Annual Audit Manual

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7014 Determine the evidence needed from substantive procedures
Dec-2011

In This Section

Desired Evidence from a substantive procedure

Overview

This section explains:

  • The concept of Desired Evidence for a substantive procedure
  • How to document the desired evidence for a substantive procedure in the audit file
Desired Evidence from a substantive procedure

CAS Requirement

The auditor shall design and perform further audit procedures whose nature, timing, and extent are based on and are responsive to the assessed risks of material misstatement at the assertion level (CAS 330.6).

In designing the further audit procedures to be performed, the auditor shall obtain more persuasive audit evidence the higher the auditor's assessment of risk (CAS 330.7(b)).

CAS Guidance

When obtaining more persuasive audit evidence because of a higher assessment of risk, the auditor may increase the quantity of the evidence, or obtain evidence that is more relevant or reliable, for example, by placing more emphasis on obtaining third party evidence or by obtaining corroborating evidence from a number of independent sources (CAS 330.A19.)

Because the assessment of the risk of material misstatement takes account of controls that the auditor plans to test, the extent of substantive procedures may need to be increased when the results from tests of controls are unsatisfactory. However, increasing the extent of an audit procedure is appropriate only if the audit procedure itself is relevant to the specific risk (CAS 330.A48).

In designing tests of details, the extent of testing is ordinarily thought of in terms of the sample size. However, other matters are also relevant, including whether it is more effective to use other selective means of testing. See CAS 500 (CAS 330.A49).

The reliability of information to be used as audit evidence, and therefore of the audit evidence itself, is influenced by its source and its nature, and the circumstances under which it is obtained, including the controls over its preparation and maintenance where relevant. Therefore, generalizations about the reliability of various kinds of audit evidence are subject to important exceptions. Even when information to be used as audit evidence is obtained from sources external to the entity, circumstances may exist that could affect its reliability. For example, information obtained from a source independent of the entity may not be reliable if the source is not knowledgeable, or a management’s expert may lack objectivity. While recognizing that exceptions may exist, the following generalizations about the reliability of audit evidence may be useful (CAS 500.A35):

  • The reliability of audit evidence is increased when it is obtained from independent sources outside the entity.

  • The reliability of audit evidence that is generated internally is increased when the related controls, including those over its preparation and maintenance, imposed by the entity are effective.

  • Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the application of a control).

  • Audit evidence in documentary form (whether paper, electronic, or other medium) is more reliable than evidence obtained orally (for example, a contemporaneously written record of a meeting is more reliable than a subsequent oral representation of the matters discussed).

  • Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles, or documents that have been filmed, digitized or otherwise transformed into electronic form, the reliability of which may depend on the controls over their preparation and maintenance.

OAG Guidance

The evidence derived from a substantive test is a function of the nature, timing and extent of the testing, which affects the quantity and quality (i.e., relevance and reliability) of audit evidence that the test provides.

In judging how much evidence a substantive test provides, consider the following:

  • How relevant is the test to the financial statement assertion? For example, an accounts receivable confirmation will provide strong evidence of the existence of an amount owing, but less evidence about the third party’s willingness and ability to settle the amount owing (i.e., valuation assertion).

  • How reliable is the evidence, taking into account the factors explained in CAS 330 and 500?

  • What is the extent of the testing we have performed? Sample sizes impact the level of evidence. Judgment will be needed, e.g., when considering the level of coverage obtained from targeted testing, or the precision used for an analytical procedure.

  • For significant risks, are the substantive procedures specifically responsive to the risk (CAS 330.21)?

Where we need only low evidence from substantive procedures, can we obtain it from performing substantive analytical procedures? CAS 520 describes factors to consider in determining whether a substantive analytical procedure will reduce the assessed risk of material misstatement at the assertion level to an acceptably low level. The assertions covered by the substantive analytical procedure are specific to the type of analytic performed.

A combination of tests which individually provide lower evidence may provide high evidence overall. However, combining two or more tests that are individually ineffective will not result in sufficient appropriate audit evidence; we only obtain evidence from audit procedures that are relevant to the risks we seek to address, and simply obtaining more evidence may not compensate for the poor quality of that evidence. Also, performing a combination of tests may be inefficient compared to performing a single, more rigorous test.