What Is Auditing Evidence?
Auditing evidence is the information collected for review of a company's financial transactions, internal control practices, and other items necessary for the certification of financial statements by an auditor or certified public accountant (CPA). The amount and type of auditing evidence considered vary considerably based on the type of firm being audited as well as the required scope of the audit.
Key Takeaways
- Auditing evidence is the information collected by an auditor to ascertain the accuracy and compliance of a company's financial statements.
- The auditing evidence is meant to support the company's claims made in the financial statements and their adherence to the accounting laws of their legal jurisdiction.
- Examples of auditing evidence include bank accounts, management accounts, payrolls, bank statements, invoices, and receipts.
- Good auditing evidence should be sufficient, reliable, provided from an appropriate source, and relevant to the audit at hand.
Understanding Auditing Evidence
The goal of any audit is to determine whether a company's financial statements comply with generally accepted accounting principles (GAAP), international financial reporting standards (IFRS), or another set of accounting standards applicable to an entity's jurisdiction. Publicly traded companies are generally required to present fully audited financial statements to shareholders periodically, and thus the compilation and organization of auditing evidence are essential for auditors and accountants to do their work. In short, auditing evidence is meant to provide auditors with the information for them to make the judgment on whether or not financial statements are accurate and true.
Auditing evidence is defined as a term to protect investors by promoting transparent, accurate, and independent audit reports. The Public Company Accounting Oversight Board (PCAOB), created by the Sarbanes-Oxley Act of 2002, defines auditing evidence as all the information that can be used by auditors to make their decision on the quality and accuracy of a company's financial statements. The auditing evidence supports and verifies the final information provided by management in the financial statements. It can also contradict it if there are errors or fraud.
Examples of auditing evidence include bank accounts, management accounts, payrolls, bank statements, invoices, and receipts. Some companies will perform continuous audits to ensure stability.
Characteristics of Auditing Evidence
Good auditing evidence can be measured by the extent of the following characteristics:
Sufficiency: Sufficiency takes into account whether or not the material provided is of an adequate quantity that would allow auditors to make an accurate judgment. If an auditor was given just one bank statement of a company, it would not be enough to make any determinations on the financial standing of that company.
Reliability: Reliability seeks to determine whether or not the material can be trusted and counted on for forming an opinion. Reliability typically factors from the source of the information.
Source: The source of accounting evidence can be obtained directly from the company or externally. Externally sourced information is generally regarded as more trustworthy and is therefore preferred.
Nature: Nature refers to the type of information that is received. For example, the information can be provided through legal documents, presentations, orally from employees, or through a physical confirmation.
Relevance: Depending on the type of audit being conducted, how pertinent the information received is in relation to the overall analysis is a guiding factor.
In general, auditors prefer information that is written as opposed to that which is provided orally. They also prefer:
- Information that is from a third-party source as opposed to that from inside the company
- Original documents as opposed to copies of those documents
- A strong understanding of the firm by the auditor to request appropriate auditing evidence
- Firsthand observations by the auditor as opposed to the documentation provided via another source
Example of Auditing Evidence
Company ABC has enlisted the auditing services of the accounting firm, Anderson Brothers, to have their financial statements from the fiscal year 2020 audited. The auditor begins working on the audit and requests information regarding reported revenues and bank balances. To obtain accurate and reliable information, regarding revenues, the auditor requests sales receipts and invoices and a physical examination of inventory. Regarding bank balances, the auditor requests all of the bank statements of the company directly from ABC's bank. All of this information; the receipts, invoices, physical observations, and bank statements are regarded as auditing evidence.
FAQs
Examples of auditing evidence include bank accounts, management accounts, payrolls, bank statements, invoices, and receipts. Good auditing evidence should be sufficient, reliable, provided from an appropriate source, and relevant to the audit at hand.
What are the examples of audit evidence? ›
Some examples of internal documentary evidence are accounting and information records, copies of outgoing correspondence, plans, budgets, annual reports and internal audit reports, etc. Some examples, of the evidence from external sources are documents originating from other entities (viz.
What is the definition and characteristics of auditing? ›
Auditing, or a financial audit, is an official examination and verification of a business's financial records. The main goal of auditing is to make sure that a company's financial statements are accurate and are following regulatory guidelines.
Which characteristic is a requirement of audit evidence? ›
Appropriateness is the measure of the quality of audit evidence. The quality of audit evidence depends on whether it is relevant and reliable in providing support to the conclusions on which the auditor's opinion is based.
What are the characteristics of reliability of evidence? ›
The characteristics of reliable audit evidence are essential for auditors to form accurate conclusions and opinions on financial statements. Relevance, sufficiency, appropriateness, reliability, independence, and completeness are key considerations when evaluating the quality and effectiveness of audit evidence.
What are the two characteristics of audit evidence? ›
Appropriateness is the measure of the quality of audit evidence, i.e., its relevance and reliability. To be appropriate, audit evidence must be both relevant and reliable in providing support for the conclusions on which the auditor's opinion is based.
What is audit evidence in simple words? ›
02 Audit evidence is all the information, whether obtained from audit procedures or other sources, that is used by the auditor in arriving at the conclusions on which the auditor's opinion is based.
What are the five characteristics of auditing? ›
The basic principles of auditing are confidentiality, integrity, objectivity, independence, skills and competence, work performed by others, documentation, planning, audit evidence, accounting system and internal control, and audit reporting.
What are the characteristics of audit report? ›
A good audit report conveys a clear message to the reader, whether that's an unqualified opinion or a list of expenditures that can be eliminated. Audit reports should be brief and to the point. Simplicity and specificity go the distance in business writing.
What is the most common characteristic of an auditor? ›
Here are the six most common traits:
- Understand the Business Risk. Understanding the business risk is how you determine what the audit risk is. ...
- Be Very Inquisitive. ...
- Be a Good Listener. ...
- Have In-Depth Knowledge of Generally Accepted Audit Standards. ...
- Be a Natural Skeptic. ...
- Learn the Tools of the Trade.
Audit evidence is the information or documentation that auditors gather and evaluate during the audit process to form an opinion about the fairness of the financial statements or the effectiveness of internal controls in an organization. This evidence serves as the foundation for the auditor's conclusions and opinions.
What is the nature of evidence in auditing? ›
The nature of audit evidence refers to the form of the evidence you're looking at during the audit. It should include all accounting documents and may include other available information, such as the minutes of the board of directors meetings.
What does audit evidence depend on? ›
Reliability of audit evidence depends on its source and nature of such evidence. Source: Audit evidence obtained within the enterprise is known as the internal source. Evidence obtained from an outside enterprise like confirmation from the third party is known as the external source.
What are evidence characteristics? ›
Good evidence is representative of what is, not just an isolated case, and it is information upon which an institution can take action to improve. It is, in short, relevant, verifiable, representative, and actionable.
What are the 6 characteristics of good evidence? ›
According to Linda Dyer, there are six aspects to good evidence: accuracy, precision, sufficiency, representativeness, authority and clarity of expression.
What are examples of evidence? ›
Examples as evidence
- quotes from a literary text.
- quotes from primary sources.
- quotes from websites, blogs or forums.
- images, paintings or photographs.
- charts, graphs or statistics.
- quotes or summaries from the media, like news articles, films, or documentaries.
- a personal experience.
Audit procedures, tests, and techniques are often said to be forms or types of audit evidence. One widely used audit text lists physical examination, confirmation, documentation, analytical procedures, inquiries, recalculation, re-performance, and observation as types of audit evidence.
What are the three types of audit evidence? ›
There are eight different types of audit evidence. They are physical examinations, confirmations, documentation, analytical procedures, observations, inquiries, reperformance, and recalculation.
What are the 7 ways to gather audit evidence? ›
Obtaining Evidence
- Inspection;
- Observation;
- Confirmation;
- Recalculation;
- Reperformance;
- Analytical procedures; and.
- Inquiry.
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).
