Audit Evidence (SA 500 Series Master Breakdown)
1. SA 500: Audit Evidence Gathering Methods (Mnemonic: ICIO-RRR)
| Procedure (ICIO-RRR) | Audit Action | Reliability Hierarchy |
|---|---|---|
| 1. Inspection | Examining records, documents, or tangible physical assets. | High for external documents; Medium for internal. |
| 2. Confirmation | Direct written response from third party (debtor, bank). | Highest Reliability (Direct external evidence). |
| 3. Inquiry | Seeking information from knowledgeable persons within/outside entity. | Inquiry alone is NOT sufficient audit evidence! |
| 4. Observation | Looking at a process or procedure being performed by others. | Limited to the point in time observed. |
| 5. Recalculation | Checking mathematical accuracy of documents or records. | High for mathematical correctness. |
| 6. Reperformance | Independent execution of procedures or controls by auditor. | High for operating effectiveness of controls. |
| 7. Analytical Procedures | Evaluations of financial info through analysis of plausible relationships. | High when controls over data are effective. |
2. SA 501: Physical Inventory Count Verification
📦 Attendance at Physical Inventory Count is Mandatory
If inventory is material, the auditor MUST attend physical inventory counting unless impracticable.
If Impracticable (e.g., hazardous cargo, remote location): The auditor must perform alternative audit procedures (inspect subsequent sales records, purchase documentation). If not possible to obtain evidence → Modify opinion under SA 705 (NFRA Case Precedent!).
- Inventory Held by Third Parties (Warehouses): Request confirmation from third party under SA 505, or perform inspection/attend count.
3. SA 505: External Confirmations Protocol
| Confirmation Type | Mechanism | Audit Evidence Value |
|---|---|---|
| Positive Confirmation | Requesting party to reply directly to auditor indicating whether they agree or disagree, or providing requested information. | High Reliability. Non-response requires follow-up or alternative procedures. |
| Negative Confirmation | Requesting party to respond ONLY if they disagree with the information provided. | Low Reliability. Permitted only when RMM is low, large number of small balances, and very low exception rate expected. |
⚠️ Management Refuses to Allow Confirmation Request
If management refuses to allow the auditor to send a confirmation request:
- Inquire as to management's reasons and seek audit evidence as to validity and reasonableness;
- Evaluate implications on RMM and risk of fraud;
- Perform alternative audit procedures;
- If refusal is unreasonable or evidence cannot be obtained → Communicate to TCWG and modify audit opinion under SA 705.
4. SA 510: Initial Audit Engagements & Opening Balances
- Objective: Determine whether opening balances contain misstatements materially affecting current period financials, and accounting policies are consistently applied.
- Audit Procedures: Read most recent financial statements and predecessor auditor's report; check whether prior period closing balances correctly brought forward; test opening inventory valuation.
- Reporting Modifications:
- If opening balances contain misstatement not corrected → Qualified or Adverse Opinion on current P&L.
- If inability to obtain evidence regarding opening balances → Qualified or Disclaimer on P&L and Cash Flows, with Unmodified on Balance Sheet (split opinion).
5. SA 530: Audit Sampling Rules
| Sampling Concept | Statutory Audit Definition & Application |
|---|---|
| Sampling Risk | Risk that auditor's conclusion based on a sample may be different from conclusion reached if entire population were tested. |
| Risk of Incorrect Acceptance | Test of details concludes material misstatement does not exist when it actually does. Affects audit effectiveness → Leads to inappropriate audit opinion! |
| Risk of Incorrect Rejection | Test of details concludes material misstatement exists when it does not. Affects audit efficiency (extra work). |
| Stratification | Dividing a population into sub-populations (strata) having similar characteristics, reducing sample size without increasing risk. |
6. SA 550: Related Parties Verification Protocol
- Heightened Risk: Related parties operate outside normal market forces, creating immense opportunities for fraudulent financial reporting.
- Auditor Procedures: Review bank and legal confirmations; inspect significant transactions outside normal course of business; evaluate contract terms for commercial rationale.
- Undisclosed Related Parties Found: Promptly communicate to engagement team; request management to identify all transactions with the newly identified party; perform detailed substantive testing; re-evaluate fraud risk.