Question

“Obtaining and documenting appropriate evidence of auditor’s opinion is one of the main objectives of

auditing financial statements” Based on the above statement, you are required to answer the following

questions in your own view:

a) Explain the concept of sufficient appropriate evidence in detail with five examples. (200 Words)

b) Mention and explain the financial statement assertions and audit objectives in the following cases.

1) Verifying inventories included in the balance sheet are physically existed.

2) Verifying that inventories listings are accurately compiled.

3) Verifying whether the transactions are recorded in the proper period.

4) Verifying the accounts receivable already sold out, does not belong to the entity

5) Verifying the pledge of material inventories is appropriately disclosed.

Answer 1

a)Audit evidence is information obtained by the auditior by applying varoius audit procedures so as to enable him to form an opinion on whether the finacial statements of an entity are free from material misstatement and state a true and fair view or not.So the evidence to be obtained should be sufficient and appropriate.

Sufficiency is the measure of the quantity of audit evidence whereas appropriateness refers to the quality of the audit evidence i.e its relevance and reliability in prioviding support to the conclusions on which auditors opinion is based.The quantity of the audit evidence is affected by the risks of misstatements assessed by the auditor,where highr the risks,the more is the quantity of audit evidence required.Whereas quality of audit evidence depends on whether it is relevant and reliable.Whether evidence is reliable depend on the source and also its nature.

Sufficiency and appropriateness are interrelated. Where more risks more quantity of audit evidence required where as if the audit evidence is of higher quality less of audit evidence is required.However a large quantity of audit evidence does not compensate for its poor quality.Examples of sufficient and appropriate audit evidence are as follows:

1.Evidence obtained in original documents are of higher quality and are preferred over photocopies.

2.Evidence obtained by the auditor in written form or as documentary evidence are more reliable.

3.Confirming the bank balance directly from the bank is not sufficient evidence as it alone does not confirm about the client cash and bank balance.for example certain cheques not cleared.So the auditor also has to check the bank reconciliation statement.The combination of these two evidence will form a sufficient audit evidence.

4.Auditor's attendance at the inventory count and then checking the physical inventory with th inventory records is a measure of quality orv appropriateness of the audit evidence.

5.Checking the invoices raised and also confirmation from the debtors of the same.

b)1.The assertion of existence-The assertion is that the assets and liabilities and shareholders equity balances appearing in the company’s financial statements at the end of accounting period exists.The objective is to form an opinion as to whether assets, liabilities and equity interests exists.

2.The assertion of accuracy and valuation-This is the statement that all the figures stated in the financial statements are accurate and are based on proper valuation. The objective is to form an opinion as to whether an information in the financial statements are disclosed fairly and at appropriate amounts.

3.The assertion of occurrence and cut off-This states that the transactions and events that has been recorded or disclosed are relevant to the period.They have been recorded in the correct accounting period.The objective is to form an opinion as to whether transactions and events that have been recorded have occurred and pertains to the entity during the relevant period.

4.The assertion of rights and obligation- The assertion of rights and obligations states that all the assets and liabilities included in the financial statements belong to the company. An asset is the right of the entity and liabilities is an obligation of an entity. The accounts receivable which has been sold no longer belongs to the entity and also do not find its place in the balance sheet. The objective is to form an opinion on whether the entity holds or controls the rights to asset ,liabilities are the obligations of the entity.

5.The assertion of existence,valuation,rights and disclosure-The final financial statement assertion is presentation and disclosure.This is the assertion that all appropriate information and disclosures are included in company's statements and all disclosures are fair and easy to understand.The objective of the auditor is to form an opinion on whether the inventory actually exists,is valued properly,entity has rights over the asset and since the material inventory has been pledged,whether that is disclosed properly and fairly and is easy to understand .