ASSERTIONS, AUDIT PROCEDURES AND AUDIT EVIDENCE a.

Existence – assets, liabilities, and equity interests exist

b. Rights and obligations – the entity holds or controls the rights to assets,
ASSERTIONS AND AUDIT OBJECTIVES and liabilities are the obligations of the entity
c. Completeness – all assets, liabilities and equity interests that should have
Nature of Assertions: been recorded have been recorded
Financial statements are not statements of facts. They are a collection of claims d. Valuation and allocation – assets, liabilities, and equity interests are
and assertions, made implicitly or explicitly by the entity’s management, about the included in the FS at appropriate amounts and any resulting valuation or
recognition, measurement, presentation, and disclosure of information in the financial allocation adjustments are appropriately recorded
statements. 3. Assertions about presentation and disclosure
a. Occurrence and rights and obligations – disclosed events, transactions,
Assertions (or management assertions) are representations by and other matters have occurred and pertain to the entity
management, explicit or otherwise, that are embodied in the financial statements. b. Completeness – all disclosures that should have been included in the
These assertions relate to the fairness of presentation of the financial statements, financial statements have been included
thus, they are directly related to applicable financial reporting framework. c. Classification and understandability – financial information is
appropriately presented and described, and disclosures are clearly expressed
Examples of assertions: d. Accuracy and valuation – financial and other information are disclosed
 All the assets exist. (Existence) fairly and at appropriate amounts
 All sales transactions have been recorded. (Completeness) The existence and completeness objectives emphasize opposite audit
 Inventories are properly valued. (Valuation) concerns. Existence deals with overstatements and completeness deals with
 All amounts are properly presented and disclosed in the financial understatements (such as due to unrecorded transactions).
statements. (Accuracy)
Auditor’s Use of Relevant Assertions:
Levels of Assertions: The auditor uses relevant assertions in developing audit objectives that will be
1. Financial statement level – entity’s management representation that the the basis for designing audit procedures. Relevant assertions are assertions that
financial statements as a whole are presented fairly, in all material respects, in have a meaningful bearing on whether an account is fairly stated. For example:
accordance with the applicable financial reporting framework  Existence assertion, not valuation, is typically relevant to the audit of cash
 For example, management asserts the financial statements are free from account.
material misstatements.  The valuation assertion would be relevant to assessing the inventory balance
2. Account balance or class of transactions level – entity’s management than assessing sales balance.
representation that the underlying account balances and class of transactions,
including related disclosures, are free of material misstatements The auditor should use relevant assertions to:
 For example, when considering the sales balance, management is asserting a. Consider the types of potential misstatements that may occur
that sales revenue is complete (completeness assertion), the transactions Examples include:
occurred (occurrence assertion), and transactions have been appropriately  Does the asset exist? (Existence)
recorded in the accounting records (accuracy assertion).  Are all sales transactions recorded? (Completeness)
 Is inventory properly valued? (Valuation)
Categories of Assertions used by the Auditor:  Did the transaction occur? (Occurrence)
1. Assertions about classes of transactions and events for the period  Are amounts properly presented and disclosed in the financial
under audit statements? (Accuracy)
a. Occurrence – recorded transactions and events have occurred and pertain b. Assess the risks of material misstatement – The auditor should
to the entity identify what controls have been implemented to address the relevant
b. Completeness – all transactions and events that should have been assertions.
recorded have been recorded Examples:
c. Accuracy – amounts and other data relating to recorded transactions and  How does management ensure transactions are recorded?
events have been recorded appropriately (Completeness)
d. Cutoff (proper period) – transactions and events have been recorded in  How does management ensure that significant estimates are based
the correct accounting period on reasonable assumptions and properly recorded in the financial
e. Classification – transactions have been recorded in the proper accounts statements? (Accuracy)
2. Assertions about account balances at the period end
 c. Design audit procedures that are responsive to the assessed
risks 2. Whether substantive or compliance
Examples: a. Substantive audit objectives – objectives that relate to the
 If the risk is high that receivables are being overstated, the audit determination of the validity of assertions on account balances or class
procedures should be designed to specifically address the valuation of transactions or disclosures found in the financial statements
assertion. b. Compliance audit objectives – objectives that relate to the degree
 When the auditor designs tests of controls, emphasis should be of entity’s compliance with relevant controls
placed on testing controls over the relevant assertions rather than
just significant controls. AUDIT PROCEDURES

 An audit procedure may provide evidence supporting more than one Based on audit objectives, the auditor should plan and perform audit procedures.
assertion. For example, when an auditor obtains confirmation of Audit procedures are the means for obtaining sufficient appropriate audit evidence
inventories held at outside locations, evidence is obtained not just about to satisfy financial statement assertions and to support audit opinion on the fairness
completeness, but also about the existence of inventory. of the financial statements. They are the detailed instructions for the collection of a
 More than one procedure may be required to fully support an assertion. particular type of evidence that is to be obtained during the audit. Since audit
procedures are performed to verify management assertions, they would differ
For example, in order to be reasonably certain that inventory quantities
depending on the particular assertion or account audited.
include all inventories on hand at year-end, the auditor should also inspect
receiving transactions near year-end for recording in the proper period.
Primary Purpose of Audit Procedures:
Audit procedures are performed to gather necessary (not all) corroborative
Audit Objectives:
evidence to achieve audit objectives in order to result to sufficient appropriate audit
The auditor develops audit objectives that relate to management assertions
evidence on the fairness of the presentation of the entity’s financial statements.
about the financial statement components. To achieve audit objectives, the auditor
shall design audit procedures and gather sufficient appropriate audit evidence
Audit procedures distinguished from audit standards and audit techniques:
whether the assertions are in accordance with the applicable financial reporting
 Audit standards – measure of the quality of the audit performance; they
framework.
are set by the AASC, thus, they remain the same from one audit
engagement to another
Audit objectives are used to verify management assertions. Thus, there
 Audit procedures – performed to meet the audit standards; determined by
should be proper matching of auditor’s objectives with management
the auditor, thus, they vary from audit to audit; although they vary from
assertions.
audit to audit, the auditor should perform relevant essential audit
procedures provided by the audit standards (PSAs)
Types of Audit Objectives:
 Audit techniques – methods used by the auditor or the details of the audit
1. Whether general or specific:
procedures; they also vary from audit to audit
a. General audit objectives – are broad objectives of auditing an
account balance or class of transactions
Nature, Timing and Extent of Audit Procedures:
 Examples of general audit objectives include existence,
a. Nature of an audit procedure – refers to:
completeness, valuation, classification, cut-off, accuracy,
(1) Its purpose (i.e., test of controls or substantive procedure) and
presentation and disclosure, validity, ownership, and overall
(2) Its type (i.e., inspection, observation, inquiry, confirmation,
reasonableness
recalculation, re-performance, or analytical procedures)
b. Specific audit objectives – audit objectives stated in terms tailored
When RMM is assessed at high level it affects the types of audit
to the specific audit engagement
procedures to be performed and their combination.
 The general audit objectives remain the same for every audit
b. Timing of an audit procedure – refers to when to perform the audit
engagement, but the evidence varies, depending on the
procedure, or the period or date to which the audit evidence applies
circumstances. The general audit objectives are applicable to every
Audit procedures are normally performed:
account balance on the financial statements.
a. Early in the accounting period being examined
 After the general objectives are understood, specific objectives for
b. Throughout the accounting period being examined, but with
each account balance on the financial statements can be
emphasis of the transactions near the end
developed. There should be one specific audit objective for each
c. Within one to three months after the close of the accounting
relevant general objective.
period
 Audit procedures performed before period end are known as interim selection of further audit procedures to be performed
work.  Making general changes to the nature, timing, or extent of
The nature and timing of the audit procedures to be used may be audit procedures (such as performing substantive procedures at
affected by the fact that some of the accounting data and other the period end instead of at an interim date)
information may be available only in electronic form or only at certain Overall responses affect auditor’s general approach:
points or periods in time.  Substantive approach – an approach whose emphasis is on
c. Extent of an audit procedure – refers to the quantity to be performed or substantive procedures
the extent of testing or the number of items to be examined (for example, a  Combined approach – an approach that uses both tests of
sample size, or the number of observations of a control activity) controls and substantive procedures
b. Further audit procedures
Audit Procedures for Obtaining Audit Evidence:
Further audit procedures include:
1. Risk assessment procedures – procedures to obtain an understanding of the (1) Tests of controls (compliance tests) – audit procedures designed to
entity and its environment, including its internal control, in order to identify and evaluate the operating effectiveness of relevant controls in preventing,
assess the risks of material misstatement (RMM) or detecting and correcting material misstatements at the assertion
Risk assessment procedures include: level
a. Inquiry of management and other personnel  In designing and performing tests of controls, the auditor shall
b. Analytical procedures (as a planning tool) obtain more persuasive audit evidence the higher/greater reliance
c. Observation and inspection the auditor places on the effectiveness of a control.
Risk assessment procedures alone do not provide audit evidence sufficient to support an audit opinion.
 Test of controls, although not intended to detect material
assessment procedures must be supplemented by tests of controls, when necessary, and substantive misstatements, may provide evidence that a misstatement is likely
procedures. to occur.

2. Further audit procedures – The auditor shall design and perform audit When to perform tests of controls:
procedures whose nature, timing, and extent are based on and are responsive to a. When the auditor intends to rely on the operating
the assessed RMM at the assertion level. effectiveness of relevant controls in determining the nature,
 Further audit procedures are actually audit procedures classified according timing and extent of substantive procedures; or
to purpose  Tests of controls are performed only on those controls
 In designing the further audit procedures to be performed, the auditor shall: that the auditor has determined are suitably designed to
(1) Consider the assessed RMM prevent, or detect and correct, a material misstatement in
(2) Obtain more persuasive audit evidence the higher the auditor’s an assertion.
assessment of risk by: b. When substantive procedures alone cannot provide sufficient
a. Increasing the quantity of evidence; or appropriate evidence at the assertion level
b. Obtain evidence that is more relevant or reliable (such a obtaining  For example, an entity conducts its business using IT and
third party evidence or by obtaining corroborating evidence from a no documentation of transactions is produced or
number of independent sources) maintained, other than through the IT system.

Auditor’s responses to assessed risks of material misstatements Dual purpose test:

(RMM) include both:  The auditor may design a test of controls to be performed
a. Overall responses – The auditor shall design and implement concurrently with a test of details on the same transaction.
overall responses to address the RMM at the financial statement Although the purpose of a test of controls is different from the
level. purpose of a test of details, both may be accomplished
Overall responses may include: concurrently by performing test of controls and test of details
 Emphasizing to the audit team the need to maintain on the same transaction, also known as a dual-purpose
professional skepticism test.
 Assigning more experienced staff or those with special skills or
using experts (2) Substantive procedures – audit procedures designed to detect
 Providing more supervision material misstatements at the assertion level
 Incorporating additional elements of unpredictability in the
Other best descriptions: Substantive procedures may also be 1. Tests of details – examining or obtaining audit evidence on the
described as audit procedures that are designed to: actual details of account balance, class of transactions, and
 Detect material peso/monetary errors or fraud disclosure
 Substantiate the validity of management's assertions regarding  The objective of tests of details is to substantiate or identify
the financial statements. Thus, substantive procedures are misstatements in the recorded amounts.
sometimes called validation procedures because they Directional testing – refers to the direction of an audit
provide evidence about the existence of misstatement. test
 Gather evidence in respect to all material classes of a. Tracing – if the auditor starts from original source
transactions, account balances, and disclosures. documents and traces forward to the accounting
 Be performed in response to the assessment of the risks of records, this tests the assertion of completeness.
material misstatement at the assertion level, which includes the This helps the auditor identify understatement errors.
results of tests of controls, if any. In other words, substantive b. Vouching – If the auditor starts from the accounting
procedures are performed in response to the planned level of records and vouches backwards to the original source
detection risk. documents, this tests the assertion of existence or
occurrence. This helps the auditor identify
Substantive procedures are mandatory: overstatement errors.
Irrespective of the assessed risks of material misstatement,
substantive procedures are required for all relevant assertions a) Test of details of transactions – testing of transactions
related to each material class of transactions, account balance, which give rise to the ending balance of a given account; these
and disclosure. This requirement reflects the fact that: involve examining authorization, recording and posting of
a. The auditor’s assessment of risk is judgmental and so transactions (such as examining receipts or disbursements of
may not identify all risks of material misstatement; and Cash account)
b. There are inherent limitation to internal control  Applicability of test of details of transactions: It is
Substantive testing cannot be eliminated. However, it may used when the account being substantiated has relatively
be reduced by auditor’s reliance on entity’s effective internal few or smaller volume of transactions of relatively material
control. amounts occurring during the year (for example, PPE,
intangibles, bonds payable and stockholders’ equity
Nature, timing and extent of substantive tests: accounts)
When internal control is not reliable, the auditor will have to  Test of transactions are often performed several months
perform extensive substantive tests. Thus, the result of test of prior to the balance sheet date.
controls is a major factor in determining the nature, timing and  Tests of details of transactions primarily involve tracing
extent of substantive tests. and vouching.
1. Nature: relates the quality of audit evidence (performing
more effective or less effective audit procedures) b) Tests of details of balances – direct testing of accounts
2. Timing: also relates to the quality of evidence ending balance
(performing the audit procedures at year-end or at  Tests of details of balances focus on obtaining evidence
interim date) directly about an account balance.
3. Extent: relates to the quantity of audit evidence (using  More types of evidence are obtained using tests of details
larger sample size or smaller sample size) of balances than by using any other type of test.
 Test details of balances is usually the most costly to
Reliance on substantive tests: perform.
The reliance placed on substantive tests in relation to the  Applicability of test of details of balances:
reliance placed on internal control has an inverse relationship.  For accounts whose balances are affected by large
volume transactions of relatively immaterial amounts
Types of substantive procedures: (such as cash, accounts receivable and inventories).
Whether or not to use substantive analytical procedures or to  If an account has a high turnover rate with many
perform tests of details of transactions and balances, the auditor usually transactions occurring during the year, the auditor
consider the relative effectiveness and efficiency of the tests. generally will concentrate more on the ending balance
total.
  It is used when the auditor is satisfied that internal 2. Observation – consists of viewing/looking at a process or procedure being
control is strong. performed by others.
Examples:
2. Substantive analytical procedures – these are analytical  Observation of the counting of inventories by the entity’s personnel
procedures performed during testing phase to substantiate  Observation of the performance of control activities that leave no
predictable relationships among both financial and non-financial audit trail
data 3. External confirmation – represents audit evidence obtained by the
 Analytical procedures are evaluations of financial auditor as a direct written response to the auditor from a third party (the
information made by a study of plausible relationships among confirming party) in paper form, or by electronic or other medium
both financial and nonfinancial data. Analytical procedures  Confirmation is a specific type of inquiry that involves the
generally involve comparisons of recorded amounts to process of obtaining a representation of information or of an
independent expectations developed by the auditor. existing condition about account balances and transactions or
 The application of planned analytical procedures is based on events directly from independent third parties.
the expectation that relationships among data exist and  Confirmations are controlled by the auditor because the auditor:
continue in the absence of known conditions to the contrary. a. Selects the parties to be contacted
 Analytical procedures will result to circumstantial evidence b. Prepares and mails the confirmation requests, and
rather than conclusive evidence. c. Receives the confirmation replies directly from the third
 Results of substantive analytical procedures would entail parties
additional tests to be performed.  External confirmations frequently are relevant when addressing
 Analytical procedures are the audit tests that are usually the assertions associated with certain account balance and their
least costly to perform. elements. However, they are not restricted to account balances
only.
Applicability of substantive analytical procedures: Examples of external confirmation:
 Generally more applicable to large volume of  Confirmation of accounts receivable balances:
transactions that tend to be predictable over time a. Positive confirmation – customers should reply whether or not
 Not required substantive procedures during testing they agree with their respective balances; it is considered more
phase (but are required during audit planning and effective than negative confirmation
final or overall review stages) b. Negative confirmation – customers should reply if there are
 When appropriate, they are used on accounts that discrepancies
are predictable and plausible.  Bank confirmation of account balances (including amount of loan
outstanding)
Limitations of analytical procedures: Since analytical  Suppliers’ confirmation of accounts payable
procedures are based on expected plausible relationships  Confirmation from lenders
among data, differences do not necessarily indicate errors or  Inventory confirmation when inventory is under custody and control of
fraud, but simply indicate the need for further investigation. a third party
Changes in an account, changes in accounting principle, and  Confirmation from lawyers or financiers who have custody over
inherent differences between industry norms and the client all client’s property title deeds
contribute to fluctuations in expected amounts.  Confirmations of the terms of agreements or transactions an entity
has with third parties
Audit Procedures According to Types:  Confirmation about the absence of certain conditions, for example,
The following procedures, individually or in combinations, may be used as risk the absence of a “side agreement” that may influence revenue
assessment procedures, test of controls, or substantive procedures, depending on the recognition
context in which they are applied by the auditor: d. Recalculation (computation) – consists of checking the mathematical
1. Inspection – consists of examining records or documents (whether internal accuracy (manually or electronically) of documents or records
or external, in paper form, or other media), or a physical examination of an Examples:
asset  Auditor’s recalculation of depreciation, interest expense or earnings
 For example, an inspection of records or documents for evidence of per share
authorization is a test of controls.
 e. Re-performance – involves the auditor’s independent execution of inventory records
procedures or controls that were originally performed (by the client’s staff)  Reconciling lead schedules to general ledger amounts
as part of the entity’s internal control 10. Analysis of accounts – to detail the composition of an account or to detail
f. Analytical procedures – consist of evaluations of financial information the individual debits and credits in the account in a chronological sequence
made by a study of plausible relationships among both financial and non- 11. Review – perform to obtain evidence of authoritative documentation to
financial data support certain transactions
Analytical procedures also encompass the investigation of identified 12. Extend – to prove the accuracy of multiplications (on invoices, payroll
fluctuations and relationships that are inconsistent with other relevant records, etc.)
information or deviate significantly from predicted amounts. 13. Foot – to prove the accuracy of vertical or horizontal additions
g. Inquiry – consists of seeking information of knowledgeable persons, both 14. Scan – looking for evidence of unusual amounts/items, which, if found,
financial and non-financial, within the entity or outside the entity. would be further investigated
 Inquiry is used extensively throughout the audit in addition to other  Scanning may also be considered an analytical procedure, as the auditor
audit procedures. uses professional judgment to search for large, significant, or unusual
 Inquiries may be formal written inquiries or informal oral inquiries. items in the accounting records.
 Evaluating responses to inquiries is an integral part of the inquiry
process.
 Evidence obtained from inquiry can be gathered with every type of AUDIT PROGRAM
audit test. An audit program is a detailed listing of the nature, timing and extent of
In respect of some matters, the auditor may consider it necessary to planned audit procedures (tests of controls and/or substantive tests) that the auditor
obtain written representation from management and, where will perform to gather sufficient appropriate evidenced. It is a set of instructions to
appropriate, those charged with governance to confirm responses to assistants involved in the audit and as a means to control and record the proper
oral inquiries. execution of work.

Audit Techniques: AUDIT EVIDENCE

The auditor applies audit techniques (methods) to gather corroborative evidence
and uses his professional judgment to determine which audit techniques would best The auditor shall design and perform audit procedures that are appropriate in
result to the audit evidence he needs. the circumstances for the purpose of obtaining reasonable assurance or sufficient
appropriate audit evidence to reduce audit risk at acceptably low level thereby enable
Examples of audit techniques: the auditor to draw reasonable conclusions on which to base the auditor’s opinion.
1. Confirm – to obtain information directly from an independent third party Most of the auditor's work in forming the auditor's opinion consists of obtaining
2. Inspect – to obtain evidence through physical examination and evaluating audit evidence. The auditor shall conclude whether sufficient
3. Count – physical examination of assets (such as cash count or petty cash appropriate audit evidence has been obtained based on his professional judgment.
count)
4. Compare – technique used after count of assets; also used to compare Audit Evidence, Defined:
current period balances with those of prior periods  Audit evidence refers to all the information used by the auditor in arriving
5. Inquire – asking questions, whether oral or written, directed to the client or at the conclusions on which the audit opinion is based. Thus, audit evidence
to third parties supports the opinion and the auditor's report.
6. Trace – to determine whether transactions supported by source documents  Sometimes called as evidential matter, it is the main output/product of
are properly recorded and posted performing audit procedures.
7. Vouch – examine and authenticate of underlying evidential papers
8. Verify – to prove the accuracy of extensions, footings, postings, ownership Audit Evidence Relationship with Assertions: Audit evidence comprises both:
and existence a. Information that supports and corroborates management's assertions, and
9. Reconcile – to bring into agreement information obtained from two groups b. Information that contradicts such assertions.
of related, but independent, figures
Reconciliation involves comparing financial amounts from two Nature of Audit Evidence:
independent sources for agreement, such as: Audit evidence includes both information contained in the accounting records
 Reconciling the cash balance per the books with the balance underlying the financial statements and other information:
per bank
 Reconciling the physical inventory count with the perpetual
 1. Accounting records (Underlying data) – accounting records/data Sources of audit evidence:
prepared by the client’s personnel and from which financial statements are  Audit evidence is cumulative in nature and is primarily obtained from
prepared audit procedures performed during the course of the audit. However,
a. Records of initial accounting entries it may also include information obtained from other sources such as:
b. Supporting records, such as checks and records of electronic fund  Previous audits (where the auditor performs audit procedures to
transfers, invoices and contracts establish its continuing relevance)
c. General and subsidiary ledgers  Firm's quality control procedures for client acceptance and
d. Journal entries and other adjustments to the financial statements that continuance
are not reflected in formal journal entries  Audit evidence may come from:
e. Records such as worksheets and spreadsheets supporting cost a. Internal sources (inside the entity) – generated internally, such as
allocations, computations, reconciliation and disclosures evidence existing within the accounting records, minutes of
meetings, or a management representation
2. Corroborating evidence – corroborating information that are used by the b. External or independent sources (outside the entity) – for
auditor to verify the fairness of the accounting records example, confirmations from third parties analysts’ reports, and
a. Documents (such as checks, bank statements, contracts and minutes of comparable data about competitors (benchmarking data)
meetings) c. Direct knowledge of the auditor
b. Information/evidence from other sources such as:  Audit evidence may also come from:
 Previous audits a. Information obtained from testing the accounting records
 Quality control procedures for client acceptance and continuance (accounting records are an important source of audit evidence) –
 Confirmations from third parties for example, through analysis and review, reperforming
 Industry analysts’ reports procedures followed in the financial reporting process, and
 Comparable data about competitors (benchmarking) reconciling related types and application s of the same information
 Client written representation b. Non-financial original records
c. Information obtained by he auditor from audit procedures such as  Audit evidence may include information prepared using the work of a
inquiry, observation, inspection and computation management’s expert.
d. Other information developed by, or available to, the auditor that permits  In some cases the absence of information (for example, management's
the auditor to reach conclusions through valid reasoning refusal to provide a requested representation) is used by the auditor,
and therefore, also constitutes audit evidence.
Types of Audit Evidence:
1. Physical evidence – obtained by physical examination of assets (such as Information to Be Used as Audit Evidence
count of stock certificates in support of stock investment account or  When designing and performing audit procedures, the auditor shall consider
observation of client’s processes or procedures) the relevance and reliability of the information to be used as audit evidence.
2. Mathematical recomputations – auditor’s recomputation of the accuracy of  When information to be used as audit evidence has been prepared using the
client’s computations such as depreciation, amortization, doubtful accounts, work of a management's expert, the auditor shall, to the extent necessary,
etc. having regard to the significance of that expert's work for the auditor's
3. Documentation – examination of the supporting documents of recorded purposes:
transactions and balances appearing in the financial statements a. Evaluate the competence, capabilities and objectivity of that expert;
4. Representation by third parties (or confirmation) – a document originating b. Obtain an understanding of the work of that expert; and
from independent outside party and sent directly to the auditor c. Evaluate the appropriateness of that expert's work as audit evidence for
5. Representation by client personnel – statements from client personnel in the relevant assertion.
response to queries posed by the auditor  When using information produced by the entity, the auditor shall evaluate
6. Results of analytical procedures whether the information is sufficiently reliable for the auditor's purposes,
7. Internal control – existence of effective internal control may be regarded as including as necessary in the circumstances:
a strong evidence of the validity of the accounts and amounts found in the a. Obtaining audit evidence about the accuracy and completeness of the
financial statements information; and
8. Subsequent events – they provide additional evidence regarding conditions b. Evaluating whether the information is sufficiently precise and detailed
that already existing on the balance sheet that and affect accounting for the auditor's purposes.
estimates
Sufficient Appropriate Audit Evidence:
 The auditor shall design and perform audit procedures that are appropriate in  Obtaining audit evidence regarding a particular assertion, for
the circumstances for the purpose of obtaining sufficient appropriate audit evidence. example, the existence of inventory, is not a substitute for
obtaining audit evidence regarding another assertion.
1. Sufficiency – the measure of the quantity or amount of audit evidence that  Audit evidence from different sources or of a different nature
the auditor shall accumulate may often be relevant to the same assertion.
 Sufficiency is determined based on the auditor’s professional judgment.
 Audit evidence is sufficient if there is enough of it to afford a reasonable b. Reliability – objectivity of evidence
basis for an audit opinion on the financial statements. Reliability of evidence is influenced by:
Factors affecting sufficiency of audit evidence:  Its source (external or internal)
Auditor’s judgment as to the quantity of audit evidence is influenced by:  Its nature (visual, documentary, or oral)
a. Auditor’s assessment of the risks of misstatement – the higher the  The circumstances under which it is obtained
assessed risks, the more audit evidence is likely to be required  Where relevant, the controls over its preparation and
 For example, as risk of material misstatement increases in maintenance
Accounts Receivable, audit evidence required also increases.
b. Quality or competence of audit evidence – the higher the quality, Generalizations about the reliability of audit evidence:
the less may be required. Obtaining more audit evidence, 1. The reliability of audit evidence is increased
however, may not compensate for its poor quality. when it is obtained from knowledgeable independent sources
c. Materiality of item being examined – more material amounts, more outside the entity.
evidence to support its validity  Examples of information from sources independent of the
d. Experience gained during previous audit may indicate the amount entity may include confirmations from third parties,
of evidence taken before and whether such evidence was enough analysts' reports, and comparable data about competitors
e. Type of information available (benchmarking data).
Merely obtaining more audit evidence may not compensate for audit 2. The reliability of audit evidence that is
evidence of lower quality. The auditor should exercise professional generated internally is increased when the related controls,
judgment and professional skepticism in evaluating the sufficiency and including controls over its preparation and maintenance,
appropriateness of audit evidence to support the audit opinion. imposed by the entity are effective. (Effective internal control
provides more reliable audit evidence than ineffective internal
The sufficiency and appropriateness of audit evidence are interrelated. control.)
3. Audit evidence obtained directly by the
2. Appropriateness – measures the quality of audit evidence, that is, its auditor is more reliable than evidence obtained indirectly or
relevance and its reliability in providing support for the conclusions on which by inference.
the auditor's opinion is based  For example, observation of the application of a control
a. Relevance – deals with the logical connection with, or bearing upon, is more reliable than inquiry about the application of a
the purpose of audit procedures and the assertion under consideration control).
 Audit evidence is considered relevant if it pertains to the 4. Audit evidence in documentary form
assertions being evaluated or to the specific audit objective (whether paper, electronic, or other medium) is more reliable
being tested. For example: than evidence obtained orally.
 Obtaining audit evidence relating to the physical existence  For example, a contemporaneously written record of a
of inventory is not relevant in obtaining audit evidence meeting is more reliable than a subsequent oral
relating to the valuation of inventory. representation of the matters discussed.
 Accounts receivable confirmations are relevant to the 5. Evidence provided by original documents is
existence of receivables, but not to their valuation (i.e., a more reliable than evidence provided by photocopies or
customer can confirm that a receivable exists, but this facsimiles.
does not necessarily imply that the customer has the
intent or the ability to pay). The above generalizations should be considered in determining
 The relevance of information to be used as audit evidence may which evidence is persuasive or least persuasive.
be affected by the direction of testing.
 A given set of audit procedures may provide audit evidence Generalizations about reliability are subject to important
that is relevant to certain assertions, but not to others. exceptions, for example, even when the information to be used as
 audit evidence is obtained from sources external to the entity, A management expert is an individual or organization possessing expertise in
circumstances may exist that could affect its reliability (such as if a field other than accounting or auditing, whose work in that field is used by the
the source is not knowledgeable or a management’s expert may entity to assist the entity in preparing the financial statements.
lack objectivity).
When information to be used as audit evidence has been prepared using the
More assurance is ordinarily obtained from consistent audit work of a management’s expert, the auditor shall, to the extent necessary, having
evidence obtained from different sources or of a different nature regard to the significance of that expert’s work for the auditor’s purposes:
than from items of audit evidence considered individually. 1. Evaluate the competence, capabilities and objectivity of that expert
a. Competence – relates to the nature and level of expertise of the
Hierarchy of reliability of evidence: (from most reliable to least reliable) management’s expert
1. Direct evidence or personal observation and knowledge (such as b. Capability – relates to the ability of the management’s expert to
physical observation) exercise that competence in the circumstances
2. Externally generated evidence sent directly to the auditor (such as c. Objectivity – relates to the possible effects that bias, conflict of interest
confirmations from banks and customers and bank statements and or the influence of others may have on the professional or business
cut-off bank statements received from banks) judgment of the management expert
3. Externally generated evidence kept by the client (such as vendor’s Sources of information regarding competence, capabilities and
invoices, bank statements received from the client) objectivity of a management’s expert:
4. Internally generated evidence circulated externally (such as sales  Personal experience with previous work of that expert
invoices from sale to customers and paid checks and cost  Discussions with that expert
allocations)  Discussions with others who are familiar with that expert’s
5. Internally generated evidence not circulated externally (such as work
purchase requisitions, customer’s order and cost allocations)  Knowledge of that expert’s qualifications, membership of a
6. Oral evidence professional body or industry association, license to practice, or
other forms of external recognition
Persuasive Evidence:  Published papers or books written by that expert
Audit evidence is persuasive if it is sufficient both in quantity and quality to  An auditor’s expert, if any, who assists the auditor regarding
support audit opinion. Thus, sufficiency and appropriateness of audit evidence are the information produced by the management expert
the determinants of persuasiveness of audit evidence. The auditor may need to rely
on audit evidence that is persuasive rather than conclusive. However, to obtain 2. Obtain an understanding of the work or field of expertise of that
reasonable assurance, the auditor must not be satisfied with audit evidence that is management’s expert
less than persuasive. Aspects of the management’s experts filed relevant to the auditor’s
understanding may include:
Cost-benefit considerations:  Whether that expert’s field has areas of specialty within it that are
The auditor should consider the relationship between the cost of obtaining audit relevant to the audit.
evidence and the usefulness of the information obtained.  Whether any professional or other standards, and regulatory or
legal requirements apply.
The valid bases for omitting an audit test/procedure for which there is no  What assumptions and methods are used by the management’s
alternative are: expert, and whether they are generally accepted within that
a. Relative risk (or inherent risk) involved expert’s filed and appropriate for financial reporting purposes.
b. Relationship between the cost of obtaining audit evidence and the  The nature of internal and external data or information the
usefulness of the information obtained auditor’s expert uses
c. Degree of reliance on the relevant internal controls (or Assessment of 3. Evaluate the appropriateness of that expert’s work as audit
control risk at a low level) evidence for relevant assertion
The auditor shall consider:
Difficulty and expense involved in testing a particular item is not a valid basis a. The relevance and reasonableness of that expert’s findings or
for an auditor of deciding to omit an audit procedure. conclusions, their consistency with other audit evidence, and whether
they have been appropriately reflected in the financial statements;
Information produced by a management expert as audit evidence: b. If the expert’s work involves use of significant assumptions and
methods, the relevance and reasonableness of those assumptions and
 methods; and
c. If that expert’s work involves significant use of source data the
relevance, completeness, and accuracy of that source data

Evaluating the Sufficiency and Appropriateness of Audit Evidence:

Based on the audit procedures performed and the audit evidence obtained, the
auditor shall evaluate before the conclusion of the audit whether the assessments of
the RMM at the assertion level remain appropriate.
Factors affecting sufficient appropriate audit evidence:
The auditor’s judgment as to what constitutes sufficient appropriate audit
evidence is influenced by such factors as the following:
 Significance of the potential misstatement in the assertion and the
likelihood of its having a material effect on the financial statements.
 Effectiveness of management’s responses and controls to address the
risks.
 Experience gained during previous audits with respect to similar
potential misstatements.
 Results of audit procedures performed, including whether such audit
procedures identified specific instances of fraud or error.
 Source and reliability of the available information.
 Persuasiveness of audit evidence.
 Understanding of the entity and its environment, including internal
control.