What are the requirements for AUDIT EVIDENCE? Explore ASA/ISA500

Summary

In 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

00:00

📚 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.

05:00

🔍 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.

10:02

🔎 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.

15:02

📝 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.

Keywords

💡Audit Evidence

Audit evidence refers to the information collected by auditors to form a basis for their audit opinion. In the video, it is emphasized that collecting sufficient and appropriate audit evidence is critical for auditors to draw reasonable conclusions. Examples of audit evidence can include documents, records, or statements that substantiate financial claims.

💡Sufficiency

Sufficiency in audit evidence relates to the quantity of evidence needed to draw conclusions. The video explains that auditors must determine how much evidence is enough, often through methods like setting numerical targets or using mental models to ensure there are no inconsistencies in the collected data.

💡Appropriateness

Appropriateness refers to the quality of audit evidence. The video discusses how the evidence must be relevant and reliable for the audit purpose. An example is making sure the evidence aligns with the risk profile of the client and the specific financial areas being audited.

💡Audit Procedures

Audit procedures are the methods used to gather audit evidence. The video introduces different types of procedures, such as inspection, observation, external confirmation, recalculation, and analytical procedures. These methods are vital for ensuring that the evidence collected is both sufficient and appropriate.

💡Professional Judgement

Professional judgement is the auditor's ability to make decisions based on experience and knowledge. In the video, it is highlighted that auditors must rely on their professional judgement to determine the sufficiency and appropriateness of evidence, especially when faced with complex or inconsistent information.

💡Internal Controls

Internal controls refer to the processes and systems within a company that ensure the accuracy and reliability of financial reporting. The video emphasizes that auditors need to understand these controls to evaluate the reliability of the information they receive from clients, particularly when controls are weak.

💡Inconsistencies

Inconsistencies in audit evidence occur when two or more pieces of information do not align. The video stresses the importance of resolving such discrepancies, as they may indicate errors, fraud, or gaps in internal controls. Auditors must adjust their procedures to address these inconsistencies.

💡Relevance

Relevance refers to whether the evidence collected is applicable to the audit question at hand. The video explains that auditors must ensure that the evidence they gather is relevant to the financial areas they are auditing, such as ensuring ownership of assets or verifying the occurrence of transactions.

💡Mental Model

A mental model in auditing is an auditor's internal framework for understanding a client’s business and assessing whether the collected evidence makes sense. The video describes how experienced auditors use mental models to decide if they have gathered sufficient and appropriate evidence, particularly by questioning the logic of the evidence.

💡Vouching and Tracing

Vouching and tracing are two specific audit procedures. Vouching involves checking the existence or occurrence of transactions by working backward from the end of the transaction. Tracing, on the other hand, ensures completeness by following a transaction from its initiation to its conclusion. Both are critical in verifying the accuracy of financial records.

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

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[Music]

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