Source of Audit Evidence

Audit evidence may be obtained from various sources, but the basic factor is that, irrespective of the source, the evidence must be acceptable, relevant and reliable so that the auditor can fulfil his statutory duty and form an opinion.

Audit evidences collected by an auditor may be divided into the following categories:

a. Observations

b. Testimony from independent third parties

c. Authoritative outside documents

d. Authoritative inside documents

f. Satisfactory internal control

g. Subsequent events

h. Relationship evidence

i. Computation and comparison

j. Calculations and analysis by auditor

k. External events.

Observations:

Auditor’s own observation of the existence of an item, asserted the existence of the item which is the strongest audit evidence. The Observation comprises of the following aspects.

a. Physical examination

b. Witnessing internal control and book keeping procedures.

c. Presence of record to ensure that procedures have been carried out.

Physical examination of cash, inventory, investments, assets provides satisfactory evidences of their existence. However, such observation is evidence of existence only and not of ownership or qualitative assertion.

Testimony from independent third parties:

The second strongest audit evidence available is written or oral statement by an independent third party e.g. confirmation from debtors, bills receivable, deposits, banks and employees.

Authoritative documents:

Documentary evidence prepared outside or inside the entity can be relied upon as audit evidence e.g. (outside) title deed, share certificates, loan documents, insurance policies, leases, contracts, invoices, (inside) minutes, copy of invoice, goods received notes, petty cash vouchers and payrolls.

Statement by directors and officers:

The auditor asks a number of questions from the directors and other officers formally and informally. In case of important matters written replies are obtained and in case of other matters verbal answers are regarded as enough. The answers, though constitute audit evidence, still they must be thoroughly verified as they do not form the strongest evidences.

Satisfactory internal control:

Soundly conceived and efficiently operated internal control system would offer a reasonable assurance regarding correctness of accounting record. The internal audit evidence available ensues the reliability of the data.

Subsequent events:

Events after the balance sheet date but before the signing of accounts provides a reliable audit evidence.

Relationship evidence:

Audit evidence confirming the truth about one item may tend to confirm the truth about another item e.g. evidence supporting receipt of investment income also confirms the existence of investment.

Computation and comparison:

Verification is facilitated by ratios, budgets, graphs and diagrams showing comparison with previous charts provide good audit evidence.

Calculations and analysis by auditor:

Usually arithmetical calculations are made by audit staff. The auditor in order to prove their accuracy must recheck material items and record the fact of re-computation to create useful evidence for the future.

External events:

The auditor should use his knowledge of current events in assessing and examining financial statements.