Audit evidence is information collected by the auditor to support the auditor’s opinion or conclusion on the financial statements of the entity.
to be useful the audit evidence should be both appropriate and sufficient.
appropriateness of the audit evidence measure the quality of the evidence which is its reliability and relevancy.
sufficiency of audit evidence is the measure of its quantity that is the audit evidence must be in the quality that support the auditor conclusion regarding the assertions in the financial statements
Audit evidence can be obtained either through basic accounting records or documents obtained from third parties upon request by the auditor. This technique of obtaining information from the third part is normally referred to as direct confirmation.
The quality of audit evidence generated by direct confirmation is very high because:
It is obtained from independent external sources and audit evidence is more reliable when it is obtained from independent sources outside the entity.
It is documentary evidence and audit evidence is more reliable when it exists in documentary form, whether paper, electronic or another medium. Typically, 3rd party confirmation calls for the evidence to be received
through the Debtor’s circularization process and the Bank Standard letter.
Examples other than debtors’ confirmation techniques that might also be used are as follows:
- Bank balances and other information from bankers
- Inventories held by third parties
- Property deeds held for safe keeping by third parties or purchased from stock brokers but not delivered at the end of the reporting period
- Loans from lenders
- Accounts payable balances
Auditing is the independent examination of financial statements or any other subject matter in order to give the assurance that the financial statement complies with the acceptable financial reporting framework
In many countries, auditing is mandatory to companies listed on the stock exchange authorities and is required by many banks when companies are seeking loans
The following is the importance of auditing to the economy of any country
it increase the faith of investors who want to invest in companies
Auditing provides reasonable assurance to the users of financial statements that the financial statements have no material misstatement which can lead to the wrong decision to the user.
One of the key users of financial statements are investors who want to invest their capital in companies.
When investors know that the independent third party (auditor) have given an unqualified opinion on the financial statement then they will easily be convinced to invest their money in the company
Auditing help companies to seek loans from money lenders
To be sure of the company’s transactions and financial position banks require the companies who seek loans from them to submit the audited financial statements.
Through audited financial statements the lenders are able to know the assets and liabilities of the companies.
Auditing helps the companies to improve their processes and increase efficiency
Through auditing, auditors test internal controls and when they find a weakness in the internal control they provide a recommendation that rectifies or removes the weakness.
Internal controls help the company to achieve its objectives by minimizing the risk associated with achieving the objectives.
This phase “the auditor must be seen to be independent both in fact and appearance”
Independent in fact
This is the state of mind that permits the provision of an opinion without being affected by the influence that compromises professional judgment, allowing individual to act with integrity and exercise objective and professional skepticism.
Independence in appearance
This is the avoidance of facts and circumstances that are so significant that a reasonable and informed third party having knowledge of all relevant information, including the safeguard applied, would reasonably conclude a firm or members of the assurance team’s integrity, objectivity, or professional skepticism had been compromised.
This refers to how independent observers perceive the auditor’s behaviors in relation to the performance of their professional duty.