Audit-Evidence

What is Audit Evidence?

Audit evidence is the data or the information collected by auditors to review a company's financial reports and transactions. The reports may need to be verified to prove the authenticity, which can be conducted by the Auditor or the Certified Public Accountant (CPA). Hence, the evidence is required to ensure the authenticity of these reports.  Audit evidence is usually considered sufficient when the company's claims, which they make in the financial statements and their abidance to the accounting laws of their country's legal framework, are at par. Without any proper audit evidence, the entire audit process cannot be completed. Hence, such proof is required to complete the task.

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Factors that influence the reliability of Audit Evidence

All the factors that influence the reliability of audit evidence are listed below:

  1. Audit evidence, when obtained from outside the corporation or the firm through independent sources, is considered more reliable.

  2. One of the most critical factors influencing the reliability of Audit evidence is the form in which it is recorded. If it is recorded in documentary form through the medium of paper or electronics in a legal format, it is considered more reliable.

  3. If the related controls that are imposed by the corporation or the firm are thoroughly effective, the Audit evidence is the most reliable.

  4. If the Audit Evidence is obtained through CPA or the Auditor directly, it will be considered more reliable when compared to obtaining Audit evidence documents from indirect source or through any other inference.

  5. Original Audit evidence documents are more reliable than photocopies.


Characteristics of Audit Evidence

Features of Audit Evidence may depend on the following factors:

Relevancy

The relevancy of the Audit evidence is largely influenced by the type of audit evidence being conducted and how to the point the information received, in comparison to the overall analysis.

Source

It is one of the major factors that influence the reliability of the audit evidence. External source information will always be preferred over any internal information because it is generally considered void of any bias.

Nature 

Audit evidence is usually considered sufficient when the information is provided through presentations, physical confirmation or legal documents.

Sufficiency

Audit evidence meaning also takes into account the material provided, such as bank statements, which further help determine the financial position of the company.


What are the sources of Audit evidence?

Physical Observations

Auditors verify the tangible and intangible assets through inspections and on spot observations. This is typically conducted during inventory audit procedures.

Original Source Document

This means vouching of the claim made by the financial statements of the company to the original documents. The Auditor conducts this through verifying the claim against any asset by comparing its sale invoice.

External Data

Certain company assets may be actively traded in the financial markets. In these cases, it should be noted if these assets are reported at a lower cost or the market value in the given financial statements. The characteristics of audit evidence become important in these situations.

Recalculations

All the recorded documents and transactions are submitted to the Auditor based on which they make the financial statements, which then gets compared to the company’s financial statement. The stated process is called recalculation.


Types of Audit Evidence

There are various types of Audit evidence which can be in any form, physical as well as non-physical. They can be in the form of sensory visuals like videos and other non-physical ways such as email and audio versions. Some of the types of audit evidence are listed below:

  1. Financial Documents

  • Invoices and Receipts

  • Fixed assets registrations

  • Management accounts

  • Payroll system

  • Bank documents

  • Balance sheets, Profit and loss account, Cash flow statements, and other financial documents

  • Accounting information

  • Other financial documents of the company.

  1. Confirmation and inspection of the document

  2. Recalculation and client inquiry


Did You Know?

1. There are certain rules which govern the procedure of Audit evidence. The characteristics of audit evidence are a set of international rules called the International Standard of Auditing (ISA) 500. These were made effective from December 15, 2009.

2. One of the top 10 Audit difficulties while gathering data for auditing arises from the problem of gathering sufficient audit evidence and wrong interpretations and applying the rules by GAAP. GAAP stands for Generally Accepted Accounting Principles. The CPA firms that provide auditing services have to ensure several ways to avoid  GAAP violations as well as ISA rules and procedure violations.

FAQ (Frequently Asked Questions)

Q1. Why does the Auditor need evidence according to the type of audit evidence being conducted?

Ans: There has to be enough evidence to be trustworthy in anyone's opinion. Without any evidence, you cannot prove you are right. In law, without any proper evidence, the judge cannot pass any judgment. Hence, a piece of solid evidence is required whenever a decision or judgment has to be made. The same goes for auditing as well, for an auditor's opinion to have weight and value, a detailed examination of all the records of the client transactions is mandatory to be performed. Therefore, sufficient and appropriate evidence must be provided for any reasonable conclusion to be made, irrespective of the type of audit being conducted.

Q2. When is Audit evidence considered the most sufficient?

Ans: The Audit evidence is usually considered sufficient when the audit has enough data on the components like- the materiality of the item and the reliability of the financial documents obtained by the Auditor from the firm. The two most important aspects of making sure the audit evidence is efficient are the reliability and the relevance of the financial documents. The firm should provide documents that are not manipulated in favour of the firm's interest. If it is found that documents are forged or changes have been made, serious actions could be taken against the company for misleading auditors. Therefore, the firm has to offer authentic documents.

Q3. What are some of the financial documents required as the Audit Evidence?

Ans: Following are some of the financial documents required as the audit evidence:

  • Invoices and Receipts

  • Fixed assets registrations

  • Management accounts

  • Payroll system

  • Bank documents

  • Balance sheets, Profit and loss account, Cash flow statements, and other financial documents

  • Accounting information

  • Other financial documents of the company

Q4. Mention the types of Audit Evidence.

Ans: Financial documents, Confirmation and inspection of the document and Recalculation and client inquiry are the types of audit evidence.