Audit evidence is important because it is all the information that an auditor gathers to reach his audit opinion about an organization’s financial statements and/or internal control environment.
Audit evidence is critical to the audit and internal controls process because it allows executives of public companies to trust the opinions of their auditors. There are a number of laws and regulations that make it clear that the executives of public companies, not the auditors, are responsible for establishing and maintaining internal control over financial reporting and assessing the effectiveness of those internal controls.
In addition, stakeholders interested in a particular business, including banks and investors, rely on this audit opinion to make their business or investment decisions regarding the organization.
These stakeholders trust the auditor’s opinion because they count on the fact that the auditor has given his assurance only after performing quality work. Because stakeholders rely on the auditor’s work, it’s critical that the auditor base his financial statement opinions on strong audit evidence.
Audit evidence can be divided into internal and external sources. Internal sources of audit evidence include a company’s documented processes, policy documents, accounting records, invoices, system logs, and reports. External sources of audit evidence can include information from banks, debtors, suppliers, stock exchanges, and the Internal Revenue Service.
An auditor has to collect all the possible audit evidence to establish the truthfulness of the system to record these transactions. An auditor can verify the financial information on the financial statements by reviewing the financial information from the various data sources, including inventory reports, available receipts, and payments to suppliers.
Auditors use a number of audit procedures to obtain audit evidence and they frequently use a combination of audit procedures. These include observation, inspection, confirmation, recalculation, reperformance, and analytical procedures, along with asking questions.
Using data analytics can improve the quality of a financial statement audit by enabling auditors to discover and analyze patterns, deviations, and inconsistencies. Data analytics can also enable the auditors to obtain other helpful information in the data that underlies or is related to the subject matter of an audit.
Analytical procedures are a type of audit evidence used during an audit that can indicate potential issues with an organization’s financial records, which the auditors can then investigate more completely. Auditors use analytical procedures to evaluate financial information by analyzing plausible relationships among financial information and nonfinancial information.
In most instances, these relationships should remain consistent over time. If that’s not the case, the client’s financial records could be incorrect, maybe because of errors or fraudulent financial reporting activity.
Two qualities of audit evidence that are related are sufficiency and the appropriateness of audit evidence. The sufficiency of audit evidence is the amount or quantity of audit evidence. The risks of misstatement the auditor assess to determine the quantity of audit evidence that the auditor needs.
The higher the risks, the more audit evidence the auditor requires. But the higher the quality of the audit evidence, the less evidence the auditor may need. However, a large amount of audit evidence will likely not make up for the poor quality of the audit evidence.
Appropriateness is the measure of the quality of the audit evidence, i.e., the reliability and relevance of the audit evidence. To be appropriate, the audit evidence must be reliable and relevant to support the conclusions that the auditor uses to form the basis of his audit opinion.
The audit evidence should also be sufficient and appropriate to support and corroborate, or contradict if necessary, the assertions of the executives as they pertain to specific transaction classes, account balances, or financial statement disclosures.