Topic audit evidence module f8 acca

Topic audit evidence module f8 acca Topic audit evidence module f8 acca Topic audit evidence module f8 acca Topic audit evidence module f8 acca

Audit Evidence: A Comprehensive Guide

ACCA F8 Audit and Assurance

Prepared by Admin

Updated: July 2025

Overview of Audit Evidence

Purpose

Audit evidence is the cornerstone of the audit process, enabling auditors toform an opinion on the financial statements’ fairness

Part of ACCA F8 Audit and Assurance syllabus

Critical for transitioning from planning to executing audit procedures.Ensures compliance with International Standards on Auditing (ISA)

Why is Audit Evidence Important?

After planning, auditors perform:

Tests of Controls : Evaluate internal control effectiveness.

Substantive Tests : Verify financial statement assertions.

Objective: Gather sufficient and appropriate evidence.

Evidence supports conclusions and the final audit opinion

Key Questions About Audit Evidence

Core Questions

1 What constitutes audit evidence?

2 How reliable is the evidence collected?

3 What specific areas require evidence?

4 What techniques are used to gather evidence?

These questions guide the auditors approach to evidence collection

What is Audit Evidence?

Definition (ISA 500)

Audit evidence is all information used by the auditor to reach conclusionsthat form the basis of the audit opinion

Includes:

Accounting records (e.g., ledgers, journals).

External confirmations (e.g., bank statements, supplier letters).

Other relevant data (e.g., contracts, invoices).

Example: A bank confirmation letter verifying cash balances

Objective of Financial Statement Audit

Audit Goal

To express an opinion on whether financial statements are prepared, in allmaterial respects, in accordance with applicable financial reporting

standards

Audit evidence provides the foundation for this opinion

Ensures stakeholders can rely on financial information

Characteristics of Audit Evidence

Per ISA 500, evidence must be:

Sufficient : Adequate quantity to support conclusions.

Appropriate : Relevant and reliable in quality.

Sufficiency depends on:

Risk of material misstatement.

Quality of evidence collected.

Appropriateness reflects relevance and reliability.

Sufficiency of Audit Evidence

Definition

Sufficiency refers to thequantity of evidence required to reduce audit risk

to an acceptable level

Influenced by:

Risk level: Higher risk requires more evidence.

Quality: High-quality evidence reduces quantity needed.

Example: For a high-risk account like cash, more evidence is needed

Appropriateness of Audit Evidence

Definition

Appropriateness reflects the qualityof evidence, encompassing its

relevance and reliability

Relevance: Evidence must pertain to the assertion being tested

Reliability: Evidence from independent sources is more trustworthy.Note: Large quantities of low-quality evidence do not compensate forpoor quality

Factors Affecting Evidence Reliability

Source: External (e.g., bank confirmations) > Internal (e.g., client

Form: Written (e.g., contracts) > Oral (e.g., discussions).

Originality: Original documents > Copies or faxes.

Reliability of Audit Evidence Types

Reliability Hierarchy

External Evidence Most reliable (independent sources,

e.g., bank confirmations)

Auditor-Collected More reliable than indirect or inferred

evidence

Client Records Reliable if internal controls are

effec-tive

Written Evidence More reliable than oral (e.g.,

con-tracts vs verbal agreements)

Original Documents More reliable than copies or faxes

Using Work of Managements Expert

Definition

A managements expert is a professional in a non-audit/accounting field(e.g., valuation expert) assisting in financial statement preparation

Auditors responsibilities:

Evaluate competence, objectivity, and capabilities.

Assess suitability of the experts work as audit evidence.

Example: Using a property valuers report for asset valuation

Using Client-Generated Information

Auditor must assess:

Reliability: Is the information trustworthy for audit purposes?

Accuracy and Completeness: Does it support audit conclusions?

Example: Verifying sales invoices against revenue records

Strong internal controls increase reliability of client data

Handling Inconsistencies and Doubts

Procedure

If evidence is inconsistent or reliability is doubted:

Perform additional procedures to resolve discrepancies

Assess the impact on other audit areas

Example: Conflicting bank confirmation vs client records requiresfurther investigation

Critical for maintaining audit integrity

What Evidence to Collect?

Focus

Auditors collect evidence to test assertions in financial statements

Assertions: Managements representations about financial statement

preparation per applicable standards

Two categories:

Transactions and events (Profit and Loss).

Account balances and disclosures (Balance Sheet).

Assertions About Transactions and Events

Occurrence: Transactions/events recorded actually occurred.

Completeness: All transactions/events are recorded.

Accuracy: Amounts and data are correctly recorded.

Cut-off: Transactions are recorded in the correct period.

Classification: Transactions are recorded in the correct accounts.

Example: Verifying sales invoices for occurrence and accuracy

Assertions About Account Balances

Existence: Assets and liabilities exist.

Rights and Obligations: Entity controls assets and is liable for

obligations

Completeness: All assets, liabilities, and equity are recorded.

Accuracy, Valuation, Allocation: Recorded at appropriate values Classification and Presentation: Properly recorded and disclosed.

Example of Assertions in Practice

Scenario: Inventory Audit

Existence: Physically inspect inventory to confirm it exists.

Completeness: Ensure all inventory items are recorded.

Valuation: Verify inventory is valued per applicable standards (e.g.,

lower of cost or market)

Presentation: Check inventory is correctly classified in financial

statements

Assertions in ACCA F8 Exams

Exam Relevance

Assertions are a frequent andcriticalexam topic

Common questions:

Identify audit procedures for specific assertions.

Explain assertions for account balances or transactions.

Example: List procedures to test the completeness of accounts

payable

Techniques for Collecting Audit Evidence

Applied in three audit phases:

Risk Assessment: Understand client and environment.

Tests of Controls: Evaluate control effectiveness.

Substantive Tests: Detect material misstatements.

Techniques can be used alone or in combination

Inspection of Tangible Assets

Purpose

Physically inspecting assets confirms their existence and completeness

Existence: Verifies assets recorded exist (e.g., counting inventory) Completeness: Ensures observed assets are recorded.

Example: Inspecting machinery to confirm recorded fixed assets

Inspection of Records/Documents

Reviewing internal (e.g., invoices) and external (e.g., contracts)

documents

Reliability depends on:

Source (external > internal).

Internal control effectiveness.

Supports assertions like Existence and Accuracy.

Example: Checking purchase orders for recorded expenses

Observation and Enquiry

Observation:

Watching client processes (e.g., inventory counting).

Limited to the time of observation.

Enquiry:

Seeking information from client staff or external parties.

Less reliable; requires corroboration with other procedures.

Example: Observing cash handling procedures

Confirmation and Recalculation

Confirmation:

Direct confirmation from third parties (e.g., bank balances).

Supports Existence and Completeness.

Reperformance and Analytical Procedures

Comparing financial/non-financial data to identify anomalies.

Example: Analyzing revenue trends for unusual fluctuations.

Conclusion and Exam Tips

Key Takeaways

Audit evidence is critical for forming a reliable audit opinion

Must be sufficient, appropriate, and relevant to assertions

Use a combination of techniques for robust evidence collection

Exam Tips:

Memorize assertions and their definitions.

Practice linking procedures to specific assertions.

Understand reliability factors for different evidence types.