Chapter 3: Audit Evidence

Question 1

Briefly describe how an auditor evaluates the sufficiency of audit evidence?

Answer 1

Sufficiency is the measure of the quantity of audit evidence. Sufficiency of the audit evidence is affected by:
1. Assessed risk of material misstatement.
2. Materiality and complexity of item.
3. Auditor’s knowledge and experience of business.
4. Quality of audit evidence.
5. Strength of internal control system of client.

[Chapter 3: LO 1]

Question 2

State factors which the auditor should consider to ensure Relevance of audit evidence.

Answer 2

Relevance deals with logical connection between assertion and audit procedures.

Factors:
1. If auditor wants to test Occurrence (e.g. when there is risk that an account is overstated), relevant procedure will be to select and test recorded amounts.

However, if auditor wants to test Completeness (e.g. when there is risk that an account is understated), relevant procedure will be to select and test information outside accounting system.

2. A procedure may provide evidence which is relevant for one assertion but not relevant for others.
3. If we want to check internal controls, relevant evidence will be obtained by performing tests of controls.
4. If we want to check financial statements, relevant evidence will be obtained by performing substantive procedures.

[Chapter 3: LO 1]

Question 3

State factors which the auditor should consider to ensure reliability of audit evidence.

Answer 3

Reliability of evidence depends on its source, nature, and circumstances under which it is obtained.

Factors:
1. Evidence in the form of Original document is more reliable than photocopy or fax.
2. Evidence in Documentary form is more reliable than evidence in oral form.
3. Evidence from independent External source is more reliable than internal evidence.
4. Evidence generated internally is more reliable when internal Controls are strong.
5. Evidence obtained Directly by the auditor is more reliable than evidence obtained indirectly.

[Chapter 3: LO 1]

Question 4

List down seven procedures obtaining audit evidence.

Answer 4

1. Inquiry (from a person)
2. Observation (of a procedure)
3. Inspection (of an item)
4. Recalculation
5. Reperformance
6. External Confirmation
7. Analytical Procedures

[Chapter 3: LO 2]

Question 5

Briefly explain audit procedure “Inquiry”.

Answer 5

 Inquiry means seeking information from knowledgeable persons within the entity or outside the entity.
 Inquiry alone is not sufficient appropriate audit evidence. Auditor should always perform further procedures.

[Chapter 3: LO 2]

Question 6

Briefly explain audit procedure “Observation”.

Answer 6

 Observation consists of looking at a process or procedure (e.g. controls) being performed by others.
 Evidence from observation is limited to the time of observation, and is also affected when people know that they are being observed.

[Chapter 3: LO 2]

Question 7

Briefly explain audit procedure “Inspection”.

Answer 7

Inspection involves:
 examining accounting records or documents (whether internal or external); or
 physical examination of a tangible asset.

 [Chapter 3: LO 2]

Question 8

Briefly explain audit procedure “External Confirmation”.

Answer 8

External confirmation is a process of obtaining evidence by auditor directly from a third party in written form (e.g. on paper, electronic or other medium).

[Chapter 3: LO 2]

Question 9

Briefly explain audit procedure “Recalculation”.

Answer 9

 Recalculation consists of checking mathematical accuracy of documents or records.
 Recalculation may be performed manually or electronically.

[Chapter 3: LO 2]

Question 10

Briefly explain audit procedure “Reperformance”.

Answer 10

Reperformance means auditor independently performing procedures or controls that were originally performed by entity as part of its internal control.

[Chapter 3: LO 2]

Question 11

Briefly explain audit procedure “Analytical Procedures”.

Answer 11

Analytical procedures means evaluation of financial information through comparisons and analysis of plausible relationships with other financial and non-financial information.

[Chapter 3: LO 2]

Question 12

Define “Risk Assessment Procedures”.

Answer 12

Risk Assessment Procedures are auditor’s procedures to obtain understanding of entity and its internal control to assess risk of material misstatement at financial statement level and at assertion level.

[Chapter 3: LO 2]

Question 13

List down Risk Assessment Procedures:

Answer 13

 Inquiries of management and others within the entity (e.g. internal audit function).
 Observation and Inspection (e.g. observation of entity’s operations and inspection of internal audit reports).
 Analytical Procedures.

[Chapter 3: LO 2]

Question 14

Briefly explain what do you understand by the risk of material misstatement at financial statement level.

Answer 14

Risk at the financial statement level refers to risk that affects financial statements pervasively, and potentially affect many assertions.

[Chapter 3: LO 2]

Question 15

List down some examples of risk of material misstatement at financial statement level.

Answer 15

1. Risk of fraud by management.
2. Risk of management override of control.
3. Lack of Competence and Integrity of management.
4. Going concern Issues.

[Chapter 3: LO 2]

Question 16

How would you respond to risk at Financial Statement level.

Answer 16

To address risk at financial statement level, auditor designs and implements overall responses, for example:
1. Increased level of professional skepticism specially during audit of judgmental areas.
2. Adequate planning, and reduced materiality level.
3. Assigning more experienced and specialized staff e.g. use of experts if necessary.
4. Increased supervision and review of the audit work performed.
5. Incorporating unpredictability in nature, timing and extent of audit procedures.
6. Making changes to audit procedures.
7. More audit procedures at period end rather than at interim date.
8. Obtaining more reliable audit evidence.
9. Evaluate whether selection and application of accounting policies is appropriate, and significant estimates are reasonable.

[Chapter 3: LO 2]

Question 17

Briefly explain what do you understand by the risk of material misstatement at assertion level.

Answer 17

Risk at assertion level refers to risk that does not affect financial statements pervasively and affect only specific identifiable assertion.

[Chapter 3: LO 2]

Question 18

List down some examples of risk of material misstatement at assertion level.

Answer 18

1. Risk that precious and portable assets may not exist.
2. Risk that a liability may not be recorded.
3. Risk that complex transactions (e.g. deferred tax, lease), and non-routine transactions (e.g. purchase or disposal of fixed assets) may not be accurately recorded.
4. Risk that large transactions at year end may be incorrectly recorded.

[Chapter 3: LO 2]