Role of Audit Evidence under SA 500 (Audit Evidence) Issued by ICAI in the Work of a Financial Auditor

 

Audit evidence lies at the heart of the auditor’s responsibility to express an independent opinion on financial statements. SA 500, issued by the Institute of Chartered Accountants of India (ICAI), establishes the core principles that guide auditors in identifying, obtaining and evaluating evidence that is sufficient and appropriate to support their conclusions. The Standard does not prescribe fixed procedures; rather, it provides a conceptual foundation within which auditors exercise professional judgment and scepticism.

 

A key feature of the Standard is the distinction between the sufficiency and appropriateness of audit evidence. Sufficiency relates to the quantity of evidence, which varies depending on the risk of material misstatement and the quality of evidence obtained. Appropriateness refers to the quality of evidence in terms of its relevance and reliability. SA 500 recognises that evidence obtained from external sources is generally more reliable than internally generated information, and that evidence obtained directly by the auditor—through observation or inspection—tends to carry greater weight than evidence obtained indirectly.

 

1. Objective and Scope of SA 500 (Key Clauses)

 

SA 500 sets out the fundamental obligation of the auditor:

 

Clause 4 — Objective of the Auditor

The objective is to design and perform audit procedures that enable the auditor to obtain sufficient and appropriate audit evidence to draw reasonable conclusions on which the audit opinion is based.

 

Clause 5 — Meaning of Audit Evidence

Audit evidence comprises information used by the auditor in arriving at conclusions. It includes both information contained in the accounting records and information from other sources.

 

Clause 6 — Sufficiency and Appropriateness

                Sufficiency relates to the quantity of evidence.

                Appropriateness relates to the quality of evidence—its relevance and reliability.

Evidence obtained directly by the auditor is generally more reliable than evidence obtained indirectly.

 

Clause 7 — Inconsistency and Doubtful Reliability

If evidence is inconsistent or doubtful, the auditor must determine its effect on other audit evidence and the audit report.

 

Clause 8 — Information from Management Specialists

The auditor must evaluate the competence, capabilities and objectivity of specialists whose work is used as audit evidence.

 

Clause 9 — Information Produced by the Entity

Where a report or data is generated internally, the auditor must determine whether it is reliable for testing and corroboration.

 

Clause 10 — Use of Management Representations

Management representations alone do not constitute sufficient and appropriate audit evidence.

 

Clause 11 — Audit Evidence in Electronic Form

The auditor must consider the reliability of electronically stored or transmitted information in the context of the IT environment and related controls.

 

2. Role of Audit Evidence for the Financial Auditor

Audit evidence enables the auditor to form a well-grounded opinion on whether financial statements present a true and fair view. Its role extends to several critical dimensions:

 

a) Basis for Evaluating Assertions

Financial statements are built upon management’s assertions—existence, completeness, valuation, accuracy, rights and obligations, and presentation. Evidence directs the auditor to validate these assertions through appropriate procedures.

 

b) Foundation for Assessing Risk

Audit evidence informs the auditor’s understanding of the entity’s environment and internal controls, thereby influencing the assessment of the risk of material misstatement.

 

c) Support for Professional Judgement

SA 500 emphasises that auditors operate with persuasive, not absolute, evidence. The role of audit evidence is to provide a reasonable basis for judgment in circumstances where certainty is neither required nor practical.

 

d) Ensuring Audit Quality and Credibility

The sufficiency and appropriateness of evidence directly affect the credibility of the auditor’s opinion. Reliable, relevant, and well-documented evidence enhances public confidence in the financial reporting process.

 

e) Defence in Regulatory and Peer Reviews

Properly obtained and documented evidence serves as the auditor’s defence in disciplinary proceedings, litigation, or quality reviews. It demonstrates due diligence and compliance with professional standards.

 

3. Types of Audit Evidence Recognised under SA 500

SA 500 does not restrict evidence to documents alone. It recognises a broad array of evidential matter, including:

                1.            Inspection of Records or Documents

                •              Invoices, contracts, bank statements, ledgers, electronic logs.

                2.            Inspection of Tangible Assets

Physical verification of inventory, fixed assets, cash on hand.

 

                3.            Observation

Watching a process, such as stock count or cash tally, being performed.

 

                4.            External Confirmations

Direct confirmations from banks, debtors, creditors, legal counsel, and others.

 

                5.            Recalculation

                Checking mathematical accuracy, recomputing depreciation, interest, etc.

                6.            Reperformance

                Independently performing a control or procedure that was originally conducted by management.

                7.            Analytical Procedures

Ratio analysis, trend analysis, comparison with budgets, industry benchmarks.

                8.            Inquiry

Oral or written inquiries with management, operational staff, or third parties.

                9.            Electronic and Digital Evidence

System logs, digital audit trails, ERP-generated reports, electronic invoices.

                10.         Work of Management Experts or Auditor’s Experts

Valuation reports, actuarial computations, technical analysis, real estate valuations.

                11.         Management Representations

Representations for matters where other evidence is insufficient, though not a substitute for substantive audit procedures.

 

4. Reliability Hierarchy of Audit Evidence

SA 500 implicitly recognises a hierarchy of reliability:

Evidence from independent external sources is generally the most reliable.

Evidence obtained directly by the auditor carries more weight than information obtained indirectly.

It Documentary evidence tends to be more reliable than oral explanations.

 

Internally generated evidence is reliable only when internal controls are strong.

 

This hierarchy guides the auditor in assessing the nature and extent of procedures required to obtain assurance.

 

5. Conclusion:-SA 500 underscores that the financial auditor’s opinion must rest on a foundation of credible, relevant, and sufficient audit evidence. In an environment where business models are increasingly digital and risks more sophisticated, the role of audit evidence assumes even greater importance. The Standard equips auditors with a structured yet flexible framework to exercise judgment, maintain scepticism, and uphold the integrity of the audit process. Proper application of SA 500 not only enhances audit quality but also reinforces public trust in financial reporting and the broader corporate governance ecosystem.