Qualities of audit evidence

Auditors collect audit evidence during fieldwork. If audit evidence is sufficient and appropriate, they issue a clean audit report.

Sufficiency of audit evidence refers to the quantity of evidence. If the risk of material misstatement is higher, the quantity of audit evidence collected should be higher. On the other hand, if the risk of material misstatement is lower, the quantity of evidence required increases. For instance, if auditors assess the risk of material misstatement as significant, they need to perform internal control checks and audit procedures. On the contrary, if the assessed risk of material misstatement is lower, the performance of audit procedures can be enough to form a clean audit opinion.

However, if audit evidence is not sufficient and appropriate, the audit report needs to be qualified.

It’s important to note that appropriateness refers to the quality of audit evidence. For instance, an external document like a supplier invoice is more reliable than an internal company memo.

Sufficient and appropriate audit evidence enables an auditor to issue clean/unqualified audit report.

Types of audit evidence

There can be different types of audit evidence that include the following,

Physical examination – It is when auditors directly observe operations and collect audit evidence. For instance, auditors observe year-end inventory count at the client premises. Alternatively, they can also count inventory. So, obtaining examination can be a good idea to collect audit evidence.

Inspection – Inspection refers to checking documents in terms of approval and authorization. It’s considered a reliable source of evidence if inspected document comes from parties independent of the audit client.

Recalculation – It’s an important auditing procedure to verify the accuracy of the account balance. It involves going through the whole calculating process step by step and ensuring the final balance is accurately recorded in the financial statement.

Analytical procedures involve studying transaction patterns and cross-checking rationale for the account balances/transactions. For instance, if revenue increases with marketing expenses, it’s in line with the expectations. Hence, this reasoning can be accepted as audit evidence. However, it’s a limited assurance.

Inquiry – Inquiry refers to questioning management about transactions, balances, accounting, records, systems, processes, and multiple other factors. Inquiry can be made verbally and via email as well.

External confirmation – External confirmationis when auditors obtain confirmation directly from the concerned party. These confirmations are obtained to verify the account balance’s accuracy, completeness, and existence.

These external parties can be banks, suppliers, customers, financing companies etc.

Example of audit evidence

Following are some of the examples of audit evidence.

Third-party documents – These are the documents obtained from third parties in the business. These parties may be suppliers, customers, banks, financing companies, leasing companies, Government, and other external stakeholders. These documents are more reliable as generated by businesses/companies independent of the audit client.

These documents may be purchase invoices, delivery notes, cheques, bank statements (payment verification), notices, emails, contracts, and many other things.

Internal company documents – The audit client internally generates these documents. These can be internal memos, internal emails, registers etc.

Although, there is less credibility of these documents as evidence. But, these can be used as evidence if internal controls implemented by the business are strong.

Documents prepared by the auditor – These are the documents prepared by auditors. These documents are prepared systematically to verify the accuracy of the account balance/transactions. In practice, auditors recalculate numbers like depreciation, amortization, deferred tax, provisions, estimates, and other items to ensure accuracy.

Source/methods of audit evidence

Source of audit evidence includes source documents and observation. The evidence is collected by performing audit procedures. These audit procedures include physical observation, inspection, recalculation, analytical procedures, inquiry, and external confirmation as discussed above.

Importance of audit evidence

Audit evidence is important because auditors form their opinion based on the same. If evidence collected is sufficient and appropriate, they form an unqualified audit/clean opinion.

Similarly, in the case of quality control reviews, the audit firms need to present working papers/audit evidence. Overall, it helps the auditor prove that they have done quality-oriented work.

Conclusion of audit evidence

Auditors collect audit evidence during audit fieldwork. It enables auditors to issue a clean audit report. However, audit evidence needs to be sufficient and appropriate for a clean audit report.

Sufficiency refers to the quantity of audit evidence. Appropriateness refers to the quality of audit evidence.

There can be different sources to obtain audit evidence, including observation, analytical procedures, recalculations, inspection, inquiry, etc.

Examples of audit evidence include documents like invoices, delivery notes, bank statements, contracts, etc.

There can be different types of audit evidence like third-party documents, internal company memos, and documents prepared by auditors.

Audit evidence is important as it enables an auditor to form an audit opinion. Further, auditors can use audit evidence if there is a quality control review from the regulator.   

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