Discuss the quality of the following types of audi

Discuss the quality of the following types of audit evidence, giving two examples of each form of evidence.

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Question Audit evidence
(a) Discuss the quality of the following types of audit evidence, giving two examples of each form of
evidence.
(i) Evidence originated by the auditors
(ii) Evidence created by third parties
(iii) Evidence created by the management of the client
(b) Describe the general considerations which auditors must bear in mind when evaluating audit
evidence.
Answer
(a) Quality of audit evidence
(i) Evidence originated by the auditors
This is in general the most reliable type of audit evidence because there is little risk that it
can be manipulated by management.
Examples
(1) Analytical procedures, such as the calculation of ratios and trends in order to
examine unusual variations
(2) Physical inspection or observation, such as attendance at inventory counts
(3) Reperformance of calculations making up figures in the accounts, such as the
computation of total inventory values
(ii) Evidence created by third parties
Third party evidence is more reliable than client-produced evidence to the extent that it is
obtained from independent sources. Its reliability will be reduced if it is obtained from
sources which are not independent, or if there is a risk that client personnel may be able to
and have reason to suppress or manipulate it.
Examples
(1) Circularisation of trade receivables or payables, confirmation of bank balances.
(2) Reports produced by experts, such as property valuations, actuarial valuations, legal
opinions. In evaluating such evidence, the auditors need to take into account the
expert’s qualifications, independence and the terms of reference for the work.
(3) Documents held by the client which were issued by third parties, such as invoices,
price lists and statements. These may sometimes be manipulated by the client and
so are less reliable than confirmations received directly.
(iii) Evidence created by management
The auditors cannot place the same degree of reliance on evidence produced by client
management as on that produced outside the company. However, it will often be necessary
to place some reliance on such evidence. The auditors will need to obtain audit evidence
that the information supplied is complete and accurate, and apply judgement in doing so,
taking into account previous experience of the client’s reliability and the extent to which the
client’s representations appear compatible with other audit findings, as well as the
materiality of the item under discussion.
Examples
(1) The company’s accounting records and supporting schedules. Although these are
prepared by management, the auditors have a statutory right to examine such
records in full: this right enhances the quality of this information.
(2) The client’s explanations of, for instance, apparently unusual fluctuations in results.
Such evidence requires interpretation by the auditors and, being oral evidence, only
limited reliance can be placed upon it.
(3) Information provided to the auditors about the internal control system. The auditors
need to confirm that this information is accurate and up-to-date, and that it does not
simply describe an idealised system which is not adhered to in practice.
(b) General considerations in evaluating audit evidence
Audit evidence will often not be wholly conclusive. The auditors must obtain evidence which is
sufficient and appropriate to form the basis for their audit conclusions. The evidence gathered
should also be relevant to those conclusions, and sufficiently reliable to form the basis for the
audit opinion. The auditors must exercise skill and judgement to ensure that evidence is correctly
interpreted and that only valid inferences are drawn from it.
Certain general principles can be stated. Written evidence is preferable to oral evidence;
independent evidence obtained from outside the organisation is more reliable than that obtained
internally; and evidence generated by the auditors is more reliable than that obtained from others.

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