Appropriate evidence

Definition

Appropriate evidence refers to the relevant and reliable information that auditors gather to support their findings and opinions about an entity's financial statements. This evidence is crucial in forming audit opinions, as it helps ensure that the conclusions drawn by auditors are based on sufficient and suitable data, which increases the credibility of the financial statements.

5 Must Know Facts For Your Next Test

1. The quality of appropriate evidence is more important than quantity; auditors must ensure the evidence is reliable and relevant to the assertions being tested.
2. Different types of evidence have varying degrees of reliability; for example, physical inspection of assets is generally considered more reliable than oral confirmations from management.
3. Appropriate evidence must be gathered throughout the audit process, from planning stages to final evaluations, ensuring ongoing support for audit conclusions.
4. The sufficiency of appropriate evidence refers to the quantity required to provide a reasonable basis for an audit opinion; this varies based on the risk assessment of the entity being audited.
5. Auditors often use a combination of tests and evidence types to form a well-rounded view of the financial statements, relying on both substantive procedures and control testing.

Review Questions

• How does appropriate evidence contribute to the reliability of an auditor's opinion on financial statements?
  • Appropriate evidence plays a critical role in establishing the reliability of an auditor's opinion by providing a solid foundation upon which conclusions are made. The auditor collects relevant and reliable information that supports their assessments regarding the accuracy and fairness of financial statements. By ensuring that the gathered evidence is sufficient in both quality and quantity, auditors can confidently issue opinions that stakeholders can trust.
• Discuss the relationship between professional skepticism and the collection of appropriate evidence during an audit.
  • Professional skepticism is essential when collecting appropriate evidence because it prompts auditors to critically evaluate the information presented by management. This attitude encourages auditors to seek corroborating evidence and challenge assumptions made by management, ultimately enhancing the reliability of the audit findings. By maintaining professional skepticism, auditors can ensure that they gather sufficient appropriate evidence that supports their conclusions rather than simply accepting information at face value.
• Evaluate how different types of audit evidence can impact the auditor's conclusion about financial statements and their implications for stakeholders.
  • Different types of audit evidence can significantly influence an auditor's conclusion about financial statements, affecting both the quality of the audit opinion and stakeholder trust. For example, more reliable evidence such as direct observation or third-party confirmations enhances confidence in the auditor's findings. Conversely, if the auditor relies heavily on less reliable sources like management representations without seeking additional corroborating evidence, it could lead to incorrect conclusions. The implications for stakeholders are substantial; an inaccurate opinion can mislead investors, creditors, and other parties relying on those financial statements for decision-making.

Related terms

Audit Evidence: The information collected by auditors to evaluate the fairness and accuracy of financial statements, which may include documents, confirmations, observations, and analytical procedures.

Substantive Procedures: Auditing procedures designed to detect material misstatements in financial statements, involving detailed testing of transactions and balances to obtain appropriate evidence.

Professional Skepticism: An attitude that includes a questioning mind and a critical assessment of audit evidence, encouraging auditors to remain alert to conditions that may indicate possible misstatement.