Audit evidence is the information used by auditors to draw conclusions on which to base their audit opinion. Sufficient and appropriate evidence is fundamental to achieving audit objectives and providing reasonable assurance that financial statements are free from material misstatement.
What is Audit Evidence?
Audit evidence includes all information used by the auditor in arriving at the conclusions on which the audit opinion is based. This includes information contained in the accounting records and other information obtained by the auditor.
Types of Audit Evidence
1. Inspection
Inspection involves examining records, documents, or tangible assets. This includes:
- Inspection of tangible assets (counting inventory, verifying property)
- Inspection of documents (contracts, invoices, bank statements)
- Inspection of electronic records and databases
2. Observation
Observation provides evidence about how processes are performed by watching activities or processes being carried out by others, such as:
- Observing inventory count procedures
- Watching control activities being performed
- Observing employee segregation of duties
3. Inquiry
Inquiry involves seeking information from knowledgeable individuals inside or outside the entity:
- Management inquiries about accounting policies
- Staff inquiries about process controls
- External confirmations from third parties
4. Confirmation
Confirmation is a specific type of inquiry involving written or electronic response from a third party:
- Bank confirmations
- Accounts receivable confirmations
- Accounts payable confirmations
- Legal confirmations
5. Recalculation
Recalculation involves checking the mathematical accuracy of documents or records:
- Verifying interest calculations
- Rechecking depreciation schedules
- Validating invoice calculations
6. Reperformance
Reperformance involves the auditor independently executing procedures or controls that were originally performed by entity personnel:
- Reperforming reconciliations
- Reperforming control procedures
- Rechecking account reconciliations
7. Analytical Procedures
Analytical procedures involve evaluating financial information by studying relationships among financial and non-financial data:
- Trend analysis
- Ratio analysis
- Reasonableness testing
Sufficiency and Appropriateness
Sufficiency
Sufficiency is the measure of the quantity of audit evidence obtained. It depends on:
- Risk of material misstatement (higher risk = more evidence)
- Size and materiality of the item
- Quality of evidence (higher quality = less needed)
Appropriateness
Appropriateness is the measure of the quality of evidence - its relevance and reliability:
- Relevance - evidence must relate to the assertion being tested
- Reliability - evidence must be trustworthy and credible
Documentation Requirements
Working Papers
Auditors must prepare working papers that record:
- Planning decisions and audit strategy
- Nature, timing, and extent of procedures performed
- Results of procedures and conclusions reached
- Evidence obtained
Documentation Principles
Effective audit documentation should be:
- Complete and factual
- Clear and organized
- Relevant to the assertions being tested
- Sufficient to allow an experienced auditor to understand the work performed
Evidence Evaluation
After collecting evidence, auditors must evaluate whether it is sufficient and appropriate to support their conclusions. This includes:
- Assessing the reliability of sources
- Considering the nature and timing of evidence
- Evaluating whether contradictions exist
- Determining if additional procedures are needed
Key Takeaways
- Audit evidence is the foundation of any audit opinion
- Multiple types of evidence may be needed to address audit risks
- Both the quantity (sufficiency) and quality (appropriateness) of evidence matter
- Proper documentation is essential for audit quality and regulatory compliance
- The auditor's professional judgment determines what evidence is sufficient
