Updated July 17, 2023
Definition of Audit Evidence
Audit evidence refers to all records, statement of facts as well as other information which are collected by the auditors of the company as part of their audit work assignment and proper discharge of their responsibilities.
Audit evidence is necessary for the auditor to draw a reasonable opinion on the financial statements of the company and accordingly based on his opinion. further audit evidence enables auditors to draw an independent opinion with an objective state of mind using a sample of information which are verifiable.
An audit is based on the shreds of evidence obtained by the auditing team while conducting audit exercise. audit evidence includes all facts and information collected and obtained from the business to enable the auditor to make a professional judgment of the actual realities.
Once the audit scope is defined, auditors pursue audit evidence which involves reviewing the data submitted by business, checking the same with actual for a fact check, and making observation wherever felt necessary.
In all likelihood audit evidence scope is wide and all information that can make the auditor make a better professional judgment is included in the same.
Procedure to Obtain Audit Evidence
Audit evidence procedure comprises the following steps:
- It begins with firstly an analytical review of the work presented by the company. under this, the working presented by the company in question is reviewed.
- Second steps involve making inquiry based on the review of the work by the auditor. this step includes both explanations, as well as any extra information, required to review the work provided above.
- The third step involves making observations based on the analytical review and explanation obtained in the second step.
- The fourth step involves doing inspection based on the scope of audit work and involves a substantial time of the audit team as under this step only the actual sample output is checked based on which opinions are mostly formed.
- Finally, Auditors recalculate the workings furnished by the client based on their assessment which is finally presented to the management and once both the parties agree to the same are finalized.
The procedure explained above is a standard procedure. There may be a few more or fewer steps involved based on case to case.
Examples of Audit Evidence
M/s Grey limited was appointed as auditors to conduct an audit of one of the specialized treasury branch of ABC Bank for the quarter ended 31st March 2020.
As part of its audit exercise, the auditors checked the balances of securities held by abc bank in its trading book with the actual securities held in depository format to reconcile that the securities reported in the books of account by the bank actually tally with the securities that the bank is having in its dematerialized account maintained with the broker.
Similarly, Auditor would like to reconcile the profitability reported by the Bank on its securities sold with the actual amount of securities sold by checking random deal slips to make an opinion. Thus just like the above Audit evidence, multiple shreds of evidence help Auditor make an opinion and report their Audit findings.
Types of Audit Evidence
Audit evidence can take various forms as long as the information is obtained from a reliable and authentic source and can be construed as material in decision making by the auditor. Few acceptable types of audit evidence include:
- Documentation: One of the most reliable and genuine audit evidence is written document duly executed by officials in-charge for the same. These documents can include bank accounts, payrolls, internal management reports, fixed asset registers, inventory balances, etc.
- Physical Examination: A physical visit by the audit team itself can be another good type of audit evidence as it provides a first-hand view and helps me make a better opinion.
- Confirmation: A written confirmation for any queries raised by auditor to the company while undertaking audit exercise is good audit evidence.
- Observation: By observing the actual activities auditor can substantiate the other audit evidence and make a meaningful observation.
Quality of Audit Evidence
The quality of audit evidence used determines the judgment based on them which make audit evidence to possess the following qualities:
- Audit evidence should be sufficient in nature which implies that the sample data is able to provide a picture of the overall data by acting as a subset of broader data.
- Audit evidence should be obtained from a credible source that is genuine, verifiable, and acceptable in nature. For instance, while checking the sales turnover auditors can insist on sample vouchers and actual visits to factory establishment to get a fair idea.
- Audit evidence should be reliable and relevant to the audit in question. For instance, while undertaking a branch audit of a bank it is important to check the loan documentation for the year for which the audit is done.
Importance of Audit Evidence
Audit evidence is very important as they are verifiable. also, an audit is conducted based on a sample of information during a finite period of time with finite resources at hand for the auditor which makes audit evidence even more indispensable to make an opinion.
Audit evidence role has grown many folds as investors and other stakeholders rely on audited financial statements to make investment decisions. also, banks and financial institution rely heavily on the auditor’s opinion which is solely based on audit evidence that they come across during their audit work.
Auditing involves an element of uncertainty as the facts and figures are checked based on sample data. in this audit, evidence plays an important part by making the audit team take appropriate actions which may include reconfirmation or modification of audit plan, changes to audit objective, or even termination of the audit if conditions require so. However, it is pertinent to note here that audit evidence is based on samples of available information and therefore involves a lot of uncertainty and anybody acting based on audit conclusion should keep this in mind before taking any action.
This is a guide to Audit Evidence. Here we also discuss the definition and procedure to obtain audit evidence along with examples and importance. You may also have a look at the following articles to learn more –