HKSA 500 - Audit Evidence (Condensed)
| Section | Key Concept | Brief Description |
|---|---|---|
| Introduction (¶1-5) | Scope, Objective, Definitions | HKSA 500 defines audit evidence, its sufficiency & appropriateness, and the auditor's objective to obtain it. |
| Requirements (¶6-12) | Sufficient Appropriate Evidence, Information Use, Selection, Inconsistency | Auditor must design procedures for sufficient appropriate evidence, consider relevance/reliability, evaluate management's expert, and resolve inconsistencies. |
| Application – External Information Source (¶A1-A4) | Definition & Distinction | External sources provide broad-use data; cannot also be management's expert, service org, or auditor's expert. |
| Application – Sufficient Appropriate Evidence (¶A5-A29) | Nature, Procedures, Relationship | Evidence is cumulative; includes contradictory info; inquiry alone insufficient; more evidence cannot fix poor quality. |
| Application – Detailed Audit Procedures (¶A18-A29) | Inspection, Observation, Confirmation, Recalculation, Reperformance, Analytical, Inquiry | Seven procedures with definitions, limitations, and examples. |
| Application – Relevance & Reliability (¶A30-A44) | Relevance, Reliability, External Source Factors | Relevance ties to assertion; reliability depends on source, controls, directness, form; external source factors listed. |
| Application – Management's Expert (¶A45-A59) | Competence, Capabilities, Objectivity, Understanding, Evaluation | Auditor must evaluate expert's competence/capabilities/objectivity, understand work, and assess appropriateness. |
| Application – Entity-Produced Info & Selection (¶A60-A67) | Reliability, Precision, Selection Methods | Entity info must be complete, accurate, precise; selection methods: all items, specific items, or sampling. |
Introduction – Scope, Objective & Definitions
Scope (¶1-2)
HKSA 500 explains what constitutes audit evidence in an audit of financial statements and deals with the auditor's responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence to draw reasonable conclusions for the auditor's opinion. It applies to all audit evidence. Other HKSAs cover specific aspects (e.g., HKSA 315, 570, 520, 200, 330).
Effective Date (¶3)
Effective for audits of financial statements for periods beginning on or after 15 December 2009.
Objective (¶4)
Design and perform audit procedures to obtain sufficient appropriate audit evidence to draw reasonable conclusions for the auditor's opinion.
Definitions (¶5)
| Term | Definition |
|---|---|
| Accounting records | Records of initial accounting entries and supporting records (e.g., checks, invoices, contracts, ledgers, work sheets). |
| Appropriateness | Measure of quality of audit evidence: its relevance and reliability. |
| Audit evidence | Information used by the auditor in arriving at conclusions for the opinion; includes accounting records and other sources. |
| External information source | External individual/organization providing information suitable for broad use, used by entity or auditor. |
| Management's expert | Individual/organization with expertise in a field other than accounting/auditing, used by entity to prepare financial statements. |
| Sufficiency | Measure of quantity of audit evidence; affected by risk assessment and quality of evidence. |
Requirements – Sufficient Appropriate Evidence & Information Use
Sufficient Appropriate Audit Evidence (¶6)
The auditor shall design and perform audit procedures appropriate in the circumstances to obtain sufficient appropriate audit evidence.
Information to Be Used as Audit Evidence (¶7-9)
¶7: Consider relevance and reliability of information, including from external information sources.
¶8: If information is prepared using a management's expert, the auditor shall, to the extent necessary:
- (a) Evaluate the competence, capabilities and objectivity of that expert
- (b) Obtain an understanding of the work of that expert
- (c) Evaluate the appropriateness of that expert's work as audit evidence for the relevant assertion
¶9: When using entity-produced information, evaluate whether it is sufficiently reliable, including:
- (a) Obtaining audit evidence about accuracy and completeness
- (b) Evaluating whether it is sufficiently precise and detailed
Selecting Items for Testing (¶10)
When designing tests of controls and tests of details, determine means of selecting items that are effective in meeting the purpose of the audit procedure.
Inconsistency or Doubts over Reliability (¶11)
If audit evidence from one source is inconsistent with another, or if there are doubts over reliability, the auditor shall determine what modifications or additions to audit procedures are necessary to resolve the matter, and consider the effect on other aspects of the audit.
Conformity with ISA (¶12)
As of March 2023, this HKSA conforms with ISA 500. Compliance ensures compliance with ISA 500.
Application – External Information Source
Examples of External Information Sources (¶A1-A2)
- Pricing services
- Governmental organizations
- Central banks
- Recognized stock exchanges
Examples of Information Obtained
- Prices and pricing related data
- Macro-economic data (e.g., unemployment rates, economic growth rates, census data)
- Credit history data
- Industry specific data (e.g., index of reclamation costs, viewership information)
- Mortality tables for life insurance and pension sectors
Key Distinction (¶A3)
An external individual or organization cannot, in respect of any particular set of information, be both an external information source AND a management's expert, service organization, or auditor's expert.
Examples of Distinction (¶A4)
| Scenario | External Information Source | Management's Expert |
|---|---|---|
| Real estate prices | Information made generally available about a geographical region | Commissioned valuations specifically tailored for the entity |
| Actuarial data | Published mortality tables for general use | Tailored information for specific pension plans |
| Securities valuation | Publicly available prices/pricing data regarding private transactions | Customized estimates using models specifically for the entity |
| Industry risks | Published information suitable for broad range of users | Commissioned information tailored to entity's circumstances |
| Market trends | Information made available to broad range of users | Commissioned information addressing entity-specific trends |
Application – Sufficient Appropriate Audit Evidence
Nature of Audit Evidence (¶A5)
- Audit evidence is cumulative in nature
- Primarily obtained from audit procedures performed during the audit
- May include information from previous audits (if evaluated for continuing relevance)
- Includes information from firm's client acceptance/continuance procedures
- Entity's accounting records and internal sources are important
- May be prepared using work of management's expert or from external information source
- Comprises information that supports and corroborates management's assertions AND information that contradicts such assertions
- Absence of information (e.g., management's refusal to provide representation) also constitutes audit evidence
Audit Procedures (¶A6)
Audit procedures to obtain audit evidence include:
- Inspection
- Observation
- Confirmation
- Recalculation
- Reperformance
- Analytical procedures
- Inquiry
Relationship between Sufficiency and Appropriateness (¶A7-A9)
| Concept | Definition | Key Points |
|---|---|---|
| Sufficiency | Measure of quantity of audit evidence | Affected by: (1) Assessment of risks of misstatement (higher risks = more evidence needed); (2) Quality of evidence (higher quality = less may be required) |
| Appropriateness | Measure of quality of audit evidence (relevance and reliability) | Reliability influenced by source, nature, and individual circumstances |
Sources of Audit Evidence (¶A11-A13)
- Internal sources: Accounting records, minutes of meetings, management representations
- External sources: Confirmations from third parties, external information sources, analysts' reports, benchmarking data
Generalization: More assurance is ordinarily obtained from consistent audit evidence obtained from different sources or of a different nature than from items of audit evidence considered individually.
Audit Procedures for Obtaining Audit Evidence (¶A14-A17)
Audit evidence is obtained by performing:
- Risk assessment procedures (HKSA 315 (Revised 2019))
- Further audit procedures (HKSA 330):
- Tests of controls
- Substantive procedures (tests of details and substantive analytical procedures)
Electronic Information Considerations
- Some accounting data may be available only in electronic form or only at certain points in time
- Electronic information may not be retrievable after a specified period
- Auditor may need to request retention of information or perform procedures when information is available
Application – Detailed Audit Procedures
1. Inspection (¶A18-A20)
| Aspect | Description |
|---|---|
| Definition | Examining records or documents (internal or external, paper or electronic) or physical examination of an asset |
| Reliability | Varies depending on nature, source, and effectiveness of controls over production |
| Test of controls example | Inspection of records for evidence of authorization |
| Limitations | Documents may provide evidence of existence but NOT necessarily ownership or value; inspection of tangible assets provides evidence of existence but NOT necessarily rights/obligations or valuation |
2. Observation (¶A21)
| Aspect | Description |
|---|---|
| Definition | Looking at a process or procedure being performed by others |
| Examples | Observation of inventory counting, observation of performance of controls |
| Limitations | Limited to the point in time at which observation takes place; act of being observed may affect how process/procedure is performed |
3. External Confirmation (¶A22)
| Aspect | Description |
|---|---|
| Definition | Audit evidence obtained as a direct written response to the auditor from a third party |
| Uses | Addressing assertions associated with account balances; confirming terms of agreements or transactions; obtaining evidence about absence of certain conditions (e.g., absence of 'side agreement') |
| Reference | HKSA 505 - External Confirmations |
4. Recalculation (¶A23)
| Aspect | Description |
|---|---|
| Definition | Checking the mathematical accuracy of documents or records |
| Method | May be performed manually or electronically |
5. Reperformance (¶A24)
| Aspect | Description |
|---|---|
| Definition | Auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control |
6. Analytical Procedures (¶A25)
| Aspect | Description |
|---|---|
| Definition | Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data |
| Includes | Investigation of identified fluctuations or relationships inconsistent with other relevant information or differing from expected values by a significant amount |
| Reference | HKSA 520 - Analytical Procedures |
7. Inquiry (¶A26-A29)
| Aspect | Description |
|---|---|
| Definition | Seeking information of knowledgeable persons (financial and non-financial, within or outside the entity) |
| Forms | Formal written inquiries to informal oral inquiries |
| Importance | Used extensively throughout the audit; evaluating responses is integral |
| Corroboration | Often of particular importance; for management intent, understanding past history, stated reasons, and ability to pursue course of action may provide relevant corroboration |
| Written representations | May be necessary for some matters (HKSA 580) |
Application – Relevance & Reliability of Information
Relevance (¶A31-A34)
Definition: Relevance deals with the logical connection with, or bearing upon, the purpose of the audit procedure and, where appropriate, the assertion under consideration.
Direction of Testing Example:
- Testing for overstatement in accounts payable → Testing recorded accounts payable may be relevant
- Testing for understatement in accounts payable → Testing recorded accounts payable would NOT be relevant; testing subsequent disbursements, unpaid invoices, suppliers' statements, unmatched receiving reports may be relevant
Key Points:
- A given set of audit procedures may provide evidence relevant to certain assertions but NOT others
- Evidence regarding one assertion (e.g., existence of inventory) is NOT a substitute for evidence regarding another assertion (e.g., valuation)
- Evidence from different sources or of different nature may be relevant to the same assertion
Reliability (¶A35-A38)
Generalizations about Reliability (subject to exceptions):
| Generalization | Explanation |
|---|---|
| Independent sources | Reliability increased when obtained from independent sources outside the entity |
| Effective internal controls | Reliability of internally generated evidence increased when related controls are effective |
| Directly obtained | Evidence obtained directly by auditor (e.g., observation) is more reliable than evidence obtained indirectly or by inference (e.g., inquiry) |
| Documentary form | Documentary evidence (paper, electronic, or other medium) is more reliable than oral evidence |
| Original documents | Original documents are more reliable than photocopies, facsimiles, or electronically transformed documents |
External Information Sources – Specific Considerations (¶A39-A44)
Factors for Considering Relevance and Reliability:
- Nature and authority of the external information source
- Ability to influence information through relationships between entity and source
- Competence and reputation of the source
- Past experience with reliability
- Evidence of general market acceptance
- Entity's controls over relevance and reliability
- Whether source accumulates overall market information or engages directly in 'setting' market transactions
- Whether information is suitable for use in the manner being used
- Alternative information that may contradict
- Nature and extent of disclaimers or restrictive language
- Information about methods used in preparing information
- Appropriateness of assumptions and other data applied
Possible Further Procedures (¶A42):
- Comparing information from external source with information from alternative independent source
- Obtaining understanding of controls management has in place
- Performing procedures to obtain information from the external information source to understand its processes, techniques, and assumptions
Single Provider Situations (¶A43): When only one provider exists (e.g., central bank inflation rate), auditor's procedures are influenced by: nature and credibility of the source, assessed risks of material misstatement, and degree to which use of information is relevant to reasons for assessed risk.
Application – Management's Expert
When Paragraph 8 Applies (¶A45-A46)
Paragraph 8 applies when information to be used as audit evidence has been prepared using the work of a management's expert. Examples: actuarial calculations, valuations, engineering data.
Distinction Example:
- Management's expert: Individual/organization applies expertise in making an estimate which the entity uses in preparing financial statements
- External information source: Individual/organization merely provides price data regarding private transactions which the entity uses in its own estimation methods
Factors Affecting Nature, Timing and Extent of Procedures (¶A47)
- Nature and complexity of the matter
- Risks of material misstatement
- Availability of alternative sources of audit evidence
- Nature, scope and objectives of the expert's work
- Whether expert is employed by entity or engaged
- Extent of management's control or influence over expert
- Whether expert is subject to technical performance standards
- Nature and extent of controls within entity over expert's work
- Auditor's knowledge and experience of the expert's field
- Auditor's previous experience of that expert's work
Competence, Capabilities, and Objectivity (¶A48-A54)
| Term | Definition |
|---|---|
| Competence | Nature and level of expertise of the management's expert |
| Capability | Ability of the management's expert to exercise that competence in the circumstances (includes geographic location, availability of time and resources) |
| Objectivity | Possible effects that bias, conflict of interest or influence of others may have on professional or business judgment |
Sources of Information about Competence, Capabilities and Objectivity (¶A49):
- Personal experience with previous work
- Discussions with the expert
- Discussions with others familiar with the expert's work
- Knowledge of qualifications, professional body membership, license to practice
- Published papers or books
- Auditor's expert (if any)
Threats to Objectivity (¶A52): Self-interest threats, advocacy threats, familiarity threats, self-review threats, intimidation threats.
Key Distinction (¶A53): An expert employed by the entity cannot ordinarily be regarded as being more likely to be objective than other employees. Threats such as intimidation threats may be of less significance to an expert engaged by the entity.
Obtaining an Understanding of the Work of the Management's Expert (¶A55-A58)
Aspects of the Expert's Field Relevant to Understanding (¶A56):
- Areas of specialty within the field
- Professional or other standards, regulatory or legal requirements
- Assumptions and methods used and whether generally accepted
- Nature of internal and external data or information used
Engaged Expert (¶A57): There will ordinarily be an engagement letter or written agreement. Evaluating the agreement may assist in determining: nature, scope and objectives of work; respective roles and responsibilities; nature, timing and extent of communication.
Employed Expert (¶A58): Less likely to have a written agreement. Inquiry of the expert and other members of management may be most appropriate.
Evaluating the Appropriateness of the Management's Expert's Work (¶A59)
Considerations include:
- Relevance and reasonableness of findings or conclusions
- Consistency with other audit evidence
- Whether appropriately reflected in financial statements
- If work involves significant assumptions and methods: relevance and reasonableness
- If work involves significant use of source data: relevance, completeness, and accuracy
- If work involves use of information from external information source: relevance and reliability
Application – Entity-Produced Info & Selecting Items for Testing
Information Produced by the Entity (¶A60-A62)
Requirements for Reliability (¶A60): Information produced by the entity needs to be:
- Sufficiently complete
- Sufficiently accurate
Example: Effectiveness of auditing revenue by applying standard prices to records of sales volume is affected by: accuracy of price information; completeness and accuracy of sales volume data.
Obtaining Evidence about Accuracy and Completeness (¶A61):
- May be performed concurrently with the actual audit procedure
- May be obtained by testing controls over preparation and maintenance
- In some situations, additional audit procedures may be needed
Precision and Detail (¶A62): When using entity-produced information for other audit purposes (e.g., performance measures for analytical procedures), appropriateness affected by whether information is sufficiently precise or detailed for auditor's purposes. Example: Performance measures used by management may not be precise enough to detect material misstatements.
Selecting Items for Testing (¶A63-A67)
Three Means Available for Selecting Items:
| Method | Description | Characteristics |
|---|---|---|
| Selecting all items (100% examination) | Examining the entire population | Unlikely for tests of controls; more common for tests of details. Appropriate when: small number of large value items; significant risk and other means insufficient; repetitive calculation makes 100% examination cost effective |
| Selecting specific items | Judgmental selection of specific items | Subject to non-sampling risk. Cannot be projected to entire population. Includes: high value or key items; all items over a certain amount; items to obtain information |
| Audit sampling | Testing a sample to draw conclusions about entire population | Discussed in HKSA 530. Enables projection to entire population |
Specific Items Selection Examples (¶A65):
- High value or key items: Items that are suspicious, unusual, particularly risk-prone, or have history of error
- All items over a certain amount: To verify a large proportion of total amount
- Items to obtain information: To obtain information about nature of entity or transactions
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