The type of audit evidence which the auditor should consider using in IT audit includes

Do you understand how auditors verify account balances and transactions? This knowledge can minimize disruptions when the audit team visits your facilities and maximize the effectiveness of your audit. Here’s a list of five common sources of “substantive evidence” that auditors gather to help them form an opinion regarding your financial statements.

1. Confirmation letters. Auditors send letters to third parties, such as customers or vendors, asking them to verify amounts recorded in the company’s books. There are two types of confirmations: A positive confirmation requests that the recipient complete a form confirming account balances (for example, how much a customer owes the company). A negative confirmation requests that the recipient respond only if the balance is inaccurate.

2. Original source documents. Auditors can verify an account balance or record by vouching (or comparing) it to third-party documentation. For example, an auditor might verify the existence of a vehicle on your fixed asset list by reviewing the invoice from the seller. Vouching enables an auditor to evaluate the accuracy of the amount claimed by the company and whether the company recorded the transaction correctly in its accounting system.

3. Physical observations. Seeing is believing. So, auditors sometimes verify the existence of assets through physical observations and inspections. For example, inventory audit procedures typically include observing or conducting a physical inventory count, inspecting the process to record incoming and outgoing inventory, and analyzing the inventory obsolescence process.

4. Comparisons to external market data. For assets actively traded on the open market, auditors may confirm the amounts claimed on the company’s financial statements by researching pricing data. For example, if the company invests in marketable securities that it plans to sell within one year, an auditor could analyze the prevailing market price to confirm their book value. Likewise, a random sample of parts inventory could be compared to online pricing sheets to confirm that items are reported at the lower of cost or market value.

5. Recalculations. Auditors may verify in-house schedules and records by re-creating them. If the auditor’s work matches the client’s work, it confirms that the underlying accounts appear reasonable. Auditors often rely on this procedure for such items as bank reconciliations and schedules of payroll-related expenses (for example, overtime, benefits and tax payments).

Let’s work together

An effective audit requires coordination between auditors and their clients. Before audit season starts, let’s discuss the types of substantive evidence we expect to gather for each major financial statement category. We can help you anticipate document requests and inquiries, thereby facilitating audit fieldwork.

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What Is Auditing Evidence?

Auditing evidence is the information collected for review of a company's financial transactions, internal control practices, and other items necessary for the certification of financial statements by an auditor or certified public accountant (CPA). The amount and type of auditing evidence considered vary considerably based on the type of firm being audited as well as the required scope of the audit.

Key Takeaways

• Auditing evidence is the information collected by an auditor to ascertain the accuracy and compliance of a company's financial statements.
• The auditing evidence is meant to support the company's claims made in the financial statements and their adherence to the accounting laws of their legal jurisdiction.
• Examples of auditing evidence include bank accounts, management accounts, payrolls, bank statements, invoices, and receipts.
• Good auditing evidence should be sufficient, reliable, provided from an appropriate source, and relevant to the audit at hand.

Understanding Auditing Evidence

The goal of any audit is to determine whether a company's financial statements comply with generally accepted accounting principles (GAAP), international financial reporting standards (IFRS), or another set of accounting standards applicable to an entity's jurisdiction. Publicly traded companies are generally required to present fully audited financial statements to shareholders periodically, and thus the compilation and organization of auditing evidence are essential for auditors and accountants to do their work. In short, auditing evidence is meant to provide auditors with the information for them to make the judgment on whether or not financial statements are accurate and true.

Auditing evidence is defined as a term to protect investors by promoting transparent, accurate, and independent audit reports. The Public Company Accounting Oversight Board (PCAOB), created by the Sarbanes-Oxley Act of 2002, defines auditing evidence as all the information that can be used by auditors to make their decision on the quality and accuracy of a company's financial statements. The auditing evidence supports and verifies the final information provided by management in the financial statements. It can also contradict it if there are errors or fraud.

Examples of auditing evidence include bank accounts, management accounts, payrolls, bank statements, invoices, and receipts.

Characteristics of Auditing Evidence

Good auditing evidence can be measured by the extent of the following characteristics:

Sufficiency: Sufficiency takes into account whether or not the material provided is of an adequate quantity that would allow auditors to make an accurate judgment. If an auditor was given just one bank statement of a company, it would not be enough to make any determinations on the financial standing of that company.

Reliability: Reliability seeks to determine whether or not the material can be trusted and counted on for forming an opinion. Reliability typically factors from the source of the information.

Source: The source of accounting evidence can be obtained directly from the company or externally. Externally sourced information is generally regarded as more trustworthy and is therefore preferred.

Nature: Nature refers to the type of information that is received. For example, the information can be provided through legal documents, presentations, orally from employees, or through a physical confirmation.

Relevance: Depending on the type of audit being conducted, how pertinent the information received in its relation to the overall analysis is a guiding factor.

In general, auditors prefer information that is written as opposed to provided orally; information that is from a third-party source as opposed from inside the company; original documents as opposed to copies of those documents; a strong understanding of the firm by the auditor to request appropriate auditing evidence; firsthand observations by the auditor as opposed to documentation provided via another source.

Example of Auditing Evidence

Company ABC has enlisted the auditing services of the accounting firm, Anderson Brothers, to have their financial statements from the fiscal year 2020 audited. The auditor begins working on the audit and requests information regarding reported revenues and bank balances. To obtain accurate and reliable information, regarding revenues, the auditor requests sales receipts and invoices and a physical examination of inventory. Regarding bank balances, the auditor requests all of the bank statements of the company directly from ABC's bank. All of this information; the receipts, invoices, physical observations, and bank statements are regarded as auditing evidence.

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