In the first place, to be acceptable as audit evidence, the information obtained by the auditor must be appropriate. Appropriateness in this context means the measure of quality of audit evidence, its relevance to a particular assertion and its reliability.
The question whether evidence is relevant depends on the extent to which it assists the auditor in achieving audit objectives. The audit objective will be related to the assertion ,which is what the auditor is attempting to gather evidence about. For example, attendance at an inventory count will provide the auditor with evidence as to the physical existence and condition of the inventory, but attendance will not provide any evidence that the inventory has been correctly valued, is complete, or is beneficially owned by the client. Other evidence such as supplier’s invoices, analytical review procedures and confirmations from lenders to whom the inventory may have been pledged ,or consignors in the case of consignment stocks held, will provide further evidence of these other assertions.
The reliability of the audit evidence will be dependent on its source and nature. The auditor obtains evidence from internal sources, from external sources and from evidence developed by the auditor. Generally speaking, evidence such as analytical reviews and trend analysis developed by the auditor will be more reliable than that provided by the client or third parties. Evidence obtained from external sources is generally more reliable than that produced by the client. For example, bank statements and confirmation of balances will be more reliable than account receivable statements produced by the client’s accounting system to send to its customers. When the client has good internal controls, the evidence developed internally will be more reliable than when internal controls are weak or nonexistent. Similarly, evidence concerning factual amounts which can be objectively corroborated, such as the balance in the bank account on a given date, will be more reliable than that which is judgmentally determined, such as a provision for inventory obsolescence, which is based on a number of assumptions about future events which may be difficult ,if not impossible, to predict with substantial accuracy. Audit evidence is more reliable when it exists in documentary form, whether paper, electronic or other medium. Original documents are more reliable than photocopies or facsimiles.Consequently,the auditor considers the reliability of the information to be used as audit evidence, for example,photocopies,fascimeles and filmed, digitalized or other electronic documents, including controls over their preparation and maintenance where relevant. In circumstances indicating fraud or error that could materially affect the financial statements ,the auditor must exercise professional skepticism in accepting explanations from management and employees, and evidence generated internally or, purportedly ,externally. The auditor should also design appropriate substantive audit procedures-which should reveal whether or not the financial statements are materially misstated-and consider the implications of any identified misstatements for other areas of the audit. Suitably qualified staff should be allocated to the audit, if necessary, and after discussion with management to ascertain what steps are being taken to address the fraud or error, the allocation of staff may include those with forensic audit experience.
Audit evidence obtained should be sufficient to restrict the audit risk with regard to each material assertion to an accepted level. This will be affected by the auditor’s assessment of inherent and control risks attached to the assertion and thus the likelihood of errors occurring, as well as the materiality of the recorded amounts. Errors detected in prior audits, in the absence of change, as well as errors detected in the current audit are of the in this...
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