In today’s business landscape, companies face many demands for risk assurance, where proof of regulatory compliance or effective risk management is paramount. Gathering audit evidence is the cornerstone of this process, as it enables auditors to form their opinions on various facets of a company’s internal control system, be it financial statements, cybersecurity measures, or privacy programs.
Conducting an internal audit is instrumental in collecting this crucial evidence. External auditors meticulously scrutinize financial data, including bank balances, invoices, and inventory, to verify the accuracy of financial statements. Meanwhile, internal auditors focus their efforts on evaluating the effectiveness of cybersecurity controls.
Ultimately, this amassed audit evidence finds its way into an audit report, a valuable resource for stakeholders to gauge the company’s adherence to regulatory compliance and the effectiveness of its risk management endeavors. These audit activities serve as pillars of transparency compliance and foster stakeholder trust.
What Is Audit Evidence?
Audit evidence is the information you collect about processes related to the operations of a specific department within your organization. Auditors use this information to make findings about your compliance efforts and prepare audit reports.
You may also include electronic audit evidence obtained as part of your data collection efforts, where you rely on several information systems and electronic reports for verification.
What Is the Difference Between Audit Documentation and Audit Evidence?
Audit documentation is an audit file that serves as the documented outcome of all the input and evidence collected during the audit. The purpose of the audit documentation is to serve as a long-term summary of the audit objectives and a detailed reference for all the auditor’s conclusions derived from the procedures performed.
Audit documentation also serves as a compilation of the audit evidence that validates these audit findings. This is a reference point for future auditors to refer to the compiled proof later.
In other words, audit documentation is a written summary of how the audit happened. Audit evidence is the information collected, described in the audit documentation.
What makes audit evidence persuasive?
The persuasiveness of audit evidence plays a pivotal role in the credibility and reliability of audit findings, particularly in the context of financial statements, internal controls, and disclosures.
To enhance the persuasiveness of evidence, it must be presented convincingly and coherently, adhering to Generally Accepted Accounting Principles (GAAP) and relevant auditing standards. Persuasive evidence entails a strong and clear introduction, well-prepared arguments supported by proof, organized presentation, and accurate and precise conclusions. By diligently considering these factors, auditors can elevate the persuasiveness of their evidence, instilling trust in the audit process and its outcomes.
What Are the Types of Audit Evidence?
Audit evidence can include documents, logs, correspondence generated internally within your organization, and external materials. Documentation requirements for audit evidence may vary from company to company, but the following lists below should be a typical example.
Internal documents include:
- Process documents
- Policy documents
- Accounting records and journal entries
- Results of control tests
- Account balance statements
- System logs
- Financial reporting documents
- Internal working papers
External sources of gathering electronic audit evidence can include information from:
- Stock exchanges
- Internal Revenue Service and other regulators
To perform the audit, an auditor must first create a comprehensive audit plan to establish the truthfulness of the system to record these transactions. For example, as part of the plan, an auditor can verify the financial information on the financial statements by reviewing the financial information from various data sources, including inventory reports, available receipts, and supplier payments.
We compiled a comprehensive guide listing the different types of audit evidence you might come across to create a series of checklists as part of your audit programs.
Methods of Collecting Audit Evidence
Auditors use internal and external audit procedures to assess risk and obtain audit evidence. During a typical audit engagement, these procedures include observation, inspection, confirmation, recalculation, reperformance, analytical methods, and asking questions. As an auditor, we have compiled an extensive list of internal audit procedures for your reference.
Data analytics can improve the quality of an audit by enabling experienced auditors to discover and analyze patterns, deviations, and inconsistencies. For example, some inquiries might also require historical data as audit evidence, so it’s essential to determine the data retention policies, especially for electronic data.
Analytical procedures are a type of audit evidence used during an audit that can indicate potential issues with an organization’s financial records, which the auditors can investigate more completely. Auditors use analytical procedures to evaluate financial information by cross-referencing plausible relationships between financial and nonfinancial information.
Two related qualities of audit evidence are sufficiency and appropriateness of audit evidence. The adequacy of audit evidence is the amount or quantity of audit evidence. The greater the “audit risk” – the chance of a mistake leading to a material error – the more evidence the auditor should collect.
Appropriateness measures the audit evidence’s quality: the material’s reliability and relevance. To be appropriate, the audit evidence must be reliable and relevant to support the auditor’s conclusions.
The audit evidence should also be sufficient and appropriate to support and corroborate – or contradict, if necessary – management’s assertions about specific transaction classes, account balances, financial statements, or related disclosures.
Common mistakes when collecting audit evidence
In the pursuit of accurate and reliable audit evidence, organizations can often fall into common pitfalls that compromise the integrity of the audit process. Here are three common mistakes organizations make, along with examples of each:
Insufficient Audit Preparation
A frequent error is commencing a quality audit without adequate preparation. This oversight can lead to challenges like knowledge gaps, communication issues, or handling incomplete data. To avoid this, thorough preparation is essential. Review relevant documents, conduct pre-audit meetings, develop checklists, and practice audit techniques to ensure a smooth and reliable audit process.
Bias Audit Conduct
A common error in quality audits involves conducting the audit with bias or unprofessional behavior, which can have significant implications for audit evidence, financial statements, and internal control assessments. Such conduct can undermine the credibility, validity, and integrity of audit findings and recommendations, impacting trust with the auditee and stakeholders.
Biased or unprofessional audit behavior may involve unwarranted assumptions or judgments, personal opinion influence, and disregard for comments or grievances, all of which can affect financial reporting and disclosures.
Reliance on Unreliable Sources
Depending on unreliable sources can lead to erroneous conclusions. Evidence from sources with a history of inaccuracies or bias jeopardizes the validity of findings. For example, relying on financial data provided by a supplier is known for frequent errors in its reporting. If the organization trusts and verifies this data independently, it may introduce inaccuracies in the audit process.
Inadequate documentation and record-keeping practices can hinder the audit process. Missing, incomplete, or disorganized records make tracing and substantiating audit procedures and findings difficult. If a company needs to maintain clear inventory movement records, it is easier for auditors to verify the accuracy of reported inventory levels or trace discrepancies.
What are the five factors that affect the value of audit evidence?
The value of audit evidence plays a critical role in the auditor’s ability to provide reasonable assurance regarding the accuracy and reliability of a company’s financial statements. Five key factors significantly influence the value of audit evidence, ensuring that the audit process is rigorous and thorough:
- Relevance: It assesses how directly the evidence addresses the assertions in the financial statements. For example, when auditing the valuation of a company’s assets, evidence related to their current market value is highly relevant.
- Reliability: It ensures that the financial information under examination is accurate and unbiased. Auditors must rely on reliable sources and methods to gather evidence, such as analyzing accounting records and financial reporting systems.
- Consistency: This refers to aligning evidence from various sources and audit procedures. When multiple sources and methods produce consistent results regarding a specific account balance or financial disclosure, it enhances the reliability and value of the evidence.
- Sufficiency: Auditors must obtain an adequate quantity and depth of evidence to support their conclusions. This involves performing substantive procedures, such as reperformance and recalculation, in obtaining audit evidence.
- Source Credibility: This involves assessing the independence and objectivity of the sources providing evidence. Evidence from external sources, like the Public Company Accounting Oversight Board (PCAOB) or third-party experts, often carries greater credibility. The auditor’s opinion is also a crucial aspect of source credibility.
These factors collectively determine the strength and value of audit evidence, guiding auditors to assess and report on the company’s financial statements and disclosures. The audit process adheres to auditing standards and principles, focusing on risk assessment procedures internal controls, and allocating audit resources to areas with higher risks of material misstatement.
Managing and Documenting Audits with ZenGRC
Audits can be a tremendous challenge, with significant time, resources, and effort from all parties involved. A compliance management solution can help you streamline the time spent on an audit report by integrating risk control information and storing all your compliance inputs in one shared space.
This is where RiskOptics ZenGRC platform enters the picture. Our software-as-a-service automatically monitors your vendors, and compiles results from all sources to serve as a single source of truth for your auditing needs. It can also provide a consolidated view of your compliance posture and analysis on an intuitive platform.
Schedule a demo today to learn how ZenGRC can streamline your audit process.