The purpose of ISA 500 is to establish standards and provide guidance on what constitutes audit evidence in an audit of financial statements, the quantity and quality of audit evidence to be obtained, and the audit procedures that auditors use for obtaining that audit evidence.


In order to form an opinion, an auditor must obtain evidence.  This evidence should be sufficient, relevant and reliable.  The auditor designs substantive procedures to obtain this evidence about the financial statement assertions.


By approving the financial statements, the directors are making representations about the information therein.  These assertions may fall into the following categories:


  • Assertions about classes of transactions and events for the period under audit:
    • Occurrence—transactions and events that have been recorded have occurred and pertain to the entity.
    • Completeness—all transactions and events that should have been recorded have been recorded.
    • Accuracy—amounts and other data relating to recorded transactions and events have been recorded appropriately.
    • Cut-off—transactions and events have been recorded in the correct accounting period.
    • Classification—transactions and events have been recorded in the proper accounts.


  • Assertions about account balances at the period end:
    • Existence—assets and liabilities exist.
    • Completeness—all assets and liabilities that should have been recorded have been recorded.
    • Rights and obligations—the entity holds or controls the rights to assets and liabilities are the obligations of the entity.
    • Valuation and allocation —assets and liabilities are included in the financial statements at appropriate amounts.


  • Assertions about presentation and disclosure:
    • Occurrence and rights and obligations—disclosed events, transactions, and other matters have occurred and pertain to the entity.
    • Completeness—all disclosures that should have been included in the financial statements have been included.
    • Classification and understandability—financial information is appropriately presented and described, and disclosures are clearly expressed.
    • Accuracy and valuation—financial and other information are disclosed fairly and at appropriate amounts.



Procedures used by auditors to obtain evidence


Inspection of tangible assets

Inspection confirms existence and valuation and gives evidence of completion.  It does not however confirm rights and obligations.

Inspection of documents and records

Confirmation to documentation confirms existence of an asset or that a transaction has occurred.  Confirmation that items are in the books shows completeness.  Also helps testing cut-off.  It provides evidence of valuation, measurement, rights and obligations and presentation and disclosure.


This procedure is of limited use in that it only confirms that a procedure took place when it was observed.

Inquiry and confirmation

Information sought from client or external sources.  The strength of the evidence depends on knowledge and integrity of the source of the information.

Recalculation and Re-Performance Audit automation tools

Checking calculations of client records

Such as computer assisted auditing techniques Analytical procedures


Sufficient and appropriate 


Sufficiency is the measure of the quantity of the evidence, while the appropriateness is the measure of the quality (reliability & relevance) of the evidence.  This applies to both tests of controls and substantive procedures.


An auditor’s judgment as to what is sufficient appropriate evidence is influenced by the following factors:

  • Risk assessment, is it low or high,
  • The nature of the accounting and internal control systems,
  • The materiality of the item being examined,
  • The experience gained during previous audits,
  • The auditor’s knowledge of the business and industry,
  • The results of audit procedures,
  • The source and reliability of the information available.


Appropriate – relevance

The relevance of audit evidence should be considered in relation to the overall audit objective of forming an audit opinion and reporting on the financial statements.  The evidence should allow the auditor to conclude on the following:

  • Balance sheet items –

Is there suitable completeness, existence, ownership, valuation and disclosure      issues?

  • Profit and loss items –

Is there suitable completeness, occurrence, valuation and disclosure issues?


Appropriate – reliable


Reliability of audit evidence depends on the particular circumstances of each case.  However, the following should be considered:

  • Documentary evidence is more reliable that oral evidence;
  • Evidence from external independent sources is more reliable than that within an entity;
  • Evidence from the auditor by such means as analysis and physical inspection is more reliable than evidence obtained by/from others.




The auditor needs to obtain sufficient, relevant and reliable evidence to form a reasonable basis for his opinion on the financial statements.  His judgement of sufficiency will be influenced by such factors as:

  • His knowledge of the business and its environment,
  • The risk of misstatement,
  • The quality of the evidence. However, merely obtaining more audit evidence may not compensate for its poor quality.


Computer assisted audit techniques (CAAT)


Audit software

Used where client has computer systems and large volumes of data.  The auditor can scrutinise large volumes of data and free up his time for review and follow up results rather than having to extract the data and select samples.


Before using software the auditor should have a basic understanding of data processing and the client’s computer application.  If the application is complex the auditor may need to have some knowledge of systems analysis.  He also needs to consider how easy is it to transfer the data and extract it.


Examples of audit software include interrogation software (e.g. IDEA), comparison programmes, interactive software for on-line interrogation and resident code software to review transactions as they are processed.


Test data are used to assess a system’s performance.  The expected results are known in advance and are compared against the output using the test data.  You can also use the test data to check the controls of the system such as attempting to process invalid data.


A significant problem using test data is that it may result in corrupting a data file.  Some systems have controls that prevent the easy removal of data without leaving a mark.  Other problems include the fact that you are only testing the operation of the system at a point in time.


Audit sampling


ISA 530 states that when designing audit procedures, the auditor should determine appropriate means for selecting items for testing so as to gather sufficient appropriate audit evidence to meet the objectives of the audit procedures.


Auditors do not examine all information that is available to them (audit limitation) as it is impractical to do so and as a result audit sampling is used to produce valid conclusions.


Audit sampling involves the application of audit procedures to less than 100% of items within a class of transactions or account balance such that all sampling units have a chance of selection.  Audit sampling can use either a statistical or a non-statistical approach.


Error means either control deviations, when performing tests of controls, or misstatements, when performing tests of details. Similarly, total error is used to mean either the rate of deviation or total misstatement.


Anomalous error means an error that arises from an isolated event that has not recurred other than on specifically identifiable occasions and is therefore not representative of errors. Population means the entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions.


Sampling risk arises from the possibility that the auditor’s conclusion, based on a sample, may be different from the conclusion reached if the entire population were subjected to the same audit procedure. There are two types of sampling risk:

  • The risk the auditor will conclude that controls are more effective than they actually are, or that a material error does not exist when in fact it does. This type of risk affects audit effectiveness and is more likely to lead to an inappropriate audit opinion; and
  • The risk the auditor will conclude that controls are less effective than they actually are, or that a material error exists when in fact it does not. This type of risk affects audit efficiency as it leads to additional work to establish that initial conclusions were incorrect. Non-sampling risk arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to the size of the sample. For example, ordinarily the auditor finds it necessary to rely on audit evidence that is persuasive rather than conclusive, the auditor might use inappropriate audit procedures, or the auditor might misinterpret audit evidence and fail to recognise an error.


Sampling unit means the individual items constituting a population, for example checks listed on deposit slips, credit entries on bank statements, sales invoices or debtors’ balances. Statistical sampling means any approach to sampling that has the following characteristics:

  • Random selection of a sample; and
  • Use of probability theory to evaluate sample results.

Sampling, that does not have the above characteristics, is considered non-statistical sampling. Stratification is the process of dividing a population into subpopulations, each of which is a group of sampling units which have similar characteristics (often monetary value).


Tolerable error means the maximum error in a population the auditor is willing to accept. Selecting Items for Testing to Gather Audit Evidence

The decision as to which approach to use will depend on the circumstances, and the application of any one or combination of the available means may be appropriate in particular circumstances. While the decision is made on the basis of the risk of material misstatement related to the assertion being tested and audit efficiency, the auditor needs to be satisfied that methods used are effective in providing sufficient appropriate audit evidence to meet the objectives of the audit procedure.


• Selecting All Items (100% examination)

The auditor may decide that it will be most appropriate to examine the entire population of items that make up a class of transactions or account balance.  100% examination is unlikely in the case of the tests of controls, it is more common for tests of details. For example, 100% examination may be appropriate when the population constitutes a small number of large value items, when there is a significant risk and other means do not provide sufficient appropriate audit evidence, or when the repetitive nature of a calculation or other process performed automatically by an information system makes a 100% examination cost effective, for example, through the use of computer assisted audit techniques (CAATs).


• Selecting Specific Items

The auditor may decide to select specific items from a population based on such factors as the auditor’s understanding of the entity, the assessed risk of material misstatement, and the characteristics of the population being tested. The judgmental selection of specific items is subject to non-sampling risk. Specific items selected may include high value or key items.While selective examination of specific items from a class of transactions or account balance will often be an efficient means of gathering audit evidence, it does not constitute audit sampling. The results of audit procedures applied to items selected in this way cannot be projected to the entire population. The auditor considers the need to obtain sufficient appropriate evidence regarding the rest of the population when that remainder is material.


• Audit Sampling

The auditor may decide to apply audit sampling to a class of transactions or account balance. Audit sampling can be applied using either non-statistical or statistical sampling methods.


Statistical Versus Non-statistical Sampling Approaches

The decision whether to use a statistical or non-statistical sampling approach is a matter for the auditor’s judgment regarding the most efficient manner to obtain sufficient appropriate audit evidence in the particular circumstances. For example, in the case of tests of controls the auditor’s analysis of the nature and cause of errors will often be more important than the statistical analysis of the count of errors. In such a situation, non-statistical sampling may be most appropriate.


Sample Size

In determining the sample size, the auditor should consider whether sampling risk is reduced to an acceptably low level. Sample size is affected by the level of sampling risk that the auditor is willing to accept. The lower the risk the auditor is willing to accept, the greater the sample size will need to be.

The sample size can be determined by the application of a statistically-based formula or through the exercise of professional judgment objectively applied to the circumstances.


Selecting the Sample

The auditor should select items for the sample with the expectation that all sampling units in the population have a chance of selection. Statistical sampling requires that sample items are selected at random so that each sampling unit has a known chance of being selected. The sampling units might be physical items (such as invoices) or monetary units. With nonstatistical sampling, an auditor uses professional judgment to select the items for a sample. Because the purpose of sampling is to draw conclusions about the entire population, the auditor endeavours to select a representative sample by choosing sample items which have characteristics typical of the population, and the sample needs to be selected so that bias is avoided.




ISA 550 states that the auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the identification and disclosure by management of related parties and the effect of related party transactions that are material to the financial statements.  Where there is any indication that such circumstances exist, the auditor should perform audit procedures as are appropriate in the circumstances.

Management is responsible for the identification and disclosure of related parties and transactions with such parties. This responsibility requires management to implement adequate internal control to ensure that transactions are appropriately identified and disclosed.

As transactions between related parties may not be on an arm’s length basis and there may be a conflict of interest, management usually ensure that such transactions are subject to appropriate approval procedures. The approval of material related party transactions is often recorded in the minutes of meetings.


In owner managed entities similar approval procedures would ideally apply. Often, however, procedures are less formalised because the owner manager is often personally aware of and, implicitly or explicitly approves, all such transactions.


Definition of Related Parties and Related party transactions

Parties are related if one controls the other or is in a position to exercise influence over the other in financial and operational decisions.  Related transactions are those between related parties regardless of whether any consideration has taken place.


Inherent difficulties of detection

Related party transactions are often inherently difficult for the auditor to detect.

  • The definition of a related party is complex and in part subjective and it may not always be self-evident to management whether a party is related.
  • Many information systems are not designed to either distinguish or summarise related party transactions and outstanding balances between an entity and its related parties.
  • An audit cannot be expected to detect all related party transactions.


Importance of related Parties

The auditor needs to have a sufficient understanding of the entity and its environment to enable identification of the events and transactions that may result in a risk of material misstatement regarding related parties and transactions with such parties because:

  • The applicable financial reporting framework may require disclosure in the financial statements of certain related party relationships and transactions
  • The existence of related parties or related party transactions may affect the financial statements such as the entity’s tax liability.
  • The source of audit evidence affects the auditor’s assessment of its reliability. A greater degree of reliance is placed on audit evidence that is obtained from unrelated third parties;
  • A related party transaction may be motivated by other than ordinary business considerations, for example, profit sharing or even fraud; and
  • Transfers of goods and services with related parties may be in accordance with specified transfer pricing policies or under reciprocal trading arrangements which may give rise to accounting recognition and measurement issues. In particular an entity may have received or provided management services at no charge.

The risk that undisclosed related party transactions, or outstanding balances between an entity and its related parties, will not be detected by the auditor is especially high when:

  • Related party transactions have taken place without charge,
  • Related party transactions are not self-evident to the auditor,
  • Transactions are with a party that the auditor could not reasonably be expected to know is a related party,
  • Transactions undertaken with a related party in an earlier period have remained unsettled for a considerable period of time,
  • Active steps have been taken by those charged with governance or management to conceal either the full terms of a transaction or that a transaction is, in substance, with a related party.


Existence and Disclosure of Related Parties

When planning the audit the auditor should assess the risk that material undisclosed related party transactions, or undisclosed outstanding balances between an entity and its related parties may exist.


The auditor should review information provided by management identifying the names of all known related parties and should perform the following audit procedures in respect of the completeness of this information:

  • Review prior year working papers for names of known related parties;
  • Review the entity’s procedures for identification of related parties;
  • Inquire as to the affiliation of management and officers with other entities;
  • Review shareholder records to determine the names of principal shareholders or, if appropriate, obtain a listing of principal shareholders from the share register;
  • Review minutes of the meetings of shareholders and those charged with governance and other relevant statutory records such as the register of directors’ interests;
  • Inquire of other auditors currently involved in the audit, or predecessor auditors, as to their knowledge of additional related parties;
  • Review the income tax returns and other information supplied to regulatory agencies;
  • Review invoices and correspondence from lawyers for indications of the existence of related parties or related party transactions; and
  • Inquire of the names of all pension and other trusts established for the benefit of employees and the names of their management.


If, in the auditor’s judgment, there is a lower risk of significant related parties remaining undetected, these procedures may be modified as appropriate.


Where the applicable financial reporting framework requires disclosure of related party relationships, the auditor should be satisfied that the disclosure is adequate.


Transactions with Related Parties


The auditor should review information provided by management identifying related party transactions and should be alert for other material related party transactions.  When obtaining an understanding of the entity’s internal control, the auditor should consider the adequacy of control activities over the authorisation and recording of related party transactions.


During the course of the audit, the auditor needs to be alert for transactions which appear unusual in the circumstances and may indicate the existence of previously unidentified related parties. Examples include:

  • Transactions which have abnormal terms of trade, such as unusual prices, interest rates, guarantees, and repayment terms.
  • Transactions which lack an apparent logical business reason for their occurrence.
  • Transactions in which substance differs from form.
  • Transactions processed in an unusual manner
  • High volume or significant transactions with certain customers or suppliers as compared with others.
    • Unrecorded transactions such as the receipt or provision of management services at no charge.


    During the course of the audit, the auditor carries out audit procedures which may identify the existence of transactions with related parties. Examples include:

    • Performing detailed tests of transactions and balances,
    • Reviewing minutes of meetings of shareholders and those charged with governance,
    • Reviewing accounting records for large or unusual transactions or balances, paying particular attention to transactions recognised at or near the end of the reporting period,
    • Reviewing confirmations of loans receivable and payable and confirmations from banks. Such a review may indicate guarantor relationship and other related party transactions.
    • Reviewing investment transactions, for example, purchase or sale of an equity interest in a joint venture or other entity.


    Examining Identified Related Party Transactions


    In examining the identified related party transactions, the auditor should obtain sufficient appropriate audit evidence as to whether these transactions have been properly recorded and disclosed.


    Given the nature of related party relationships, audit evidence of a related party transaction may be limited.  Because of the limited availability of appropriate audit evidence about such transactions, the auditor considers performing audit procedures such as:

    • Discussing the purpose of the transaction with management ,
    • Confirming the terms and amount of the transaction with the related party,
    • Inspecting information in possession of the related party,
    • Corroborating with the related party the explanation of the purpose of the transaction and, if necessary, confirming that the transaction is bona fide,
    • Obtaining information from an unrelated third party,
    • Confirming or discussing information with persons associated with the transaction such as banks, lawyers, guarantors and agents.


    Disclosures Relating to Control of the Entity


    The auditor should obtain sufficient appropriate audit evidence that disclosures in the financial statements relating to control of the entity are properly stated.

    Management Representations


    The auditor should obtain a written representation from management concerning the completeness of information provided regarding the identification of related parties; and the adequacy of related party disclosures in the financial statements

    Audit Conclusions and Reporting


    If the auditor is unable to obtain sufficient appropriate audit evidence concerning related parties and transactions with such parties or concludes that their disclosure in the financial statements is not adequate, the auditor should modify the audit report appropriately.

    Problems associated with applying the standard include the identification of the controlling party which may be difficult and the auditor may not be able to determine whether transactions are material.  (See materiality notes and limitations of criteria)

    What procedures should a company put in place:


    • Advise all directors and officers that they have a responsibility to disclose appropriate transactions;
    • Record all such transactions in the minutes of directors’ meetings;
    • Maintain a register of all details which should be disclosed;
    • Set out approval procedures in respect of transactions which fall under related party issues;
    • Obtain a formal statement annually from each director indicating the necessary disclosures.


    Audit procedures to assess such a system


    • Inspect the board minutes
    • Examine any agreements and contracts involving directors
    • Consider whether transactions disclosed are on commercial grounds
    • Assess the recoverability of amounts due in respect of directors or connected persons
    • Review the legality of the disclosable transactions
    • Review subsequent events after the year end for any additional disclosure requirements




    ISA 580 states that the auditor should obtain appropriate representations from management.  These are an important source of evidence.  Indeed these may be the only suitable evidence available where knowledge of such facts is confined to management or may even be one of judgement and opinion.  The representations may be oral or written and may be obtained either on a formal or informal basis.  The auditors will include this information in their audit working papers where it forms part of their total audit evidence.  Written confirmation should be obtained before the audit report is issued.


    Acknowledgment by Management of its Responsibility for the Financial Statements


    The auditor should obtain audit evidence that management acknowledges its responsibility for the fair presentation of the financial statements in accordance with the applicable financial reporting framework, and has approved the financial statements.   This normally occurs when the auditor gets a signed copy of the financial statements which usually includes a statement of management responsibilities.  On the other hand the auditor can obtain audit evidence from relevant minutes of meetings by obtaining a written representation from management.


    Representations by Management as Audit Evidence


    The auditor should obtain written representations from management on matters material to the financial statements when other audit evidence cannot reasonably be expected to exist.  It may be necessary to inform management of the auditor’s understanding of materiality.


    The possibility of misunderstandings between the auditor and management is reduced when oral representations are confirmed by management in writing.


    The auditor should obtain written representations from management that:

    • It acknowledges its responsibility for the design and implementation of internal control to prevent and detect error; and
    • It believes the effects of those uncorrected financial misstatements aggregated by the auditor during the audit are immaterial to the financial statements taken as a whole.


    During the course of an audit, management makes many representations to the auditor, either unsolicited or in response to specific inquiries. When such representations relate to matters which are material to the financial statements, the auditor will need to:

    • Seek corroborative audit evidence from sources inside or outside the entity,
    • Evaluate whether the representations made by management appear reasonable and consistent with other audit evidence obtained and
    • Consider whether the individuals making the representations can be expected to be well informed on the particular matters.


    Representations by management cannot be a substitute for other audit evidence that the auditor could reasonably expect to be available.  If the auditor is unable to obtain sufficient appropriate audit evidence regarding a matter which has a material effect on the financial statements and such audit evidence is expected to be available, this will constitute a limitation in the scope of the audit, even if a representation has been received on the matter.


    In certain instances, audit evidence other than that obtained by performing inquiry may not be reasonably expected to be available; therefore the auditor obtains a written representation by management.


    If a representation by management is contradicted by other audit evidence, the auditor should investigate the circumstances and, when necessary, reconsider the reliability of other representations made by management.


    Documentation of Representations by Management


    The auditor would ordinarily include, in audit working papers, evidence of management’s representations in the form of a summary of oral discussions with management or written representations from management.


    A written representation is ordinarily more reliable audit evidence than an oral representation and can take the form of:

    • A representation letter from management,
    • A letter from the auditor outlining the auditor’s understanding of management’s representations, duly acknowledged and confirmed by management,
    • Relevant minutes of meetings of the board of directors or similar body or a signed copy of the financial statements.


    Basic Elements of a Management Representation Letter


    When requesting a management representation letter, the auditor should request that it be addressed to the auditor, contain specified information and be appropriately dated and signed. It would ordinarily be dated the same date as the auditor’s report.


    A management representation letter would ordinarily be signed by the members of management who have primary responsibility for the entity and its financial aspects (ordinarily the senior executive officer and the senior financial officer) based on the best of their knowledge and belief.


    Action if Management Refuses to Provide Representations


    If management refuses to provide a representation that the auditor considers necessary, this constitutes a scope limitation and the auditor should express a qualified opinion or a disclaimer of opinion.  In such circumstances, the auditor would evaluate any reliance placed on other representations made by management during the course of the audit and consider if the other implications of the refusal may have any additional effect on the auditor’s report.




    The auditor is not expected to have the expertise of a person trained for or qualified to engage in the practice of another profession or occupation, such as an actuary or engineer.  For this reason an auditor may need to use the work of an expert to obtain sufficient, appropriate audit evidence.


    “Expert” means a person or firm possessing special skill, knowledge and experience in a particular field other than accounting and auditing.


    When using the work performed by an expert, the auditor should obtain sufficient appropriate audit evidence that such work is adequate for the purposes of the audit.

    If unable to obtain sufficient appropriate audit evidence, the auditor should consider the need to modify the auditor’s report.  Although the auditor may use the work of an expert, the auditor has sole responsibility for the audit opinion.


    The expert can be engaged by the client or the auditor themselves.  When the expert is employed by the audit firm, the auditor will be able to rely on the firm’s own systems for recruitment and training that determine that expert’s capabilities and competence instead of needing to evaluate them for each audit engagement.


    If neither the auditor nor the entity employs an appropriate expert, the auditor considers asking management to engage an appropriate expert subject to the auditor being satisfied as to the expert’s competence and objectivity. If management is unable or unwilling to engage an expert, the auditor may consider engaging an expert or whether sufficient appropriate audit evidence can be obtained from other sources.

    Determining the Need to Use the Work of an Expert


    In obtaining an understanding of the entity and performing further procedures in response to assessed risks, the auditor may need to obtain, in conjunction with the entity or independently, audit evidence in the form of reports, opinions, valuations and statements of an expert. Examples are:

    • Valuations of certain types of assets, for example, land and buildings, plant and machinery, works of art, and precious stones.
    • Determination of quantities or physical condition of assets, for example, minerals stored in stockpiles, underground mineral and petroleum reserves, and the remaining useful life of plant and machinery
    • Determination of amounts using specialised techniques or methods, for example, an actuarial valuation.
    • The measurement of work completed and to be completed on contracts in progress
    • Legal opinions concerning interpretations of agreements, statutes and regulations.


    When determining the need to use the work of an expert, the auditor would consider

    • The engagement team’s knowledge and previous experience of the matter being considered;
    • The risk of material misstatement based on the nature, complexity, and materiality of the matter being considered and
    • The quantity and quality of other audit evidence expected to be obtained.


    Competence and Objectivity of the Expert


    When planning to use the work of an expert, the auditor should evaluate the professional competence of the expert.  This will involve considering

    • The expert’s professional certification or licensing by, or membership of, an appropriate professional body and
    • Experience and reputation in the field in which the auditor is seeking audit evidence.


    The auditor should also evaluate the objectivity of the expert.  The risk that an expert’s objectivity will be impaired increases when the expert is:

    • Employed by the entity or
    • Related in some other manner to the entity, for example, by being financially dependent upon or having an investment in the entity


    If the auditor is concerned regarding the competence or objectivity of the expert, the auditor needs to discuss any reservations with management and consider whether sufficient appropriate audit evidence can be obtained concerning the work of an expert. The auditor may need to undertake additional audit procedures or seek audit evidence from another expert.

    If the auditor is unable to obtain sufficient appropriate audit evidence concerning the work of an expert, the auditor needs to consider modifying the auditor’s report.


    Scope of the Expert’s Work


    The auditor should obtain sufficient appropriate audit evidence that the scope of the expert’s work is adequate for the purposes of the audit.  Audit evidence may be obtained through a review of the terms of reference which are often set out in written instructions from the entity to the expert.  Such instructions to the expert may cover matters such as:

    • The objectives and scope of the expert’s work,
    • A general outline of the specific matters the auditor expects the report to cover,
    • The intended use by the auditor of the expert’s work, including the possible communication to third parties of the expert’s identity and extent of involvement,
    • The extent of the expert’s access to appropriate records and files,
    • Clarification of the expert’s relationship with the entity, if any,
    • Confidentiality of the entity’s information,
    • Information regarding the assumptions and methods intended to be used by the expert and their consistency with those used in prior periods.


    In the event that these matters are not clearly set out in written instructions to the expert, the auditor may need to communicate with the expert directly to obtain audit evidence in this regard. In obtaining an understanding of the entity, the auditor also considers whether to include the expert during the engagement team’s discussion of the susceptibility of the entity’s financial statements to material misstatement.


    Evaluating the Work of the Expert


    The auditor should evaluate the appropriateness of the expert’s work as audit evidence regarding the assertion being considered. This will involve evaluation of whether the substance of the expert’s findings is properly reflected in the financial statements or supports the assertions, and consideration of: • Source data used,

    • Assumptions and methods used and their consistency with prior periods,
    • When the expert carried out the work,
    • Results of the expert’s work in the light of the auditor’s overall knowledge of the business and of the results of other audit procedures.


    When considering whether the expert has used source data which is appropriate in the circumstances, the auditor would consider the following procedures:

    • Making inquiries regarding any procedures undertaken by the expert to establish whether the source data are relevant and reliable and
    • Reviewing or testing the data used by the expert.


    The appropriateness and reasonableness of assumptions and methods used and their application are the responsibility of the expert.  The auditor does not have the same expertise and, therefore, cannot always challenge the expert’s assumptions and methods. However, the auditor will need to obtain an understanding of the assumptions and methods used and to consider whether they are appropriate and reasonable, based on the auditor’s knowledge of the business and the results of other audit procedures.


    Results of the expert


    If the results of the expert’s work do not provide sufficient appropriate audit evidence or if the results are not consistent with other audit evidence, the auditor should resolve the matter.  This may involve discussions with the entity and the expert, applying additional audit procedures, including possibly engaging another expert, or modifying the auditor’s report.


    Reference to an Expert in the Auditor’s Report


    When issuing an unmodified auditor’s report, the auditor should not refer to the work of an expert.  Such a reference might be misunderstood to be a qualification of the auditor’s opinion or a division of responsibility, neither of which is intended.


    If, as a result of the work of an expert, the auditor decides to issue a modified auditor’s report, in some circumstances it may be appropriate, in explaining the nature of the modification, to refer to or describe the work of the expert (including the identity of the expert and the extent of the expert’s involvement). In these circumstances, the auditor would obtain the permission of the expert before making such a reference. If permission is refused and the auditor believes a reference is necessary, the auditor may need to seek legal advice.



    Internal audit


    If the client has an internal audit dept., it may sometimes be possible for the external auditor to make use of their work in arriving at their audit opinion.




    All evidence obtained during an audit should be documented.  The auditor’s working papers are the evidence of all the work done which supports his audit opinion.


    Where evidence is difficult to obtain such as related parties or discussions with management, it is imperative that written notes are made of conversations, particularly where they concern material matters.


    Working papers should be reviewed by more senior members of staff before an audit conclusion is reached.  The review should consider whether:

    • The work has been performed in line with the detailed audit programmes,
    • The work performed and the results thereof have been adequately documented,
    • Any significant matters have been resolved or are reflected in the audit opinion,
    • The objectives of the audit procedures have been achieved,
    • The conclusions expressed are consistent with the results of the work performed and support the opinion of the auditor.


    The following documentation should be reviewed on a timely basis:

    • The overall audit strategy and the detailed audit plan,
    • The assessment of inherent and control risks,
    • The results of control and substantive procedures and the conclusions drawn from them,
    • The proposed audit adjustments to the financial statements.


    In some cases, particularly large complex audits, personnel not involved in the audit may be asked to review some or all of the audit work.  This is sometimes known as a peer review or a hot review.


    Question 7.1


    You are the manager in charge of the audit of Newworld properties and you have been asked to prepare the letter of representation which will be signed by the company’s directors.


    There are two material items in the accounts for the year ended 30 April 2010 on which you want the directors to confirm that the treatment in the accounts are correct.


    Oldworld Builders, a subsidiary company, is experiencing going concern problems and you want the directors to confirm that they intend to support the subsidiary for the foreseeable future.


    Trouble Manufacturing Ltd is in dispute with Newworld properties over repairs required to a building they purchased a number of years ago.  The customer is claiming that RWF3m worth of repairs are required and that Newworld properties is liable to pay for these repairs as a result of negligent construction of the building.  In addition, Trouble is claiming RWF2m for the cost of disruption to the business due to the faults in the building.  Newworld properties have obtained the advice from their lawyer and a surveyor, and the directors believe that there are no grounds for the claim.  However, Newworld has included a note in its accounts concerning this contingent liability.


    You are required to:

    1. Draft a letter of representation for the directors to sign. You should include the two items above and any other required matters.


    1. Discuss the letter of representation as reliable audit evidence and the extent to which auditors can rely on this form of evidence.


    1. Describe the work to be performed to check whether a provision in respect of Trouble Manufacturing Ltd should be included in the accounts.


    1. Describe the matters to consider and the further action that is necessary if the directors refuse to sign the letter of representation because of the legal claim from Trouble Manufacturing Ltd.


    Question 7.2


    What are the audit objectives.

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