Standard on Auditing (SA) 500 – Audit Evidence, issued by the Institute of Chartered Accountants of India (ICAI), lays down the foundational principles for auditors to gather and evaluate evidence to form a credible audit opinion. Audit evidence is information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. It includes both information contained in the accounting records underlying the financial statements and information obtained from other sources. The objective is not just to prescribe a checklist for collection of documents — it digs deeper to ensure sufficiency, relevance and reliability of the information gathered. This article explores the key elements of SA 500, highlighting its role in ensuring audit integrity through effective evidence gathering, assessment, and adherence to the best practices while addressing common challenges.
Cornerstones of Audit Evidence - Sufficiency and Appropriateness
The concepts of sufficiency and appropriateness lie at the heart of the SA 500 guidance. Both are interrelated yet distinct in nature.
A. Sufficiency
Refers to the quantity of evidence obtained, and it depends on the scale and nature of the assessed risk. More evidence is typically needed when the risk of material misstatements is higher. However, obtaining more evidence may not compensate for its poor quality.
B. Appropriateness
Relates to the quality of audit evidence, focusing both on relevance and reliability.
- Relevance ensures that the audit evidence aligns with the audit objective and is directly related to the assertion being examined – for example, when testing for understatement of payables, reviewing subsequent disbursements is more relevant than checking recorded invoices.
- Reliability, meanwhile, requires that the evidence be trustworthy with a proven track record. For instance, a confirmation received directly from a bank is more trustworthy than a printout provided by the client.
Determining whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level (as specified in SA 330) and thereby enabling one to arrive at a credible opinion is a matter of professional judgement which requires effective evaluation of both the quantity and quality of the evidence.
Sources of Audit Evidence
To form a credible opinion, auditors gather evidence from various sources, both within and outside the entity. Usefulness of such evidence depends upon factors like source, sufficiency, relevance and reliability. Below are the key sources from which auditors commonly obtain audit evidence:
A. Information generated or maintained by the Entity
- Accounting records like sales and purchase journals, general ledgers, payroll records, etc. for verifying financial transactions and ensuring proper recording and classification in line with applicable accounting standards.
- Information produced for internal use, like reports to monitor business operations, helps in understanding the trends, assessing risk and performing analytical procedures.
- Management’s representations provide explanations, assurances and confirmations.
B. External Evidence from Independent Sources
Various independent sources, such as confirmations from banks, vendors or customers, and legal documentations, are generally considered more reliable due to their nature of independence and hence strengthen the reliability of the evidence.
C. Work of a Management’s Expert
Information from a Management Expert is used when a specialised knowledge is involved, such as actuarial calculations, valuations or engineering data. However, the auditor’s responsibility here include:
- Evaluating the expert’s competence, capabilities and objectivity
- Gaining an understanding of the expert’s work
- Assessing the appropriateness of the expert’s conclusions for audit purposes
D. Corroborative, Contradictory, or Absent Evidence
- Corroborative evidence: The documents that support management’s assertions. Auditors can resort to reliable and trusted sources of corroborative evidence, such as contracts matched with execution documents, vendor invoices, or relevant delivery receipts.
- Contradictory evidence: Information obtained during the audit which conflicts with management’s assertions – for instance, a supplier’s denial of sending goods which the management claims to have received would be contradictory evidence leading to a question of possible fraud or error.
- Absent evidence: If the auditor expects to find certain documents or confirmations but they are missing, or if management refuses to provide information, such absence of evidence itself becomes important and may indicate a risk of material misstatement.
Audit Procedures and Techniques for Audit Evidence
In accordance with SA 315 and SA 330, audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is obtained by performing the below key categories of audit procedures.
A. Risk Assessment Procedures
These are carried out to understand the entity and its environment, including internal controls. The aim is to identify and assess the risk of material misstatements which backs the further audit procedures.
B. Tests of Controls
These are carried out to evaluate the operating effectiveness of controls when such controls are relevant to audit strategy.
C. Substantive Procedures
These are performed to detect material misstatements at the assertion level. These include
- Tests of Details: Transaction-level checks to confirm accuracy (e.g., vouching invoices, checking payroll records)
- Analytical Procedures: These involve analysing relationships and trends to identify unusual or inconsistent indications that may need further investigation. (e.g., Comparing sales numbers with previous years, evaluation of trends through ratios)
The following audit techniques may be used during risk assessment, test of controls or substantive audit procedures depending upon the audit objective.
Practical Approaches to SA 500 Compliance: Addressing Challenges
Conclusion
The credibility of any audit process ultimately depends on the evidence, as it forms the foundation for arriving at audit conclusions. By adhering to the principles of SA 500, auditors can ensure that their audit opinion is supported by sufficient and appropriate audit evidence, thereby upholding both the integrity of the financial reporting process and the profession itself.
Contributors
CA N Srilatha Bhat – LinkedIn
Kuldeep Sarma – LinkedIn
Poonam Vernekar – LinkedIn
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