ISA 500 – Audit Evidence

Introduction

What is ISA 500?

ISA 500, titled “Audit Evidence,” is one of the foundational International Standards on Auditing issued by the International Auditing and Assurance Standards Board (IAASB). It establishes the framework auditors must follow when designing and performing audit procedures to obtain sufficient appropriate audit evidence to draw reasonable conclusions upon which to base the audit opinion.

Every financial statement audit conducted under ISAs relies on ISA 500 as its evidence-gathering backbone. Without a sound understanding of this standard, auditors cannot fulfill their fundamental professional obligation providing an independent, evidence-based opinion on whether financial statements are presented fairly in all material respects.

ISA 500 applies to all audits of financial statements conducted in accordance with International Standards on Auditing. It works in close conjunction with other ISAs, particularly ISA 315 (identifying and assessing risks) and ISA 330 (responding to assessed risks) forming an integrated evidence-gathering cycle throughout the Audit Engagement.

Core Purpose

Objective of ISA 500

The standard’s primary objective is straightforward but demanding in practice: auditors must obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level. This twin criterion i.e. sufficiency and appropriateness, forms the conceptual heart of the standard.

The auditor’s opinion cannot be based on intuition, professional guesswork, or management representations alone. ISA 500 demands that every material assertion in the financial statements be supported by corroborating evidence gathered through systematic audit procedures.

Foundational Definitions

Key Concepts in ISA 500

ISA 500 introduces and clarifies several critical concepts that shape how auditors approach evidence-gathering. Understanding these definitions precisely is essential for consistent professional application.

Audit Evidence Defined

Under ISA 500, audit evidence refers to information used by the 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 statements and other information obtained through inquiry, observation, inspection, and analytical procedures.

Sources and Forms of Audit Evidence

Methods of Evidence Gathering

Audit Procedures Under ISA 500

ISA 500 recognises several categories of audit procedures for obtaining evidence. These procedures are applied across risk assessment, tests of controls, and substantive testing phases of the audit.

1. Inspection Examining records, documents, or tangible assets. Inspection of records and documents provides varying degrees of reliability depending on their nature and source. Physical inspection of tangible assets provides reliable evidence about existence but not necessarily valuation or ownership.
2. Observation Looking at a process or procedure being performed by others, such as attending inventory counts. Evidence from observation pertains only to the point in time when it is performed and does not guarantee the procedure is carried out the same way at other times.
3. External Confirmation Obtaining a direct written response from a third party (the confirming party) in paper or electronic form. External confirmation is particularly powerful for asserting the existence of account balances, such as bank balances or accounts receivable, due to its independence from the client.
4. Recalculation Checking the mathematical accuracy of documents or records, either manually or electronically. This provides highly reliable evidence for the accuracy assertion but is limited in scope to mathematical correctness.
5. Re-performance The auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control. It provides strong evidence that controls actually function as described.
6. Analytical Procedures Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. ISA 520 governs these procedures in detail; their use as substantive tests depends on the precision with which they can detect misstatements.
7. Inquiry Seeking information from knowledgeable persons, both financial and non-financial, within or outside the entity. Inquiry alone is insufficient and must be corroborated. Management’s responses to inquiries, while important, are inherently less reliable than independently obtained external evidence.

Professional Judgment Considerations

Factors Affecting Reliability of Audit Evidence

ISA 500 acknowledges that not all evidence carries equal weight. Several generalizations while not absolute rules, guide auditors in evaluating the reliability of evidence obtained:

Standard Requirements

Specific Requirements of ISA 500

Using Information Produced by the Entity

When audit evidence consists of information produced by the entity, the auditor must evaluate whether the information is sufficiently reliable for the auditor’s purposes. This includes, where necessary, obtaining audit evidence about the accuracy and completeness of the information, and evaluating whether it is sufficiently precise and detailed for the auditor’s purposes.

Selecting Items for Testing

The auditor must select appropriate items to test by using professional judgment to determine which specific items should be selected. Auditors typically use one or a combination of three selection methods: all items (100% examination), specific items, or audit sampling as governed by ISA 530.

Inconsistency in, or Doubts over Reliability of, Audit Evidence

If audit evidence from one source is inconsistent with evidence from another, or if the auditor has doubts about the reliability of information to be used as audit evidence, the standard requires the auditor to determine what modifications or additions to audit procedures are necessary to resolve the matter, and consider its effect on other aspects of the audit.

Relationship to Financial Statement Assertions

A critical requirement under ISA 500 is that audit evidence must be linked to specific financial statement assertions, the representations by management embedded in the financial statements. These assertions include:

Common Questions

Frequently Asked Questions – ISA 500