Question 1: Audit evidence

As the manager responsible for the audit of Ntokozo Co. which is a manufacturing
company that supplies stainless steel components to a wide range of industries, the
job to be completed is to review the audit work which has been completed on a
number of material balances as well as transactions: assets held for sale.

When looking at audit evidence, it is regarded as a valid audit opinion whereby the
auditor should have proof in order to support their audit opinion. It is important that
sufficient and appropriate evidence is obtained and supports the opinion expressed.
Audit evidence consists of accounting records underlying financial statements,
source documents and collecting information from other sources.

There is a certain category used to obtain audit evidence and involves the following:

 Inspection
 Observation
 Enquiry
 External confirmation
 Recalculation
 Re-performance
 Analytical procedures

In order to ensure that audit evidence is sufficient, the below is analysed:

 Sufficient audit evidence relates to the volume or quantity of evidence which

has been gathered.
 Evaluation needs to take place so that enough evidence to support the
opinion exists.
 The question of whether audit evidence is sufficient is further complicated by
the fact that evidence about assertion is not collected by the performance of a
single procedure, but by the performance of a number of procedures each of
which contribute some evidence.
 There isn’t a fast nor a hard way in which the quantity of audit evidence
needed can be precisely calculated.
 Audit evidence’s quantity relates to the ‘extent of testing’ which is a
component of the audit plan (the other 2 being the nature and timing of tests).
 Auditors need not to base their opinions on a ‘half truth’.
In order to ensure that audit evidence is appropriate, the below is analysed:

 Appropriate evidence relate to the quality of audit evidence.

 It is further broken down into relevance as well as reliability

Reliability
 There is much importance in basing conclusions on facts and not
rumours.
 Auditors need to verify sources of information and ensure
trustworthiness.

The hierarchy of reliability for audit evidence can be expressed as follows:

 Evidence which is developed by auditor is the most reliable.

 Evidence from third parties needs to be independent of the client,
reputable and competent.
 Evidence from third parties but passed through the client is less reliable
 Evidence which is provided by original documents is more reliable.
 Evidence which is written is more reliable than oral evidence.
 Evidence which has been generated through the client’s system will be
more liable when related internal controls are effective.
 When evidence is provided by the client, it becomes less reliable as it
lacks ‘independence’.

Auditors will need to rely on evidence from all the above mentioned sources and will
therefore not reject evidence solely on the grounds of its source.

Relevance

 The auditor needs to check whether or not the evidence relates to the audit
objective.
 Relevance relates to the relevance to the assertion which is being audited
 It includes understanding exactly to which assertion the evidence being
collected related is important.
 If this is not understood, incorrect conclusions will be made.
 There needs to be evidence of existence.
 When test of controls are being performed, the auditor attempts to determine
whether or not the major objective of the accounting system and related
internal control, to produce accurate, valid and complete information is being
achieved.
 When this is done, the auditor obtains evidence relating to the accuracy,
occurrence, cut-off, completeness and classification assertions relating to
transactions processed through that accounting system.
Factors that have an influence in determining whether sufficient, appropriate
evidence have been obtained:

While the decision as to whether sufficient, appropriate evidence has be collected,

cannot be precisely measured (as it remains a matter of professional judgement), the
following factors will influence the auditor in making the decision:

 Materiality of the account heading being examined.

 Significance of potential misstatements in the assertion.
 Experience which has been gained during previous audits.
 Results of audit procedures which have already been conducted.
 The persuasiveness of the audit evidence.
 Reliability as well as reliability of information available.

From all the above mentioned information regarding sufficient, appropriate audit
evidence, we have analysed based on Ntokozo Co. that it is sufficient, as according
to the given paragraph.

We reckon that the disposal of the factory site, property and associated assets have
been planned and classified as held for sale in the financial statements. In this case,
things that have been planned have a proper direction as enough evidence is
gathered and information that supports this information is clearly stated.

The audit senior is asked by the finance director to check the journal before it is
posted, this is because there is nobody with the relevant knowledge to do this at
Ntokozo Co. This is regarded as appropriate audit evidence as a third party is
included in this matter, which makes information more reliable.

A brief note has been put into the audit working papers stating that in the
management’s opinion, the accounting treatment to classify factory as held for sale
is correct. This means that an inspection has been done on the above mentioned
and therefore states that this information is relevant, reliable and sufficient. It
contains existing evidence and is enough to support the opinion.

The manual journal has been arithmetically checked by a different member of the
audit team and the amounts agreed back to the non-current asset register.
According to this piece of information, a third party is involved- giving enough
information to support the opinion and it contains existing evidence. This information
is relevant, sufficient and reliable.

In this case we can therefore conclude that Ntokozo Co. has sufficient, appropriate
audit evidence as the given information details itself to a maximum of the required
detail in relation to all information regarding sufficient and appropriate audit
evidence.