The auditor‘s operational standard states, ―The auditor should obtain relevant and reliable audit evidence sufficient to enable him to draw reasonable conclusions thereon‖.
a) What factors would influence the judgment of the auditor with regard to sufficiency of audit evidence? (10 marks)
b) What factors would influence the auditor to accept third party certificates as audit evidence? (7 marks)
c) State the important factors that must be considered when assessing the reliability of audit evidence.
(A) According to ISA 500 ―Audit evidence‖ the auditor‘s judgment as to what is sufficient appropriate audit evidence is influenced factors such as:
i. The auditor‘s assessment of the nature and level of inherent risk at both the financial statement level and the account balance or class of transactions level.
ii. Nature of the accounting and internal control systems and the assessment of control risk.
iii. Materiality of item being examined.
iv. Experience gained during previous audits
v. Results of audit procedures including fraud or error, which may have been found.
vi. Source and reliability of information available.
NB: Sufficiency of audit evidence refers to the quantity of audit evidence. Audit evidence is considered to be sufficient if auditor can be able to reach a conclusion on an audit objective based on that information.
Appropriate audit evidence refers to the quality of audit evidence, which is assessed in terms of the relevance, and reliability of the evidence.
Relevant audit evidence provides the auditor with audit evidence and information regarding
management‘s assertions of the financial statements. These assertion include:
i. Existence: An asset or liability exists at a given date.
ii. Rights and obligations: An asset or liability pertains to the entity at a given date.
iii. Occurrence: A transaction or event took place, which pertains to the entity during the period.
iv. Completeness: There are no unrecorded assets, liabilities, transactions or undisclosed items.
v. Valuation: An asset or liability is recorded at an appropriate carrying value.
vi. Measurement: A transaction or event is recorded at the proper amount and revenue or expenses are allocated to the proper period.
vii. Presentation and disclosure: An item is disclosed, classified and described in accordance with the applicable financial reporting framework.
(B) Factors that would influence the auditors to accept third party certificates as audit evidence include:
1. Whether the third party be reliably determined to be knowledgeable in the mater for which he is providing the certificate.
2. The integrity of the source for the certificate – can the source be said to be honest or independent of the client.
3. The relationship of the source with the client. For instance, a certificate from a related party may not be as reliable as certificate issued on arm‘s length transaction an independent party.
4. Previous experience with the third party. If the certificates given the third party previously have proved unreliable, chances are that the certificate would be unreliable.
(c) The reliability of audit evidence is influenced by: –
1) Its source: internal or external, and
2) By its nature: visual, documentary or oral. While the reliability of audit evidence is dependent on individual circumstances, the following generalizations will help in assessing the reliability of audit evidence:
(i) Audit evidence from external sources (e.g. confirmation received from a third party) is more reliable than that generated internally.
(ii) Audit evidence generated internally is more reliable when the related accounting and internal control systems are effective.
(iii) Audit evidence obtained directly the auditor is more reliable than that obtained from the entity.
(iv) Audit evidence in the form of documents and written representations is more reliable than oral representations.
NB: Audit evidence is more persuasive when items of evidence from different sources or of different nature are consistent. Thus, the auditor may obtain a cumulative degree of confidence higher than would be obtained from items of audit evidence when considered individually.
Conversely, when audit evidence obtained from one source is inconsistent with that obtained from another, the auditor determines what additional procedures are necessary to resolve the inconsistency.