Definition
Audit evidence refers to the information collected or analyzed by an auditor to ascertain the accuracy of a company’s financial statements and records. This evidence can include accounting data, documents, records, verbal confirmations, or observable characteristics. The quality and appropriateness of audit evidence can significantly influence the auditor’s conclusion.
Key Takeaways
- Audit Evidence is the information that the auditor gathers during the process of an audit, with the aim of determining the congruity between the provided financial account information by the auditee and the established criteria.
- Audit Evidence is crucial in shaping the auditor’s professional opinion. They should be reliable, relevant and sufficient to enable the auditor to form their opinion on the work under audit objectively and fairly.
- The sources of Audit Evidence can be varied: they can originate from the client’s records, documentation, or through performing procedures that are required by the auditor such as observations, inquiries, confirmations, re-computations and others.
Importance
Audit evidence is crucial in the finance sector because it serves as the basis for auditors in formulating their audit opinions on financial statements.
This evidence, which is gathered during the auditing process, determines whether the transactions and balances stated on the financial statements are fairly presented and in accordance with the applicable accounting standards.
The quality and sufficiency of audit evidence impact the effectiveness of the audit and its ability to detect potential misstatements or fraud.
Therefore, for an audit to be deemed reliable, it must be supported by sufficient, relevant and reliable audit evidence.
Without strong audit evidence, the trustworthiness of the financial statements may be questioned, leading to potential credibility issues for the company.
Explanation
Audit Evidence is pivotal in the financial audit process as it forms the basis upon which audit opinions are built. The primary purpose of audit evidence is to assist auditors in formulating their conclusions about the financial statements being audited and to ultimately ensure accuracy, integrity, and reliability of the information provided.
It helps the auditor identify inconsistencies, errors, and fraudulent activities, if any, providing a sound foundation for the credibility of the financial reports. As such, the quality of the audit evidence and its relevance to the audit objectives are of paramount importance to maintain the authenticity of the audit process.
The use of audit evidence goes beyond just corroborating mathematically accurate records. It extends to assess compliance with accounting standards, confirm the validity of transactions, and provide assurance about the fair presentation of the financial statements.
It comprises various forms including bank statements, invoices, contracts, management records, etc., and may be gathered through techniques such as inspection, observation, inquiry, and external confirmations. In other words, audit evidence is an essential tool for auditors to objectively assess a company’s financial health and to enhance stakeholders’ trust in the financial statements.
Examples of Audit Evidence
Audit evidence refers to the information collected for reviewing a company’s financial transactions, internal control practices, and other items necessary for certified public accountants. Here are three real-world examples:
Financial Statements Review: During an audit, the auditor will collect and review the company’s various financial statements, like the balance sheet, income statement, and cash flow statement. These documents provide evidence of how the company has been handling its financial resources. They are reviewed for accuracy and alignment with standard accounting principles.
Transaction Records: Auditors review sales records, receipts, and invoices to audit the transactions that a company has engaged in over the study period. For example, the auditor may review the purchase orders issued by a company to verify the company’s reported expenses. This forms a key part of audit evidence.
Interview Notes: Often, auditors will interview the company’s staff as part of the auditing process. The notes and information gathered from these interviews can provide insights into the company’s operations that are not immediately apparent from reviewing financial statements or records alone, such as understanding the company’s process of recording transactions, internal controls, or identifying any potential risks. These can be invaluable sources of audit evidence.
Frequently Asked Questions about Audit Evidence
What is Audit Evidence?
Audit evidence refers to the information collected for the review of a company’s financial transactions, internal control practices, and other factors necessary for the certification of financial statements by an auditor.
What is the importance of Audit Evidence?
Audit evidence is necessary to back up the auditor’s conclusion and opinions. It assures that the financial records have been maintained in accordance with the standards. It forms the basis of the audit carried out by the auditor.
What are the types of Audit Evidence?
Types of Audit Evidence include Physical Evidence, Documentary Evidence, Oral Evidence, and Evidence obtained through the Auditor’s personal observations and experience.
What factors affect the reliability of Audit Evidence?
Reliability of Audit Evidence can be affected by factors such as the source of the evidence, the nature and content of the evidence, and the circumstances under which it is obtained.
How is Audit Evidence gathered?
Audit Evidence is gathered through techniques such as inspection, observation, confirmation, recalculation, and inquiry. The type of technique used often depends on the nature of the audit procedure and the type of assertion being tested.
Related Entrepreneurship Terms
- Assessment Procedures
- Materiality
- Compliance Testing
- Substantive Testing
- Internal Control Evaluation
Sources for More Information
- International Federation of Accountants (IFAC): The IFAC offers broad resources on all areas of accounting, and their materials on audit evidence are thorough and reliable.
- American Institute of Certified Public Accountants (AICPA): As a professional organization for certified public accountants in America, they produce a wealth of informative resources including those on audit evidence.
- Financial Accounting Standards Board (FASB): The FASB is a reliable authority on accounting standards, and their resources often provide context for understanding the importance of audit evidence.
- International Auditing and Assurance Standards Board (IAASB): The IAASB is an internationally recognized body that sets auditing and assurance standards; their resources include detailed information on audit evidence.
