Definition
Audit evidence refers to the information gathered and used by auditors in forming and supporting their audit opinion regarding an entity’s financial statements. This evidence is collected from numerous sources associated with the accounting records, inherent documentation, tangible assets, and interactions with management, employees, customers, suppliers, and other third parties. The methods of obtaining audit evidence include:
- Compliance Tests (Tests of Controls): These tests are conducted to evaluate the effectiveness of a company’s internal controls.
- Substantive Tests: These focus on the details of financial transactions and account balances as well as patterns and variances by employing analytical review techniques.
The primary techniques for gathering audit evidence include:
- Inspection
- Observation
- Enquiry
- Analysis
- Computer-Assisted Audit Techniques (CAATs)
Each of these methods contributes to providing a comprehensive basis for the audit opinion.
Examples
- Inspection: Reviewing invoices and contracts to verify their accuracy and compliance.
- Observation: Watching a process or procedure being performed by the company personnel to ensure it is operating as described.
- Enquiry: Making formal inquiries from management and employees to obtain additional insights into a specific transaction or process.
- Confirmation: Obtaining a third-party confirmation of a company’s account receivables from its customers.
- Recalculation: Verifying the mathematical accuracy of accounts or transactions to check for any errors or inconsistencies.
Frequently Asked Questions (FAQs)
What are some common sources of audit evidence?
Common sources include the company’s accounting systems, underlying documentation, tangible assets, management, employees, customers, suppliers, and third parties with knowledge of the company.
What are compliance tests?
Compliance tests, or tests of controls, evaluate the effectiveness of an entity’s internal controls to ensure that they are working as intended.
How do substantive tests differ from compliance tests?
Substantive tests focus more on the veracity of details in financial transactions and account balances, unlike compliance tests that evaluate the internal controls.
What is the purpose of using analytical review techniques?
Analytical review techniques are used to identify any unusual variances or relationships within the financial data that might indicate error or fraud.
What is meant by Computer-Assisted Audit Techniques (CAATs)?
CAATs involve using specialized software to perform audit procedures more efficiently, allowing for detailed and extensive data analysis that might be infeasible manually.
Related Terms
- Audit Opinion: The judgment of an auditor regarding the accuracy and fairness of the financial statements.
- Financial Statements: Formal records of the financial activities and position of a business, entity, or individual.
- Compliance Tests: Procedures to test the effectiveness of a company’s internal controls.
- Substantive Tests: Audit procedures that verify the accuracy of accounts and transactional details.
- Analytical Review: Analysis of financial information to identify patterns, trends, or anomalies.
- Computer-Assisted Audit Techniques (CAATs): Use of software tools in performing audit procedures.
Online Resources
- Investopedia: Audit Evidence
- AICPA: Audit Procedures
- IFAC: International Standards on Auditing (ISA)
Suggested Books for Further Study
- “Principles of Auditing and Other Assurance Services” by Raymond N. Johnson and Laura Davis Wiley - A comprehensive guide to the principles and procedures involved in auditing.
- “Auditing and Assurance Services: An Integrated Approach” by Alvin A. Arens, Randal J. Elder, and Mark S. Beasley - An integrated approach to understanding auditing concepts.
- “Audit and Assurance Essentials: For Professional Accountancy Exams” by Katharine Bagshaw - A focused guide for individuals preparing for accountancy exams.
Accounting Basics: Audit Evidence Fundamentals Quiz
### What is the primary purpose of audit evidence?
- [ ] To help the management make better decisions.
- [x] To support the auditor's opinion on the financial statements.
- [ ] To improve the company’s financial performance.
- [ ] To attract new investors.
> **Explanation:** The primary purpose of audit evidence is to support the auditor's opinion on the financial statements, ensuring their accuracy and reliability.
### Which of the following is an example of a compliance test?
- [x] Testing the effectiveness of internal controls.
- [ ] Examining financial transactions for accuracy.
- [ ] Analyzing variance in account balances.
- [ ] Observing inventory procedures.
> **Explanation:** Compliance tests are designed to evaluate the effectiveness of a company's internal controls, ensuring they are functioning correctly.
### What technique involves recalculating invoice totals to verify accuracy?
- [ ] Inspection
- [ ] Observation
- [ ] Enquiry
- [x] Recalculation
> **Explanation:** Recalculation involves verifying the mathematical accuracy of accounts or transactions, checking for any errors or inconsistencies.
### Why might an auditor use Computer-Assisted Audit Techniques (CAATs)?
- [ ] To replace human auditors entirely.
- [x] To perform audit procedures more efficiently and analyze extensive data.
- [ ] To eliminate the need for substantive tests.
- [ ] To ensure complete compliance with financial regulations.
> **Explanation:** CAATs are used to enhance the efficiency of audit procedures, allowing detailed analysis of large volumes of data.
### What is obtained by means of substantive tests?
- [ ] Evaluation of internal controls.
- [ ] Identification of misstatements in financial records.
- [x] Verification of transaction and account details.
- [ ] Compliance with regulatory standards.
> **Explanation:** Substantive tests involve examining transaction and account details to verify their accuracy and detect misstatements.
### Which of these is the most reliable source of audit evidence?
- [ ] Information from employees.
- [x] Third-party confirmations.
- [ ] Inquiry with management.
- [ ] Company’s internal accounting records.
> **Explanation:** Third-party confirmations are often considered the most reliable source of audit evidence as they come from impartial and independent sources.
### What is the role of analytical review in audit evidence gathering?
- [x] To identify unusual variances and relationships within financial data.
- [ ] To observe internal procedures.
- [ ] To inspect financial documents.
- [ ] To make inquiries from the management.
> **Explanation:** Analytical review techniques are used for identifying unusual patterns, variances, or relationships in financial data that may indicate errors or fraud.
### What is a key feature of compliance tests?
- [ ] They review the entire financial statements.
- [x] They evaluate the effectiveness of internal controls.
- [ ] They validate the accuracy of specific transactions.
- [ ] They involve third-party confirmations.
> **Explanation:** Compliance tests are focused on evaluating the effectiveness and reliability of a company's internal controls.
### Which technique involves obtaining insights through questioning?
- [ ] Analysis
- [ ] Observation
- [x] Enquiry
- [ ] Inspection
> **Explanation:** Enquiry involves making formal inquiries to obtain additional insights into transactions or processes, usually by questioning knowledgeable parties.
### What ensures that audit evidence is reliable and accurate?
- [ ] Sole reliance on internal data.
- [ ] Ignoring management’s explanations.
- [x] Using diverse sources and methods for gathering evidence.
- [ ] Relying mainly on compliance tests.
> **Explanation:** Audit evidence is more reliable and accurate when it is gathered from diverse sources and through various methods, providing a comprehensive and well-rounded basis for forming an audit opinion.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
