The Search For Evidence Explained: Edition

The search for evidence explained
Chapter 6
UseAudit
with Process:
The AuditPrinciples, th Edition
Process 4Practice
Use with The and Cases
By Iain Gray
Third Edition & Stuart
by Iain Gray &Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
LEARNING OBJECTIVES
After studying this chapter you should be

able to:
• Explain why the audit evidence search is a ce
ntral concept of auditing.
• Identify the stages of the audit process and sh
ow that evidence has to be collected in differe
nt ways at each stage.
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Process 4Practice
By Iain Gray
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2008 Thomson
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LEARNING OBJECTIVES CONT'D
• Explain the relationship between audit evidenc

e and audit risk.
• Show that there are different grades of audit e
vidence and that evidence may be up graded
or downgraded.
• Explain the relationship between audit evidenc
e and the application of audit judgement.
UseAudit
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Process 4Practice
By Iain Gray
© 2005
2008 Thomson
Cengage Learning
• Show to what extent the evidence-gathering p

rocess might be affected by a decision by the
auditor to rely on the directors and the control
environment they have introduced.
• Form conclusions on the basis of evidence av
ailable in selected scenarios.
UseAudit
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2008 Thomson
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• Explain the difference between an audit, a limi

ted assurance engagement, a compilation eng
agement and an engagement involving agree
d-upon procedures, and suggest how the evid
ence-gathering process may differ between th
em.
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KEY POINTS – p.222
The audit process is a search for evidence to form

an opinion, based on a whole series of conclusions
with regard to:
(a) accuracy and dependability of the accounting rec
ords;
(b) validity of figures in financial statements;
(c) compliance with legislation and accounting and r
eporting standards.
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By Iain Gray
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.222 CONT'D
Relevant ISAs in the area are:
• ISA 500 – Audit evidence and

• ISA 501 – Audit evidence: additional consid
erations for specific items.
The purpose of these standards is ‘to establish standards and t
o provide guidance on what constitutes audit evidence in an au
dit of financial statements, the quantity and quality of audit evid
ence to be obtained, and the audit procedures that auditors us
e for obtaining that audit evidence.
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Figure 6.1 Evidence supporting reasonable conclusions
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By Iain Gray
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2008 Thomson
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The words ‘sufficient’ and ‘appropriate’ are

interrelated, ‘appropriate’ having two further
elements:
(a) ‘Relevant’, that is, pertinent to the matter in han
d;
(b) ‘Reliable’, that is, trustworthy, with some grade
s of evidence more reliable than others.
UseAudit
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2008 Thomson
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Evidence is persuasive rather than conclusive

and auditors seek evidence from different sources
to support the same assertion (that is, to corrobor
ate it). There is a link between persuasiveness an
d quantity as auditors seek to be persuaded that o
bjectives have been met by accumulating evidenc
e.
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Evidence is the cornerstone of the audit process

– a prerequisite for forming an opinion.
Collecting and assessing it needs considerable ima
gination; the relevant evidence is frequently difficult
to find, being often concealed (whether intentionall
y or unintentionally).
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Management assertions may be classified in the

following three ways:
(1) genuine;
(2) accurate; and
(3) complete.
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KEY POINTS – pp.225–226
Trade debtors exist and owe the amounts stated in

the debtors ledger to the company.
Trade debtors’ balances are fully collectible.
All amounts owed by the trade debtors are include

d in the amount attributed to trade debtors in the fin
ancial statements and relate to the correct period.
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KEY POINTS – pp.227–232
This approach enables auditors to set objectives
and place evidence search in a suitable context.
Guidelines for assessing evidence are as follows:
(a) Audit evidence is more reliable when it is obtain

ed from independent sources outside the entity;
(b) Audit evidence that is generated internally is mo
re reliable when the related controls imposed by
the entity are effective;
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KEY POINTS – pp.227–232 CONT'D
(c) audit evidence obtained directly by the auditor i

s more reliable than audit evidence obtained ind
irectly or by inference;
(d) audit evidence is more reliable when it exists in
documentary form;
(e) audit evidence provided by original documents i
s more reliable than audit evidence provided by
photocopies or facsimiles;
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(f) evidence created in the normal course of busine

ss is better than evidence specially created to s
atisfy the auditor;
(g) the best informed source of audit evidence will
normally be management of the company but m
anagement’s lack of independence reduces its
value as a source of such evidence;
(h) Evidence may be upgraded by the skilful use of
corroborative evidence;
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Business risk approaches have resulted in greater

reliance on management. As auditors align them-s
elves more with management, they begin to feel th
at they can judge individuals’ integrity.
This trust can result in a reduction in substantive te
sting, with a consequent reduction in audit cost
to counterbalance the increased cost of time spent
at the planning stage.
UseAudit
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Process 4Practice
By Iain Gray
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 6.1
Think about these matters and decide if it is wise

to trust management in the way that the protagon
ists of the business risk approach to auditing beli
eve is possible. Before you do this, go back to C
hapter 1 and reread what we had to say about a
gency theory on pages 9–11.
UseAudit
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This approach might not be justified in the light of E

nron and WorldCom, and the agency theorists may
be right that it would be unwise for auditors to acce
pt the word of management, without obtaining cons
iderable corroborative evidence from elsewhere.
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But auditors do not start from a presumption

that managements lack integrity. A major issue
is that business risk may bring the auditor so
close to management that independence may
be threatened.
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Professional accountants carry out many kinds of e

ngagement in relation to financial information.
Many engagements may result in lower levels of ev
idence being collected, so that a ‘true and fair’ form
of opinion cannot be given.
Such audits are likely to be of value to users nonet
heless.
UseAudit
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By Iain Gray
© 2005
2008 Thomson
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Examples of such engagements are:

• compilation engagement;
• limited assurance engagement;
• agreed-upon procedures engagement.
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Compilation engagement is when professional acc

ountants prepare financial statements using data a
nd information provided by management
and a compilation report is issued that gives no ass
urance as to truth and fairness, nor compliance wit
h CA 1985 and accounting standards.
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Limited assurance engagement is not a full audit b

ut the professional accountant forms an opinion on
the reasonableness of financial statements and obt
ains limited assurance that the financial statements
comply with the CA 1985 and accounting standard
s. The review report contains
a negative form of opinion.
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Agreed upon procedures engagement is similar to

a review except that certain detailed procedures w
ould be performed, as agreed with management, re
quiring the accountant to seek evidence that the ite
ms subject to the agreed procedures have been st
ated appropriately.
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By Iain Gray
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 6.2
Now that we have introduced you to the above e

ngagements, do you believe that they will be of v
alue to users?
UseAudit
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Process 4Practice
By Iain Gray
© 2005
2008 Thomson
Cengage Learning
CHAPTER SUMMARY
This chapter has attempted to show that:

• Evidence is the cornerstone of the whole audit pr
ocess and the audit is an evidence-gathering pro
cess;
• Evidence is required to give the auditors assuran
ce that they are forming proper conclusions;
UseAudit
with Process:
Process 4Practice
By Iain Gray
© 2005
2008 Thomson
Cengage Learning
CHAPTER SUMMARY CONT'D
• Evidence-gathering does not take place in a va

cuum, but in real organizations and with the part
icipation of real people;
• Sufficiency and appropriateness (relevance and
reliability) with regard to audit evidence;
• Different factors that might affect reliability;
• Consistent audit evidence can affect the conclu
sions of the auditor.
UseAudit
with Process:
Process 4Practice
By Iain Gray
© 2005
2008 Thomson
Cengage Learning
FURTHER READING
The ISAs in the area, ISA 500 – Audit evidence, a

nd ISA 501 – Audit evidence – additional consider
ations for specific items, are essential reading.
UseAudit
with Process:
Process 4Practice
By Iain Gray
© 2005
2008 Thomson
Cengage Learning

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The search for evidence explained

After studying this chapter you should be

• Explain the relationship between audit evidenc

• Show to what extent the evidence-gathering p

• Explain the difference between an audit, a limi

The audit process is a search for evidence to form

• ISA 500 – Audit evidence and

The words ‘sufficient’ and ‘appropriate’ are

Evidence is persuasive rather than conclusive

Evidence is the cornerstone of the audit process

Management assertions may be classified in the

Trade debtors exist and owe the amounts stated in

Trade debtors’ balances are fully collectible.

All amounts owed by the trade debtors are include

(a) Audit evidence is more reliable when it is obtain

(c) audit evidence obtained directly by the auditor i

(f) evidence created in the normal course of busine

Business risk approaches have resulted in greater

Think about these matters and decide if it is wise

This approach might not be justified in the light of E

But auditors do not start from a presumption

Professional accountants carry out many kinds of e

Examples of such engagements are:

Compilation engagement is when professional acc

Limited assurance engagement is not a full audit b

Agreed upon procedures engagement is similar to

Now that we have introduced you to the above e

This chapter has attempted to show that:

• Evidence-gathering does not take place in a va

The ISAs in the area, ISA 500 – Audit evidence, a

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