What are the requirements for AUDIT EVIDENCE? Explore ASA/ISA500
Summary
TLDRIn this video, Dr. Amanda provides an overview of auditing standard ASA 500, which focuses on audit evidence. She explains the importance of collecting sufficient and appropriate evidence during an audit to form a reasonable opinion. The video covers methods for gathering evidence, such as inspection, observation, recalculation, and inquiry, while emphasizing the need for professional judgment. Dr. Amanda also introduces advanced techniques like mental models, vouching, and tracing to ensure the completeness and reliability of evidence. She concludes with practical tips on designing effective audit procedures.
Takeaways
- 📄 AS 500 focuses on audit evidence and guides auditors on collecting evidence during the audit of financial reports.
- 🎯 The objective is to design procedures to gather sufficient and appropriate audit evidence.
- 🔢 'Sufficiency' refers to the quantity of evidence needed, while 'appropriateness' refers to the quality and relevance of the evidence.
- 🧠 Auditors can collect evidence through setting a number of items, using checklists, or applying a mental model to assess if the evidence makes sense based on their understanding of the client.
- 📊 Risk of material misstatements affects how much evidence is considered sufficient.
- 🔍 Evidence must be relevant and reliable, and auditors must evaluate whether information used from the client is accurate and complete.
- 👨🔬 If using experts, auditors must ensure the experts' work is reliable and unbiased.
- ⚠️ Inconsistent evidence must be resolved by modifying audit procedures and ensuring conclusions align with available data.
- 🛠️ Common audit procedures include inspection, observation, confirmation, recalculation, re-performance, analytical procedures, and inquiry.
- 🔄 Auditors should use correct terminology, be specific, and customize procedures to fit the client’s systems and audit goals.
Q & A
What is the main focus of the 500 series of auditing standards?
-The main focus of the 500 series of auditing standards is audit evidence, which encompasses all aspects related to collecting and evaluating evidence during an audit.
What does ASI 500 mean in the context of auditing standards?
-ASI 500 refers to the overarching standard that guides auditors on what to consider overall when it comes to collecting audit evidence.
Why is it important for auditors to have sufficient and appropriate evidence?
-Having sufficient and appropriate evidence is crucial for auditors to draw reasonable conclusions and form an opinion on the financial statements, as it ensures the reliability and validity of their audit findings.
What does 'sufficiency' of evidence refer to in auditing?
-Sufficiency of evidence refers to the measure of the quantity of evidence needed to draw a conclusion, which can depend on the risks of material misstatements within the client's financial statements.
What does 'appropriateness' of evidence mean in the context of auditing?
-Appropriateness of evidence means that the evidence is of the right quality, relevant, reliable, and is obtained using the right mix of procedures to gather the audit evidence.
How can auditors determine if they have collected sufficient and appropriate evidence?
-Auditors can determine if they have sufficient and appropriate evidence by using professional judgment, which is informed by experience, practice, and understanding of the client's business and financials.
What are some methods auditors use to collect evidence?
-Auditors use methods such as inspection of documents and tangible assets, observation, external confirmation, recalculation, reperformance, analytical procedures, and inquiry to collect evidence.
What is the significance of the mental model approach in determining the sufficiency of evidence?
-The mental model approach is significant because it allows auditors to use their understanding of the client to assess whether they have enough evidence, rather than relying on a set number or checklist, leading to a more contextually appropriate assessment.
Why is it important for auditors to consider the risks of material misstatements when collecting evidence?
-Considering the risks of material misstatements helps auditors to determine the extent of evidence needed, as higher risks may require more evidence to mitigate the possibility of incorrect conclusions in the audit opinion.
What should auditors do if they encounter inconsistent evidence during an audit?
-If auditors encounter inconsistent evidence, they should consider changing their audit procedures to resolve the inconsistency and investigate the cause, as it may indicate issues such as fraud or poor internal controls.
How do the four basic rules for audit procedures mentioned in the script contribute to a more effective audit?
-The four basic rules for audit procedures—using correct audit terms, client names for things, being specific, and ensuring the procedure is fit for purpose—contribute to a more effective audit by ensuring clarity, accuracy, and relevance in the audit process.
Outlines
📚 Introduction to Audit Evidence
Dr. Amanda introduces the 500 series of auditing standards, focusing on AS 500, which is about audit evidence. She discusses the standard's objective, definitions, and requirements. The video aims to help students understand how to design audit programs by considering audit procedures and the explanatory material provided in the standard. Dr. Amanda also highlights the importance of sufficient and appropriate evidence in forming an auditor's opinion and mentions her PhD research on how auditors determine the sufficiency of evidence.
🔍 Sufficiency and Appropriateness of Evidence
This section delves into the concepts of sufficiency and appropriateness of audit evidence. Dr. Amanda explains that sufficiency refers to the quantity of evidence needed, which can vary based on the risks of material misstatements. Appropriateness, on the other hand, pertains to the quality of evidence, including its relevance, reliability, and the mix of procedures used to gather it. She emphasizes the role of professional judgment in determining the amount and type of evidence, which comes from experience and practice.
🔎 Addressing Inconsistencies in Evidence
Dr. Amanda addresses how to handle inconsistencies in audit evidence. If evidence from different sources conflicts or raises doubts about reliability, auditors must consider changing their audit procedures to resolve the inconsistency. She stresses the importance of using a mental model approach to evaluate the sense and fit of evidence with the company's risk profile and inherent risks. The video also briefly mentions various audit methods for collecting evidence, such as inspection, observation, and inquiry.
📝 Audit Procedures and Best Practices
In the final paragraph, Dr. Amanda discusses audit methods in more detail, including inspection of documents and tangible assets, observation, confirmation, recalculation, reperformance, analytical procedures, and inquiry. She adds vouching and tracing to the list, explaining their purposes in testing for existence and completeness. The video concludes with four basic rules for audit procedures: using correct audit terms, client-specific names, being specific, and ensuring the procedure fits its purpose. Dr. Amanda invites viewers to like, comment, and subscribe for more content on auditing standards.
Mindmap
Keywords
💡Audit Evidence
💡Sufficiency
💡Appropriateness
💡Audit Procedures
💡Professional Judgement
💡Internal Controls
💡Inconsistencies
💡Relevance
💡Mental Model
💡Vouching and Tracing
Highlights
Introduction to the 500 series of auditing standards focusing on audit evidence.
Explanation of AS 500 as an overarching standard for collecting audit evidence.
The scope of AS 500 and its application to all evidence obtained during an audit.
Definition of audit evidence and the auditor's responsibilities in using it.
Importance of collecting sufficient and appropriate evidence for an auditor's opinion.
Discussion on the sufficiency of evidence and how auditors determine it.
Different methods auditors use to collect evidence, including setting a number or using a checklist.
Mental model approach to determining sufficient evidence based on the auditor's understanding of the client.
The significance of professional judgment in determining the quantity and quality of evidence.
Definition of appropriate evidence in terms of relevance, reliability, and the mix of procedures used.
Requirement for auditors to design and perform audit procedures for obtaining sufficient and appropriate evidence.
Consideration of the relevance and reliability of information when designing audit procedures.
The need to evaluate the work of experts used by management for their reliability.
How to evaluate the reliability of information produced by the entity being audited.
Selection of evidence items that are effective in meeting the purpose of the audit procedure.
Handling of inconsistent or unreliable audit evidence and the need to change audit procedures if necessary.
The role of the mental model approach in making sense of evidence and identifying inconsistencies.
Discussion of audit methods for collecting evidence as outlined in AS 500.
Additional audit procedures of vouching and tracing for testing existence and completeness.
Four basic rules for designing audit procedures.
Link to other videos for more detailed examples of implementing audit procedures.
Transcripts
[Music]
hi dr. Amanda here and welcome to Amanda
loves to audit and our series on audit
evidence now we start into the 500
series of auditing standards and
everything in the 500s is about audit
evidence and it starts with this
overarching standard a si 500 about what
we should think about overall when it
comes to collecting audit evidence when
we look at our table of contents nothing
unusual here we're going to look at the
objective of the standard the
definitions and the requirements and as
usual I'm not going to go through too
much of the explication or explanatory
material at the end however I am going
to talk a little bit about audit
procedures and what is discussed in the
explanatory material and how I think
students can use that to design
appropriate audit programs as always we
have our conformity standard so is a 500
and a sa 500 are internationally aligned
so if you're studying the ISAs and this
video will be just as applicable to you
as to the Australian students looking at
the ASA's when we dig into the standard
we start with the scope and the scope is
always what is this standard about so
the scope actually says here it's what
exactly is audit evidence so constitutes
really means what exactly is ordered
evidence in the audit of our financial
report and it talks about what our
responsibilities are because we have to
use our audit evidence we have to design
and perform audit procedures to be able
to get evidence so that we can draw our
reasonable conclusions in our auditors
opinion remember I can't make an opinion
without some form of evidence or making
an opinion without any evidence would
certainly be a contravention of the
auditing standards so a si 500 is quite
broad and it applies to all evidence
obtained
during the audit we have some very
specific standards for specific
circumstances so 305 is about
understanding the client at the planning
stage there was going to be a standard
on solicitors confirmations on
confirmations on analytical procedures
but 500 is overarching when we look at
the objective and I'll just zoom this in
a tiny bit more I need to design my
procedures in such a way so that I get
sufficient and appropriate evidence and
the question here becomes well what does
it mean for evidence to be sufficient
and appropriate how much is sufficient
and what is appropriate so if we go down
into our definitions will say that
sufficiency means the measure of the
quantity of evidence how much is really
the key let me add that in here the key
here is how much evidence do I need to
collect and this is actually the area of
my PhD where we looked at there were
different ways that auditors decided
whether they had enough evidence I'll
just move my whiteboard over a bit we'll
talk a little bit about ways in which
auditors can collect evidence so from my
PhD we found that one of the ways that
auditors used to collect evidence is
that they set a number they set a number
of items that they want to collect and
once they hit that number then they say
I have sufficient and appropriate
evidence another option is that they use
a checklist they have a very specific
list of things that they might need to
collect once they've collected
everything on that checklist and
remember that checklist may be
incomplete they say that they've got
sufficient and appropriate evidence the
third option and the option that from my
PhD we found was more appropriate to
help auditors make sure they had
sufficient evidence was a mental model
approach where they used their
understanding of the client to say do we
have enough and we ask ourselves well
does this make sense
does the evidence make sense with what I
know about the company and if we have
something that doesn't make sense so if
we have inconsistencies or gaps we need
to search more right and when we
actually went and we talked to a whole
lot of different auditors and we looked
at experts people who are better able to
implement this approach the mental model
about making sense and searching for
inconsistencies and we're not tied to a
specific number of items 20 or 50 came
up with much more appropriate sufficient
and appropriate levels of audit evidence
now the mental models going to be
different for everyone so that's really
quite a tough approach but it's one that
we see most audit firms implementing in
their training this real focus on
understanding the client understanding
the financials understanding accounting
so that you know whether you have
sufficient and appropriate evidence all
right after that little interlude let's
go back here so sufficiency is the
question about how much evidence and
really that's also the question like how
long is a piece of string so how much
will depend on potentially the risks of
material misstatements that you're
expecting within the client now the
standard says sufficient and appropriate
so what is going to be appropriate
evidence appropriate evidence means it's
the right quality it's relevant it's
reliable it's used using the right mix
of procedures to gather that audit
evidence
so really appropriate comes down to
designing the right audit procedures and
that takes experience is one of the
hardest things for students to get a
handle on is designing the right audit
procedures and there's no absolutely
hundred percent foolproof answer as to
how much is sufficient and how much is
appropriate the key for auditors is that
they have to use
their professional judgement all right
and that only comes from experience and
practice and understanding the
profession so that's the objective and
says oh we have to go out and make sure
we can collect sufficient and
appropriate evidence and that's
reinforced here in the requirement so
the remember the requirements is where
we start the actual bits of what we have
to do and the auditor shall design and
perform audit procedures that are
appropriate for the circumstances of
obtaining sufficient and appropriate
evidence so we have to consider the
relevance and reliability of information
where does it come from is it the right
information for the right question so
the relevance one I always like to think
of as use the evidence fit for its
purpose if you want to check whether a
company owns a piece of land will that
piece of evidence actually tell you and
that comes down to the design of the
right procedure is that information
reliable can I rely on it so that I can
give my opinion now if we do decide to
use experts we have to consider well is
that expert appropriate can they make
the right decision I need to evaluate
the work if management of use an expert
I might need to even engage an expert of
my own and we have a SAS in the 600's
that tell us about how we need to select
our experts because we might not want to
trust the expert of clients management
because there is the possibility of some
bias there's definitely the possibility
that management's expert is telling
management exactly what they want to
hear and what they're paying them for if
we go on to the next part
when using information produced by the
entity I shall evaluate whether the
information is sufficiently reliable
including the accuracy and the
completeness of that information and
whether it's sufficiently precise and
detailed now how do we do that we're
going to do that by making sure that we
understand the systems of internal
control
at our clients because the systems of
internal control are the systems that
actually collect and capture a lot of
information used and collected by the
clients so if we have a situation where
control risk is high systems are fairly
poor I try and minimize information that
I would use just rameen side the company
I might even want to think about trying
to correlate that information or confirm
that information with someone else
now how do we go about selecting
evidence well I actually have a standard
about when designing tests of controls
and tests of details I should select
items that are effective in meeting the
purpose of that audit procedure so that
really means that when I'm sampling and
we're going to look at the sampling
standard a little bit later on I'm
selecting a sample in an appropriate
manner and we're going to look at that
in a SI 530 now what happens if I have
information that is inconsistent or
doubts the reliability of audit evidence
and inconsistency is a key one if you
find information where you've got two
pieces of information from within the
client that tell a different story you
cannot simply ignore that it exists so
it says if evidence from one source is a
inconsistent with evidence we get from
somewhere else or we think that there's
doubts over a liability potentially
because of poor internal controls
potentially because of some other you
might have a fraud risk that might mean
that evidence might be less reliable
then what I need to get to is consider
whether I need to change my audit
procedures to resolve the inconsistency
and find out the heart of the matter
because this bit here consider the
effect and resolve the matter if there's
inconsistencies why there
inconsistencies is that because of fraud
is it because people are trying to hide
something and that's why we're seeing
inconsistencies in the evidence when I'm
talking to my students my key is always
when you're looking at evidence you ask
yourself
does this make sense alright does this
make sense this is the mental model
approach and it does this match with
everything we know about the company how
does this fit with their risk profile
and what we found out about them in the
inherent risks so we have to go collect
evidence to make sure that we can give
our audit opinion now I wanted to talk
briefly about the audit methods the
methods that are included in a si 500
about how to collect evidence and these
are actually from a si 500 but they're
actually in the explanatory paragraphs a
7 to a 25 at the back and a 7 and a 23
to a 25 say we have inspection
observation external confirmation
recalculation read performance
analytical procedures and inquiry and I
have absolutely no qualms with either of
these but I always like to give these a
little bit more depth and detail so when
I talk to my students I talked about
inspection in two ways I talked about
inspection of documents all right and
then I also talked about inspection of
tangible assets now you might be
wondering why I don't just say assets
because remember we have intangible
assets so when I talk about inspection I
break this down further into inspection
of documents and inspection of tangible
assets observation is just watching
people confirmation I'll talk about that
in a separate standard recalculation is
simply redoing the maths now Reaper
formance is an interesting standard
because reef performance is really only
only applies to internal controls
testing because your Reaper forming a
procedure related to an internal control
so we tend not to use Reaper formants
too much unless it's with internal
controls analytical procedures ratios
anything we know a lot about that
inquiry is talking to people but I want
to add two extra procedures to our list
those extra procedures are these two
here vouching and tracing and these are
really important because vouching is at
the end of the transaction so you go
from the end of the transaction to the
start so you work backwards alright and
the thing with vouching is that it's a
great test for existence and occurrence
then we also have tracing and tracing is
when you go from the start of the
transaction to the end and tracing is a
really great procedure to help us with
completeness so they have different
purposes and the reason I include these
is because they I guess a part of
inspection but it's a very specific type
of inspection and so when we voucher
when we trace we're giving very clear
instructions on how to do the audit now
I've talked about in other videos about
my full rules for audit procedures so I
thought I'd add these to the very end
and then I'll link you to some other
videos where I go about it in more
detail we have four really simple
procedures or four really simple rules I
guess they are rule number one is always
use the correct audit term this is
because we're part of a profession right
we don't say I'll just test stuff which
I came in a vouch I'm gonna trace I'm
gonna do an analytical procedure so that
proves to your Assessor or your marker
or the person that you're working for
you know the profession my second point
is always use the client names for
things
client names and terms and this is
because clients use different names for
different things
even in the same industries one company
might call this a packing slip others
might call it a bill of lading or a
shipping document if you don't give
clients the exact name of what you're
asking for they won't give it to
so we don't have that I don't have that
document so always use the client names
that's customizing your audit number
three is be specific all right your
procedure should be detailed enough for
someone else to follow this is really
really critical and then number four the
procedure needs to be fit for purpose so
if you are testing an internal control
you need to make sure the procedure is
about testing the internal control if
you're testing the occurrence of sales
you need to be using vouching and not
tracing so these are my four basic rules
a link to some other videos where you
can find out more and see examples have
our way of how I implement this so
thanks for listening I'm glad to be back
I'm sorry we had a little bit of a break
there I've been a little bit on well
with a bad cuff you probably hear I'm
still a bit croaky if you liked the
video we'd love for you to give us a
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about auditing standards
[Music]
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