Audit evidence

Definition

Audit evidence refers to the information collected by auditors to support their opinion on the financial statements of an entity. This evidence can come from various sources and helps ensure that the financial statements are free from material misstatement. It plays a crucial role in substantive testing procedures, where auditors evaluate the accuracy and completeness of financial information by obtaining reliable data.

5 Must Know Facts For Your Next Test

1. Audit evidence can be classified as either persuasive or conclusive, depending on its strength in supporting an auditor's conclusions.
2. Types of audit evidence include physical inspection, observation, inquiries, confirmations, and analytical procedures.
3. The reliability of audit evidence is influenced by its source, whether internal or external, and the circumstances under which it was obtained.
4. Auditors must gather sufficient appropriate audit evidence to provide a reasonable basis for their opinion on the financial statements.
5. Documentation of audit evidence is essential, as it serves as a record that supports the auditor's findings and conclusions.

Review Questions

• How does audit evidence contribute to the reliability of financial statements during substantive testing?
  • Audit evidence is vital during substantive testing because it allows auditors to verify the accuracy and completeness of financial statements. By collecting sufficient and appropriate evidence, auditors can form a reliable opinion on whether the statements are free from material misstatement. This process involves evaluating various types of evidence, such as confirmations and analytical procedures, ensuring that the information presented is trustworthy for users.
• Discuss the relationship between internal controls and audit evidence in the context of obtaining sufficient evidence for an audit.
  • Internal controls play a significant role in determining the quality of audit evidence. Strong internal controls reduce the risk of material misstatements and enhance the reliability of the data collected by auditors. When internal controls are effective, auditors may rely more on them when gathering evidence, potentially reducing the extent of substantive testing required. Conversely, weak internal controls may necessitate a greater volume of direct audit procedures to obtain sufficient evidence.
• Evaluate the impact of materiality on the collection and assessment of audit evidence during an audit.
  • Materiality significantly influences how auditors collect and assess audit evidence because it determines what is considered relevant for an accurate opinion on financial statements. Auditors must focus their efforts on areas where misstatements could affect users' decisions. By establishing materiality thresholds, auditors prioritize their work to gather evidence that impacts significant account balances or transactions. This approach ensures that resources are allocated effectively while providing a meaningful assessment of financial integrity.

Related terms

substantive testing: Substantive testing is a method used by auditors to detect material misstatements in financial statements through direct verification of transactions and balances.

internal controls: Internal controls are processes put in place by an organization to ensure the integrity of financial and accounting information, promoting accountability and preventing fraud.

materiality: Materiality refers to the significance of an omission or misstatement of financial information that could influence the economic decisions of users based on those financial statements.