what is audit evidence

Auditing evidence is the information collected by an auditor to ascertain the

accuracy and compliance of a company's financial statements.

Nature of Audit Documentation

Audit documentation provides:
(a) evidence of why the auditor believes they achieved their main goals.
(b) evidence that the audit was planned and conducted following SAS and the law.

Explaining this further, audit evidence includes:-

(1)Information contained in the accounting records
(2) Other information that authenticates the accounting records and also supports
the auditor's rationale behind the true and fair presentation of the financial
statements

Sufficiency of Audit Evidence: Sufficiency is the measure of the quantity of audit

evidence.
It depends on two things:
 The risks of errors (higher risks mean more evidence is needed).
 The quality of the evidence (better quality means you might need less).
But remember, having lots of evidence won't help if it's not good quality.

. Auditor's judgment as to sufficiency may be affected by the factors such as:

(i) Materiality
(ii) Risk of material misstatement
(iii) Size and characteristics of the population.
(1) Materiality may be defined as the significance of classes of transactions,
account balances and presentation and disclosures to the users of the financial
statements. Materiality means how important certain parts of financial
statements are to the people who use them. If something isn't very important,
you don't need a lot of proof. But if it's really important, you'll need more proof to
make sure it's right.,
(2) Risk of material misstatement may be defined as the risk that the financial
statements are materially misstated prior to audit. Risk of material misstatement
means the chance that the financial statements are significantly wrong before the
audit. It has two parts:
(a) Inherent risk: How likely it is for something to be wrong in a financial
statement before any controls are considered.
(b) Control risk: The risk that even if something is wrong, the company's internal
controls won't catch and fix it in time.
If the risks are lower, you don't need as much evidence.
Size of a population
Size of a population refers to the number of items included in the population.
Population size means how many things are in a group. If the group is small and
similar, you don't need a lot of evidence. But if it's big and diverse, you'll need
more evidence to be sure.

Appropriateness of Audit Evidence:

Appropriateness is about how good the audit evidence is—how well it fits and
how reliable it is in supporting the auditor's conclusions for their opinion. The
quality of evidence depends on where it comes from and what it is. It also
depends on the specific situation
(a)if it is relevant (b)if it has reliability

What are the sources of Audit evidence?

Physical Observations: Auditors check physical items, like goods in a warehouse

or equipment, by looking at them in person. This is often done during inventory
checks.
Original Source Document: Auditors check if the numbers in the financial
statements match the original documents, like invoices for sales. They make sure
the claims in the statements are backed by proof.
External Data: Sometimes, a company's assets are traded on financial markets.
Auditors need to see if these assets are valued correctly in the financial
statements—either at their actual cost or their current market value.
Recalculations: Auditors go through all the records and transactions used to
create the financial statements. They double-check these numbers against the
company's official financial statement. This process is called "recalculation."

Characteristics of Audit Evidence

Relevancy: Audit evidence needs to be directly related to what's being checked. It
should help in the analysis.
 Source: External information is more reliable because it's less likely to be biased
compared to internal data.
Nature: Audit evidence is good when it comes from presentations, physical
checks, or legal documents.
Sufficiency: You need enough evidence, like bank statements, to understand the
company's financial situation.

Audit Procedures to Obtain Audit Evidence

(a) Risk Assessment Procedures: These help the auditor understand the
company, its environment, and its internal controls. They aim to identify and
assess the risks of significant errors or fraud in the financial statements.
(b) Further Audit Procedures: These include two parts:
Test of Controls: These are checks on the company's internal controls, either
required by rules or chosen by the auditor.
Substantive Procedures: These involve detailed tests and analytical checks to
confirm the financial information.
The specific procedures used can include inspection, observation, confirmation,
recalculations, re-performance, and analytical methods. The choice of procedures
can depend on the context of the audit.
The nature and timing of these procedures might be influenced by factors like
whether data is electronic or the timing of when certain information is available.
Tracing
Tracing in auditing is a substantive procedure that auditors use to test for
details. This process involves obtaining source documents based on a
sample and following them to the accounting records.

Confirmation
Confirmation is the process of obtaining and evaluating a direct
communication from a third party in response to a request for information
about a particular item affecting financial statement assertions. The
process includes— Selecting items for which confirmations are to be
requested.
examining contract

Audit Procedures

1. Inspection: Auditors collect evidence by inspecting physical assets, records,

or documents.
2. Observation: Auditors observe the client’s business processes and
operations to identify deficiencies.
3. Inquiry: Auditors talk with the client’s senior management to gain a deeper
understanding of business processes for the auditing process. Inquiry alone,
however, isn’t considered sufficient audit evidence to reduce the risk.
4. External confirmation: This involves obtaining written or oral responses
directly from third parties, such as customers, suppliers, or financial
institutions
5. Recalculation: The auditors perform calculations to verify that the final
account balances match those reported by the client.
6. Reperformance: The auditor independently performs procedures or controls
that were originally performed by the entity to verify their effectiveness.
7. Analytical procedures: The auditor analyzes financial and non-financial
data, such as comparing current and prior year financial ratios or trends, to
identify unusual fluctuations or patterns that may indicate potential errors.