Chapter 4.

Fundamental Concepts:
Evidential Matter and Its
Documentation
Auditing Standards require:
Sufficient, appropriate evidential matter is
to be obtained through inspection,
observation, inquiries, and confirmations to
afford a reasonable basis for an opinion
regarding the financial statements under
examination.
: That the auditor believe that the evidence
examined is good enough and indeed
examined enough good evidence.
The evidence gathering is the core of an
audit.
Evidence the information obtained by the
auditor in arriving at the conclusions on
which the audit opinion is based.
PSA 500(rev): Audit Evidence
provides guidance on the quantity and
quality of audit evidence to be obtained
when auditing FS, and the procedures in
obtaining audit evidence.
Audit Evidence (Evidential matter)necessary information that the auditor
gathers in order to form a credible opinion on
the assertions by the clients management
that are inherent in the FS.
(examples: pp 82)
Components of Audit Evidence
1. Information contained in the accounting
records underlying the FS
2. Other Corroborating evidence
Accounting Records: records of initial
accounting entries and supporting records
Important Characteristics of underlying
accounting data : they are prepared by the
clients personnel and represent the end
result in the processing of transactions.
Auditors use corroborating information
to validate the underlying accounting
records
Corroborating
Evidence
includes
documentary material showing that
(a) Propriety of the accounting data
(b) Contracts and minutes of meetings
(c) Confirmations and other written
representations of knowledgeable
persons
(d) Analysts reports and comparable data
about competitors (Benchmarking
data)

(e) Results of inquiry, direct observation,

physical examination and inspection,
as well as computations
(f) Conclusions reached through valid
reasoning

Seven Types of Audit Evidence

1. Physical Examination
2. Re-performance
3. Documentation
4. Confirmation
5. Analytical Procedures
6. Inquiries of client personnel or
management
7. Observation
Characteristics of evidence
*Auditors gather evidence of sufficient
quantity and appropriate quality to form their
opinion on the FS. Sufficiency and
appropriateness are interrelated and apply to
audit evidence obtained from both tests of
controls and substantive procedures.
Sufficiency of Evidence: relates to the
quantity of evidence gathered by the auditor.
- Recognizes that the accumulation of
evidence should be persuasive rather
than convincing.
The auditor is not free to collect unlimited
amounts of evidence since he must work
within economic limits.
Influenced by the ff. factors:
1. Auditors assessment of the nature
and level of inherent risk at both the
FS level and the account balance or
class of transaction level.
2. Nature of the accounting and internal
control systems and the assessment of
control risk
3. Materiality of the item being examined
4. Experience gained through previous
audits
5. Results of audit procedures
6. Source and reliability of information
available
Appropriateness of Evidence: measure of
the quality of the evidence and its relevance
to a particular assertion and its reliability.
*Relevance refers to whether the evidence
provides the auditor with the information
sought by him/her
Audit Evidence is said to be relevant if it
pertains to the specific audit objective being
tested.
*Reliability related to validity
Reliability of evidence is influence by the
source (internal or external) and by its nature
(visual, documentary, or oral) and is
dependent on the individual circumstances
under which it is obtained.

General Rules Reliability of Audit

Evidence
1. Audit evidence is more reliable when it
is obtained from independent sources
outside the entity.
2. Audit evidence obtained directly by
the auditor is more reliable than audit
evidence obtained indirectly or by
inference.
3. Audit evidence is more reliable when
its exists in documentary form.
4. Audit evidence provided by original
documents is more reliable than audit
evidence provided by the photocopies
or facsimiles.
READ (pp. 84) Hierarchy or reliability of
Evidence
PSA 510(Red): Initial EngagementsOpening Balances
The auditor should obtain sufficient
competent audit evidence that
a. The opening balance do not contain
misstatements that materially affects
the current periods FS
b. The prior periods closing balance have
been correctly brought forward to the
current period or when appropriate,
have been restated
c. Appropriate accounting policies are
consistently applied or changes in the
accounting policies have been properly
accounted for and adequately disclosed.
Procedures for Obtaining Evidence
1. Inspection: consists of examining
records, documents or tangible assets.
- Because of the variety of documents,
records or tangible assets that the
auditor may inspect, this audit
technique addresses all of the FS
assertions.
*Scanning: review of documents for
unusual items
2. Observation: consists of looking at a
process or procedures being performed by
others where no paper trail exists.
Observation differs from physical inspectionObservation focuses on client activities to
understand them of how and when they are
done.
-

It is best suited for testing the

existence of the assertion.

3. Inquiry: consists of making the

information of knowledgeable persons
inside or outside the entity.
-

Although the responses to the

inquiries are usually of limited
reliability: they do provide a starting
point for the performance of other
auditing techniques.

However, the auditor is usually more

efficient when corroborating responses
to inquiries than when finding answers
independently through an undirected
examination of detailed evidence.

4. Confirmation: consists of the response

of the inquiry to corroborate information
contained in the accounting records.
5. Computation: Consists of verifying the
arithmetical accuracy of source documents
and accounting records, or, of independent
calculations.
6. Analytical Procedures: Consists of
evaluation of financial information made
by a study of plausible relations among
both financial and non-financial data.
- These are generally used to develop
and expectation for a FS account and
to assess the reasonableness of the FS
in that context.

Relationship of Evidence to Audit

Objective and Audit Procedures
The overall Objective of Audit of FS of an
entity
- To gather and evaluate audit evidence
of sufficient quantity and appropriately
quality in order to form, and
communicate to the users of the FSs,
and opinion on the reliability of the
assertions of management inherent in
those FS for the purpose of adding
credibility to those assertions.
*Audit Procedures constituting the specific
acts performed in the conduct of the audit
are designed to generate information
indicative of the fairness of the management
assertions and are therefore useful for the
determining if an audit objective has been
satisfied.
*When an audit procedure (A collection of
this is called audit program) is performed,
it results in the generation of audit evidence.
Audit program: describes what and how
much evidence is required to be gathered
and evaluated, and how, when and by whom
it is to be gathered and evaluated during the
interim and final visits.
- Details the nature, timing and extent
of the planned audit procedures
relating to a particular account
balance or account balance assertion.
3 Primary purpose of Audit Programs
1. They provide evidence of Audit
planning
2. They provide guidance to the audit
team
3. They are used to help monitor the
progress of the audit.

3 basic Factors in developing an Audit

Program
1. The auditor assesses the risk of
material misstatements and
determines how much testing of
internal controls needs to be
performed and how much substantive
testing of account balances should be
performed.
2. The materiality of the account balance
and the item that make up that
balance.

3. Relevant assertions that need testing.