Chapter 6

The search for

evidence explained

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 Learning objectives
• Explain why the audit evidence search is a central concept of auditing.
• Identify the stages of the audit process and show that evidence has to
be collected in different ways at each stage.
• Explain the relationship between audit evidence and audit risk.
• Show there are different grades of audit evidence and that evidence
may be upgraded or downgraded.
• Explain the relationship between audit evidence and the application of
audit judgement.
• Show to what extent the evidence-gathering process might be affected
by a decision by the auditor to rely on the directors and the control
environment they have introduced.
• Form conclusions on the basis of evidence available in selected
scenarios.
• Explain the difference between an audit, a limited assurance
engagement, a compilation engagement and an engagement involving
agreed upon procedures, and suggest how the evidence-gathering
process may differ between them.

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 Audit is a search for evidence to enable an
opinion to be formed
• Evidence search is to enable conclusions to be
formed on:
– Accuracy and dependability of accounting records
– Truth and fairness of financial statements
– Compliance with legislation, accounting, reporting
standards
• Audit evidence collected from audited entity
and independent sources.
• Auditors collect audit evidence using inquiry,
inspection, observation, confirmation,
recalculation, re-performance, analytical
procedures

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 Audit is a search for evidence to enable an
opinion to be formed

• Sufficient appropriate audit evidence

– ‘Sufficient’: enough evidence is obtained to
meet audit objectives. Persuasiveness of audit
evidence and quantity linked.
– ‘Appropriate’ has two elements:
 Relevance: evidence must be pertinent to
matter in hand.
 Reliability: many grades of reliability.
• Sufficiency and appropriateness related – the
higher the quality the less may be required.

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Audit is a search for evidence to enable an
opinion to be formed

Figure 6.1

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Table 6.2 (a) Assertions about classes of transactions
and events for period under audit

i. Occurrence – transactions and events that have been

recorded have occurred and pertain to the entity –
Genuine
ii. Completeness – all transactions and events that should
have been recorded have been recorded – Complete
iii. Accuracy – amounts and other data relating to recorded
transactions and events have been recorded
appropriately – Accurate
iv. Cut-off – transactions and events have been recorded in
the correct accounting period – Accurate

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Table 6.2 (b) Assertions about account balances at the
period end

i. Existence – assets, liabilities, and equity interests

Exist – Genuine
i. Rights and obligations – the entity holds or controls the
rights to assets, and liabilities are the obligations of the
entity – Genuine
ii. Completeness – all assets, liabilities and equity interests that
should have been recorded have been recorded – Complete
iii. Valuation and allocation – assets, liabilities, and equity
interests are included in the financial statements at
appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded – Accurate

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 Table 6.2 (c) Assertions about presentation and
disclosure
i. Occurrence and rights and obligations – Disclosed
events, transactions, and other matters have occurred
and pertain to the entity – Genuine
ii. Completeness – all disclosures that should have been
included in the financial statements have been included
– Complete
iii. Classification and understandability – financial
information is appropriately presented and described,
and disclosures are clearly expressed – Accurate
iv. Accuracy and valuation – financial and other
information are disclosed fairly and at appropriate
amounts – Accurate

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 Role of management assertions in the audit
process

• The importance of management assertions is that

(reframed) they form audit objectives
• Assertion: All trade receivables shown in the
financial statements are collectable
• Audit objective: To prove within reason that all
trade receivables shown in the financial
statements are collectable
• Suggested audit step to prove collectability: Test
amounts received from credit customers after the
year-end

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Reliability of audit evidence (grades of audit evidence)

• Reliability of audit evidence increases when from independent sources

outside the entity (particularly from professional persons).
• Reliability of audit evidence generated internally increases when related
controls on preparation and maintenance are effective.
• Audit evidence obtained directly by the auditor more reliable than evidence
obtained indirectly or by inference.
• Audit evidence in documentary form more reliable than oral evidence.
• Audit evidence provided by original documents is more reliable than copies,
reliability of which depends on controls over preparation and maintenance.
• Evidence created in normal course of business is better than evidence
specially created to satisfy the auditor.
• Best-informed source of evidence normally management of the company
but lack of independence reduces its value.
• Evidence about future particularly difficult to obtain and less reliable than
evidence about past events.
• Evidence may be upgraded by skilful use of corroborative evidence.

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Forming conclusions on the basis of evidence: the exercise of
judgement

Figure 6.2

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The business risk approach to gathering audit evidence

• If auditors form good impression of management, evidence from them

may be relied on by auditor to greater extent.
• As auditors get to know individual members of management well,
engagement partners may feel they can judge integrity.
• Close involvement of audit team with management may reveal lack of
integrity – reason for withdrawing from engagement.
• Trust in integrity and competence of management could lead to
reducing level of substantive tests of detail.
• A basic idea of agency theory is principals cannot trust managers to
use resources properly. But, auditors cannot start with presumption
that managements lack integrity.
• A major issue is that business risk approach brings auditor close to
management and independence may be threatened
• Protagonists of business risk approach suggest audit failures are not
because auditors fail to perform tests of detail, but because they
missed clear indicators of impending catastrophe.

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 The stages of the audit process and evidential
requirements at each stage (1) (Table 1.1)
• See Gilsland Electronics Limited – auditors’ year

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The stages of the audit process and the evidential
requirements at each stage (2)

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The stages of the audit process and the evidential
requirements at each stage (3)

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The stages of the audit process and the evidential
requirements at each stage (4)

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The stages of the audit process and the evidential
requirements at each stage (5)

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The stages of the audit process and the evidential
requirements at each stage (6)

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The stages of the audit process and the evidential
requirements at each stage (7)

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 The stages of the audit process and the
evidential requirements at each stage (8)

Figure 6.3 below shows the audit process, its audit stages, and
evidence-gathering process in more detail.

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The stages of the audit process and evidential
requirements at each stage (9) Figure 6.3

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 The stages of the audit process and evidential
requirements at each stage (10) (Figure 6.3 continued)

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 The stages of the audit process and evidential
requirements at each stage (11) (Figure 6.3 continued)

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 The stages of the audit process and evidential
requirements at each stage (12) (Figure 6.3 continued)

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 Compilation engagements

• Professional accountants prepare financial statements on

basis of data and information provided by management –
not an audit. Normally carry out following procedures:
– Find out what accounting principles and practices are
common in entity’s industry.
– Get general understanding of business, the risks facing it,
nature of the transactions, accounting principles used, and
the presentation and content of the financial statements.
– Generally review the financial statements using limited
analytical procedures and discuss critically with
management.
– Obtain letter from management saying they have been given
all the books and records and other information pertinent to
the preparation of the financial statements.

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 Limited assurance engagement

• Not full audit; accountant aims to obtain limited assurance

financial statements comply with legislation and accounting
standards. Evidence-gathering procedures include:
– Determine accounting principles and practices in industry.
– Get good understanding of business, how organized, operating
characteristics, risks facing it and related controls, nature of
transactions, assets and liabilities – goes further than compilation
engagement work but very few detailed tests.
– Analytical procedures to identify relationships between figures
appearing unusual and discuss with management. May advise
management on appropriate adjustments to financial statements.
– Letter of representation from management confirming significant
oral representations by management during review.
– At completion of review read financial statements to ascertain
appear to conform to requirements of Companies Act and
accounting standards.

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 Agreed upon procedures engagement

• Similar to limited assurance engagement except

certain detailed procedures would be performed –
as agreed with management.
• Report would indicate detailed procedures carried
out but would disclaim a full audit opinion.
• Agreed procedures would require the accountant
to seek evidence the items subject to the agreed
procedures have been stated appropriately.

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