What is audit evidence?
Audit evidence refers to information or data that use or collect by auditors as part of their audit works so that they could conclude their opinion on whether or not financial statements are prepared in all material respect and in accordance with the applicable financial reporting frameworks.
Before auditors could make the conclusion on the financial statements as a whole or any part, they need to make sure that the evidence they obtain is sufficient enough with appropriate quality to make the conclusion.
Audit evidence is obtaining by the auditor throughout all of the audit stages including the planning stage, execution stage, as well as conclusion stages. And to gather this evidence, the auditors use many different technologies and procedures suitable for them.
In this article, we will discuss various topics related to the audit evidence including the types of evidence, the procedures that use by auditors to gather the evidence as well as the quality of it.
Types of audit evidence:
Auditors use audit evidence in many different forms and sources. Those audit evidence could be data or information, physical or nonphysical. For an example of audit evidence:
- Financial statements
- Accounting information
- Bank accounts
- Management Accounts
- Fixed Assets Register
- Payrolls Listing
- Banks Statements
- Bank confirmation
- And others documents use by businesses to support financial transactions or events in the financial statements.
Audit evidence could also form in video, email, audio, and verbal.
Procedures to obtain audit evidence:
There are many procedures that auditors use to obtain audit evidence to support their conclusion.
Such procedures include audit inquiry, audit observation, audit inspection, analytical procedure, audit recalculation, audit confirmation, as well as re-performance.
- Audit inquiry: Auditor inquires management on certain business transactions or events for the purpose of obtaining an understanding or to confirm some related assertion.
- Audit observation: Auditor observes the way how certain controls related to financial reporting perform.
- Audit Inspection: Auditor inspect on certain documents or evidence that related to financial transaction or event.
- Analytical Procedure: Analytical procedure is normally used by the auditor to assess the transactions or amounts in the financial statements through other financial and non-financial data.
- Recalculation: The auditor sometimes recalculates some depreciation expenses that prepare by management.
- Re performance: The auditor sometimes re-performs bank reconciliation that prepares by the client.
Quality of Audit Evidence:
The quality of audit evidence is very important to make sure that the conclusion that makes by the auditor is correct.
If the information is not strong or low quality, the audit risks of making incorrect audit opinions are high.
The quality of audit evidence is dependent mainly on the form and source of the evidence. Here is the detail:
- External Source: The evidence that obtains directly from external parties like customers, suppliers, or banks are more reliable than obtaining from clients. For example, accounts receivable confirmations that obtain from client’s customers are more reliable than the records that prepare by clients.
- Prepare by Auditor: The evidence that prepares by auditors themselves are more reliable than the one that prepares by or obtains from the client. For example, the bank reconciliation that prepares by the auditor is more reliable than the bank reconciliation prepared by the accountant.
- Prepare by client: The level of reliability of evidence that obtains from clients are depending on the reliability of client internal control.
- Written form: The audit evidence that forms in writing is more reliable than the one that forms in verbal. For example, management confirmation in the form of email is more reliable than the confirmation by verbal.
- Original Form: Original invoices that use to support the payments transactions are more reliable than the copy invoices.
Since the quality of audit evidence is important, the standard or local authority that controls audit firms required the audit firm to have the proper audit manual, policy, and procedures in place so that the firm could maintain the quality of audit as well as the quality of audit evidence.
The Use of Assertions in Obtaining Audit Evidence:
Auditors should prepare audit procedures to confirms and verify the financial statements’ assertion as part of their materiality assessment in the financial statements.
And auditors could tailor the procedures to obtain the audit evidence to support their verification and confirmation of financial statements’ assertion.
Here is the list of financial statements’ assertions that auditors could use to obtain the evidence:
Classes of Transactions and Events’ Assertion:
Sometimes it is called the income statement’s assertions. These are the assertions that use by management to confirm the accuracy and completeness of the financial transactions and events in the income statement.
These assertions including:
- Occurrence: This assertion is used for assuring that the financial transactions that recording the financial statements, especially in the income statement, are occurred in the entity.
- Completeness: all transactions and events that should be recorded in the period have recorded.
- Accuracy: amounts and other data relating to recorded transactions and events have been recorded appropriately
- Cut-off: transactions and events have been recorded in the correct accounting period
- Classification: transactions and events have been recorded in the proper accounts.
1) Account balances:
Account balance assertion or balance sheet items’ assertion. These assertions are used by management to confirm the existence and completeness of accounts in balance items.
These balance sheet’s assertions are:
- Existence: assets, liabilities, and equity interests exist
- Right and Obligation: the entity holds or controls the rights to assets, and liabilities are the obligations of the entity
- Completeness: all assets, liabilities, and equity interests that should have been recorded have been recorded
- Valuation and Allocation:
2) Presentation and disclosure:
Occurrence and rights and obligations: disclosed events, transactions, and other matters have occurred and pertain to the entity.
Completeness: all disclosures that should have been included in the financial statements have been included.
Classification and understandability: financial information is appropriately presented and described, and disclosures are clearly expressed.
Accuracy and valuation: This assertion concerning the accuracy of the information disclosed in or noted to the financial statements.
It is also concerning the valuation of the disclosed accounts balance. There should be procedures for obtaining this evidence.
This assertion concerning the accuracy of the information disclosed in or noted to the financial statements. It is also concerning the valuation of the disclosed accounts balance. There should be procedures for obtaining this evidence.
Written by Sinra