NSA 500:- Audit Evidence

Meaning of Audit Evidence:-

Information, Records, etc. obtained by the auditor by applying
audit procedures and on the basis of which auditor expresses
his audit opinion.
Forms of Audit Evidence:- 1. Verbal 2. Written/documentary 3.
Electronic 4. Audio-Video, etc.
Characteristics: -
1. Sufficient
2. Appropriate – Reliable and Relevant
a. Sufficiency of audit evidence: - Audit evidence should
be sufficient in number. Auditor should obtain
evidences sufficient enough to justify his audit
opinion. This is the measure of quantity.
For eg. Auditor should obtain copies of purchase
order, Goods Receipt note and Invoice of goods
purchased to ensure that the transaction is genuine.
He has obtained 3 independent evidences to check
the purchase transaction.

b. Appropriateness of Audit Evidence :-

Appropriateness is the representation of quality of
audit evidence. Appropriateness comprises of the following two
components:-
(i). Reliability
(ii). Relevance

The word ‘reliability’ refers to the degree of trust/faith that can

be placed on the audit evidences. In other words, evidences
obtained from reliable and independent sources are better
audit evidences in terms of quality.

Similarly, audit evidences should be relevant for the subject

matter being checked. For eg. Evidences of transactions
pertaining to previous year is not relevant for the current year.

Factors to be considered in evaluating the reliability of audit

Evidence.
SN Situation/Factor Effect on Reliability
of Audit Evidence
1 The audit Evidence is in Increases
written/Documented form
2 The audit Evidence is in Verbal form Decreases
3 The audit evidence is in the form of Increases
original document
4 The audit Evidence is in the form of Decreases
Photocopy/Xerox
5 The audit evidence is obtained directly by Increases
the auditor from third party
6 The audit evidence is obtained by the Decreases
auditor through the client, not directly
from third party
7 The audit evidence is obtained from Increases
independent external source and not
internal sources
8 The audit evidence is obtained from Decreases
internal sources, not from independent
external sources
9 The internal Control system is strong. Increases
10 The internal control system is weak. Decreases

Management Expert:-
Person or firm, whose expertise in the field other than
accounting or auditing is used by the management in
preparation of financial statements.
Factors to be considered in using the work done by
Management Expert
1. Work done by the expert: - Auditor should check whether
the work performed by the expert is appropriate. For this,
auditor should examine the followings:-
a. Source Data: - Auditor should check whether the source
data taken by the expert is correct.
b. Assumptions and methods applied: - Auditor should
check if the assumptions and methods applied by the
expert are correct.
c. Suitability of final outcome: - Auditor should check if the
final outcome/ end result calculated by the expert is
correct.
2. Competence of Expert: - Auditor should check whether
the expert is competent for the job. For this, he can
examine the degrees and certificates obtained by the
expert.
3. Objectivity of expert: - Auditor should check whether the
expert possesses objective mindset. The expert should
have a focused mindset while working on the project.
4. Capability of expert: - Auditor should check whether the
expert is capable for the given project. For this, auditor
should evaluate the past experience and track record of
the expert.
 5. Appropriateness of expert: - Auditor should check
whether the job done by expert is appropriate for being
used by the auditor.

Q. You are the auditor of a commercial bank. The bank has

provided loan to a customer, Mr. A, for the purpose of
purchase of machinery on the basis of valuation report
prepared by Civil Engineer. Please comment how you will
proceed your audit of this lending by the bank to Mr. A.
1. Introduction: -
The given question is related to provisions contained
in NSA 500, “Audit Evidence”.

2. Provisions from the standard:-

(i) According to NSA 500, management expert refers
to Person or firm, whose expertise in the field
other than accounting or auditing is used by the
management in preparation of financial
statements.

(ii) The following factors related to management

expert are required to be examined by the auditor
before considering the work performed by the
expert:-
a. Objectivity of expert
 b. Competence of expert
c. Capability of expert
d. Work done by the expert
e. Appropriateness of work done by expert.

3. The given case

In the given case, the company has provided loan on the
basis of advice received from the civil engineer. Hence,
auditor should check qualities and work performed by the
civil engineer in line with NSA 500 before accepting the
work performed by him.

4. Analysis of the case

By applying the principles of NSA 500 in the given case, the
auditor should check the following parameters related to
the lawyer:-
a. Work done by the expert :-
Auditor should check whether the work performed by the
expert is appropriate. For this, auditor should examine the
followings:-
1. Source Data :- Auditor should check whether the
source data taken by the expert is correct.
2. Assumptions and methods applied :- Auditor should
check if the assumptions and methods applied by the
expert are correct.
 3. Suitability of final outcome: - Auditor should check if
the final outcome/ end result calculated by the expert
is correct.

b. Competence of Expert :-
Auditor should check whether the expert is competent for
the job. For this, he can examine the degrees and
certificates obtained by the expert.

c. Objectivity of expert :-
Auditor should check whether the expert possesses
objective mindset. The expert should have a focused
mindset while working on the project.

d. Capability of expert :-
Auditor should check whether the expert is capable for the
given project. For this, auditor should evaluate the past
experience and track record of the expert.

e. Appropriateness of expert :-
Auditor should check whether the job done by expert is
appropriate for being used by the auditor.

5. Conclusion: -
Thus, as an auditor I will decide my action based on my
observation on above-mentioned points.
# Inconsistency in Audit Evidences
Answer: - If Audit evidences obtained from two or more
sources are inconsistent with each other, auditor will consider
the followings:-
1. Auditor will reconsider the reliability of audit evidences
earlier obtained.
2. Auditor will reconsider the level of integrity of
management and revise his understanding of inherent risk.
3. Auditor will extend the nature, timing and extent of audit
procedures
4. Auditor will consider its impact on the audit report as per
NSA 705

Purchase of Raw Materials

Invoice :- 500 Kg
GRN :- 400 Kg
Q. You are appointed the auditor of ABC Pvt. Ltd. for the year
2078-79. While conducting audit of purchase transactions, you
found the following situation on purchase of raw materials:-
1. Total value of purchase as per Invoice raised by supplier A :-
30 tons equivalent to Rs. 60 lacs.
2. Total value of goods received by the co. as per goods
received Note from supplier A :- 40 tons equivalent to Rs. 80
lacs.

Please mention how you will deal with this situation.

Procedures for Obtaining Audit Evidence

Q.Explain audit procedures in brief.
1. Compliance – Test of Controls
2. Substantive Procedure
 Test of Detail
1. Vouching
2. Verification
 Analytical Review Procedures

NSA 330 – CP/SP

NSA 500 –
Q. What are the procedures to obtain Audit Evidence?
1. Inspection: - Reading of documents such as rent agreement,
employment contract, invoices against expenses, etc.
2. Observation: - Watching any activity to confirm the
transaction.
3. External Confirmation: - Receiving response from third party
against any particular transaction or account balance.
4. Re-calculation:- Computation of any mathematical
calculation separately by the auditor
5. Re-performance: - Performing of any activity which was
earlier performed by management team
6. Analytical Procedures: - Refer NSA 520
7. Inquiry: - Asking of queries to the management team to
resolve them.

NSA 501:- Audit Evidence – Specific

Considerations for Selected Items
Selected Items:-
1. Inventory
 If inventory is material, auditor should examine it
physically on the balance sheet date, unless that is
impracticable or there exists unforeseen situation.

Assertions to be verified
- Existence
- Condition/Valuation

Responsibility while conducting Physical Verification of

Inventory
Sr. Management – Auditor - Responsibility
No. Responsibility
1 To count/ Measure the To check whether the
inventory by applying methods applied by the
suitable methods management are
appropriate
2 To implement internal To check the suitability of
controls in the internal controls applied by
counting/measuring the management
activity
3 To count/measure the
inventory on test basis

Illustration
Date of Balance Sheet :- 31 Asar :- Inventory :-
Impracticable:- Inventory is under the control of third party.
 1. Your client is consignor. Inventory is in the custody of
consignees. There are 5 consignees. The consignees
deal with multiple suppliers.
2. The inventory is with transporter.
Unforeseen Situation
Q. The client of Auditor Mr. A is a producer of apples in
Mustang. Mr. A is of the view that since Mustang is a
remote place, he is not required to conduct physical
verification of apples in Mustang. Comment on Mr. A’s
Viewpoint.

Q. :- Due to unforeseen or impracticable situation,

auditor is unable to conduct physical verification of
inventory. What alternatives are available for such
auditor?
Answer :- If there exists unforeseen situation or
impracticable situation, auditor can consider the following
activities as alternatives to physical verification :-

1. Conducting of Physical Verification on an alternative

date
In such situation, auditor should make adjustment to
the count/measure of inventory so that the position of
inventory as on balance sheet date could be correctly
ascertained.
 2. Obtaining confirmation from third party or obtaining
report from third party auditor
3. Obtaining Management Representation letter/ written
representation
4. Examination of relevant documents to check inventory
(documents such as Goods Received Note, Gate
Register, etc.)
If auditor is unable to obtain sufficient and appropriate
audit evidences regarding inventory even after
applying alternative procedures as discussed above,
auditor will consider modifying his opinion based on
NSA 705.

Q. Mr. A is the auditor of TRP ltd.

- Mr. A could not verify the existence and
condition of imported goods lying with the
transporter
- Auditor collected MRL from management
without receiving any other evidences.
- Comment.

MRL :- Management representation Letter

:- Letter written by Management and provided
to auditor confirming or mentioning certain
facts
MRL :- additional Audit Evidence :- Not
sufficient and appropriate audit evidence in
itself

2. Litigation and Claims

a. Auditor should check the minutes of meeting of the
board of directors to identify the litigations currently
faced by the organization.
b. Auditor should check the correspondence with the legal
advisor of the organization.
c. Auditor should examine the ledger in the name of
lawyer or legal expenses.
d. Auditor should conduct inquiry with the legal advisor or
with the management of the client regarding litigations
currently in progress.
What if Auditor is denied the access to contact legal advisor of
the client?
Answer:-
Auditor should try to obtain sufficient and appropriate audit
evidences regarding the litigation and claim by applying
alternative procedures, in such circumstances.
If auditor is unable to obtain sufficient and appropriate audit
evidence regarding the transactions, even after applying
alternative procedures, he will consider modifying his opinion
as per NSA 705.
3. Segment Information
a. Auditor should check whether the basis of segmentation
is appropriate.
b. Auditor should check compliance with relevant Financial
Reporting Framework.

audit client is facing lawsuit of significant amount but client has

only disclosed the existence of the lawsuit. How to deal with
the situation?

1. Business – Vertical wise segmentation

 2. Geographical Segmentation

NSA 580:- Written Representation (WR)

Also referred to as Management Representation Letter (MRL)

Characteristics
1. Written Form
2. Written by Management : i.e. generated from internal
source
3. Additional Audit Evidence
4. Not a self-sufficient or self-appropriate audit evidence

In other words, MRL is not a substitute for other audit

evidences.

5. This is dated prior to the date of audit report.

 6. Auditor can collect multiple MRL for different matters.

Sample MRL under NSA 580

……………………. Pvt. Ltd.

23rd Ashwin 2079

To,
…. & Associates,
…………………,
Kathmandu.
Dear Sir,

We state the following facts and information for your reference

in relation to audit of Financial Year 2078/79:-
1. We have disclosed all identified frauds and errors to you
through letters dated 14th Bhadra 2079 and 18th Bhadra
2079.
2. The following value and quantity of inventory was in the
possession of consignee on 31st Asar 2079. We have
separately issued a letter on this on the same date.

Name of Item :- Raw Iron

Quantity :- 500 metric ton
Value per metric ton:- ………….Rs.
Total Value :-……………Rs.
3. We have prepared books as per applicable Financial
Reporting Framework with application of suitable internal
controls.

Warm Regards,
………….
Managing Director,
…………..Pvt. Ltd.
Meaning of Written Representation/ Management
Representation Letter:-
Written representation is a statement written by management
and provided to auditor mentioning certain information or
confirming certain facts.

General Content of Management Representation Letter

There does not exist any exhaustive list of cases where
management representation letter should be used. In other
words, it depends on auditor’s judgement. Normally, auditor
obtains management representation letter regarding the
following matters:-
1. Auditor can obtain Management Representation Letter
(MRL) regarding responsibility of management for
preparation of financial statements as per applicable FRF.
2. Auditor can obtain Management Representation Letter
(MRL) regarding responsibility of management for design
and implementation of suitable internal control system
3. Auditor can obtain Management Representation Letter
(MRL) regarding responsibility of management for
providing all relevant information to the auditor,
additional information to the auditor and providing
unrestricted access to personnel.
 4. Auditor can obtain MRL regarding communication of all
identified frauds and errors by the management to the
auditor.
5. Auditor can obtain MRL regarding any other matter as per
his professional judgement or as required under any other
standard on auditing. For eg. Auditor can obtain MRL
regarding position of inventory lying with transporter, as
per NSA 501.

Specific Situations
1.Requested MRL denied by the management
2.MRL provided by management is inconsistent
with other audit evidences and hence it is
doubtful

Answer
1.Auditor reconsiders the reliability of audit
evidences earlier obtained.
2.Auditor reconsiders the level of integrity of
management and hence reconsiders his
assessment of inherent risk.
 3. Auditor extends the nature, timing and extent
of audit procedures.
4.Auditor considers modifying his opinion as per
NSA 705 if he believes that the effect of such
inconsistency or denial to provide MRL is
material.

NSA 620:- Using the work of an auditor’s expert

Auditor’s Expert
Person or firm whose expertise in the field other
than accounting or auditing is used by auditor in
obtaining sufficient and appropriate audit evidence.

Auditor's responsibilities
- He is solely responsible for expressing his opinion
-Use of expert's work does not reduce the responsibility of auditor
Written agreement with expert
  For nature, scope & objectives of expert's work
 Responsibility of auditor and expert
 Communication between auditor and expert
 Confidentiality requirement

Evaluation of expert's work

Refer WACOC from NSA 500
If he determines that auditor's expert's work is not adequate and he
cannot resolve the matter through alternative procedure including
employing another expert, he should modify the opinion

Is Reference of expert necessary in the audit Report?

 Not Necessary, normally
 Necessary if required under any law
 Necessary if report is modified and auditor believes that such
reference is helpful in developing understanding of such
modification among users.
But reference does not reduce the responsibility of auditor.

NSA 505:- External Confirmation

Direct Written Response received by auditor from the
third party
Letter 2: Reply against Letter 1:- External Confirmation
Auditor Third Party
Letter 1: E.C. Request
 Auditee

Letter No. 1/ External Confirmation Request:-

1. Positive External Confirmation Request

Reply is a must
Method No. 1
Dear Gurjeet,

Please reply directly to our auditor in the following

address with closing balance and a summary of
transactions between you and our company in the
financial year 2078-79.

Address of our auditor

A and Associates,
Putalisadak, Kathmandu
……………@gmail.com

Warm Regards,
Mr. X,
Finance Manager,
Worldlink………….

Method No. 2
Dear Gurjeet,
According to our records for the year 2078-79, we have
debit balance of Rs. 30,000 in your name.

Please reply on this directly to our auditor in the

following address.

Address of our auditor

A and Associates,
Putalisadak, Kathmandu
……………@gmail.com

Warm Regards,
Mr. X,
 Finance Manager,
Worldlink………….

2. Negative External Confirmation Request

Reply by third party only if third party disagrees with the
auditee.

Dear Gurjeet,
According to our records for the year 2078-79, we have
debit balance of Rs. 30,000 in your name.

Please reply on this directly to our auditor in the

following address only if you disagree with us, regarding
the above mentioned matter.

Address of our auditor

A and Associates,
Putalisadak, Kathmandu
 ……………@gmail.com

Warm Regards,
Mr. X,
Finance Manager,
Worldlink………….

During the course of audit, the new auditor found a credit

item of rs 5 lakhs. On enquiry, the company explained him
that it is, a very old credit balance. The trade payable had
neither approached for the payment nor is he traceable.
Under the circumstances no confirmation of the credit balance
is available. How to deal with this situation

B/S
Creditor :- 5 Lacs
320, 450 and 705
1. Materiality 320, 450 and 705
2. NSA 510
3. NSA 505
4. 210
Situation where negative confirmation request can
be used
1. There is low risk of ignorance from third party.
2. There is low level of expected error.
3. There is low level of control risk and inherent risk.
4. A large number of small balances is involved.

Refusal by management to provide external

confirmation from third party to the auditor

Illustration
Management-----------------------------------Auditor
Dispute

You are the auditor of popular Kids Daily for 78-79

Healthy Biscuits Co…….....Popular Kids Daily
Third Party (Auditee)
(Healthy Biscuits) Date of Advt. Magh 1, 2078

Value :- Rs. 10 Lakhs (credit)

Magh 26 :- News Published :- Healthy biscuits is inedible, it contains inedible range of

chemicals.

external confirmation is furnished with a restrictive

language "Information is furnished as a matter of
courtesy without a duty to do so and without
responsibility, liability, or warranty, expressed or
implied"
As an auditor of MS XYZ Finance Company Ltd., you
came across a payment of Rs. 20 million for investment
in share of ABC Hydro Company Ltd. The share
investment script was not provided to you for
verification. In response to the positive external
confirmation from ABC Hydro Company Ltd., you
received a phone call confirming the investment of the
said amount and specifying the reason for delay in
delivering the investment script on the ground that the
same is in the process of printing. However, upon your
personal request, you received a written confirmation
from ABC Hydro Company Ltd. of the receipt of the said
amount but with the restrictive language Information is
furnished as a matter of courtesy without a duty to do
so and without responsibility, liability, or warranty,
expressed or implied'. Give your opinion whether the
oral confirmation and the written confirmation
obtained amounts to sufficient appropriate audit
evidence.
case: if a person obtained a loan from bank by keeping
land as a collateral in bank and also provided financial
statement and tax cleareance certificate to bank
regarding Earning source. during the audit it was found
that tax cleareance information did not matched with
audit report and also even that tax cleareance
certificate did not show in ird website. How can deal
with situation?
Easy Removals Private Limited is a removals company.
During the year ended Ashadh 2077, the company made
a profit of Rs. 800,000. You are the manager in charge of
the audit. The following issues have arisen:
A customer is suing the company for Rs. 1,000,000 for
damage caused to antique furniture. The company is
defending the claim and believes that the furniture was
reproduction as opposed to antique and therefore
worth only Rs. 100,000.A balance due from Oli
Constructions Private Limited in respect of sub-contract
work, of Rs. 300,000, has been outstanding for over six
months. Your firm has been asked by Easy Removals
Private Limited’s accountant not to write to Oli
Constructions Private Limited for direct confirmation of
this amount as the latter company objects to such
letters. You have been assured by the accountant that
the relationship between the two companies is good
and that the outstanding balance will be paid.Required:
For each of the above issues
i) State with reasons, the audit work that you would
expect to find in undertaking your review of the audit
working papers for the year ended Ashadh 2077.
ii) Draft the relevant sections dealing with these issues
of the written representation letter you would wish the
directors to sign. June 2021

Use of External Confirmation Procedures

1. Debtor
2. Creditor
3. Bank Balance
4. Loans and borrowings
5. Advances Given
6. Inventory lying with third party (eg. NSA 501)
7. Other Assets lying with third party
External Confirmation Procedure
Step 1. Which information to be confirmed?
Step 2. Which Party to be confirmed?
Step 3. Which type of External Confirmation
request to be used (Positive or Negative?)
Step 4. Follow-up, Analysis of responses
Refusal by management to provide external confirmation
from third party to the auditor
Answer
Auditor should evaluate the reasons for refusal by
management to co-operate for External Confirmation

The refusal is Reasonable Refusal is unreasonable

Auditor should apply alt.

Procedures to obtain
SAAE 1. Communicate
to TCWG
2. Limitation of
Scope: -
SAAE SAAE Not Modify his
Received Received opinion