Audit Evidence.

Audit evidence refers to the information collected for reviewing the financial transactions of a company in addition to its internal control practices and other essential factors needed for the certification of financial statements. “The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.”

            In most cases, auditors emphasize the importance of sufficiency (measure of the quantity of audit evidence) and appropriateness (the degree to which the evidence can be considered trustworthy) of the audit evidence. However, the evidence should also be persuasive rather than convincing.

Audit evidence decisions:
A key decision the auditor must make is the appropriate types and amounts of evidence to draw conclusions regarding financial statements or internal control. You might suggest that all evidence available should be used--but unfortunately, the cost of sampling every piece of evidence in a population would be prohibitive. In practice, the profession of auditing often requires taking a sample, and then drawing a conclusion based on that sample.
There are types of decisions that an auditor must make:

1.   Sample size. This refers to the number of items that should be tested for each audit   procedure.
2.   Items to select. This emphasizes which items should be included in the audit exercise.
3.   Timing. This can vary from early in the accounting period to after it has ended.

Appropriateness and sufficiency are affected by the following factors:

1.   Timeliness. The balance sheet account evidence is better when it’s collected around the date of the financial statements.
2.   Independence. Evidence that is from external sources such as suppliers is stronger than that of sources within the organization.
3.   Auditor’s direct knowledge. The auditor’s determinations are stronger than the client’s views.
4.  Objectivity. Objective evidence is stronger than subjective evidence.
5.   Effectiveness of client’s internal controls. Good internal controls mean better information.
6.   Relevance. Must pertain to the audit objective being tested.
7.   Qualifications. Reliability of the information is enhanced if the person providing it is qualified to do so.

Types of audit evidence:

In deciding which procedures to use, the auditor may choose from different types of evidence:

1.    Inspection of tangible assets. This involves examining assets of the company being audited. It requires the auditor to physically count the tangible assets. This evidence provides assurance of existence of the asset.

2.    Observation.  This involves looking at the processes and procedures being performed by the client. For example, focusing on the client’s activities. However, this method has a downside in that it’s only limited to the time that those activities occur.

3.    Mathematic recalculation. Involves checking the arithmetic accuracy of the records. This can be done by use of computer-assisted audit techniques (CAATs) to check the accuracy of the summarization of the files. For example, recalculating depreciation and reconciling the ledgers.

4.    Analytical procedures. Consist of evaluations of financial information made by a study of recorded data with expectations developed by the auditor. These procedures help reveal unusual transactions, trends and ratios that might have implications for audit planning.

The types of analytical procedures include:

•          Preliminary analytical procedures.
•          Substantive analytical procedures.
•          Final analytical procedures. 

5.   Confirmations. This is the process of getting a representation of information directly from an independent third party. The client has request that the third party responds directly to the auditor. For example, the auditor may call the inventory agents to confirm the consignments or attorneys to confirm the contingent liabilities.

The reliability of the evidence got through confirmations may be affected by factors such as:

·         Nature of the information being confirmed.

·         Form of confirmation.

·         Prior experience with the entity.

Confirmations are of two types. That is:

·         Positive confirmation. This asks for response even if the balance is correct and it’s more reliable than negative confirmation.

·         Negative confirmation. Asks for a response only of the balance is incorrect.

6.    Inquiry. Involves auditors obtaining information from the client in response to questions. It may be in written form or oral form. Much evidence can be got through inquiry however; it cannot be thought of as final and may be biased in  favor of the client.

Inquiry alone is not sufficient to test the operating effectiveness of controls. Therefore, auditors need to use inquiry as well as other procedures to get sufficient appropriate audit evidence.

7.    Reperfomance. Involves the testing of mathematical accuracy to confirm the computations and transfers of information those can be done by use of CAATs.

8.    Scanning. This is the review of accounting data to identify unusual items. This includes the identification of abnormal individual items within account balances or other client data through analysis of entries on transactions, ledgers and other accounts.

9.    Inspection of documents. This consists of examining internal or external records that are in paper form, electronic or other media. The auditor should be aware about the reliability of the documents.

There are two types of documents and they include:

·         External documents. These are documents that are outside the client. They are held by    a third party. These documents are more reliable than internal sources.

·         Internal documents. They are documents prepared by the client company and don’t go outside the client. They could be biased and therefore not reliable.