What is ‘Audit Evidence’ and how it is obtained? (5Marks, June 2007) Or
What is an “Audit Evidence”? (5 Marks December 2009, December 2012) Or
Write short notes on Audit Evidence (4 Marks June 2005, June 2009)
Sufficient Appropriate Audit Evidence (5 Marks December 2010)
NSA-500 defines audit evidence as “the information obtained the auditor in arriving at the conclusions on which the audit opinion is based. “An auditor is called upon to assess effectiveness of internal control, review the books of accounts and financial statements and provide audit opinion. For this purpose, auditors are required to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. In other words, Audit evidence refers to the necessary information that an auditor gathers in order to form a credible opinion on the assertions the client’s management that are inherent in the financial statements. Audit evidence comprises source documents and accounting records underlying the financial statements and corroborating information from other sources. These evidences, therefore often, include information relating to the completeness, validity and accuracy of the recorded value of assets, liabilities, equity, income and expenditure of the client entity. The information, so obtained, may be either in written or oral form. An audit in accordance with NSA is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement. Reasonable assurance is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements taken as a whole. Therefore, auditor is expected to make critical assessment, with a questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that contradicts or brings into question the reliability of documents or management representation.
Audit evidence is obtained from an appropriate mix of tests of control and substantive procedures. In some circumstances, evidence may be obtained entirely from substantive procedures. NSA 500 on Audit Evidence further elaborates this concept. According to it, sufficiency and appropriateness are inter related and apply to evidence obtained from both compliance and substantive procedures. Sufficiency refers to the quantum of audit evidence obtained while appropriateness relates to its relevance and reliability. In fact, the quantum of evidence to be obtained would depend upon the nature of the evidence collected. More relevant and reliable is the evidence; the lesser quantity would have to be collected. Normally, the auditor finds it necessary to rely on audit evidence, which is persuasive rather than conclusive. He may often seek evidence from different sources or of different nature to support the same assertions.
Ordinarily, audit evidence is obtained regarding each financial statement assertion. Audit evidence regarding one assertion, for example, existence of inventory, will not compensate for failure to obtain audit evidence regarding another, for example, valuation. The nature, timing and extent of substantive procedures will vary depending on the assertions. Tests can provide audit evidence about more than one assertion, for example, collection of receivables may provide audit evidence regarding both existence and valuation.
While collecting audit evidence, the auditor must remember that the cost of obtaining evidence should not exceed the benefits to be derived from it.
The auditor obtains evidence in performing compliance and substantive procedures inspection,
observation, inquiry and confirmation computation and analytical review.