International Standard Auditing and Audit Evidence


ISA8 describe audit evidence as:
“Audit evidence means the information obtained by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence comprises source documents and accounting records rendering the financial statements and corroborating informations from other sources.”

ISA8 requires that an auditor should obtain sufficient appropriate audit evidence through the compliance procedures and substantive procedures to enable him to draw reasonable conclusions therefore to form the basis of his opinion on the financial statements.

ISA8 contains three important standards relating to nature and sources of audit evidences:
(a) ISA8.2: The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.
(b) ISA8.10: When obtaining audit evidence from tests of control, the auditor should consider the sufficiency and appropriateness of the audit evidence to support the assessed level of control risks.
(c) ISA8.12: When obtaining audit evidence from substantive procedures, the auditor should consider the extent to which the evidence supports the relevant financial statement assertions.

Sufficient Appropriate Audit Evidence
Sufficient and appropriateness are interrelated and apply to both tests of controls and substantive procedures:
a. Sufficiency is the measure of the quantity of audit evidence.
b. Appropriateness is the measure of the quality or reliability of the audit evidence.
The auditing standard points out that the quantity of audit evidence required cannot be prescribed but is a matter of professional judgement. Factors influencing the decision include:
1. Auditor’s assessment of the nature and level of inherent risks at both the financial statement level and the account balance or class of transactions level.
2. Nature of the accounting and internal control system and the assessment of control risk.
3. Materiality of the item being examined.
4. Experience gained during previous audit.
5. Result of auditing procedures.
6. Source and reliability of information available.
If the auditor is unable to obtain sufficient appropriate audit-evidence, the auditor should consider the need to qualify his audit report.

Test of Control
Test of control means tests performed by the auditor to obtain audit evidence about the suitability of design and effective operation of the accounting and internal control system:
(a) Design: The accounting and internal control system are suitably designed to prevent or detecting and correcting material misstatements.
(b) Operation: The systems exist and have operated effectively throughout the relevant period.
Substantive Procedures: Substantive procedures mean tests performed to obtain audit evidence to detect material misstatement in the financial statement.
Procedures for Obtaining Audit Evidence
An auditor obtains audit evidence by conducting one or more for the following procedures.
1. Inspection
2. Observation
3. Inquiry
4. Confirmation
5. Computation
6. Analytic procedures

1. Inspection:
Consists of examination of client’s records, documents or tangible assets. The reliability of audit evidence obtained by inspection of records and documents varies according to the nature or source and effectiveness of internal control over their processing. Three major categories of documentary audit evidence exist, given here in descending degree of reliability as audit evidence.
a. Created and provided to auditor by third parties.
b. Created by third parties and held by entity.
c. Created and held by entity.
Inspection of tangible assets provides reliable audit evidence about their existence but not necessary as to their ownership or value.

2. Observation:
Observation involves looking at a procedure while it is being performed by others. The standard examples of observation are attendance at the wages payments, stocktaking, general security measures including high risk areas like computer centre, directorate’s office. Observation tests are generally compliance assurance because the client’s staff may be on their best when auditor is watching and less conscientious at other times.

3. Enquiry:
Enquiry involves seeking information from client’s staff or external sources. Enquiries may range from formal written ones to third parties to oral ones to persons inside the entity. Responses may provide the auditor with:
(a) information not previously possessed; or
(b) corroborator audit evidence

4. Confirmation:
Confirmation aims to verify what is shown in client’s accounting records. Examples of confirmation include direct confirmation by debtors, banks, creditors, lawyers, etc. The strength of the evidence depends on the knowledge and integrity of the source. Internal anguishes may be part of either compliance testing of substantive testing approaches but most external request for confirmations are example of substantively based exquisites.

5. Computation:
Computation includes checking the arithmetical accuracy of source documents, depreciation calculations, payroll deductions, reconciliation’s inventory valuation, control accounts etc. So the auditor carries out computational audit test during both the compliance and substantive phase of the audit.

6. Analytic procedures:
Analytical procedures consist of analysis of significant ratios and trends including resulting investigation of fluctuation and relationship that are inconstant with other relevant information or deviate from predicted amounts.

Common Law Evidence in Auditing
Common law evidence rules determine what facts are relevant to a particular issue before a court, which party is required to prove, what material can be tendered to and accepted by a court as evidence. The burden of providing evidence rests upon a party to proceedings to issue. Failure by such a party to adduce sufficient evidence on an issue would result in the case being lost. Such a party, however is not required to produce absolute evidence. Any single piece of cogent evidence can be sufficient to satisfy the burden of proof cast upon him. Evidence will be considered by a court only if it is both.

(a) Relevant to the issue before the court and
(b) Is capable of being admissible as evidence.
The evidence which is admissible can be oral, documentary or real.

Concludingly, common law evidences requirements are:
a. Evidence should be reasonably admissible
b. Evidence should be relevant
c. Evidence should be provided by the party claiming existence of certain facts.
d. Evidence may be oral or documentary
e. Failure to adduce evidence results in loosing the case

The main principles or rules of common law evidence are equally applicable in auditing on account of similarity of action. In common law, the judge is to decide the acceptance or otherwise of evidence which must be sufficient and admissible. Same is the situation with auditing. The auditor has to decide the sufficiency and acceptability of evidence and the client is required to produce evidence. Which may be oral or documentary.

In auditing a client must prove by sufficient evidence the facts that have been recorded in his books of accounts and must prove their correctness, authentically genuineness and relevancy to the business of the undertaking. If he so succeeds and the evidence is admissible the auditor shall accept such evidence, otherwise the same will be liable to be rejected. Thus common law rules and principles of evidence are equally applicable in auditing.

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