Evidence and testing considerations: formula sheet

Key formulas

Sufficiency

Sufficiency = quantity of audit evidence

Affected by assessed risk of material misstatement and by the quality of the evidence. Higher risk needs more.

Appropriateness

Appropriateness = relevance + reliability

Quality of evidence. Both parts are needed to support an assertion.

Reliability guides

External > internal (with good controls) > internal (weak controls); direct > indirect; documentary > oral; original > copy

General guides only. Always judge in the circumstances of the scenario.

Audit procedures

Inspection, observation, external confirmation, recalculation, reperformance, analytical procedures, inquiry

Inquiry alone is not sufficient. It must be corroborated.

Evidence and risk

Higher risk of material misstatement → more and better evidence

Link every procedure to a risk and an assertion.

Inherent risk factors (ISA 540 Revised)

Estimation uncertainty + Complexity + Subjectivity (+ other bias or fraud susceptibility)

Use these as labels when assessing risk. Higher levels mean higher inherent risk and more persuasive evidence needed.

Responses to assessed risk

Subsequent events | Test management's method, assumptions and data | Auditor's point estimate or range

You can use one or more. Name the one you choose and say why it suits the scenario.

Auditor's range

If management's point estimate lies outside your range, misstatement = difference between management's estimate and the nearest point of your range

If it lies within a range based on reasonable assumptions, evidence supports it. Do not treat this as a rigid rule, use judgement.

Fair value hierarchy (IFRS 13)

Level 1: quoted prices | Level 2: observable inputs | Level 3: unobservable inputs

Level 3 measurements carry the highest estimation uncertainty and subjectivity, so expect a significant risk.

Bias review

Compare prior-year estimates with actual outcomes, and review judgements for a consistent direction

Bias is a one-directional pattern, such as always optimistic. ISA 540 treats it as a matter to evaluate, not automatically as fraud.

ISA 501: inventory attendance

Observe instructions + inspect inventory + perform test counts (both directions) + cut-off and condition

If attendance is impracticable, perform alternative procedures. If still no evidence, consider a modified opinion.

Test count direction

Sheets to floor = existence; Floor to sheets = completeness

A frequent exam point. Do both.

ISA 505: control of confirmations

Auditor selects, sends, receives; management does not handle the request or reply

Non-response: perform alternative procedures, such as subsequent cash receipts for receivables.

ISA 550: core requirements

Understand relationships → identify transactions → assess risk → obtain evidence on any arm's length assertion made in the financial statements → check disclosure → obtain written representations → communicate significant matters to those charged with governance

Treat identified significant related party transactions outside the normal course of business as significant risks. Obtain evidence about arm's length terms only where the financial statements include such an assertion.

ISA 250: auditor's approach

Understand framework → enquire → inspect regulator correspondence → obtain representations → respond to non-compliance

Distinguish laws with a direct effect on the financial statements from those without.

Core principle

Reliance = evaluate competence + objectivity + quality of work, then direct and review

Applies to internal auditors, experts and component auditors. Responsibility for the opinion stays with the auditor.

ISA 610 assessment factors

Objectivity + competence + systematic and disciplined approach

Use these to decide whether to use internal audit work. Also consider the nature and extent of the work and the risk.

ISA 610 limit on use

Greater judgement or higher risk → less reliance

Reliance is lower where significant judgement or significant risks are involved. Direct assistance is prohibited where objectivity is threatened.

ISA 620 evaluation

Evaluate relevance and reasonableness of findings, assumptions and methods, and the source data

Check consistency with other evidence and the use of source data.

ISA 600 responsibility

Group engagement partner remains responsible for the group opinion

The group auditor's report does not refer to component auditors unless law or regulation requires it.

Reporting reference

No reference to the expert, internal audit or component auditor unless law or regulation requires it.

Law or regulation may require a reference. The modified-report allowance applies to an ISA 620 auditor's expert only, not to internal auditors or component auditors. ISA 620 allows a reference to the expert in a modified report only where it is relevant to understanding the modification, with wording that makes clear your responsibility is not reduced. For component auditors, ISA 600 (Revised) allows a reference only where law or regulation requires it, and the report must then state that it does not reduce the group engagement partner's responsibility.

Expectation test

Difference = Recorded amount − Expected amount; investigate if Difference > Threshold

The threshold is the amount of difference you can accept without investigation. Set it so that differences, aggregated with other misstatements, could not cause the financial statements to be materially misstated. It is lower when you need higher assurance.

Gross profit margin

Gross profit margin = Gross profit ÷ Revenue × 100

A common ratio for expectations. Compare with prior year, budget and industry.

Receivables days

Receivables days = Trade receivables ÷ Credit revenue × 365

Increases may signal overstated receivables or weak credit control.

Payables days

Payables days = Trade payables ÷ Credit purchases (or cost of sales) × 365

State which denominator you use and keep it consistent between years.

Inventory days

Inventory days = Inventory ÷ Cost of sales × 365

Increases may suggest obsolete inventory or overstated inventory.

Reasonableness test

Expected amount = Driver × Rate

Example: expected payroll = average staff × average pay, adjusted for known pay rises.

Quick revision

• Sufficiency is the quantity of evidence; appropriateness is its relevance and reliability.
• Evidence is generally more reliable when it is from independent external sources, obtained directly by the auditor, and in original form.
• Higher assessed risk needs more evidence and better quality evidence.
• Sampling risk is the risk that the sample conclusion differs from testing the whole population; non-sampling risk is not related to sample size.
• Tolerable misstatement is set at or below performance materiality for sampling purposes; investigate any deviations and consider projecting misstatements to the population.
• For estimates, consider testing management's method, data and assumptions, using a point estimate or range, and looking for management bias.
• Events after the reporting date can provide evidence about estimates made at the year end.
• Attending the inventory count lets you observe procedures, test count records and inspect condition; also perform cut-off testing.
• External confirmation gives strong evidence, but consider non-response, reliability of the respondent and alternative procedures.
• Related parties: identify them, review transactions, assess disclosure, and stay alert to risk of undisclosed relationships.
• When using an expert or component auditor, assess competence, objectivity and the work done, and keep responsibility for the opinion.
• Analytical procedures are used in risk assessment and review, and can be substantive; an unexpected result needs investigation and corroboration.

Common mistakes

• Treating sufficient and appropriate as the same thing. Fix: Define sufficiency as quantity and appropriateness as quality (relevance and reliability). Comment on each separately.
• Listing procedures without linking them to an assertion or risk. Fix: For every procedure, state what it tests, such as existence of inventory or completeness of liabilities.
• Listing generic audit procedures such as inspect and recalculate with no link to the scenario. Fix: Tie every procedure to a named fact, such as the discount rate, the customer or the product line in the question.
• Treating all management bias as fraud. Fix: Say bias is an indicator you evaluate. It may be unintentional. If intentional, consider fraud risk under ISA 240.
• Listing generic count steps without using the scenario facts. Fix: Tie each step to a fact, such as high-value items, third-party locations or a new count system.
• Saying the auditor counts the inventory for the client. Fix: Management counts. You observe, inspect and test count. Your evidence supports existence and condition.
• Saying the auditor can transfer responsibility to the expert or component auditor. Fix: State that the auditor keeps sole responsibility for the opinion. The group engagement partner is responsible for the group opinion.
• Listing the ISA criteria without applying them to the scenario. Fix: Pair each criterion with a fact, such as the head of internal audit reporting to the finance director, which weakens objectivity.
• Listing ratios without interpreting them. Fix: For every ratio, say what it suggests about risk and what you would do next.
• Accepting management's explanation as evidence. Fix: Treat the explanation as a lead. Corroborate it with documents or independent evidence.

Exam tips

• Always give both halves: sufficiency (quantity) and appropriateness (relevance and reliability). Examiners reward the distinction.
• Use scenario facts. Name who produced the evidence and in what form, then judge it.
• When asked for procedures, name the type (inspection, observation, confirmation, recalculation) and the assertion it supports.
• Earn professional skills marks by showing scepticism: question management explanations and ask for corroboration.
• Do not claim the hierarchy is absolute. Use words like 'generally' and mention exceptions.
• Always say which of the three response approaches you will use and why. This shows the structure of ISA 540 (Revised).
• Use the scenario's incentives (bonuses, covenants, targets) to explain bias. Generic bias statements score poorly.
• Include professional skills: be sceptical of management, communicate clearly to those charged with governance, and show commercial awareness.