AUDITING AND ASSURANCE SERVICES

(CODE: ECAU604103)

INTERNAL AUDIT & AUDIT EVIDENCE

GROUP 3
1. Adini Nadia Putri 1706105170
2. Ayrin Nashfati 1706105201
3. Kevin AB Sebayang 1706105366
4. Rania Salsabila Aryansis 1706105523

EXTENSION PROGRAM
ACCOUNTING DEPARTMENT
FACULTY OF ECONOMICS AND BUSINESS
UNIVERSITAS INDONESIA
CLASS OF 2017
 TABLE OF CONTENTS

REFERENCE ....................................................................................................................................... iii

SECTION I RELIANCE ON INTERNAL AUDIT BY THE EXTERNAL AUDITOR ..................... 4
A. Internal Audit as an Element of Internal Control........................................................................... 4
B. Internal Audit as an Element of Internal Control........................................................................... 4
C. The responsibility of the External Auditor When Relying Upon the Work of Internal Audit ......... 4
SECTION II THE AUDIT DEFINED AS A SEARCH FOR EVIDENCE TO ENABLE AN
OPINION TO BE FORMED ................................................................................................................ 5
A. Introduction ................................................................................................................................. 5
B. Sufficient appropriate audit evidence............................................................................................ 6
SECTION III FORMING CONCLUSIONS ON BASIS OF EVIDENCE: THE EXERCISE OF
JUDGEMENT ....................................................................................................................................... 8
SECTION IV RELIABILITY OF AUDIT EVIDENCE (GRADE OF AUDIT EVIDENCE) .......... 10
A. Guidelines for assessing evidence reliability ............................................................................... 10
SECTION V STAGES OF THE AUDIT PROCESS AND THE EVIDENTIAL REQUIREMENTS
AT EACH STAGE .............................................................................................................................. 13

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 REFERENCE

1. Gray, Ian. Stuart Manson, Louise Crawford. 2015. The Audit Process-Principles, Practice
and Cases Sixth Edition. Singapore. Cengage Learning.

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 SECTION I

RELIANCE ON INTERNAL AUDIT BY THE EXTERNAL AUDITOR

A. Internal Audit as an Element of Internal Control

Internal Audit could provide a dynamic role within organization provide a dynamic
role within organization provided the function had been properly established. External
auditors accept that the scope of internal audit is expanding but tend to concentrate on its
internal control aspect. External auditors are interested in the soundness of internal control,
it is clear that they will be interested in the internal control role of internal audit.

B. Internal Audit as an Element of Internal Control

1. Assessment of Effectiveness of Internal Audit
Before deciding to use the work of the internal auditors, some specific factors have to
be considered
2. Extent of Reliance
An internal audit function lacking independence or with staff of a low level of
competence would represent a weak element in the system of internal control. If
external auditors decide to place reliance on some aspects of internal audit work, they
should agree the timing and extent of the work with the chief internal auditor and
record the decision in the audit files.
3. Specific work of the Internal Auditors
The external auditors may use the work of internal auditors in obtaining evidence in
respect of specific assertions relating to the financial statements. If they are to do this
external auditors must first consider the risks of material misstatement at the assertion
level for the particular classes of transaction, account balances and disclosures.
4. Documentation of Effectiveness
Naturally, if external auditors decide to rely upon evidence collected by internal audit
the assessment and conclusions with regard to these matters should be fully
documented in audit files

C. The responsibility of the External Auditor When Relying Upon the Work of Internal
Audit
Irrespective of the degree of autonomy and objectivity of the internal audit function,
such function is not independent of the entity as is required of the external auditor when
expressing an opinion on financial statements. The external auditor has sole responsibility
for the audit opinion expressed and that responsibility is not reduced by the external
auditor’s use of the work of the internal auditors

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 SECTION II

THE AUDIT DEFINED AS A SEARCH FOR EVIDENCE TO ENABLE AN OPINION

TO BE FORMED

A. Introduction
In the external audit context the opinion is formed from a whole series of conclusions
in pursuit of the main audit objectives of:
1. Verifying the accuracy and dependability of the accounting records
2. Giving an opinion on the truth and fairness of financial statements
3. Being satisfied that legislation and accounting and reporting standards have been
compiled with
Before we continue our subject we will explain of some words such as Sufficient and
Appropriate. But first let us define what audit evidence is. Audit Evidence is the
information used by auditor in arriving at the conclusions on which the auditor’s opinion
is based. Audit evidence includes both information contained in the accounting records
underlying the financial statement and other information.
To start the discussion of audit evidenced, there are basic point that you have to know
first:
1. Sufficient, appropriate audit evidence has to be obtained to reduce audit risk to an
acceptably low level, and thereby enable the auditor to draw reasonable conclusions
on which to base the auditor’s opinion on the financial statements. The auditor has
to exercise judgment in deciding that the audit evidence collected is sufficient and
appropriate and that most of the time the evidence will be persuasive rather than
conclusive in forming audit conclusions. Because much audit evidence is merely
persuasive auditors seek evidence from different sources to support the same
assertion. In other word, auditor seeks corroborative evidence. Another important
point to be made here is that collecting audit evidence is like making a picture. It is
cumulative in nature in that as the auditor collects audit evidence the final picture
of the validity of an assertion gradually emerges.
2. Audit Evidence is not merely collected within the audited entity but also from
sources outwith the entity and independent of it, such as from lawyers.
3. Auditor collect audit evidence using a number of different procedures, including:
a. Inquiry: Involves seeking information from client staff or management (ISA
500). An example might be inquiries made when comparison of inventory
records with quantities counted reveal material discrepancies.
b. Inspection: The auditor inspects documents and accounting records for a number
of different reasons. Example:
a) The auditor might inspect inventory records and compare them with records
of inventory counted

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 b) Inspection of assets that are recorded in the accounting records confirms
existence and gives evidence of evaluation but does not confirm right and
obligation (ISA 500)
c) Inspection of documentation confirms that an assets exists or a transaction
has occurred.
4. Observation: Involves watching a procedure being performed (for example, an
inventory count). This procedures has inherent limitation as it only confirms
procedure took place when the auditor was watching. (ISA 500)
5. Confirmation: Conformation from third patries external to the entity can be a
valuable source of auditor evidence to support trade receivables and from such
people as lawyers and actuaries. Confirmation is stronger evidence than inquiry to
the client’s staff as it is in written form and from independent sources.
6. Recalculation: Involves checking the arithmetic accuracy of client’s records (ISA
500). Recalculation would be a useful procedure when assessing wether documents
and records had been properly prepared, recalculating either manually or
electronically, example figures appearing on sales invoices and reconciliation
statement (ISA 500). Another example is the use of computer to re-perform the
ageing of trade receivables.
7. Re-performance: Involves re-performing various reconciliations as at the reporting
date or at interim periods to check controls have been operating effectively,
example: re-performing a bank reconciliation statements. (IAS 500)
8. Analytical Procedures: Consist of comparing items, for example, current year
financial information with prior year financial information, and analyzing
predictable relationship such as the relationship of trade receivables with revenue.
It can also be used to help identify any unusual trends or characteristics within the
financial statements. (IAS 500)

B. Sufficient appropriate audit evidence

Basically, sufficiency is a measure of the quantity of audit evidence, while
appropriateness is a measure of its quality.
1. Sufficient means that enough evidence has to be obtained by the auditor to meet
audit objectives, a major factor being degree of confidence required.
Note! That there is a link between persuasiveness of audit evidence and quantity as
auditors seek to be persuaded that their objectives have been meet by accumulating
evidence.
2. Appropriate has two elements and means that evidence is:
a. Relevant: The evidence must be pertinent to the matter in hand, to a
management assertion you wish to prove.
b. Reliable: The evidence must trustworthy. You will find, however, that there are
many grades of evidence, some being more reliable or trustworthy than others.

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 Note! At this point that sufficiency and appropriateness are related, as the higher the
quality of the audit evidence the less may be required. For instance, if tests of quantity of
inventory on hand reveal that inventory records are accurate, the auditor will be able to
reduce the number of inventory items counted. On the other hand, if the quality of audit
evidence is poor, obtaining more evidence probably not give grater satisfaction to the
auditor. For instance, if the quality of information in the accounting records is low,
extended analytical procedures are unlikely to give the audit evidence required.

FIGURE 2.1 Audit evidence supporting reasonable conclusions

Reasonable
conclusions based
on evidence
gathered by author

Sufficient Evidence
Appropriate
Evidence (must be enough to
be representative)

Relevant Evidence
Reliable Evidence
(pertinent to the
(Trustworthy and
assertion to be
Persuasive)
proven)

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 SECTION III
FORMING CONCLUSIONS ON BASIS OF EVIDENCE: THE EXERCISE OF
JUDGEMENT

We should not assume that search for audit evidence is an easy matter. It needs the
exercise of considerable imagination and the relevant evidence is frequently difficult matter
to find, being often concealed, intentionally or unintentionally.

TABLE 3.1 Assertions used by the auditor

General Category Specific Category Our General Heading

(a) Assertions about (i) Occurrence- transactions and events that have Genuine
classes of been recorded have occurred and pertaint to the
transactions and entity.
events for the period (ii) Completeness – all transactions and events that Complete
under audit should have been recorded.
(iii) Accuracy – Amounts and other data relating Accurate
to recorded transactions and events have been
recorded appropriately.
(iv) Cut-Off – Transactions and events have been Accurate/complete
recorded in the correct accounting period.
(b) Assertions about (i) Existence-Assets, liabilities and equity interests Genuine
account balances at exist.
the period end (ii) Right and Obligations – the entity holds or Genuine
controls the rights to assets, and liabilities are the
obligations of the entity.
(iii) Completeness – All assets, liabilities and Complete
equity interests that should have been recorded
have been recorded.
(iv) Valuation and allocations – assets, liabilities, Accurate
and equity interests are included in the financial
statements at appropriate amounts and any
resulting valuations or allocations adjustments are
appropriately recorded.

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(c) Assertions about (i) Occurrence and rights and obligations – Genuine
presentation and disclosed events, transactions, and other matters
disclosure have occurred and pertaint to the entity.
(ii) Completeness – all disclosures that should Complete
have been included in the financial statements have
been included.
(iii) Classifications and understandability – Accurate
financial informations is appropriately presented
and described, and disclosures are clearly
expressed.
(iv) Accuracy and valuation – financial and other Accurate
information are disclosed fairly and at appropriate
amounts.

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 SECTION IV
RELIABILITY OF AUDIT EVIDENCE (GRADE OF AUDIT EVIDENCE)

A. Guidelines for assessing evidence reliability

1. The reliability of audit evidence is increased when it is obtained from independent
sources outside the entity
Make a distinction between evidence provided by independent third parties
acting in professional capacity and evidence from third parties such as customers
and suppliers in the business contact group. Non-professional business contacts
such as customers may have a closer, more dependent relationship to the entity.
Neither can the auditor be certain that the credit customer’s accounting and control
systems are reliable.Evidence from independent sources outside the entity is more
reliable, particularly when received from persons acting in a professional capacity.
2. The reliability of audit evidence that is generated internally is increased when the
related controls, including those over its preparation and maintenance, imposed by
the entity are effective.
3. Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly or
by inference (for example, inquiry about the application of a control)
Analysis and observation carried out by auditors is good evidence. Although
more intangible than the evidence collected by auditors, making sure that it supports
other evidence collected, will normally produce very good evidence. Another kind
of analysis that is useful to auditors is analytical review of accounting information
performed by auditors themselves, resulting in reliable evidence, or at least a
reliable basis for further questioning of management. Although analytical review
can be very valuable to the auditor, a ratio, for instance, is only as good as the
figures used to calculate it.
4. Audit evidence in documentary form, whether paper, electronic, or other medium,
is more reliable than evidence obtainer orally (for example, a contemporaneously
written record of a meeting is more reliable than a subsequent oral representation of
the matters discussed)
During an audit, the auditor will receive a wide variety of oral evidence from
officials of the client. Much of this oral evidence will be reflected in the working
files of the auditor and this act of recording does have the effect of making the
evidence more useful and more reliable. As a matter of policy audit firms should
require staff members to record immediately in the working files (whether
computerized or manual) minutes of meetings held with the client’s staff. Some of
the oral statements made by management will be included in a formal letter of
representation from management to the auditor, thus putting this guidance on
evidence into effect. An example of a representation would be ‘There have been no

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 legal cases affecting the company other than those of which you have been
informed’.
5. Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles, or documents that have been filmed,
digitized, or otherwise transformed into electronic form, the reliability of which may
depend on the controls over their preparation and maintenance.
6. Evidence created in the normal course of business is better than evidence specially
created to satisfy the auditor.
7. The best-informed source of audit evidence will normally be management of the
company but management’s lack of independence reduces its value as a source of
such evidence. Possible sources of corroborative evidence might include:
a. Directors’ minutes of the meeting at which the policy decision was taken.
b. Instructions issued on a routine basis to credit control staff in the entity.
c. Commentaries in the financial press and trade press confirming the increased
competition in the industry and the steps taken as a result.
8. Evidence about the future is particularly difficult to obtain and is less reliable than
evidence about past events. Auditors frequently have to consider future events in the
course of their duties. Examples of such events are:
a. Outcome of potential legal claims.
b. Net realizable values of inventories.
c. Collectability of trade receivables.
d. Useful lives of non-current assets.
Although it may be more difficult for the auditor to obtain evidence about the
future, its main feature being the uncertainty associated with it, there are ways in
which the future may be made less cloudy. Generally speaking, the auditors’ view
of future events is likely to be colored by their opinion of the reliability of
management, the extent to which management has proved able to anticipate the
future in the past and the means by which management itself attempts to control the
future. Good company-generated evidence about the future might include budgets
for control purposes, forecasts of profits and up to-date price lists for the post-
balance sheet period. Other evidence about the future which must be treated with
great care might include:
a. Government reports about the state of the economy.
b. Comments by industry leaders.
c. Reports in the trade and financial press.
9. Evidence may be upgraded by the skilful use of corroborative evidence
The idea of upgrading of evidence is very important in the audit process, as,
indeed, is the rejection of the evidence as the result of downgrading. Corroborative
evidence is evidence that is consistent with the data or information that have already
collected. When finding evidence that corroborates another piece of evidence, both

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pieces of evidence are much enhanced, so that taken together they ate more valuable
than the sum of their individual values.

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STAGES OF THE AUDIT PROCESS AND THE EVIDENTIAL REQUIREMENTS AT
EACH STAGE
Preliminary stages
Audit Stage
1 Considering engagement risk and
establishing the terms of reference
2 Study of the business in its
external environment; initial view of
business/inherent risk
3 Study of the control environment
of the organization; continuing
assessment of inherent risk; first
assessment of control risk
4 Planning the audit process on a
global basis; risk analysis
System Work
5 Issue preliminary report to
management
6 Establish objectives of individual
accounting and control systems
7 Record accounting and control
systems in use and features of the
control environment
8 Confirm that accounting and
control systems in use are
operating as recorded
SECTION V
Evidence-gathering process
Initial view of organization obtained and of
some, if not all, leading officials
Gathering information about
industrial/commercial sector and
organization's position within it. Obtaining
view of business/ inherent risks and external
factors
Information on background and qualifications
of key personnel/ basic power structure and
control environment; management response
to environmental challenges; first analytical
review
Important stage in evidence gathering
process: determines how the subsequent
evidence gathering will be carried out;
identifies risk areas
It is at this stage that the auditor identifies
matters that might affect evidence-gathering
and audit reporting
Linked to planning Stage 4, but more
detailed. Evidence-gathering is streamlined
as carried out in the context of specific
objectives. Setting objectives also done in
context of analytical review (see stage 16)
Discussions with client staff, walk-through
tests, use of ICQs to determine system and
narrative description, ICQs and flowcharts to
record in working papers
Tests of control (cradle to grave, block tests, etc.)
to confirm auditor has understood systems and
has recorded accurately. Tests effectiveness of
systems
Main Audit Objectives
Establishes relationship with
management, defines responsibilities
of auditor and management. May
reject if engagement risk deemed high
Establishes the major external factors
affecting the organization and its
operations; sets context of ‘true and
fair view’
Sets scene for later systems reviews
and transactions/ figures testing,
particularly by obtaining understanding
of inherent and potential control risk.
Aid to planning
To carry out audit in an efficient and
effective manner
The objective is to inform management
of initial time planning, estimates of
fees, problems for management
attention
Directs audit work to predetermined
objectives
The three stages, 7, 8 and 9, together
with 6, are all directed to company
systems and the control environment
which supports them. The audit
objective is to discover how effective
the systems in use are in processing
transactions, safeguarding assets etc.
and the extent they can be relied on
by the auditor and the level of control
risk with which the auditor is faced.
The control environment, although
important, is not sufficient in itself so
examination of it needs to be
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 Review of systems notes and flowcharts,
9 Evaluation of the system in use, accompanied by detailed tests of
ICQs and ICEQs and tests conducted in 8 to
forming conclusions and deciding control
form conclusions on the effectiveness of
on level of control risk
systems and extent of control risk

Transaction Testing

A vital decision point at which the

10 Determine scope of examination
of transactions processed by the
system
The auditor decides how much evidence
auditor considers all control risk factors
should be collected (whatever system in use)
(weak systems, inefficient
to be satisfied that transactions are properly
management, etc.) and decide how
processed. Analytical review is useful here
much additional evidence must still be
also (see stage 16)
collected

(Continued)
Audit Stage Evidence-gathering process Main Audit Objectives
Ineffective accounting
Effective accounting and control systems
and control systems

At this stage the auditor The purpose of this stage is to give

11 Extended substantive controls the evidence search the auditor reasonable assurance
11 Limited substantive tests on
tests on transactions at by means of an audit that the books and records are a
transactions at interim
interim programme tailor-made to the reliable basis for the preparation of
situation of the organization financial statements

The conclusions formed by

12 Conclude on the
likelihood that
transactions are
properly recorded
Basically, there are two important
the auditor must be supported
purposes: (1) inform management
in each case by carefully
of matters relating to their duties;
evaluated evidence that
(2) to highlight matters which may
transactions are completely
affect audit work and fee levels
and accurately recorded

The auditor summarizes

13 Issue report to those charged with
governance on accounting and internal
control systems and other matters
evidence on systems and
The purpose is to redefine known
other aspects seen to be of
risk areas, to direct audit effort and
interest to management etc.
client attention to them. The audit
and sends a formal report of
plan is reassessed
comments and
recommendations

Preparation for final work

At this pre-final examination

stage the auditor plans for the
final examination using all The purpose is to obtain evidence
14 Prepare for final examination of
the evidence collected to date, that is only available at the year-
figures in the financial statements
knowledge of problem areas end date
and special matters. Audit
objectives are reassessed

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Final work

Some parts of the evidence

The purpose is to direct audit work
search are performed at the
to where the figures in the
balance sheet date or just
15 Carry out year-end procedures accounts do not make sense in
before. Examples are
terms of what is known about the
inventory-count observations
organization
and bank confirmations

The analytical review is an

important element of
evidence gathering at all
16 Carry out analytical review of
stages of the audit but is
accounts
particularly valuable for
setting the scene for final
work on year-end accounts
This includes year-end
This is the stage at which the
circularizations, cut-off tests,
auditor pulls together the threads
17 Carry out verification tests of figures bridging to interim work,
of interim work and directs
in accounts verification of assets and
attention to verifying individual
liabilities and generally to
figures in the accounts
confirm the true and fair view

At this stage (as at 11) the

17 Extended substantive
17 Limited substantive tests on figures at
tests on figures at final
final (see also Stage 11)
(see also Stage 11)
18 Review the total evidence collected
and summarize results
auditor controls the evidence
search by means of an audit
programme tailormade to the
situation of the organization.
The work is designed to test
financial statement assertions
The purpose is to carry out
sufficient tests on figures to satisfy
the auditor within reason that all
figures are genuine, accurate and
complete

The report is addressed to

At this stage use analytical
19 Conclude on total evidence and issue
procedures to form view on
audit report
accounts taken
members of the company;
although not part of audit work in
itself the auditor may issue
additional assurance reports to
management or third parties

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