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. Audit evidence consists of both information that supports and corroborates management’s assertions regarding the financial statements or internal control over financial reporting and information that contradicts such assertions.
Audit evidence must be sufficient and appropriate. Sufficiency signifies the quantity and appropriateness refers to quality of the evidence. In other words sufficiency is decided by the risk associated with the control system and appropriateness is judged by the relevance and reliability of the evidence.
Audit evidence are aimed to prove or disprove the audit assertions made in the financial statements. Various elements (Assets, Liability, Income and Expenditure) of Financial Statements signify following assertions in respect of them, which are :-
1. Existence : the existence verifies that asset, liability and equity exist in the same manner as they are specified by the financial statements. For Example, if balance sheet is showing Inventory @ Rs. 15,00,000 then there is first and foremost assertion in that respect is – Inventory of Rs. 15,00,000 exist.
2. Occurrence : It determines transaction recorded in financial statements have actually taken place. Example : if Financial Statements shows a sale of Rs. 50,00,000 then this assertion specify that transactions of Sales of Rs. 50,00,000 has actually occurred.
3. Accuracy : This is assertion as to the recording of correct amount in the financial statements. Example : Customer account is looked and checked with an intention to find that all transaction in his account including payments are recoded correctly and Account is showing accurate balance.
4. Completeness : This assertion depicts that all the transactions occurred during the financial period are completely recorded. Example : if it has to be established that all salaries and wages arises during the period are recoded completely. For the said purpose Payroll records, Payroll Journal and Active Employee List are to be referred.
5. Valuation : This assertion signify that all elements of financial statements are truly valued and presented. Example : Receivable must be shown at their realizable value. If any receivable is being shown without allowing probable allowance of Bad Debts then certainly receivables are not perfectly valued.
6. Rights and Obligation : This assertion speaks about the ownership of Asset, Liability and Equity of the business. It signify that Assets are rights of the business and Liabilities are the obligation of the business. Example : if Expenditure incurred by the business belongs to business and not owners.
7. Classification : This assertion says that Statements are presented in acceptable format, include all necessary information and easy to understand. Example : Interest payable and account payable must be shown separately as per the approved format of balance sheet.
8. Cut Off : This assertion determines whether the transactions recorded have been recorded in appropriate accounting period. Example : Prior Period, Outstanding and Prepaid are to be recorded.
Different authors and scholars have classified Audit Evidences in their own way,. Professor Jim Crockett have also specified different Types of Audit Evidences as follows :-
1. Physical Evidence: He says such evidence are evidences produced by Auditors’ senses i.e. Evidence obtained from seeing, Touching, Hearing, Smelling or Tasting. Audit evidences is anything that causes an Auditor to get closer to knowing that assertions are true. For some assets it is very important audit evidence Like Stock and Fixed Assets. Through this evidence qualitative assurance as to stock is also obtained.
2. Arithmetical Evidence: Such evidence are produced by the auditors by performance of Arithmetical Calculations. Auditors normally computes how the value of inventory arrived and how gratuity and pension liabilities are recognized in balance sheet. The first step in this direction is to make sure that data and assumptions used by the preparer are appropriate, secondly auditor themselves calculates the value of financial statement items from the data and Lastly they compare those figures with the figures of balance sheet. Example : in a contractual liability plaintiff may value at Rs. 4.00 crore and defendant may value at 350 crores. In such cases auditors should find sufficient appropriate audit evidence and value that liability at a reasonable level.
3. Analytical Evidence : Analytical evidence is based on postulate “ In the absence of clear evidence to the contrary, what has held true in the past for the enterprise under examination will hold true in the future.” Example : If business has expended Rs. 15000, 17000 and 14000 for Audit in last three years than it is expected to be reasonable if it expends around Rs. 15000 in the current year. Analytical evidence themselves has only persuasive vale and not conclusive value. The analytical evidence simply signify that figures appearing does not seems to be reasonable and therefore substantial evidence is needed for acceptance or rejection of audit assertion in respect of those elements of financial statements.
In our example if audit expense during the current year are shown as Rs. 14,500 then auditor can be satisfied with the less or less weighty evidence.
4. Testimonial Evidence : Auditor converse with people and secure answers to their query and from them auditor draw conclusions. Such oral evidences are lest weighty type of audit evidence, it normally needs to be corroborated by one or more other type of audit evidences. The success of Oral evidence depends on “ asking right question to the right person in proper language (Tone)”. What has to be asked ? requires home work and plan on the part of auditor. Right person is one who is reliable, honest and who has by virtue of his position has knowledge and authority to answer the question. Right language depends how words and phrases are understood commercially.
5. Documentary Evidence: Documentary evidences are developed by the auditors as they examine documents. One main source documentary evidence is the entity’s accounting accounting information system. Some time reports generated by Management Information system also plays a crucial role while conducting audit. There can be 4 type of documentary evidences, which have various level of quality :
Documents that are produced and retained by the entity: Such type of evidences are subject to various Internal Controls laid within the organization. Their value and weight that can be assigned to these documents depends on the quality of Internal control system prevailing in the organization to which these documents are subject. The better the design and functioning of the control system the higher the quality of the documentary evidence it produces. Example are Vouchers, Payroll, Purchase requisitions, Purchase orders placed by the entity and various reports generated for use of management. These type of evidences can be easily manipulated.
Documents produced by the entity and circulated outside the entity, returned back to the entity and form part of record : These documents may have marking of the external party indicating their agreement with what is recorded on the documents. Marking by external party is called “Cleansing”. It is somewhat difficult to fabricate such evidences. The classic example of such documents is Dishonored Cheques.
Documents produced by the external party and retained into the entity’s system: These documents considered to be of a higher quality, here it is to be understood that these documents are also subject to entity’s control system once they enter the system. Here also the value and weight is substantially affected by the organization’s laid internal control system. Example of such evidences are Purchase Order received from external entities, Invoices etc.
Documents produced by the third party directly to the Auditor: Such type of audit evidences never enters the system of the Auditee. Such type of documents have highest vale and weight. Superiority of such documents is due to reliability and integrity associated with them. Example of such evidences are Receivable confirmation and Bank Balance confirmation.
Documenting Oral Audit evidence: Questionnaire, Flow charts, Representation and electronic records are some of the ways how oral evidences can be documented. Electronic records may not be retrievable after a certain period of time it the information is not backed up.
Last but not the least documentation of Audit Plan, Procedure and Work Progress report are also comes with in this category.
Audit Evidence Vs. Audit Procedures
In Audit literature Audit Procedures/ Tests/ Techniques are normally misunderstood as Audit Evidences.
Audit techniques (Procedure & Tests) are normally employed to produce Evidences and are not evidence it self. On the other hand Audit evidence is some thing which influence auditor’s mind in respect of assertions. Audit procedure and test are done with an intention to produce the influence over views of the auditor.
Most common texts perceive Physical Examination, Confirmation, Documentation, Analytical Procedure, Inquires, recalculation, re-performance and observation as audit evidence. Actually these are techniques to generate audit evidence.
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