identify the specific
goal/objectives he has to accomplish. This makes audit assertions and audit objectives essentially similar.
The table below shows the congruence between audit assertions and audit objectives in the audit of
receivables.

Audit Assertions Audit Objectives

Existence To determine that accounts receivables exist at the balance sheet date

Occurrence To prove that all credit sales pertaining to the accounts receivables that
were recorded in the period have actually occurred

Completeness To ensure that all credit sales pertaining to the accounts receivable that
occurred during the period have been properly recorded completely

Rights (and Obligations) To prove that the company has ownership or rights to the accounts
receivable

Valuation or Allocation To determine that the accounts receivable are properly valued at net
realizable value

Accuracy To ensure that the computation of the accounts receivable and its
valuation are accurate and appropriately recorded

Cut-off To determine that all credit transaction to which the accounts receivable
pertain have been recorded in the correct accounting period

Classification To see to it that accounts receivable are properly classified in the financial
statements as current assets

Preparation and Disclosure To find proof that all presentation and disclosure requirements pertaining
to accounts receivable have been presents and disclosed

Audit Procedures

Audit procedures are the methods that auditors use to gather evidence to determine the validity of
financial statement assertions. According to PSA 200, the scope of the audit refers to the audit procedures
that in the auditor’s judgment and based on the PSAs are deemed appropriate in the circumstances to
achieve the audit objective. One way to increase the amount of evidence obtained is to select a more
effective audit procedure. For example, if the auditor wishes to increase the amount of evidence about the
existence of accounts receivable, they could decide to confirm the accounts rather than rely upon the
inspection of internal documents.
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Nature, Timing, and Extent of Audit Procedures

The nature of an audit procedure refers to its innate applicability in relation to the audit objective set for a
particular assertion. Professional judgment and common sense usually dictate what type of audit
procedure(s) is (are) applicable to gather evidence about a particular assertion.

The timing of an audit procedure indicates when the auditor procedure is likely to be performed by the
auditor. If the auditor assesses the risk of material misstatement as high and plans to conduct the audit
more strictly, then the audit procedures would probably be conducted near the balance sheet date.
Conversely, if the auditor expects a lower risk of material misstatement and plans to conduct the audit less
strictly, some audit procedures could be conducted at interim dates.

The extent of audit procedures relates to the range, magnitude, or scope of audit procedures to
substantiate a particular assertion, class of transactions, or account balance. A stricter audit would
necessitate more extensive (more scope or larger magnitude) audit procedures; less extensive audit
procedures would be needed for a less strict audit.

Audit Procedures According to Purpose

1) Risk assessment procedures – includes assessing the risks of material misstatement at the f/s level
and assertion level. However, risk assessment procedures by themselves do not provide sufficient
appropriate audit evidence and, therefore, need to be supplemented by further audit procedures
in the form of tests of controls and substantive procedures. (See discussion in the hand-out on
Risk Assessment and Materiality.)

2) Test of controls – includes testing the effectiveness of controls in preventing or detecting and
correcting material misstatements at the assertion level. Test of controls are required when
substantive procedures alone do not provide sufficient appropriate audit evidence. They are
conducted to provide reasonable assurance that accounting/internal control procedures are being
applied as prescribed or being followed. This evaluation identifies the control procedures that can
be relied on in the performance of substantive tests.
Test of controls can be directed at control procedures that leave no audit trail or those that leave
an audit trail. An audit trail is a processing sequence or path that allows for managers and auditors
to “walk through” a particular transaction and ascertain whether it has been executed properly
following required policies and procedures set by the company. Audit trails are composed of the
source documents and accounting records that are used to track down and support transactions
entered into by the company. If a particular class of transaction leaves no audit trail, the auditor
makes inquiries of personnel and observations of routines to determine how control procedures
are performed and who performs them. On the other hand, if a class of transaction leaves an audit
trail or documentary trail, the auditor inspects the documents to see whether a control procedure,
such as approval or other checking was performed and who performed it as evidenced by
signatures or initials.

3) Substantive tests – are tests to detect material misstatements at the assertion level and include
tests of details of classes of transactions, account balances, and disclosures and substantive
analytical procedures. They are planned and performed by the auditor in order to be responsive to
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the related assessment of the risks of material misstatements, including the results of tests of
controls. However, the auditor’s risk assessment is judgmental and may not be sufficiently precise
to identify all risks of material misstatements; therefore, substantive procedures for material
classes of transactions, account balances, and disclosures are always required to obtain sufficient
appropriate audit evidence. Substantive tests are used to determine whether the peso amount of
an account is properly stated.

There are two general categories:

1) Tests of details of transactions or balances - involves obtaining audit evidence on the items or
details involved in a class of transactions or a particular account balance.
2) Analytical procedures – involve the study and comparison of relationships among account data
and related information. (Refer to further discussion in the following section.)

Audit Procedures according to Nature

1) Inspection – consists of examining records, documents, or tangible assets. In most audits, inspection of
records or documents makes up the bulk of the evidence gathered by the auditor. The records or
documents inspected provide audit evidence of varying degrees of reliability and persuasiveness
depending on their nature and source and on the effectiveness of internal controls over their
processing. Documentary evidence may be classified into those:
a) created and held by third parties (purely externally generated)
b) created by third parties and held by the entity (external-internal evidence)
c) created and held by the entity (purely internally generated
Inspection of tangible assets, on the other hand, provides audit evident with respect to their
existence, but not necessarily as to their ownership or value. Therefore, other audit procedures
are done to authenticate ownership and value.

2) Observation – looking at a process or procedure being performed by others. The actions being
observed are those that typically do not leave an audit trail that can be tested by examining records
or documents. An example would be when the auditor observes the counting of inventories at
period end.

3) Inquiry – consists of seeking information from knowledgeable persons inside or outside the entity.
Inquiries may be made of management, internal auditors, other company personnel, in-house legal
counsel, or others outside the entity like banks, creditors, suppliers, customers, etc. Inquiries may
be formal written inquiries or informal inquiries. Responses to these inquiries provide the auditor
with information not previously possessed or may provide corroborative audit evidence.

4) Confirmation – a more formal type of inquiry, which response corroborates information contained in
the accounting records. Examples are the confirmation requests sent to the customers to validate
accounts receivable or the standard confirmation requests sent to banks to audit cash in bank.

5) Computation or Recalculation – checking the mathematical accuracy of documents or records or

account balances or performing independent calculations. Examples are recalculation of
depreciation expense, accrued interest, salaries payable and testing postings from journals to
ledgers or mathematical checking of account balances.
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6) Re-performance – is the auditor’s independent execution of procedures or controls that were

originally performed as part of an entity’s internal control; in short, repeating a client’s activity.
Examples would be re-performing aging of accounts receivable, footing, proving the total of a
vertical column of figures, and extending (re-computing by multiplication) or a “walkthrough” of a
company’s sale or purchasing function.

7) Reconciliation – establishing agreements between two sets of independently maintained but related
controls. An example is the preparation of a bank reconciliation or proof of cash to reconcile the
balance in the bank statement and the balance per books.

8) Vouching – involves following a transaction back to supporting documents (“tracing back”} to establish
the existence or occurrence of recorded transactions. For example, a recorded purchase transaction in
the purchase journal may be vouched with the related purchase invoice, receiving report, and purchase
requisition (supporting documents) to prove that the recorded purchase actually occurred. The
direction of audit testing in vouching is from the accounting records to the supporting documents to
support the existence assertion of a purchase.

9) Tracing – following a transaction forward through the accounting records to establish completeness of
transaction processing, The direction of the audit testing is from the supporting documents to the
accounting records (opposite of vouching) to determine if transactions have been recorded
completely. For example, an auditor compares information on receiving reports (which provides
evidence that there were purchase transactions) to the purchases journal to prove that all valid
purchases were recorded completely in the accounting records.

10) Analytical procedures - consists of comparing relationships or determining relationships between data
to determine the reasonableness of recorded amounts. It also involves analysis of ratios and trends,
including the resulting investigation of fluctuations and relationships that are inconsistent with
other relevant information or deviate from historical data or predicted amounts. The data can be
financial or nonfinancial, industry-wide data, or client data. Client data could be form prior years,
budgets or the current year. They can also be used as substantive tests to provide evidence as to the
reasonableness of the specified account balances. Analytical procedures are performed at the
planning and overall final review stages of the audit.
Examples:
a) Compare inventory levels for the current year to that of prior years
b) Compare research and development expense to the budgeted amount
c) Compare interest expense to the average outstanding balance of interest-bearing debt
d) Compare client’s gross profit percentage to published industry averages
e) Compare production records in units to sales

Selecting the Audit Procedures to be Applied

After the auditor has developed specific audit objectives in relation to the assertion for a particular account
balance or class of transactions, the next step is to select audit procedures to achieve the objectives. In
determining which audit procedures to use to obtain evidence, the auditor must consider whether one or
more procedures will provide evidence that can reduce the risk of that assertion being misstated to an
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acceptable low level. It is possible that more than one audit procedure may be required to determine the
validity of an assertion. In some cases, however, an audit procedure may provide evidence about the
validity of more than one assertion.

The selection of particular procedures to achieve specific audit objectives is influenced by:
1) Nature and materiality of the particular account balance or class of transaction
2) Nature of the audit objective to be achieved
3) Reliance that can be placed on internal control structure
4) Relative risk of material errors or irregularities
5) Kinds and competence of available evidence
6) Expected efficiency and effectiveness of possible audit procedures

Following is a summary of audit procedures:

Audit Procedure Risk Assessment Tests of Controls Substantive Tests

Inquiry * * *
Inspection * * *
Observation * * *
Re-performance *
Confirmation *
Recalculation * *
Analytical Procedures * *

Types of Audit Tests

A. Compliance Tests or Tests of Controls – done to provide reasonable assurance that accounting
control procedures are being applied as prescribed. Furthermore, these are conducted to assess the
operating effectiveness of internal control. This evaluation identifies the control procedures that can
be relied on in the performance of substantive tests.

Compliance tests of controls can be classified as:

1) No trail – does not leave a visible trail in the supporting documents of the performance of control
procedure by the client’s employee The auditor makes inquiries and observation of office
personnel and routines to determine how control procedures are performed and who performs
them.
2) Documentary trail – leaves a visible trail in the supporting documents; hence, the auditor inspects
the documents supporting a particular type of transaction to see whether a control procedure,
such as approval or other checking was performed and who performed it as indicated by signatures
or initials.

B. Substantive Tests – done to obtain evidence of the validity and the propriety of the accounting
treatment of transaction and balances or of errors or irregularities therein. In other words, the
auditor’s purpose is to see whether the peso amount of an account is properly stated. Thus, there is
an inverse relationship between the amount of reliance and the amount of additional work that will
be needed, i.e., if the auditor believes that the records can be relied on, the amount of
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additional work needed is less and, conversely, if the auditor believes that the amount of reliance on
the records of the company is low, the amount of additional work to be done will be greater.

Substantive tests can be classified as:

1) Tests of details of transactions/balances – involves obtaining evidential matter on the items (or
details) involved in an account balance or class of transactions. Tests of details are also referred
to as follows:
a) Tests of transactions – are tests of the processing of individual transactions by inspection of
the documents and accounting records involved in processing. For example, tracing a sample of
receiving reports to the purchase journal to see whether receipt of merchandise has been
recorded as purchases.
b) Tests of balance – are tests applied directly to the details of balances in general ledger
accounts. For example, confirming the balances of accounts in the accounts payable subsidiary
ledger with individual customers. These tests have the objective of establishing the monetary
correctness of the accounts they relate to.

It should be noted that substantive tests and compliance tests of control that leave a documentary
trail both involve the inspection of documents supporting the transactions. For this reason, these
tests are often applied together to the same group of documents. In that case, the test is referred to
as a dual-purpose test because it has both compliance and substantive objectives.

2) Analytical Review Procedures – analytical types of tests involve study and comparison of
relationships among accounting data and related information. They identify unusual fluctuations
for investigation and focus on the rationale of relationships. They are substantives tests that may
achieve specific audit objectives if the evidential matter is considered persuasive by the auditor.

Timing of Testing

An audit usually begins sometime during the year being audited and ends one to three months after the
end of the year. Audit procedures performed before year-end are referred to as interim audit, whereas
those performed between year-end and the completion of the audit are referred to as year-end audit.
The auditor should consider the following in deciding whether and when to perform interim work in a
particular account balance:

1) the internal control associated with the account

2) how rapidly business conditions might change
3) management’s predisposition to misstate the financial statements and the potential impact of such
misstatements on the account
4) the predictability of the account balances at year-end
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Audit Evidence

Obtaining and evaluating audit evidence constitute the bulk of the auditor’s work. Audit evidence is the
basis for the auditor’s opinion.

Nature and Scope of PSA 500 (redrafted)

PSA 500 explains what constitutes audit evidence in an audit of f/s and deals with the auditor’s
responsibility to design and perform audit procedures to obtain relevant and reliable audit evidence Other
PSAs deal with specific aspects of the audit the audit evidence to be obtained, the procedures to be
performed in obtaining audit evidence, and the evaluation of where sufficient appropriate evidence has
been obtained.

Nature of Audit Evidence

Audit evidence refers to all the information used by the auditor in arriving at the conclusions on which the
audit opinion is based. This is the definition under the new auditing standards. In the old auditing
standards, audit evidence only constitute accounting records and other corroborating information the
auditor obtains and evaluates to support a basis for the audit opinion. The new auditing standards have
expanded the definition to include all the information obtained and evaluated by the auditor in the audit,
provided they are both relevant and reliable. Audit evidence comprises both information that supports and
corroborates management’s assertions, and any information that contradicts such assertions.

Audit evidence is cumulative in nature0 and is primarily obtained from audit procedures performed during
the course of the audit. It may, however also include information obtained from e.g., previous audits and a
fir’s quality control procedures for client acceptance and continuance. The entity’s accounting records are
an important source of audit evidence along with other sources inside and outside the entity.

Sources of Audit Evidence

Management is responsible for the preparation of the financial statements based upon the accounting
records of the entity. Some audit evidence is obtained by performing audit procedure to test the account
records, e.g., through analysis and review, re-performing procedures followed in the financial reporting
process, and reconciling related types and applications of the same information. Through the performance
of such audit procedures, the auditor may determine that the accounting records are internally consistent
and agree to the f/s.

More assurance is ordinarily obtained from consistent audit evidence obtained from different sources or of
a different nature than from items of audit evidence considered individually. For example, corroborating
information obtained from a source independent of the entity may increase the assurance the auditor
obtains from evidence existing within the accounting records or from representations made by
management. This information obtained from a source independent of the entity may include confirmation
from third parties, analysts’ reports, and comparable data about competitors (benchmarking data).
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Competence and Persuasiveness of Audit Evidence

As provided by the Framework for Assurance Engagements, evidence should possess two qualities in an
audit: sufficiency and appropriateness. A great number of evidence may not be appropriate or evidence
could be very appropriate but may not be sufficient to substantially support or contradict an assertion. In
short, evidence should both be sufficient and appropriate to make it competent.

Another general characteristic that makes evidence competent is its persuasiveness. It is the evidence’s
ability to enable the auditor to make a decision regarding the reasonableness of the information in the
assertions being represented by management that would potentially affect the opinion to be included in
the audit report.

When documentary evidence is considered, the most persuasive type of evidence those that are purely
externally-generated and the least persuasive are those that are purely internally-generated.
The following hierarchy shows how evidence is ranked as to persuasiveness/competency:

MOST COMPETENT/ Evidence obtained through physical observation and the auditor’s own
PERSUASIVE mathematical computation (direct, personal knowledge of the auditor)

Evidence directly obtained from external sources

External-internal evidence – originated outside the client’s data-processing

system, but which has been received and processed by the client

Internal evidence consisting of documents that are produced, circulated,

and finally stored with the client’s information system, while considered
low in competence is used extensively when produced under satisfactory
conditions of internal control. Sometimes, internal evidence is the only
kind of evidence available.

LEAST COMPETENT/ Verbal and written representations given by the client’s officers, directors,
PERSUASIVVE owners, and employees, which should be corroborated with other types of
evidence.

The PSAs provided a hierarchy of reliability of audit evidence:

 The reliability of audit evidence is increased when it is obtained from independent sources outside
the entity.
 The reliability of audit evidence that is generated internally is increased when the related controls,
including those over their preparation and maintenance, imposed by the entity are effective.
 Audit evidence obtained directly by the auditor (e.g., observation of the application of a control) is
more reliable than audit evidence obtained indirectly or by inference (e.g., inquiry about the
application of a control).
 Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable
than evidence obtained orally.
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 Audit evidence provided by original documents is more reliable than audit evidence provided by
photocopies or facsimiles or documents that have been filmed, digitized or otherwise transformed
into electronic form, the reliability of which may depend on the controls over their preparation and
maintenance. Photocopies can be used provided they are authenticated or certified as a true copy
of the original.

Sufficiency of Audit Evidence

Sufficiency is the measure of the quantity of audit evidence, which is affected by the risks of misstatement
and the quality of such evidence. Therefore, the greater the risk of material misstatement, the more
audit evidence will be required to reduce the audit risk to an acceptably low level. Similarly, the higher
the quality of audit evidence, the less evidence may be required. Obtaining more audit evidence does not,
however, compensate for poor quality. Professional judgment should be used to determine the extent of
audit procedures necessary to obtain sufficient audit evidence. Considerations involved include materiality
and the relative risk of the item.

In general, auditors generally rely on evidence that is persuasive than convincing in forming an opinion on
the f/s. Evidence have different degrees of reliability and even evidence tha tis highly reliable may also
have weaknesses. Physical observation of inventory taking may conclude that the procedures set for the
inventory count are reasonable, but may not be able to provide information about inventory obsolescence.
Therefore, the nature of the evidence obtained by the auditor seldom provides absolute assurance about
an assertion.

Appropriateness of Audit Evidence

Appropriateness is the measure of the quality of audit evidence, i.e., its relevance and its reliability in
providing support for or detecting misstatements in the f/s. Evidence that is both relevant and reliable
makes the evidence competent.

In order for the evidence to be appropriate and competent, it has to satisfy the following factors:

1) relevance of the evidence to the assertion being tested.

2) objectivity of the evidence
3) qualifications of the provider (source) of the evidence
4) timeliness of the evidence (during the audit period)

Relevance of Audit Evidence

Relevance deals with the logical connection with, or bearing upon, the purpose of the audit procedure and,
where appropriate, the assertion under consideration. Considering relevance includes considering the
direction of testing. The appropriate direction will depend upon the purpose of a particular audit test.
Under directional testing, the auditor looks for overstatement of assets and understatement of revenues.
Also the auditor looks for understatement of liabilities and overstatement of expenses.
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Reliability of Audit Evidence

Reliability of audit evidence or its validity refers to whether a particular type of evidence can be relied
upon to signal the true state of the assertion. Simply
stated, it means trustworthiness or believability. Reliability depends on two factors:

1) the source (where the evidence originated and who prepared the evidence)
2) the nature (specific type of evidence)