Audit evidence, procedures and substantive testing of balances and transactions
Audit evidence
Sufficient appropriate evidence is needed to support the audit opinion. Appropriateness relates to relevance and reliability. Reliability hierarchy: external > internal; auditor-obtained > client-provided; original > copy.
Procedures
Procedures include inspection, observation, inquiry, confirmation, recalculation, re-performance, and analytical procedures. Substantive procedures test for material misstatements at assertion level. They include tests of details and substantive analytical procedures.
Substantive testing
For balances: e.g., receivables (confirmations, after-date receipts), inventory (attendance, valuation), payables (supplier statements, search for unrecorded liabilities). For transactions: test of details of transactions (e.g., sales, purchases).
Traps in questions
- Relying on inquiry alone as sufficient evidence.
- Confusing substantive analytical procedures with tests of controls.
- Forgetting that external evidence is more reliable.
- Overlooking that confirmations may be biased if client controls them.
- Mixing up direction of testing (e.g., from records to source documents for occurrence).
Worked example / rule of thumb
For trade receivables, send confirmations to debtors. If no reply, use after-date cash receipts. Rule: external confirmations are strong evidence but must be controlled by auditor. For occurrence, test from journal to source document; for completeness, test from source document to journal.
Key points
- Evidence must be sufficient and appropriate.
- Reliability: external > internal, auditor-obtained > client-provided.
- Substantive procedures include tests of details and analytical procedures.
- Direction of testing affects which assertion is tested.
- Confirmations should be under auditor control.