Audit evidence

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Audit evidence
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Audit evidence is information used by auditors to support their opinion of the financial statements. Audit evidence is collected, evaluated, and analyzed to form the basis of an auditor's opinion as to whether the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of an entity in conformity with accounting principles generally accepted in the United States of America (GAAP).

Audit evidence is used to support the auditor's opinion that the financial statements are presented fairly and in conformity with GAAP. Primary audit evidence is the most reliable type of evidence, while secondary audit evidence, analytical procedures, physical examination, and observation are all used to support the audit opinion.

Example of Audit evidence

One example of audit evidence is the confirmation of accounts receivable. This involves sending letters to customers asking them to confirm their outstanding balance. The auditor will then compare the customer's response to the accounts receivable balance reported on the client's financial statements. This process provides assurance that the accounts receivable balance is accurate and any potential misstatements are identified. Additionally, the auditor will assess the adequacy of the client's accounts receivable aging to ensure that all accounts receivable are properly classified and that any bad debt expenses are accurate.

Confirmation of accounts receivable is an example of audit evidence used to support the audit opinion. The auditor will use this evidence to assess the accuracy of the accounts receivable balance and the adequacy of the client's accounts receivable aging. This information is used to form the basis of the auditor's opinion as to the accuracy of the financial statements.

When to use Audit evidence

Audit evidence is used by auditors to form an opinion as to whether the financial statements of an entity are presented fairly, in all material respects, in conformity with GAAP. Audit evidence should be collected, evaluated, and analyzed to ensure that the financial statements are free from material misstatement. Audit evidence should be collected from a variety of sources to ensure that the financial records are accurate and reliable.

  • Documentary Evidence: Documents such as invoices, contracts, and bank statements should be obtained to provide support for transactions recorded in the financial statements.
  • Internal Confirmations: Confirmations should be obtained from third parties to verify the accuracy of balances such as accounts receivable and accounts payable.
  • Analytical Procedures: These are tests performed on financial statement items to determine if they are reasonable. Analytical procedures include ratios, trend analysis, and comparisons with prior year financial statements.
  • Physical Examination: This involves auditors examining physical assets such as plant and equipment to determine if they exist and if they are valued properly.
  • Internal Controls: Auditors should evaluate the internal control environment to ensure that it is sound and effective.

Audit evidence is used to form an opinion as to whether the financial statements are presented fairly and in conformity with GAAP. Documentary evidence, internal confirmations, analytical procedures, physical examination, and internal controls should all be used to collect evidence and support the audit opinion.

Types of Audit evidence

Audit evidence is the information collected and reviewed by auditors to support their opinion of the financial statements. There are four main types of audit evidence: Primary Audit Evidence, Secondary Audit Evidence, Analytical Procedures, and Physical Examination.

  • Primary Audit Evidence: This is the most reliable type of evidence and is composed of original documents such as bank statements, invoices, contracts, etc.
  • Secondary Audit Evidence: This is less reliable than primary evidence and includes items such as a client's financial statements, management representation letters, and analytical procedures.
  • Analytical Procedures: These are tests performed on financial statement items to determine if they are reasonable. Analytical procedures include ratios, trend analysis, and comparisons with prior year financial statements.
  • Physical Examination: This involves auditors examining physical assets such as plant and equipment to determine if they exist and if they are valued properly.

Audit evidence is essential for auditors to form an opinion as to whether the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of an entity in conformity with accounting principles generally accepted in the United States of America (GAAP). Primary audit evidence is the most reliable type of evidence, while secondary audit evidence, analytical procedures, physical examination, and observation are used to provide additional support.

Steps of gathering Audit evidence

The process of gathering audit evidence consists of five steps: planning, understanding, testing, evaluating, and documenting.

  • Planning: This involves the auditor planning the audit process, including what evidence needs to be gathered and how it will be gathered.
  • Understanding: This involves the auditor gaining an understanding of the client's business, the industry, and the accounting principles that applied.
  • Testing: This involves the auditor gathering evidence to support the opinion. This includes observation, inquiry, inspection, and analytical procedures.
  • Evaluating: This involves the auditor determining whether the evidence gathered is sufficient and reliable.
  • Documenting: This involves the auditor documenting the evidence gathered and the conclusions reached in the audit working papers.

Advantages of Audit evidence

Audit evidence provides the auditor with the assurance they need to provide a clean opinion on the financial statements. The primary advantages of audit evidence include:

  • Enhanced Confidence in Financial Statements: Audit evidence provides the auditor with the assurance that the financial statements are free from material misstatements.
  • Objective Evidence: Audit evidence is objective and provides the auditor with a basis for forming an opinion on the financial statements.
  • Increased Reliability: Audit evidence increases the reliability of the financial statements by providing an independent and objective assessment of the financial condition of the company.
  • Increased Transparency: Audit evidence increases the transparency of the financial statements by providing a comprehensive overview of the financial position of the company.

Audit evidence provides the auditor with the assurance they need to provide a clean opinion on the financial statements. The primary advantages of audit evidence include enhanced confidence in the financial statements, objective evidence, increased reliability, and increased transparency.

Limitations of Audit evidence

The limitations of audit evidence are that it is subject to inherent limitations, such as the possibility of human error, fraud, or illegal activities, and it may be incomplete or inaccurate. Additionally, audit evidence is obtained from the client's records, which may not be reliable or accurate. Furthermore, the scope of the audit is limited to what can be observed, examined, tested, and documented. Finally, audit evidence may not be sufficient to detect or prevent all misstatements.

Inherent limitations, such as the possibility of human error, fraud, or illegal activities, as well as the fact that audit evidence is obtained from the client's records which may not be reliable or accurate can lead to limitations on audit evidence. Additionally, the scope of the audit is limited to what can be observed, examined, tested, and documented, and audit evidence may not be sufficient to detect or prevent all misstatements.

Other approaches related to Audit evidence

The International Standards on Auditing (ISA) provides guidance to auditors on the use of audit evidence when conducting an audit. The ISAs outline the responsibilities of auditors in obtaining and evaluating audit evidence and set out the procedures that must be followed to ensure that the audit has been conducted in accordance with professional standards. The ISAs also provide guidance on the types of evidence that should be obtained, such as:

  • Confirmations: These are requests sent to third parties to verify the accuracy of the information being audited.
  • Enquiries: These are questions posed to management or other personnel to obtain information about a particular transaction or account balance.
  • Inspections: These are examinations of documents, records, and other evidence in order to verify the accuracy of the information.
  • Re-performance: This involves re-calculating or re-computing the amounts in an account or transaction to verify the accuracy of the information.

The International Standards on Auditing (ISA) provides guidance to auditors on the use of audit evidence when conducting an audit. The ISAs outline the responsibilities of auditors in obtaining and evaluating audit evidence, set out the procedures that must be followed to ensure that the audit has been conducted in accordance with professional standards, and provide guidance on the types of evidence that should be obtained, such as confirmations, enquiries, inspections, and re-performance.

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