I.THE CONCEPT OF AUDIT EVIDENCE
Audit evidence can be defined in simple terms as any piece of information which assists the auditor to reach conclusion on the truth and fairness of the financial statements.
Audit evidence might therefore include such items as:
- Documents such as purchase orders, invoices, receipts, employee time sheets, customer orders, letters, bank statements, contracts and other legal documents.
- Entries in accounting records
- Answers from management to questions raised by the auditor
- Information from external parties who enter into transactions with the company, such as customers and suppliers, the bank, solicitors, government agencies (the tax authorities)
- Computations produced by the client or by the auditor himself, for example, depreciation calculations, computations of accruals and prepayments.
- Information gained from the auditor’s observations. An example would be the auditor attending and observing the client’s inventory count.
II.THE CHARACTERISTICS OF GOOD AUDIT EVIDENCE
Audit Evidence requires that auditors obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.
Sufficient relates to the quantity of evidence.
Appropriate relates to the quality or reliability and relevance of evidence.
Key questions for the auditor to consider therefore will be:
- Do I have enough evidence to reach a conclusion on this audit area?
- Is the evidence that I have reliable enough to allow me to reach a conclusion on this area of the audit?
III.THE CHARACTERISTICS OF GOOD AUDIT EVIDENCE
Quantity of audit evidence
The quantity of audit evidence required is affected by the level of risk in the area being audited. It is also affected by the quality of evidence obtained. If the evidence is high quality, the auditor may need less than if it were poor quality.
The auditor’s judgement as to what amounts to sufficient appropriate evidence is influenced by such factors as:
- The assessment of audit risk involved
- The nature of accounting and internal control system
- The materiality of the item
- The auditor’s knowledge and experience of the business
- The findings of audit procedures. If the audit procedures indicate problems, additional evidence will need.
- The source and reliability of the information
- Size of the organisation-a small company is less likely to have as tight controls are a large organisation.
Quality of Evidence
In assessing the reliability of audit evidence, the auditor can be guided by the following general principles:
- Evidence provided by original documents is more reliable than using photocopies or faxes of documents. When using documents as a source of audit evidence, the auditor should always try to use original documents rather than photocopies or faxes of documents.
- Written evidence is more reliable than verbal evidence.
- Evidence is more reliable when it is obtained from independent source outside the entity.
- Evidence that is generated internally is more reliable when the related controls imposed by the entity are effective.
- Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly or by inference.
Please note
Audit procedures are carried out by the auditor in order to generate audit evidence.
Practical Question
Assume that ABC Company has the following expenses:
| Expenses/Revenue | Amount ($) |
| Salary expense | 60,000 |
| Electricity expense | 700 |
| Advertising expense | 10,000 |
| Material expense | 40,000 |
| Revenue | 200,000 |
Required
Please list possible audit evidences we may collect for transactions above.
Answer
1.Audit Evidence for Salary Expense:
- Employee time sheet
- Payslip , bank check
- Employee contract
- Employee list
- Inspect/count No. of employee
- Salary calculation ( basic salary, OT, tax on salary)
2.Audit Evidence for Electricity Expense:
- invoice from supplier
- Inspect KW
3.Audit Evidence for Advertising Expense:
- invoice from supplier
- Contract with supplier
- Advertising time etc
4.Audit Evidence for Material Expense:
- invoice from supplier
- Delivery note
- Goods received note
- Contract etc
5.Audit Evidence for Revenue:
- Our invoice
- Delivery note
- Contract with customer
- Bank statement etc.
Source :
1.BPP University, F8 and FAU
2.Kaplan, Inc., F8 and FAU