EIRC- Student’s Programme for Standards on Auditing

Topics:SA 500: Audit Evidence &SA 501: Audit Evidence- Specific Considerations for Selected ItemsSA 580: Written Representation

STANDARD ON AUDITING

SA 500: Audit Evidence &SA 501: Audit Evidence- Specific Considerations for Selected Items

SA 500: Audit Evidence

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Scope & Objective

Snapshot of SA 500

Audit Evidence

Methods to obtain Audit Evidence

Information prepared using the work of Management Expert

Scope and Objective of SA 500

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Scope

•This Standard on Auditor (SA) explains what constitutes audit evidence in an audit financial statements, and deals with the auditor’s responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion. This SA is applicable to all the audit evidence obtained during the course of the audit.

Objective

•The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’sopinion.

Snapshot of SA 500

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Audit evidence

Sufficient Appropriate

Audit Evidence (SAAE)

Information to be used as

Audit Evidence

Selecting items for selecting

Audit Evidence

Inconsistency in,

Doubts over Reliability

of, Audit Evidence

Audit Evidence

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•Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information obtained in accounting records underlying the financial statements and other Information MR-oral/ written.

Meaning of Audit Evidence

Types of Evidence Examples

Physical Evidence Can be seen by the auditor. Generally effective for Existence assertion.

E.g. Property Plant Equipment &, Cash-in hand & Inventory.

Third Party Representation Confirmations, lawyer’s letters, reports of specialists- Actuary report

Documentary Evidence Created by outside parties & transmitted directly to auditor,

Created by outside party and shared by client,Created and shared by client & electronic documents

Computations /

Data Interrelationships

Performed independently by the auditor, Analytical procedure

Used to verify mathematical accuracy of client’s analyses and records

Accounting records Important source of audit evidence

Sufficient Appropriate Audit Evidence

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• Measure of the quality of audit evidence;

• Emphasis on relevanceand its reliability in providing support for the conclusions on which the auditor’s opinion is based.

Appropriateness of audit evidence:

• Measure of quantity of audit evidence which depends on:

• a.)Auditor’s assessment of Risk of Material Misstatements.

• b.)Quality of such audit evidence.

Sufficiency of audit Evidence:

Methods to obtain Audit Evidence

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Audit procedures Description Type of Evidence

Inspection Examining records, vouching, tracing, physical Examination Documentaryevidence, Physical Evidence

Observation Looking at process being performed by others E.g.- observing Inventory count by client or performance of the internal control that leave no audit trail.

PhysicalExamination

External Confirmation Audit evidence obtained by the auditor as a direct written response to the auditor from a third party

Third-party

Recalculation Checking of mathematical accuracy of documents or records. Can be manually or electronicallyE.g. profit/ loss as per AS-13, Stock valuation

Computation

Re-performance Execution of procedures or controls that were originally performed as part of the entity’s internal control. E.g. Reconciliation of BRS

Computation

Analytical procedures Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data.E.g. Trend Analysis, comparison

DataInterrelationship

Inquiry Seeking information from knowledgeable persons- within the entity/outside. Written or verbal

ManagementRepresentation

Information to be used as Audit Evidence

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The quality of all audit depends on - relevance and reliability of information to be used

as Audit evidence

1. Relevance• Relevance of an Evidence implies that whether the evidence successfully tests the Assertion which is required to be tested.

• Relevance deals with the logical connection between

a) Purpose of the audit procedure and

b) The assertion under consideration

For example,• Testing Existence of Debtors cannot be done by deducting ‘total cash received from debtors’ from the ‘total Credit Sales’. That will only

check arithmetical Accuracy and NOT Existence of Debtors

• Audit evidence showing existence of Inventory is not valid for valuation assertion

2. Reliability

Reliability is influenced by its source, its nature, and circumstances under which it is obtained includingcontrols over its preparation & maintenance where relevant.

a) External Evidences are considered more reliable than internal evidences.

b) The reliability of internal evidence is increased when the related controls, imposed by entity are effective.

c) Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly.

d) Audit evidence in documentary form, is more reliable than evidence oobtained orally. e) Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies.

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Information to be used as Audit Evidence

3. Information prepared using work of Management Expert:

a) Evaluate Competence, Capability and Objectivity of the that Expert:

❖ Personal Experience with previous work.

❖ Discussion with that expert.

❖ Discussion with others.

❖ Knowledge of expert’s qualification, memberships, other forms of recognitions.

❖ Published books or papers.

❖ Auditor’s expert.

b) Obtain an understating of expert work:

❖ Area of Specialty

❖ Applicable professional standards.

❖ Legal & Regulatory Requirements.

❖ Assumptions and Methods used.

❖ Nature of Source Data used.

c) Evaluate appropriateness of Expert Work

❖ Finding & Conclusion – Relevance, Reasonableness & Consistency with other Audit Evidence.

❖ Assumptions and Methods – Relevance and Reasonableness.

❖ Source Data – Relevance, Completeness and accuracy.

Selecting Items for testing to obtain Audit Evidence

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For selecting items for testing / applying audit procedure- Auditor needs to consider all the factors such as risk assessed, relevance, reliability, effectiveness, sufficiency, timing, nature & extent of audit evidence to be obtained from audit procedures.

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Select all items (100%)

Selecting specific items

Audit Sampling (SA530)

Inconsistency in, Doubts over Reliability of Audit Evidence

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• If, audit evidence obtained from one source is inconsistent with that obtained from another; or

• The auditor has doubts over the reliability of information to be used as audit evidence,

The Auditor shall determine what modifications or additions to audit procedures are necessary to resolve the

matter, and shall consider the effect of the matter, if any Other aspects of audit.

❖ E.g. Of Inconsistency in audit evidence

Receivable balance as per books and external confirmation not matching.

Perform other substantive procedures such as reconciliation, subsequent realisation.

Check impact on auditor’s conclusion.

❖ E.g. Of lack of Reliability in audit evidence

Xerox copies were made available instead of original, non-availability of bank statement, absence of

maker checker concept are indications of doubting over reliability of audit evidence

MCQ 1:-

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1. Audit Evidence means _________ used by the auditor in arriving at the

conclusions on which the auditor’s opinion is based.

a) Evidence

b) Working paper

c) Information

d) Data

Answer: c

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MCQ 2:-

Audit Evidence in form of Working papers will include:

a) Sources of Information

b) Basis of Forecasts

c) Assumptions at arriving forecast

d) All of the above

Answer: d

MCQ 3:-

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The manager of ABC Ltd. Is presently out of country for business purpose.

The company has produced photocopies of fixed deposits receipts as the

original receipts were kept in the iron safe of the manager. As an auditor

what step can be taken?

a) Obtain external confirmation from bank managerb) Modify the report

c) Give a disclaimer of opinion

d) Withdraw from the audit if legally permissible

Answer: a

MCQ 4:-

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The measure of the quality of audit evidence about its relevance and

reliability in providing support

for the conclusions on which the auditor’s opinion is based is:

(a) Sufficiency of audit evidence

(b) Appropriateness of audit evidence

(c) Accounting estimates

(d) Reasonableness of audit evidence

Answer : b

MCQ 5:-

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While conducting the audit of M/s ABC Ltd, a soap making company, it was

found that a purchase of motor car was made in the name of the company.

Your Article Assistant has performed the following audit procedures.

Identify which of the following procedure is incorrect.

a) Ascertain whether the purchase of car has been properly authenticated.

b) Check invoice of the car dealer to confirm the purchase price.

c) Examine registration with Transport Authorities to verify the ownership.d) Ensure that the motor car has been include in the Closing inventory of goods.

Answer: d

SA: 501 Audit Evidence- Specific Considerations for Selected Items

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Scope & Objective

Related Assertions

Procedures to obtain SAAE for Inventory

Procedures to obtain SAAE for Litigation and Claims

Procedures to obtain SAAE for Segment Information

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Scope & Objective

Scope

•This Standard on Auditing (SA) deals with specific considerations by the auditor in obtaining sufficient appropriate audit evidence in accordance with SA 330 , SA 500 and other relevant SAs, with respect to certain aspects of inventory, litigation and claims involving the entity, and segment information in an audit of financial statements.

Objective

•The objective of the auditor is to obtain sufficient appropriate auditevidence regarding the:

•Existence and condition of inventory

• Completeness of litigation and claims involving the entity; and•Presentation and disclosure of segment information in accordance with the applicable financial reporting framework.

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Related Assertions

Inventory

• Existence – To check whether inventory exists , and

• Condition – if they exist, then in what condition they exist.

Litigation & Claims

• Completeness – To see whether entity has provided complete and all the details of the litigations and claims which are pending.

Segment Information

• Presentation & Disclosures – To see whether the entity has properly presented and disclosed all the information related to Segment.

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Procedures to obtain SAAE for Inventory

General Procedure

When inventory is material to the F.S. the auditor shall obtain SAAE regarding existence & condition

by a) Attendanceat physical inventory counting, unless impracticable, to:

❖ Evaluate management instructions & procedures for recording & controlling the results of the

entity’s physical inventory counting;

❖ Observe the performance of management’s count procedures;

❖ Inspect the inventory;

❖ Perform test counts;

b) Performing audit procedures over the entity’s final inventory records to determine whether they

accurately reflect actual inventory count results.

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Procedures to obtain SAAE for Inventory

Special ProceduresA. Inventory counting conducted at date other than B/S date

➢Perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the F.S. are properly recorded.

B. Auditor unable to attend Inventory Count ➢Make or observe some physical counts on an alternative date, and perform audit procedures on

intervening transactions C. Attendance at inventory count is impracticable

➢Perform alternative audit procedures to obtain S.A.A.E. regarding existence and condition of inventory.

➢ If it is not possible to do so, modify the opinion in the auditor’s report in accordance with SA 705. D. Inventory under custody and control of Third Party

➢Obtain S.A.A.E by performing the following: a) Request confirmation from third party. b) Perform Inspection/other audit procedure.

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Procedures to obtain SAAE for Litigation & ClaimsAuditor is required to identify litigation and claims by following procedures:

❑ Inquiry: of management & others within entity, including in house legal counsel. ❑ Review – minutes of meetings of TCWG, communication between entity & external legal counsel. ❑ Review – legal expenses account. If Risk of Material Misstatement regarding litigation & claims is identified, auditor shall communicate directly with entity’s

external legal counsel,

The auditor shall perform the following procedure:

❖ The auditor shall do so through a letter of inquiry, prepared by management and sent by the auditor, requesting entity’s

external legal counsel for directly communicating with auditor.

❖ If, law, regulation or the respective legal professional body prohibits the entity’s external legal counsel from communicating

directly with the auditor, the auditor shall perform alternative audit procedures.

❖ If management refuses to permit auditor to communicate with external legal counsel refuses / auditor unable to collect

SAAE by performing alternate procedures. Then the auditor shall Modify Opinion in accordance with SA 705.

❖ The auditor shall request management and, where appropriate, those charged with governance to provide written

representations that all known actual or possible litigation and claims whose effects should be considered when

preparing the financial statements have been disclosed to the auditor and appropriately accounted for and disclosed in

accordance with the applicable financial reporting framework.

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Procedures to obtain SAAE for Segment Information

To obtain SAAE regarding presentation & disclosure of segment

information in accordance with the applicable FRF the auditor shall:

I. Obtaining an understanding of the methods used by management in

determining segment information, and

✓ Evaluate whether such methods are likely to result in appropriate

disclosure in accordance with the applicable FRF; and

✓ Where appropriate, testing the application of such methods; and

II. Performing analytical procedures or other audit procedures appropriate

in the circumstances.

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MCQ 1:-

M/s XYZ& Co. is a statutory auditor at JKL Ltd. The company deals in provide coal to electricity,

steel and cement company. During the physical counting of coals the auditor was unavailabledue to unforeseen circumstances and due to which the management of the company arrangedthe program of coal counting on the very next day. During the physical counting of coals the

health of M/s XYZ& Co. deteriorated due to which again the inventory counting could not bedone.What are the actionstakenby the management / auditor?

a) The managementshouldcomplain the instituteof Charteredaccountantof India.

b) The auditor shall perform alternative procedure to obtain sufficient and appropriate audit

evidence regardingexistenceandconditionof inventoryc) Both a and bd) None of the above

Answer: b

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MCQ 2:-

By conducting which steps, the auditor can obtain sufficient and

appropriate audit evidence regarding existence of inventory, when the

inventory is under the custody and control of third party and the auditor

considers it material to the Financial statements

a) Request confirmation from the third partyb) Perform inspection if possible or other audit procedure

c) Both a and b

d) Give a Disclaimer of opinion

Answer: c

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MCQ 3:-

When audit procedures performed indicate that other material

litigation or claims exist, the auditor shall, seek direct communication

with the entity’s .

a) Third party

b) Legal counsel

c) Employers

d) All of the above

Answer: b

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MCQ 4:-

The auditor needs to obtain that all the litigations and claims have

been presented in financial statement and disclosed to the auditor.

a) Sufficient and appropriate audit evidence

b) Written representation

c) Expert’s advice

d) Legal councilor’s advice

Answer: b

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MCQ 5:-

As per SA 501, auditor is required to obtain SAAE as to,

a) Valuation of inventory

b) Completeness of litigation and claims

c) Presentation and disclosure if financial statement.d) All of above

Answer: b

STANDARD ON AUDITING

SA 580- WRITTEN REPRESENTATIONS

CONTENTS

❖ Introduction

❖ Objectives & Definitions

❖ Written Representations AboutManagement’sResponsibilities.

❖ FormOfWrittenRepresentation& Date Of And Period(s) Covered.

❖ Doubt As To Reliability OfWritten Representation.

❖ RequestedWritten Representation Not Provided.

❖ Management FromWhomRequested

❖ OtherWritten Representation.

❖ Communicating A ThresholdAmount

❖ Necessary Inclusion in RepresentationbyManagement

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INTRODUCTION

▪ This SA is effective for audits of financial statements for periods beginning on or after 1st April, 2009.

▪ SA-580 deals with the auditor’s responsibility to obtain written representations from management and, where

appropriate, thosechargedwith governance.

▪ A necessary information that the auditor requires in connection with the audit of the entity’s financial

statements

▪ Written representations are audit evidence similar to responses to inquiries.

▪ They do not provide sufficient appropriate audit evidence on their own about any of the matters with which they

deal.

▪ Furthermore, the fact that management has provided reliable written representations does not affect the

nature or extent of other audit evidence that the auditor obtains about the fulfillment of management’s

responsibilities.32

DEFINITION

▰ A written statement by management to confirm certain

matters or to support other audit evidence. Written

Representation in this context does not include

financial statements, the assertions therein, or

supporting books and records.

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OBJECTIVES

➢ To obtain written representations from management and, where appropriate, those charged with governance

that they believe that they have fulfilled their responsibility for the preparation of the financial statements and

for the completeness of the information provided to the auditor.

➢ To support other audit evidence relevant to the financial statements or specific assertions in the financial

statements bymeans ofwritten representations

➢ To respond appropriately to written representations provided by management and, where appropriate, those

charged with governance, or if management or, where appropriate, those charged with governance do not

provide the written representations requested by the auditor.

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WRITTEN REPRESENTATION ABOUT MANAGEMENT’S RESPONSIBILITIES

➢ The financial statements has been prepared in accordance with the applicable financial reporting framework,

includingwhere relevant their fair presentation, as set out in the terms of the audit engagement as per SA 210.

➢ It has provided all relevant information and access as agreed in the terms of the audit engagement.

➢ All transactions have been recorded and are reflected in the financial statements .

➢ The auditor may also ask management to reconfirm its acknowledgement and understanding of those

responsibilities in written representations. This is particularly appropriate when:

✓ Those who signed the terms of the audit engagement on behalf of the entity no longer have the relevantresponsibilities;

✓ The terms of the audit engagement were prepared in a previous year;

✓ There is any indication that management misunderstands thoseresponsibilities; or

✓ Changes in circumstancesmake it appropriate to do so.35

FORM OF WRITTEN REPRESENTATION & DATE OF AND PERIOD(S) COVERED

• The written representation shall be in the form

of a representation letter addressed to the

auditor.

• The date of the written representations shall be as

near as practicable to, but not after, the date of the

auditor’s report on the financial statements.

• The written representations are for all periods

referred to in the auditor’s report.

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Form of Written Representation Date of and Period(s) covered

DOUBT AS TO RELIABILITY OF WRITTEN REPRESENTATION

➢ If the auditor has concerns about the competence, integrity, ethical values or diligence of management, or about its

commitment to or enforcement of these the auditor shall determine the effect that such concerns may have on the

reliability of representations (oral orwritten) and audit evidence in general.

➢ Perform audit procedures to attempt to resolve the matter in case written representation are inconsistent with other

audit evidence.

➢ If the matter remains unresolved, the auditor shall reconsider the assessment of the competence, integrity, ethical

values or diligence of Management and shall determine the effect that this may have on the reliability of

representations (oral orwritten) and audit evidence in general.

➢ If the auditor concludes that the written representations are not reliable, the auditor shall take appropriate actions,

includingdetermining the possible effect on the opinion in the auditor’s report in accordancewith SA 705.

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DOUBT AS TO RELIABILITY OF WRITTEN REPRESENTATION.

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CASE STUDY 1:ABC & Co, the auditors of X Ltd , obtained a representation from the management of X Ltd that the inventoriesincluded in the financial statement physically existed as on the balance sheet date, but according to the auditors itwas inconsistent with the other audit evidence obtained.

ANSWER:ABC& Comay adopt the following procedure to resolve thematter:-▪ Physical examination of inventory items.▪Obtaining confirmation of inventories at locations outside theentity.▪ Inspection of documents relating to inventory transactions between a physical inventory date and balance sheetdate.

After following the above procedures also, the matter remains unresolved, then ABC & Co shall reconsider theassessment of the competence, integrity and ethical values of the management and shall also determine the effecton the reliability of the representationand audit evidence.

If it considers that the representation is unreliable, then he shallmodify his opinion as per SA 705.

REQUESTED REPRESENTATION NOT PROVIDED

➢ Discussmatterwith management and thosechargedwith governance

➢ Re-evaluate the integrity of management and evaluate the effect on the reliability of representation and

audit evidence,

➢ Take appropriate actions, including determining the possible effect on the opinion in the auditor’s report in

accordancewith SA 705.

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MANAGEMENT FROM WHOM REQUESTED

➢ Written representations are requested from those responsible for the preparation and presentation of the

financial statements.

➢ Those individuals may vary depending on the governance structure of the entity, and relevant law or

regulation; however,management is often the responsible party.

➢ Written representations may therefore be requested from the entity’s chief executive officer and chief

financial officer, or other equivalent persons in entities that do not use such titles.

➢ Individuals who have specialized knowledge relating to thematters. Such individuals may include:-

• An actuary responsible for actuarially determined accountingmeasurements.

• Internal counselwhomay provide information essential to provisions for legal claims.

• Staff engineers whomay have responsibility for and specialized knowledge

about environmental liability measurements. 40

OTHER WRITTEN REPRESENTATIONS

Other SAs require the auditor to request written representations. If, in addition to such required representations,the auditor determines that it is necessary to obtain one or more written representations to support other auditevidence relevant to the financial statements or one or more specific assertions in the financial statements, theauditor shall request such otherwritten representations.

ADDITIONAL WRITTEN REPRESENTATIONS:-➢ Whether the selection and applicationof accounting policies are appropriate.

➢ Matters that are relevant under the applicable financial reporting framework includes:

• Plans or intentions that may affect the carrying value or classification of assetsand liabilities.

• Liabilities, both actual and contingent,

• Title to, or control over, assets the liens or encumbrances on assets, and assets pledged as collateral;

• Aspects of laws & legislative requirements.

• It has communicated to the auditor all deficiencies in internal control of which management is aware.

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OTHER WRITTEN REPRESENTATIONS

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CASE STUDY 2:Mr. L while conducting the audit of ABC Ltd, that a substantial amount is recognised in respect of obsolesce ofinventory and warranty obligations in the financial statements. Mr. L wants to obtain written representation from themanagement to determine whether the assumptionsand estimatesused are reasonable.

ANSWER:Written Representation as to Accounting estimates

➢ SA 540-”Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures”requires the auditor to obtain written representations from the management and where appropriate, those chargedwith governance whether they believe significant assumptions used in making accounting estimates arereasonable.

➢ Depending on the nature, materiality and extent of estimation uncertainty, written representations aboutaccounting estimates recognized or disclosed in the financial statementsmay include representations:

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• About the appropriateness of the measurement processes, including related assumptions and models, usedby management in determining accounting estimates in the context of the applicable financial reportingframework, and the consistency in application of the processes.

• That the assumptions appropriately reflect management’s intent and ability to carry out specific courses of

action on behalf of the entity, where relevant to the accounting estimates and disclosures.• That disclosure related to accounting estimates are complete and appropriate under the applicable financial

reporting framework.• That no subsequent event requires adjustment to the accounting estimates and disclosures included in the

financial statements

➢ For those accounting estimates not recognized or disclosed in the financial statements, written representationsalso include representations about:

• The appropriateness of the basis used by management for determining that the recognition or disclosure

criteria of the applicable financial reporting framework have not beenmet .• The appropriateness of the basis used by management to overcome the presumption relating to the use of fair

value set forth under the entity’s applicable financial reporting framework, for those accounting estimates notmeasured or disclosed at fair value.

COMMUNICATING A THRESHOLD AMOUNT

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SA 450 “Evaluation of Misstatements Identified during theAudit” requires the auditor to accumulate misstatementidentified other than those that are clearly trivial.

Determine a threshold above which misstatement cannotbe regarded as trivial.

Communicate to management a threshold for purpose ofthe requested written representations.

NECESSARY INCLUSIONS IN REPRESENTATION BY MANAGEMENT

❖ It has fulfilled its responsibility for the preparation of the financial report in accordance with the applicable

financial reporting framework, including where relevant their fair presentation, as set out in the terms of the

audit engagement.

❖ It has provided the firm with all relevant information and accessas agreed in the terms of the audit engagement.

❖ All transactions have been recorded in the accounting records and are reflected in the financial statements.

❖ Its responsibility for the design, implementation and maintenance of internal control to prevent and detect

fraud.

❖ Whether they have disclosed to the firm the results of management’s assessment of the risk that the financial

report may be materially misstated as a result of fraud as per SA 240.

❖ Whether they believe significant assumptions used in making accounting estimates are reasonable as per SA

540.45

“A written representation letteris not a substitute forAuditor’s responsibilities toplan and execute an effectiveaudit.”

POINT TO REMEMBER

MCQ 1:-

The auditor shall request management and, where appropriate, thosecharged with governance, to provide a written representation inaccordance with SA 580, “Written Representations” that all eventsoccurring _____ to the date of the financial statements and for which the

applicable financial reporting framework requires adjustment ordisclosure have been adjusted or disclosed?

a) Prior

b) Subsequent

c) Former

d) None of the above

Answer: (b)

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The auditor shall obtain written representation in relation to responsibility of the management about?

a) Preparation and presentation of Financial statement

b) To provide auditor with all relevant information

c) To support other audit evidences

d) All of the above

Answer: (d)

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MCQ 2:-

The auditor shall obtain _____ from the management that they have appropriatelyaccounted for related party transaction and made appropriate disclosure of suchrelationship and transaction in accordance with the requirements of the framework.

a) Absolute assurance

b) Reasonable assurance

c)Written representation

d) Audit evidence

Answer: (c)

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MCQ 3:-

Thank You

From: M/s A.C. Bhuteria & Co.