The purpose of an audit procedure determines whether it is a risk assessment procedure, test of controls, or substantive procedure. Auditors can verify an account balance or record by vouching it to third-party documentation. For example, an auditor might verify the existence of a vehicle on your fixed asset list by reviewing the invoice from the seller. Vouching enables an auditor to evaluate the accuracy of the amount claimed by the company and whether the company recorded the transaction correctly in its accounting system.
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. Reperformance involves the auditor’s independent execution of procedures or controls originally performed as part of the entity’s internal control. For assets actively traded on the open market, auditors may confirm the amounts claimed on the company’s financial statements by researching pricing data. For example, if the company invests in marketable securities that it plans to sell within one year, an auditor could analyze the prevailing market price to confirm their book value. Likewise, a random sample of parts inventory could be compared to online pricing sheets to confirm that items are reported at the lower of cost or market value. So, auditors sometimes verify the existence of assets through physical observations and inspections.
Example of audit evidence
This means an inventory observation on December 31 demonstrates the amount of inventory the company has on that date. Inspection occurs when the auditor check’s the clients records for important evidence. These records can be from the client, or from outside companies giving information about the client. Audit evidence is evidence obtained by auditors during a financial audit and recorded in the audit working papers. SHE Limited owns many shopping arcades in Hong Kong and mainland China, all are used to earn rental income.
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. Audit evidence is important as it enables an auditor to form an audit opinion.
Audit Evidence and Audit Testing
The timing of the audit procedure used to test the assertion or control. 9/ AU sec. 333, Management Representations, establishes requirements regarding written management representations, including confirmation of management responses to oral inquiries. The auditor also might select specific items to obtain an understanding about matters such as the nature of the company or the nature of transactions. Evidence obtained from a knowledgeable source that is independent of the company is more reliable than evidence obtained only from internal company sources.
What are 2 preventative controls?
- Separation of duties.
- Pre-approval of actions and transactions (such as a Travel Authorization)
- Access controls (such as passwords and Gatorlink authentication)
- Physical control over assets (i.e. locks on doors or a safe for cash/checks)
Evaluating responses to inquiries is an integral part of the inquiry process. Inquiry consists of seeking information from knowledgeable persons, both financial and non-financial, within or outside the entity. Disclosures about relationships with the company in the specialist’s report, or equivalent communication, pursuant to requirements promulgated by the specialist’s profession or by legislation or regulation governing the specialist. Existence or occurrence—Assets or liabilities of the company exist at a given date, and recorded transactions have occurred during a given period. Existence or occurrence – Assets or liabilities of the company exist at a given date, and recorded transactions have occurred during a given period. Evaluate whether the information is sufficiently precise and detailed for purposes of the audit. 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.
Characteristics of Auditing Evidence
An external confirmation is a written response obtained directly by the auditor from a third https://online-accounting.net/ party. To be deemed sufficient, it all depends on the level of assurance required.
Audit evidence is considered to be high quality if it is relevant and reliable. For audit evidence to be relevant, it has to pertain to the assertion or the object of the audit test. For audit evidence to be reliable, you have to consider types of audit evidence the nature and source of the evidence. An external confirmation represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party , in paper form, or by electronic or another medium.
This assertion concerning the accuracy of the information disclosed in or noted to the financial statements. Analytical procedures include performing various analyses on the financial statements of the client to identify any trends or discrepancies. Auditors use their own calculations to perform analytical procedures. Similarly, analytical procedures can help obtain an overall view of the changes in the financial year. Physical examination consists of auditors physically verifying the existence of various assets.
Such documents may be marked some way by the external party indicating their agreement with what is recorded on the documents. The marking by the external party is sometimes called “cleansing.” It is difficult for the entity to manipulate this type of document. This type of document may be subjected to the entity’s internal controls before it leaves the entity and when it returns to the entity. Since the information on the retained documents has been attested to by an outside party, the evidence produced by examining such documents is generally considered to be of higher quality than that secured from internal documents. The classic example of such documents is the canceled check (internal/external documents). Through the accounting system, the auditor can obtain all relevant information relating to the financial statements.
The auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal controls. For example, the checking of bank reconciliation prepared by client. An example of inspection used as a test of controls is inspection of records for evidence of authorization. Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or physically examining an asset. Audit evidence so collected must be sufficient and competent and in appropriate quality, only then the auditor will express his opinion.
- Several factors limit the audit evidence that auditors can gather.
- Inspection of items, records, or documents produces either physical evidence or documentary evidence.
- There may be a few more or fewer steps involved based on case to case.
- An effective audit requires coordination between auditors and their clients.
- Asking the right questions requires auditors to do their homework and plann the audit properly.
Audit evidence has undergone significant change with the emergence of Artificial Intelligence, Big Data, and audit data analytics. As the field of accounting is transforming, technologies such as AI are playing a role in audit evidence. AI is enhancing the collection of audit evidence due to the large quantities of data that can be processed with very little error. Audit evidence collection is also being improved through audit data analytics, which also provide the auditor the ability to view the entire population of data, rather than just a sample. Viewing greater amounts of data leads to a more efficient audit and a greater understanding of the audit evidence. Reduce the tests of details where the results of analytical procedures indicate a lower risk of material misstatements.