SAP 5 - Audit Evidence

SAP 1 states that the auditor should obtain sufficient audit evidence through the performance of compliance and substantive procedures to enable him to draw reasonable conclusions therefrom on which to base his opinion on the financial information.

Compliance Procedures are tests that help in obtaining reasonable assurance regarding internal controls on which reliance is to be placed.

Substantive Procedures help in obtaining evidence for the accuracy, validity and completeness of the financial data (transactions, balances or financial ratios and trends). There are two types – (a) tests of details of transactions and balances & (b) Analysis of significant ratios and trends including the resulting inquiry of unusual fluctuations and items.

Sufficient, Appropriate Audit Evidence has to be obtained through compliance and substantive procedures. While sufficiency is the quantum of audit evidence, appropriateness refers to its relevance and reliability.

The auditor's judgement as to what is sufficient appropriate evidence is influenced by factors such as: the degree of risk of misstatement; materiality of the item; his experience during previous audits; etc.

While obtaining the audit evidence through compliance procedures the auditor is concerned with assertions such as: the existence of control, its effectiveness and its consistent application throughout the period.

The purpose of obtaining audit evidence through substantive procedures is to assure the auditor of assertions such as: existence of an asset/liability; the rights/obligations regarding the same; occurrence of transactions; their completeness; valuation; measurement; presentation and disclosures, etc.

The reliability of audit evidence is influenced by two factors: its source - i.e., internal/external and its nature - i.e., visual/documentary/oral. Generally a third party, documented evidence obtained by auditor himself is good.

When evidences from different sources are consistent the auditor can place a higher degree of reliability. But in the case of the contrary, he must extend his procedures to resolve the inconsistency.

When the auditor is unable to obtain sufficient appropriate evidence he must give a qualified opinion.

Obtaining audit evidence could be by one or more of the following methods:

• Inspection: It comprises of an examination of the records or documents or tangible assets. The degrees of reliability may vary. Examples: Documentary evidence originating from and held by third parties; originating from entity and held by third parties; originating from third parties and held by entity; originating and held by the entity.
• Observation: It involves witnessing of a process/procedure being performed by others. A classic example is the counting of inventories.
• Inquiry & Confirmation: Inquiry consists of seeking information from the persons inside or outside the entity. When such an inquiry is responded to, it becomes confirmation and forms a good audit evidence for the auditor.
• Computation: This is the checking of arithmetical accuracy of the source data, accounting records and performing independent calculations.
• Analytical Review: This is a study of significant ratios and trends depicted by the financial statements.