Chapter-Five:

Audit Responsibility, Objectives, Evidence and Recording the Audit

5.1 Audit Responsibility

Audit responsibility refers to the duty and accountability of Auditors to perform an independent
examination of an organization’s financial statements and other relevant information. The
primary responsibility of auditor is to express an opinion on whether financial statements present
a true and fair view of the organization’s financial position, results of operations, and cash flows
in accordance with the applicable financial reporting framework.
Auditors have professional and ethical obligation to conduct the audit with due care, professional
skepticism, and independence. They are responsible for planning and performing the audit to
obtain reasonable assurance about whether financial statements are free from material
misstatement, whether due to fraud or error. Auditors should also consider the organization’s
internal control and assess the risk of material misstatement.
5.2. Management Assertions
Management assertions refers to the claims and representation made by management regarding
the financial statement and the underlying transactions and events. These assertions are the
foundations for the auditor’s evaluation of financial statements and the basis for designing and
performing audit procedures.
They are generally three categories of management assertions:
1. Assertion about class of transactions and events for the period under audit such as
occurrence, completeness, accuracy and cutoff.
2. Assertion about account balances at the period end including existence, right and
obligation completeness, and valuation & allocation.
3. Assertion about presentation and disclosure, such as occurrence and rights and
obligations, completeness, accuracy and valuation, and classification and
understandability.
Auditors assert these assertions to determine the risk of material misstatement in the financial
statements and to plan their audit procedures accordingly. This helps ensure the reliability and
accuracy of the financial information being presented to users.

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5.3 Audit Objectives
Audit Objectives are the specific goals and purposes that the auditors aim to achieve during the
audit process.
The objectives guide auditors in planning and executing their works effectively. The main audit
objectives can be categorized into three broad categories:
1. Reliability and accuracy: The objective is to insure that financial statements are reliable
and accurate, reflecting the true financial position and performance of the organization.
Auditors assess the appropriateness of accounting policies, the completeness and
accuracy of financial records, and the proper application of accounting standards.
2. Compliance: Auditors verify whether the organization has complied with relevant laws,
regulations and contractual obligations. This includes assessing compliance with
Accounting standards, tax laws, Industry specific regulations, and internal policies and
procedures.
3. Internal Control Evaluation: Auditors evaluate the effectiveness of the organization’s
internal control. They assess the design and implementation of internal control to identify
weakness or deficiencies that may increase the risk of material misstatement in the
financial statements. This objective aims to provide assurance on the reliability of the
organization’s internal control system.
By achieving these audit objectives, auditors provide stakeholders, such as shareholders, lenders
and regulators with reasonable assurance regarding he accuracy reliability and compliance of
financial statements. This helps stakeholders make informed decisions and enhances confidence
in organization’s financial reporting.
5.4 Audit evidence
Audit evidence- is the information obtained by the auditor in arriving at conclusions on which
their reports are based. During financial statement audits, the auditors gather and evaluate
evidence to form an opinion about whether the financial statements follow the appropriate
criteria, (IFRS). The auditors must gather sufficient competent evidence to provide an adequate
basis for their opinion on the financial statements. The audit evidence is intended to assure the
users of accounting information that the financial statements are a credible source of information
about the organization. The users may not accept the auditor’s opinion on the truth and fairness

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of financial statements unless the auditor has collected sufficient competent evidence about the
material misstatements. Hence, the collection of evidence lies in the heart of the audit.
Hence, the requirement to obtain sufficient competent evidence is reflected in the third
standard of field work that states:
Sufficient competent evidential matter is to be obtained through inspection, observation,
inquires, and confirmation to afford a reasonable basis for an opinion regarding the financial
statements under audit.
Audit risk which refers to the possibility that the auditors may unknowingly fail to appropriately
modify their opinion on financial statements that are materially misstated, can be greatly reduced
by gathering evidence. One way to gather additional evidence is to increase the extent of the
audit procedures. However, additional evidence may also be obtained by selecting a more
effective audit procedure or by performing the procedures closer to the balance sheet date.
The auditor must gather sufficient evidence to reduce audit risk to a low level in every audit and
this concept is reflected in the third standard of fieldwork. The evidence collected by the auditor
must be sufficient and appropriate.
Assertions for which the evidence is sought-The auditor has to collect appropriate evidence
and evaluate whether it supports the various assertions on which the auditor has to express
his opinion. The nature of assertions for which the auditor collects evidences for an
independent financial audit is the following
1. Existence: the inclusion of an item of asset or liability in the balance sheet implies an
assertion by the preparer that the asset or the liability exists at the date of the balance sheet.
2. Rights and obligations: it is asserted that the assets shown in the balance sheet are the rights
of the organization and liabilities are the obligations on the date of the balance sheet
3. Occurrence: there is an assertion that the transactions reflected in the financial statements are
occurred during the relevant accounting period and that they pertain to the organization.
4. Completeness: this assertion implies that there are no unrecorded assets, liabilities or
transactions.
5. Valuation: this assertion implies that the assets and liabilities are included in the balance
sheet are at an appropriate value i.e. as per the normally accepted bases of valuation.
6. Measurement: this assertion implies that transactions have been recorded at proper amounts
and that revenues and expenses have been allocated to the proper accounting periods

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7. Presentation and disclosure: this assertion implies that the disclosure, classification and
description of various item in the balance sheet and in the income statements are in
accordance with the generally accepted accounting standards and relevant statutory
requirements
5.4.1 Audit Evidence Decisions
Major decision of an auditor involves determining the appropriate type and amount of evidence.
In this judgment the cost factor should be considered.
The auditors' decisions on evidence accumulation can be broken down in to four sub decisions:
Which audit procedure to use (Audit Procedure?)
Which sample size to select for a given procedure (Sample Size?)
Which items to select from population (Items?)
When to perform the procedures (Timing)
1. Audit procedures
It is a detailed instruction for the collection of a type of audit evidence that is to be obtained at
some time during the audit. The instructions should be clearly and specifically stated.
Example: - Obtain cash disbursement journal and compare the payer name, amount, and date on
the cancelled cheque with cash disbursement journal.
2. Sample Size
After selection of audit procedure, the decision of how many items to test must be made by the
auditor for each audit procedures.
Example: - If 60,000 checks are recorded in cash disbursement journal, only
400 may be selected.
3. Items to Select
Following the sample size selection, it is necessary to decide which items in the population to
test.
Example: - The auditor may see the 400 checks based on random selection, weakly selection,
amount etc.
4. Timing
The timing decision is affected by when the client needs the audit to be completed. Also, it can
be affected by the auditors' belief on effective timing for accumulation and the availability of
audit staff.

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Example:- the auditor often prefer to count inventory up close to the balance sheet dates.
The audit procedure often incorporates the other three sub decisions.
Example: - obtain the October cash disbursement journal and compare the payee, name,
amount, and date on the cancelled cheque with cash disbursement journal for a randomly
selectedsample of 40 cheque numbers.
5.4.2: NATURE OF EVIDENTIAL MATTER
Evidential matter is any information that corroborates or refutes an assertion. The evidential
matter supporting the assertions in a company’s financial statements consists of the underlying
accounting data and all corroborating information available to the auditors. The auditing standard
states that sufficient competent evidential matter should be obtained to afford a reasonable basis
for an opinion regarding the financial statements under audit. It is unlikely to say that the auditor
will be completely convinced that the opinion is correct because of the nature of audit evidence
and cost limitations. However, he must be persuaded that his/her opinion is correct with high
level of assurance.
The two determinants of the persuasiveness of audit evidence are competence and sufficiency.
a)Competence of evidence
This refers to the extent to which evidence can be believable or worthy of trust; sometimes
reliability is interchanged with competence.
Competence of evidence deals only with the audit procedures selected. It isn't improved by
selecting larger sample size or different population items. It can be improved only by selecting
audit procedures that contain higher quality of characteristics of competent evidence.
Characteristics of competent evidence
Relevance: - Evidence must be relevant to specific audit objective.
For example if the auditor is interested to examine sales transaction, the evidences gathered
must be related to sale.
Independence of provider: - Evidences obtained outside the client company is more reliable than
that obtained from with in.
Effectiveness of client's internal control: - Strong internal control systems produce more
reliable evidence than weaker ones.
Auditor's direct knowledge: - Information obtained directly by the auditor through physical
examination, observation and computation are more competent.

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Qualifications of individuals providing information
The person who provides information must be qualified to do so. This affects the competence of
the evidence. Examples in clued communications from banks, attorney that have relationship
with business.
Degree of objectivity
Objective evidences are more reliable than subjective. Examples of objective evidence are
physical counts; confirmation from banks on cash balances, adding subsidiaries to check against
related general ledgers etc.
Timeliness
This refers either to when evidence is accumulated or the period covered by the audit. For
balance sheet items it is good if evidence is collected near balance sheet dates. For income
statement it is timely if the sample is taken from the entire period under audit rather than only
from part of the period.
b) Sufficiency of evidence
This refers to the quantity of evidence. It is primarily measured by the sample size. The selection
of sample size is determined at least by:
Auditor's expectations of misstatement
The strength of client's internal control
In addition to sample size, individual items may affect sufficiency. For example,
Items with larger dollar value
Items susceptible to misstatement
Items representative of the population
To sum up, the persuasiveness of evidence is judged by the combined effect of competency and
sufficiency.
In answering the question of persuasiveness, cost consideration must also exist. The objective is
to obtain a sufficient amount of competent evidence at the lowest possible cost.
5.4.3. TYPES OF AUDIT EVIDENCES
The major types of audit evidences gathered by the auditor during audit are the following:
1. Physical evidence: Actual physical examination or observation provides the best evidence of
the existence of certain assets. The existence of the property may be established through
physical examination. For example, the existence of plant assets, inventory, cash etc can be

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 verified by the physical examination. It might seem that physical examination of an asset
would be conclusive verification of all assertions relating to that asset. It may not be always
true. Physical verification gives evidence of the existence of the asset to the auditor
2. Documentary evidence: Another types of evidence relied upon by the auditor is the
documents. The worth of the documentary evidence depends on whether the documents are
created within the company (sales invoices) or it came from outside the company (vendors
invoice). Some times the documents created within the organization are sent outside for
endorsement and processing and these documents are regarded as very reliable evidence. In
accepting the reliability of the documentary evidence, the auditor should consider whether
the document is of a type that could easily be forged or created in its entirety by a dishonest
employee. The documentary evidence is classified into three categories and they are
a. Documents created outside the organization and transmitted directly to the auditor- the
most reliable documentary evidence consists of documents created by independent
parties outside the organization and transmitted directly to the auditors without passing
through the client’s hands. For example, the verification of accounts receivable
b. Documents created outside the organization and held by the organization-many of the
externally created documents referred to by the auditors will be in the possession of
organization. For example, bank statements, vendor’s invoices and statements, property
tax bills notes receivables etc.
c. Documents created and held within the organization- most documents created within
the organization represent a lower quality of evidence because they circulate only
within the company and do not receive critical review by an outsider. For example, the
sales invoices, shipping notices, purchase orders etc. The degree of reliance to be
placed on documents created and used only within the organization depends on the
effectiveness of the internal control. If the accounting procedures are so designed that
another person must critically review a document prepared by one person and if all
documents are serially numbered and all numbers in the series accounted for, these
documents may represent reasonably good evidence. Adequate internal control will also
provide for extensive segregation of duties so that no one handles a transaction from
beginning to end.

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3. Accounting records as evidence: the dependability of ledgers and journals as evidence is
indicated by the extent of internal control covering their preparation. An auditor will attempt
to verify an amount in the financial statements by tracing it back through the accounting
records. They will ordinarily carry this process through the ledgers to the journals and vouch
the item to such basic documentary evidence. To some extent, the ledger and journals
constitute worthwhile evidence in themselves to the auditors
4. Evidence from the analytical procedures: analytical procedures involve evaluations of the
financial statements by a study of relationships among financial and nonfinancial data. The
process of analytical procedures consists of four steps
a. Develop an expectation of an account balance
b. Determine the amount of difference from the expectation that can be accepted without
investigation
c. Compare the account balances with the expected account balance
d. Investigate the significant deviations from the expected account balance
Techniques used in performing analytical procedures range from complex models
involving many relationships and data from many years. For example, comparison of
revenue and expense amounts for the current year to those of the previous years and to
the industries average.
5. Evidence from computations: to prove the arithmetical accuracy of the client’s records, the
auditor make computations independently as another form of audit evidence. Computations
verify the mathematical processes and used to prove the calculation of the client.
6. Evidence provided by the specialists: since the auditors may not be experts in all the fields
of business of the client, he may get the services of the experts in performing highly technical
tasks such as valuation of inventory, or making the actuarial computations to verify liabilities
for postretirement benefits. The expert should be independent person. If the auditor feels that
the expert is not an independent person, he may perform additional procedures or engage
another specialist.
7. Oral evidence: during the examination of records, the auditor may ask many questions to the
officers and the employees of the organization on the endless topics ranging from the
location of records and documents, the reasons underlying an unusual accounting procedures,

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 the probabilities of collecting a long past due accounting receivables etc. The answers the
auditor receives to the questions constitute another type of evidence.
8. Evidence from client representation letters: The auditor should get a representation letter
from the client summarizing the most important oral representations made during the
engagement. These letters are dated as the last day of the fieldwork and usually signed by the
chief executive officer and chief finance officer. Most of the representations fall into the
following categories
1. All accounting records, financial data and minutes of the directors meetings have
been made available to the auditors
2. The financial statements are complete and prepared in conformity with International
Financial reporting Standards (IFRS)
3. All items requiring disclosure have been properly disclosed

EVIDENCE FOR RELATED PARTY TRANSACTIONS

Related parties refer to the client entity and any other party with which the client may deal where
one party has the ability to influence the other to the extent that one party to the transaction may
not pursue its own separate interests. Examples of related parties are officers, directors, principal
owners, members of the immediate families, affiliated companies, subsidiary companies etc. A
related party transaction is a transaction between the company and these parties. The primary
concern for the auditor is that significant materials of related party transactions are adequately
disclosed in the client’s financial statement or the related notes. Disclosure of related party
transactions should include the nature of the relationship, the description of the transactions etc.
Evidences about accounting estimates -The auditor must be very careful in considering
financial statement accounts that are affected by estimates made by the management, particularly
those for which a wide range of accounting methods are considered acceptable. For example, the
estimates of obsolete inventory, allowances for loan losses, estimates of warranty liabilities etc.
though the making of estimates are the responsibility of the management, the auditor should
determine that
a. All necessary estimates have been developed
b. The accounting estimates are reasonable and
c. The accounting estimates are properly accounted for and disclosed

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5.5 Audit Documentation
Audit documentation is a critical aspect of the audit process that involves the preparation and
maintenance of records, working papers, and other evidence that support the auditor's findings
and conclusions. Here are some key points to consider when discussing audit documentation:
1. Purpose: Audit documentation serves as the primary record of the audit work performed,
including the procedures conducted, evidence obtained, and conclusions reached. It provides a
basis for the auditor's report and helps demonstrate compliance with auditing standards.
2. Content: Audit documentation typically includes planning documents, risk assessments,
testing results, supporting schedules, and management representations. It should be organized,
detailed, and sufficiently complete to enable another auditor to understand the work performed.
3. Retention: Audit documentation should be retained for a specific period in accordance with
professional standards and regulatory requirements. Retention policies help ensure that the audit
trail is preserved for future reference, quality control reviews, or potential legal proceedings.
4. Confidentiality: Audit documentation is considered confidential and should be protected from
unauthorized access or disclosure. Auditors have a duty to maintain the confidentiality of client
information and restrict access to sensitive documents.
5. Review and Approval: Audit documentation should be reviewed by supervisors or quality
control personnel to ensure accuracy, completeness, and compliance with audit standards. Proper
review procedures help validate the audit work and enhance the overall quality of the
engagement.
6. Electronic Tools: Many audit firms use electronic work paper software to facilitate the
creation, organization, and storage of audit documentation. These tools offer features such as
version control, electronic sign-offs, and secure file sharing to streamline the audit process.

Audit documentation plays a crucial role in supporting the audit process, ensuring accountability,
and providing a reliable basis for the auditor's opinion. By maintaining thorough and well-
organized documentation, auditors can enhance the quality and credibility of their work while
meeting professional standards and regulatory requirements.

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