2 (a) List and explain FOUR factors that will influence the auditor’s judgement regarding the sufficiency of the
evidence obtained. (4 marks)
(b) ISA 580 Management Representations provides guidance on the use of management representations as audit
evidence.
Required:
List SIX items that could be included in a management representation letter. (3 marks)
(c) After performing tests of controls, the auditor is of the opinion that audit evidence is not sufficient to support the
audit opinion; in other words many control errors were found.
Required:
Explain THREE actions that the auditor may now take in response to this problem. (3 marks)
(10 marks)

2 (a) Sufficiency of evidence
– Assessment of risk at the financial statement level and/or the individual transaction level. As risk increases then more
evidence is required.
– The materiality of the item. More evidence will normally be collected on material items whereas immaterial items may
simply be reviewed to ensure they appear correct.
– The nature of the accounting and internal control systems. The auditor will place more reliance on good accounting and
internal control systems limiting the amount of audit evidence required.
– The auditor’s knowledge and experience of the business. Where the auditor has good past knowledge of the business
and trusts the integrity of staff then less evidence will be required.
– The findings of audit procedures. Where findings from related audit procedures are satisfactory (e.g. tests of controls over
receivables) then substantive evidence will be collected.
– The source and reliability of the information. Where evidence is obtained from reliable sources (e.g. written evidence)
then less evidence is required than if the source was unreliable (e.g. verbal evidence).
(b) Management representation letter contents
– No irregularities involving management or employees that could have a material effect on the financial statements
– All books of account and supporting documentation have been made available to the auditors
– Information and disclosures with reference to related parties is complete
– Financial statements are free from material misstatements including omissions
– No non-compliance with any statute or regulatory authority
– No plans that will materially alter the carrying value or classification of assets or liabilities in the financial statements
– No plans to abandon any product lines that will result in any excess or obsolete inventory
– No events, unless already disclosed, after the end of the reporting period that need disclosure in the financial statements.
(c) Additional audit procedures
– The auditor could expand the amount of test of controls in that audit area. This may indicate that the control weakness
was not as bad as initially thought.
– The problem could be raised with the directors, either verbally or in a management letter, to ensure that they are aware
of the problem.
– The auditor could perform additional substantive procedures on the audit area. This action will help to quantify the extent
of the error and makes the implicit assumption that the control system is not operating correctly.
– If the matter is not resolved, then the auditor will also need to consider a qualification in the audit report; the exact
wording depending on the materiality of the errors found.

good question.

thank you.