Auditors are not expected to examine all information that may exist. Audit evidence, which is cumulative in nature, includes audit evidence obtained from audit procedures performed during the course of the audit and may include audit evidence obtained from other sources, such as previous audits and a firm’s quality intro procedures for client acceptance and continuance.
Accounting records generally include the records of initial entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, Journal entries, and other adjustments to the financial statements that are not reflected in formal Journal entries; and records such as worksheets and spreadsheets supporting cost allocations, computations, reconciliations, and disclosures.
The entries in the accounting records are often initiated, authorized, recorded, processed, and reported in electronic form. In addition, the accounting records may be part of integrated systems that share data and support all aspects of the entity’s financial reporting, operations, and compliance objectives. Management is responsible for the preparation of the financial statements based on the accounting records of the entity.
The auditor should obtain audit evidence by testing the accounting records, for example, through analysis and review, reforming procedures followed in the financial reporting process, and reconciling related types and applications of the same information. Through the performance of such audit procedures, the auditor may determine that the accounting records are internally consistent and agree to the financial statements.
However, because accounting records alone do not provide sufficient appropriate audit evidence on which to base an audit opinion on the financial statements, the auditor should obtain other audit evidence. Other information that the auditor may use as audit evidence includes minutes of meetings; confirmations from third parties; industry analysts’ reports; comparable data about competitors (benchmarking); controls manuals; information obtained by there information developed by or available to the auditor that permits the auditor to reach conclusions through valid reasoning.
Sufficient Appropriate Audit Evidence Sufficiency is the measure of the quantity of audit evidence. Appropriateness is the measure of the quality of audit evidence, that is, its relevance and its reliability in providing support for, or detecting misstatements in, the classes of transactions, account balances, and disclosures and related assertions. The auditor should consider the sufficiency and appropriateness of audit evidence to be obtained when guessing risks and designing further audit procedures.
The quantity of audit evidence needed is affected by the risk of misstatement (the greater the risk, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less the audit evidence that may be required). Accordingly, the sufficiency and appropriateness of audit evidence are interrelated. However, merely obtaining more audit evidence may not compensate if it is of a lower quality. A given set of audit procedures may provide audit evidence that is relevant to certain assertions but not to others.
For example, inspection of records and documents related to the collection of receivables after the period end may provide audit evidence regarding both existence and valuation, although not necessarily the appropriateness of period-end cutoffs. On the other hand, the auditor often obtains audit evidence from different sources or of a different nature that is relevant to the same assertion. For example, the auditor may analyze the aging of accounts receivable and the subsequent collection of receivables to obtain audit evidence relating to the valuation of the allowance for doubtful accounts.
Furthermore, obtaining audit evidence relating to a particular assertion, for example, the physical existence of inventory, is not a substitute for obtaining audit evidence regarding another assertion, for example, rights and obligations. The reliability of audit evidence is influenced by its source and by its nature and is dependent on the individual circumstances under which it is obtained. Generalizations about the reliability of various kinds of audit evidence can be made; however, such generalizations are subject to important exceptions.
Even when audit evidence is obtained from sources external to the entity, circumstances may exist hat could affect the reliability of the information obtained. For example, audit evidence obtained from an independent external source may not be reliable if the source is not knowledgeable. While recognizing that exceptions may exist, the following generalizations about the reliability of audit evidence are useful : Audit evidence is more reliable when it is obtained from knowledgeable independent sources outside the entity. Intros imposed by the entity are effective. Audit evidence obtained directly by the auditor (for example, observation?¬ of the application of a control) is more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the application of a control). Audit evidence is more reliable when it exists in documentary form, whether paper, electronic, or other medium (for example, a contemporaneously written record of a meeting is more reliable than a subsequent oral representation of the matters discussed). Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles. The auditor should consider the reliability of the information to be used as audit evidence, for example, photocopies; facsimiles; or filmed, digitized, or other electronic documents, including consideration of controls over their preparation and maintenance where relevant. However, an audit rarely involves the authentication of documentation, nor is the auditor trained as or expected to be an expert in such authentication.
When information produced by the entity is used by the auditor to perform further audit procedures, the auditor should obtain audit evidence about the accuracy and completeness of the information. In order for the auditor to obtain reliable audit evidence, the information upon which the audit procedures are based needs to be sufficiently complete and accurate. For example, in auditing revenue by applying standard prices to records of sales volume, the auditor should consider the accuracy of the price information and the completeness and accuracy of the sales volume data.
Obtaining audit evidence about the completeness and accuracy of the information produced by the entity’s information system may be performed concurrently with the actual audit procedure applied to the information when obtaining such audit evidence is an integral part of the audit procedure itself. In other situations, the auditor may have obtained audit evidence of the accuracy and completeness of such information by testing controls over the production and maintenance of the information.
However, in some situations the auditor may determine that additional audit procedures are needed. For example, these additional procedures may include using computer-assisted audit techniques (Scats) to recalculate the information The auditor ordinarily obtains more assurance from consistent audit evidence obtained from different sources or of a different nature than from items of audit evidence considered individually.
In addition, obtaining audit evidence from different sources or of a different nature may indicate that an individual item of audit evidence is not reliable. For example, corroborating information obtained from a from a management representation. Conversely, when audit evidence obtained from one source is inconsistent with that obtained from another, the auditor should determine what additional audit procedures are necessary to resolve the inconsistency.
The auditor may consider the relationship between the cost of obtaining audit evidence and the usefulness of the information obtained. However, the matter of faculty or expense involved is not in itself a valid basis for omitting an audit procedure for which there is no appropriate alternative. In forming the audit opinion, the auditor does not examine all the information available (evidence) because conclusions ordinarily can be reached by using sampling approaches and other means of selecting items for testing.
Also, the auditor may find it necessary to rely on audit evidence that is persuasive rather than conclusive; however, to obtain reasonable assurance, the auditor must not be satisfied with audit evidence that is less than persuasive. The auditor should use reflections Judgment and should exercise professional skepticism in evaluating the quantity and quality of audit evidence, and thus its sufficiency and appropriateness, to support the audit opinion.
The Use of Assertions in Obtaining Audit Evidence : Management is responsible for the fair presentation of financial statements that reflect the nature and operations of the entity. In representing that the financial statements are fairly presented in conformity with generally accepted accounting principles, management implicitly or explicitly makes assertions regarding the recognition, measurement, presentation, ND disclosure of information in the financial statements and related disclosures.
Audit Procedures for Obtaining Audit Evidence : The auditor should obtain audit evidence to draw reasonable conclusions on which to base the audit opinion by performing audit procedures to : a) Obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and relevant assertion levels (audit procedures performed for this purpose are referred to as risk assessment procedures); ) When necessary, or when the auditor has determined to do so, test the operating effectiveness of controls in preventing or detecting material misstatements at the relevant assertion level (audit procedures performed for this purpose are referred to as tests of controls); and c) Detect material misstatements at the relevant assertion level (audit procedures performed for this purpose are referred to as substantive procedures and include tests of details of classes of transactions, account balances, and disclosures, and The auditor must perform risk assessment procedures to provide a satisfactory basis or the assessment of risks at the financial statement and relevant assertion levels. Audit evidence is evidential material collected during the course of a financial audit. Evidence collected during an audit can take a number of different forms, and there must be sufficient audit evidence for the auditor to make a final opinion.
This evidence also has to be carefully controlled because it can potentially include confidential material and access to the evidence must be limited to people who authorized to examine it. Access is also limited to prevent tampering or interference tit the evidence which could compromise the audit. In an audit, financial records and practices are scrutinized. People can perform audits for a wide range of reasons. Internally, companies use auditing to make sure that all of their practices are legal. Auditing can also be performed externally for compliance reasons, to determine whether or not a company is reporting financial information accurately.
If errors are uncovered during an audit they must be corrected and deliberate errors may be punishable by law. People can break up audit evidence into two broad categories: internal and external. An example of internal audit evidence might be something like a checkbook register. External evidence includes things such as bank statements. Both types of evidence can be important for an audit; ideally, the evidence should agree, demonstrating that a company is following procedure and that its financial practices are fully legal. Collection of evidence can include gathering documents, observing practices within a company, and conducting interviews with employees.
There interviews may be conducted with people responsible for financial reconsidering along with other members of the personnel. If a company is engaging in fraudulent or questionable activity, employees who are not directly involved in the activity may have noticed irregularities which could be important to auditors. As auditors collect evidence, they record the evidence in the audit working papers and make sure that it is carefully documented. At the end of the audit, all of the evidence is reviewed and the auditor generates an opinion. Auditors must be able to back up their conclusions with evidence, demonstrating exactly where areas of concern lie and showing how they came to the opinion they did.
For example, if an auditor states that a company knowingly committed tax fraud, she or he could point to interviews in the audit evidence in which people disclosed their awareness that certain practices were illegal, and can document with financial records that these practices were engaged in by company personnel. Audit evidence can include physical evidence, testimonial material, and analysis of information. Together, the body of evidence should allow an auditor to make an suggests accounting practices are sound, or inconclusive evidence that makes it difficult to take a firm position. In the audit report, the auditor will discuss the evidence and its sources so anyone who reviews the report can understand how the auditor arrived at a given conclusion.
In terms of physical evidence, auditors have several kinds of evidence available to them. One is documentary in nature; a firm should have hard copy accounting records as well as electronic ones, and this information can be very useful. Furthermore, audit evidence can include a physical inspection of assets. If a firm claims to own a piece of real estate, for example, the auditor can go to look at it and determine whether the property matches the description in accounting documentation. Rules for gathering evidence are multifaceted, based on the situation, and on whether the person gathering evidence is an attorney or a law enforcement officer.
Officers, for example, must follow certain standards and laws that relate to the prosecution of a criminal offense. Attorneys, on the other hand, gather evidence through a process called discovery, which is governed by an entirely different set of laws. In such cases, attorneys may be collecting evidence for a criminal or civil case. For police officers, rules for gathering evidence are very specific, especially in cases where an investigation is ongoing, and there is no imminent threat. The first thing an officer must do is secure a search warrant through a court by showing probable cause that a crime has been committed and there is evidence of that crime. Once a judge issues a search warrant, the police can then execute that search warrant.
The warrant only applies to the specific matter at hand, and often other evidence seen or collected cannot be used to prosecute for a different crime. A warrant can include earache and seizure of both physical locations and electronic communication, such as intercepting phone calls and e-mails. At a crime scene, or while in the process of gathering evidence with a search warrant, police also have certain rules that must be followed. Generally, standard procedure is to photograph the area as it appeared before evidence collection. Often, evidence is collected with special tools and placed into sterile bags or containers to prevent contamination.
It is then handed to a chain-of-custody officer who is responsible for making sure the evidence gets to the appropriate destination without being altered. Although an attorney may visit a crime scene or physical location as part of the process of gathering evidence, it is rare. Rather, attorneys follow rules for gathering evidence outlined through a process of discovery. In such cases, the attorney may subpoena certain individuals to testify and ask for certain physical objects. Sometimes, an attorney may decide to issue written questions to an interview subject, instead of doing a direct, oral examination. These written questions are called interrogatories.
Subpoenas and interrogatories compel a person to testify under oath and answer artfully all questions, unless the information is privileged. At the same time, an attorney may ask the opposing side for a list of evidence. Anything not disclosed on that list may not be able to be used later during a trial or hearing. No matter whether the individual is a police officer or attorney, the rules for gathering evidence must be followed meticulously. If rules for evidence collection are not followed, then it is possible the court could throw out any evidence collected. This could seriously alter the possibility of a favorable outcome for the evidence collector.