chartered accountant
Audit evidence encompasses all information used by auditors to formulate their conclusions regarding financial statements. This evidence stems from diverse audit procedures and sources, serving to support or contradict management’s assertions about financial reporting and internal controls.
For an auditor, audit evidence must be both sufficient and appropriate. Sufficiency relates to the amount of evidence, while appropriateness pertains to its quality. Therefore, sufficiency is influenced by the risks associated with the control system, and appropriateness hinges on the relevance and reliability of the evidence.
Audit evidence is pivotal in validating or challenging the assertions made in financial statements. Various components of financial statements—including Assets, Liabilities, Income, and Expenditure—are associated with specific assertions:
Existence: This assertion confirms that the assets, liabilities, and equity reported actually exist. For instance, if the balance sheet states that Inventory amounts to Rs. 15,00,000, the assertion is that this inventory actually exists.
Occurrence: This checks that transactions recorded in financial statements have genuinely taken place. For example, a sale of Rs. 50,00,000 in the financial statements implies that this transaction was executed.
Accuracy: This assertion ensures that amounts recorded in the financial statements are correct. For example, an auditor examines a customer account to verify that all transactions, including payments, are accurately recorded.
Completeness: This asserts that all transactions occurring within a financial period have been thoroughly recorded. If it needs to be determined that all salaries and wages during the period are documented, the auditor will refer to payroll records and the payroll journal.
Valuation: This confirms that all financial statement elements have been accurately valued. For example, receivables must be presented at their realizable value; failing to account for potential bad debts means the valuations are flawed.
Rights and Obligations: This asserts the ownership rights relating to assets, liabilities, and equity. For example, expenditures incurred should be recognized as belonging to the business, not the owners.
Classification: This asserts that financial statements are formatted appropriately, including all necessary information and ensuring clarity. For example, interest payable should be explicitly differentiated from accounts payable as required by balance sheet standards.
Cut-Off: This assertion verifies that transactions have been recorded in the correct accounting period, including prior period adjustments and prepaid items.
Different scholars categorize audit evidence in various ways. Professor Jim Crockett has identified the following types:
Physical Evidence: This evidence results from the auditor's sensory observations, such as seeing or touching. It is crucial for certain assets like stock and fixed assets, providing qualitative assurance about physical inventory.
Arithmetical Evidence: This is derived from the auditor's calculations. For instance, auditors compute how inventory values are derived and validate liabilities such as gratuity on balance sheets. They first verify data and assumptions and then independently calculate figures for comparison against those in the balance sheet.
Analytical Evidence: This is predicated on the assumption that past trends will continue. For example, if a business spent Rs. 15,000 on audits in previous years, it might be reasonable to expect similar expenditures in the current year. This type of evidence is more persuasive than conclusive and may necessitate further substantial evidence for validation.
Testimonial Evidence: Involves auditors conversing with individuals to gather information. While valuable, testimonial evidence generally requires corroboration from other evidence types. The effectiveness of this type of evidence relies on asking the right questions to the right people in an appropriate manner.
Documentary Evidence: This is created by examining documents, often originating from the entity's accounting information system. It can be categorized based on the source and quality:
To document oral audit evidence, tools such as questionnaires, flowcharts, and electronic records can be used. However, electronic information may not be retrievable without proper backup. Additionally, documenting the audit plan, procedures, and progress reports falls within this category.
In audit literature, terms like "Audit Procedures," "Tests," and "Techniques" are often confused with audit evidence.
Audit techniques are methods employed to gather evidence and do not constitute the evidence itself. Conversely, audit evidence shapes the auditor's perspective concerning assertions. Procedures and tests are designed to garner insights that ultimately influence the auditor’s conclusions.
Commonly cited audit techniques such as physical examination, confirmations, documentation reviews, analytical procedures, inquiries, recalculations, reperformance, and observations are strategies aimed at generating audit evidence rather than being classified as evidence in their own right.