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The search for evidence explained

Chapter 6
Use with The Audit Process 4th Edition
By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

LEARNING OBJECTIVES
After studying this chapter you should be
able to:
Explain why the audit evidence search is a
central concept of auditing.
Identify the stages of the audit process and
show that evidence has to be collected in
different ways at each stage.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

LEARNING OBJECTIVES CONT'D


Explain the relationship between audit
evidence and audit risk.
Show that there are different grades of audit
evidence and that evidence may be up graded
or downgraded.
Explain the relationship between audit
evidence and the application of audit
judgement.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

LEARNING OBJECTIVES CONT'D


Show to what extent the evidence-gathering
process might be affected by a decision by the
auditor to rely on the directors and the control
environment they have introduced.
Form conclusions on the basis of evidence
available in selected scenarios.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

LEARNING OBJECTIVES CONT'D


Explain the difference between an audit, a
limited assurance engagement, a compilation
engagement and an engagement involving
agreed-upon procedures, and suggest how
the evidence-gathering process may differ
between them.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.222


The audit process is a search for evidence to form
an opinion, based on a whole series of conclusions
with regard to:
(a) accuracy and dependability of the accounting
records;
(b) validity of figures in financial statements;
(c) compliance with legislation and accounting and
reporting standards.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.222 CONT'D


Relevant ISAs in the area are:

ISA 500 Audit evidence and


ISA 501 Audit evidence: additional
considerations for specific items.

The purpose of these standards is to establish standards and


to provide guidance on what constitutes audit evidence in an
audit of financial statements, the quantity and quality of audit
evidence to be obtained, and the audit procedures that
auditors use for obtaining that audit evidence.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

Figure 6.1

Evidence supporting reasonable conclusions

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.223


The words sufficient and appropriate are
interrelated, appropriate having two further
elements:
(a) Relevant, that is, pertinent to the matter in
hand;
(b) Reliable, that is, trustworthy, with some grades
of evidence more reliable than others.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.224


Evidence is persuasive rather than conclusive
and auditors seek evidence from different sources
to support the same assertion (that is, to
corroborate it). There is a link between
persuasiveness and quantity as auditors seek to
be persuaded that objectives have been met by
accumulating evidence.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.224 CONT'D


Evidence is the cornerstone of the audit process
a prerequisite for forming an opinion.
Collecting and assessing it needs considerable
imagination; the relevant evidence is frequently
difficult to find, being often concealed (whether
intentionally or unintentionally).

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.225


Management assertions may be classified in the
following three ways:
(1) genuine;
(2) accurate; and
(3) complete.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS pp.225226


Trade debtors exist and owe the amounts stated in
the debtors ledger to the company.
Trade debtors balances are fully collectible.
All amounts owed by the trade debtors are included
in the amount attributed to trade debtors in the
financial statements and relate to the correct
period.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS pp.227232


This approach enables auditors to set objectives
and place evidence search in a suitable context.
Guidelines for assessing evidence are as follows:
(a) Audit evidence is more reliable when it is
obtained from independent sources outside the
entity;
(b) Audit evidence that is generated internally is
more reliable when the related controls
imposed by the entity are effective;

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS pp.227232 CONT'D


(c) audit evidence obtained directly by the auditor is
more reliable than audit evidence obtained
indirectly or by inference;
(d) audit evidence is more reliable when it exists in
documentary form;
(e) audit evidence provided by original documents
is more reliable than audit evidence provided by
photocopies or facsimiles;

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS pp.227232 CONT'D


(f) evidence created in the normal course of
business is better than evidence specially
created to satisfy the auditor;
(g) the best informed source of audit evidence will
normally be management of the company but
managements lack of independence reduces
its value as a source of such evidence;
(h) Evidence may be upgraded by the skilful use of
corroborative evidence;

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.234


Business risk approaches have resulted in greater
reliance on management. As auditors align themselves more with management, they begin to feel
that they can judge individuals integrity.
This trust can result in a reduction in substantive
testing, with a consequent reduction in audit cost
to counterbalance the increased cost of time spent
at the planning stage.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

ACTIVITY 6.1

Think about these matters and decide if it is wise


to trust management in the way that the
protagonists of the business risk approach to
auditing believe is possible. Before you do this,
go back to Chapter 1 and reread what we had to
say about agency theory on pages 911.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.236


This approach might not be justified in the light of
Enron and WorldCom, and the agency theorists
may be right that it would be unwise for auditors to
accept the word of management, without obtaining
considerable corroborative evidence from
elsewhere.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.236 CONT'D


But auditors do not start from a presumption
that managements lack integrity. A major issue
is that business risk may bring the auditor so
close to management that independence may
be threatened.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.240


Professional accountants carry out many kinds of
engagement in relation to financial information.
Many engagements may result in lower levels of
evidence being collected, so that a true and fair
form of opinion cannot be given.
Such audits are likely to be of value to users
nonetheless.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.240 CONT'D


Examples of such engagements are:

compilation engagement;

limited assurance engagement;

agreed-upon procedures engagement.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.240 CONT'D


Compilation engagement is when professional
accountants prepare financial statements using
data and information provided by management
and a compilation report is issued that gives no
assurance as to truth and fairness, nor compliance
with CA 1985 and accounting standards.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS pp.240241 CONT'D


Limited assurance engagement is not a full audit
but the professional accountant forms an opinion
on the reasonableness of financial statements and
obtains limited assurance that the financial
statements comply with the CA 1985 and
accounting standards. The review report contains
a negative form of opinion.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

KEY POINTS p.241


Agreed upon procedures engagement is similar to
a review except that certain detailed procedures
would be performed, as agreed with management,
requiring the accountant to seek evidence that the
items subject to the agreed procedures have been
stated appropriately.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

ACTIVITY 6.2

Now that we have introduced you to the above


engagements, do you believe that they will be of
value to users?

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

CHAPTER SUMMARY
This chapter has attempted to show that:
Evidence is the cornerstone of the whole audit
process and the audit is an evidence-gathering
process;
Evidence is required to give the auditors
assurance that they are forming proper
conclusions;

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

CHAPTER SUMMARY CONT'D


Evidence-gathering does not take place in a
vacuum, but in real organizations and with the
participation of real people;
Sufficiency and appropriateness (relevance and
reliability) with regard to audit evidence;
Different factors that might affect reliability;
Consistent audit evidence can affect the
conclusions of the auditor.
Use with The Audit Process 4th Edition
By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases

FURTHER READING

The ISAs in the area, ISA 500 Audit evidence,


and ISA 501 Audit evidence additional
considerations for specific items, are essential
reading.

Use with The Audit Process 4th Edition


By Iain Gray & Stuart Manson ISBN 9781844806782
2008 Cengage Learning

Use with The Audit Process: Principles, Practice and Cases