AUDIT EVIDENCE AND

EXTERNAL CONFIRMATIONS

(PSAs 500, 501, 505)

 Evidenc
e
Auditor’s Objective

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.

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Evidence
Underlying
Accounting Corroborating
Data Information

It refers to the accounting It supports the underlying

records under the financial accounting data obtained
statements. from client and other
sources.

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 Information Used
Accounting Other Information
Records
◎ Records of initial ◎ Minutes of
accounting entries meetings
◎ Invoices ◎ Confirmations
◎ General and from third parties
Subsidiary ◎ Analysts’ reports
Ledgers ◎ Comparable data
◎ Worksheets and about competitors
Spreadsheets 4
 “
The auditor shall design and perform audit
procedures that are appropriate in the
circumstances for the purpose of obtaining
sufficient appropriate audit evidence.

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 “
The auditor shall design and perform audit
procedures that are appropriate in the
circumstances for the purpose of obtaining
sufficient appropriate audit
evidence.

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 SUFFICIENT VS
APPROPRIATE
Sufficiency
Is the measure of the quantity
of evidence, which considers
assessment of the risks of
material misstatement and
also by the quality of audit
evidence
Appropriateness
Is the measure of the quality of
evidence, or its relevance to a
particular assertion and its
reliability;
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Sufficiency of
Evidence
 Sufficiency and
Appropriateness are
Interrelated
If the quality of audit evidence is
high, a lesser amount of evidence
may be required and vice-versa.

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 Information Used

Information may come from two sources, namely the work of a

management’s expert, and work produced by the entity.

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What does it mean to be a
Management’s expert

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 The work of a
Management’s expert
(a) Evaluate the competence, capabilities, and objectivity of
that expert;

(b) Obtain understanding of the work of that expert

(c) Evaluate the appropriateness of that expert’s work as audit

evidence for the relevant assertion

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Information Produced
by the Entity
(a) Obtaining audit evidence about the accuracy and
completeness of the information;

(b) Evaluating whether the information is sufficiently precise

and detailed for the auditor’s purpose

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Inconsistency or Doubts over
Reliability

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.
 Audit
Evidence

SPECIFIC
CONSIDERATIONS FOR
SELECTED ITEMS
 Presentation and disclosure of segment information in
accordance with the applicable financial reporting

Completeness of litigation
framework 03
and claims involving the

Existence and
entity 02
condition of inventory
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INVENTORY

Attendance at physical
inventory counting,
unless impracticable, to

Performing audit
procedures over the
entity’s final inventory
 If physical count is done
INVENTORY at a date other than FS
date:
Perform audit procedures to determine whether
changes in inventory between the count date and
the FS date are properly recorded

If unable to attend
physical count:

Observe physical counts

on alternative date
INVENTORY If attendance to physical
count impracticable:

Perform alternative audit

procedures; if not possible,
modify the opinion
When inventory is in third party:

request confirmation
from third party

perform inspection or
other procedures
appropriate
Litigation and
Claims
LITIGATION AND CLAIMS

◎ Inquiry of management or entity legal

counsel;

◎ Reviewing minutes of meetings and its

correspondence; and

◎ Reviewing legal expense accounts

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LITIGATION AND CLAIMS

◎ Modify the opinion if:

◉ Management refuses to give the auditor

permission to communicate with the
legal counsel
◉ Auditor is unable to obtain sufficient
appropriate evidence
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 “
The auditor shall request management and,
those charged with governance to provide written
representations that all known actual or possible
litigation and claims . . . and its effects have been
disclosed to the auditor . . .

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 Segment
Information
 Segment Information

◎ Obtaining an understanding of the methods used

by management; and

◎ Performing analytical procedures appropriate in

the circumstances

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 Example of Relevant Matters

Sales, Comparisons Consistency

transfers and with budgets with prior
charges and other The allocation periods, and
between expected of assets and the adequacy
segments, and results, like, costs among of disclosures
elimination of operating segments with respect to
intersegment profits as a % inconsistencie
amounts of sales s

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 External
Confirmation
s

PROCEDURES TO
OBTAIN AUDIT EVIDENCE
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Generalizations on Audit Evidence

Evidence obtained Evidence generated

from independent internally is more
outside sources is reliable when
more reliable than that accounting and
generated internally internal control
systems are effective

Evidence obtained Evidence in the form

directly by the auditor of documents and
is more reliable than written
that obtained from the representations is
entity more reliable than oral
representations

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 External Confirmation Procedures

Designing the
Sending the
confirmation
requests, requests,
Determining
Selecting the determining that including
the information
appropriate requests are follow-up
to be properly
confirming requests when
confirmed or addressed and
party applicable, to
requested contain return
the confirming
information for
responses party

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 Factors to Consider When Designing Confirmation Requests

The layout and The method of

The assertions being
presentation of the communication
addressed
confirmation request whether paper,
electronic, etc.

Specific identified Management’s

Prior experience on authorization or
risks of material
the audit or similar encouragement to the
misstatement,
engagements confirming parties to
including fraud risks
respond to the auditor

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MANAGEMENT
REFUSAL . . .
Perform
Evaluate the alternative
implications audit
procedures
of
designed to
management’ obtain
Inquire as to s refusal on relevant and
management’ the auditor’s reliable audit
s reasons for assessment evidence
the refusal of the relevant
risks of
material
misstatement
 Results of External Confirmation
Procedures

When Responses Necessary

If responses will not be available,
determine the implications for the
Reliability of audit and the auditor’s opinion

Responses
If there are doubts as to confirmations,
evaluate the implications on the
Reliability of Responses assessment of the relevant risks of material
misstatement
If there are doubts as to confirmations,
obtain further audit evidence to resolve
those doubts
 Negative Confirmations

The auditor The population

The auditor is
has of items
not aware of
comprises a
assessed large number of
circumstances
A very low or conditions
the risk of small,
exception rate that would
material homogeneous,
is expected cause
account
misstateme balances,
recipients to
nt as low . . disregard such
transactions or
requests
. conditions;

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 Evaluating Evidence
Obtained
The auditor shall evaluate
whether the results provide
relevant and reliable audit
evidence, or whether
performing further audit
procedures is necessary
 Initial Audit
Engagements

OPENING BALANCES
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 Initial Audit
Engagements
Objectives:
• Opening balances contain misstatements that materially affect the
current period’s financial statements
• Appropriate accounting policies reflected in the opening balances
have been consistently applied in the current period’s financial
statements

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 “
For opening balances, the auditor shall read the most recent
financial statements, if any, and the predecessor auditor’s report
thereon, if any, for information relevant to opening balances,
including disclosures.

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 To obtain sufficient appropriate evidence by:

Determining whether the prior

period’s closing balances have Performing procedures, like specific audit
been correctly brought forward or procedures to obtain evidence regarding
restated as of the current period the opening balances

Determining whether
the opening balances
reflect the application
of appropriate
accounting policies

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Factors to Consider When Designing Audit Procedures

The significance of
The accounting the opening balances
policies followed by relative to the current
the entity period’s financial
statements

The nature of the

account balances, Whether the prior
classes of period’s financial
transactions and statements were
disclosures and the audited and, if so,
risks of material whether the
misstatement in the predecessor auditor’s
current period’s opinion was modified
financial statements

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Additional Notes
Consistency of Relevant Information
Policies from Previous Auditor
◎ whether the ◎ Auditor shall evaluate
accounting policies the effect of the
have been matter giving in
consistently applied assessing the risks of
in the current period’s material
financial statements misstatement in the
current period’s
financial statements

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 AUDIT
CONCLUSIONS
AND
REPORTING

Opening Balances
If unable to obtain sufficient appropriate evidence, issue
either a qualified opinion or a disclaimer of opinion
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 AUDIT
CONCLUSIONS
AND
REPORTING

Opening Balances
If opening balances contain material misstatements affecting
current FS, issue either a qualified opinion or an adverse
opinion
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 AUDIT
CONCLUSIONS
AND
REPORTING

Consistency of Accounting Policies

If current period policies are inconsistent or changes in
policies are unaccounted for or inadequately presented,
issue either a qualified opinion
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 AUDIT
CONCLUSIONS
AND
REPORTING

Modification to the Opinion in the

Predecessor Auditor’s Report
If modifications remain relevant and material to current
period FS, modify the opinion on current period FS
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Cost/benefit consideration

There should be a rational relationship between the cost of

obtaining evidence and the usefulness of the information
obtained
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Thank you!

Any questions?

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