Audit Evidence Meaning
The Audit Evidence is the information that the auditor of the company collects from the company. It is part of auditing work for reviewing and verifying the company’s different financial transactions, internal control in place, and other requirements to express his opinion on the real and fair view of the financial statements of the company during the period under consideration.
Types of Audit Evidence
#1 – Physical Examination
Physical examination is where the audit inspects the asset physically and counts them whenever required. This evidence is collected wherever possible based on the nature of the audit.
#2 – Documentation
Under the documentation, the auditor collects written documents like purchase invoices, sales invoices, policy documents of the company, etc., which can be internal or external. This evidence is more reliable as there is some proof in writing based on which the auditor is forming his opinion.
#3 – Analytical Procedures
Auditor uses the analytical procedure to derive the required data or to know the correctness of different information. It includes the usage of the comparisons, calculations, and the relationships between the various data by the auditor.
#4 – Confirmations
Many times the auditors require the balances confirmations from the third party to ensure that the clients do not manipulate the balances reflected in the financial statements. This receipt of the written response directly from the third party to verify the accuracy and authenticity of different information required by the auditor.
#5 – Observations
Observation is where the auditor of the company observes the various activities of the clients and their employees before making any conclusion.
#6 – Inquiries
Inquiries are the different questions asked by the auditor of the company to the management or concerned employee of the company in the areas where the auditor has the doubt. The auditor obtains the answers to these questions.
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Example of Audit Evidence
The company Y ltd appoints M/s B as the auditor of the company for auditing the financial statements of the company for the fiscal year 2018-19. The auditor asks for the written confirmation of the balances from the customers as selected by them to ensure that the balances reflected in the financial statements are correct.
The receipt of the written response, directly from the third party, is required to verify the accuracy and authenticity of various information needed by the auditor. It forms the part of the audit evidence of the working of the auditor. In the above case, the auditor asks for the written confirmation of the balances from the customers as selected by them to ensure that the balances reflected in the financial statements are correct. So, these written confirmations are an example of the audit evidence.
Advantages of Audit Evidence
- It helps in ensuring the accuracy and authenticity by the auditor of the information furnished to him by his client.
- It forms the basis on which the auditor of the company expresses his opinion on the financial statements of the company during the period under consideration, i.e., whether the financial statements of the company presents the right and fair picture or not.
Disadvantages of Audit Evidence
- Sometimes the information obtained as the audit evidence, mainly derived from the internal sources, is manipulated by the clients. If the auditors rely on that information, then it would lead to expressing the wrong audit opinion on the financial statements of the company.
- If the size of the data is enormous, then the auditor generally considers the material things only as his sample for verification of the data and not the whole of the data. In case the data having the problem are left out by the auditor in his sample, then it will not present the correct picture of the company.
- The auditor can obtain different types of audit evidence, and it includes Physical Examination, documentation, analytical procedure, observations, confirmations, inquiries, etc.
- The type and amount are dependent on the type of organization that is being audited and the required audit scope.
- It can be obtained from the internal as well as external sources. However, the evidence obtained from the external sources is more reliable than the evidence obtained from the internal sources of the company.
Audit Evidence is the vital information which the auditor appointed by the company collects as the part of its auditing work to express his opinion on the financial statements of the company during the period under consideration, i.e., whether the financial statements of the company presents the right and fair picture or not.
This article has been a guide to what is audit evidence and its meaning. Here we discuss various types of audit evidence along with an example. You can learn more about auditing from the following articles-