What is Audit Evidence?
Recall that the auditor’s role is to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base their audit opinion. The auditor needs to obtain evidence to support each assertion that management is proposing.
What exactly constitutes evidence? Audit Evidence refers to the source documents and accounting records (i.e., ledgers, journals) that support the financial statements and all other information that is pertinent to the audit. In deciding how to collect this evidence, an auditor must plan three important factors: the nature, extent, and timing of the audit evidence.
Nature, Extent, and Timing of Evidence
|Nature||Which audit procedure to use? An audit procedure is a detailed instruction for the collection of particular audit evidence.||Confirm the accounts receivable balance with the customer or check accounts receivable collections after year end|
|Extent||a) Sample size|
b) Which items to select from the population?
|An accounts receivable balanced over a threshold such as $10,000 may be labeled as one with “high-value” that will be tested. Other non high-value items will be selected from a population|
|Timing||When to perform the particular audit procedure and NOT how long it takes to do?||At year end or interim phase. For example, an inventory count observation at December 31 or October 31?|
Once the nature, extent, and timing of the audit procedures are decided, the auditor can assemble a full-scale audit program. An audit program is a list of detailed audit procedures for each area or cycle, that specify the audit procedures to be performed. Audit programs must address each relevant assertion and are only complete when they’ve addressed all important assertions. For example, consider the following audit program for accounts receivable:
|Sample Size||Items to Select||Timing||Audit Procedure||Assertion|
|80 customers||30 largest, 50 randomly||Interim phase (before year-end)||Confirm accounts receivable directly with the customer||Existence, Rights, Valuation|
|30 items||20 oldest, 10 random||Interim phase||Obtain an aged listing of receivable and trace items to general ledger||Existence|
|All||All||Year-end||Obtain an analysis of the allowance for doubtful accounts and assess reasonableness||Valuation|
|All||All||Year-end||Review board of directors’ minutes to determine if any accounts have been assigned or discounted||Rights|
The audit program shown is very detailed in designing the nature, timing, and extent of audit procedures, however, it is not complete because it does not address the four relevant assertions to accounts receivable. Remember that balance sheet accounts have 4 relevant assertions. The one missing in this example is completeness. Therefore, the step by step methodology of developing an audit program is as follows:
- Auditor determines which management assertions are applicable. For account balances, the applicable assertions are existence, rights, valuation, and completeness. For the class of transactions, the applicable assertions are occurrence, completeness, accuracy, cut-off, and classification.
- From there, the nature, extent, and timing of the audit procedures are designed and indicated for each assertion.
- The audit program is carried out in order to determine any material misstatements.
Remember that an auditor is not an absolute guarantor. In fact, in the auditor’s report, the auditor will use phrases such as “reasonable assurance” or “audit evidence we have obtained is sufficient and appropriate to provide a basis of our audit opinion.” Hence, normally an auditor will rely more on audit evidence that is persuasive rather than on evidence that is 100% conclusive. The sufficiency of evidence relates to the quantity, and the appropriateness of evidence relates to the quality of the evidence.
|Sufficient (Quantity)||Appropriate (Quality)|
|How much evidence is enough?||Relates to relevance and reliability|
|Judgment is involved and factors impacting the sample size include the auditor’s expectation of errors, and the effectiveness of client’s internal controls||Relevance – The audit evidence assists the auditor in achieving the management assertion|
|Larger sample size means more audit work and higher costs||Reliability – Depends on the nature (documentary, visual, oral) and source (auditor, third party, and client) of the audit evidence|
This has been CFI’s explanation of audit evidence. Explore these additional CFI resources on your mission to become a certified financial analyst.