Question

1. What is audit evidence?
   1. Define audit evidence? Provide three examples of audit evidence and explain why you believe that each example is audit evidence
   2. Discuss the two attributes of audit evidence and provide one or more examples of each attribute to complete your discussions. Be specific and thorough when discussing each attribute or criteria.

Answer 1

a. Audit evidence is the evidence used by the auditor to draw conclusions on the basis of which auditor decides which opinion to pass on the true and fair view of the financial statements. It forms the very basis of all the procedures to be performed during an audit. Auditor needs to first obtain the audit evidence and then check its sufficiency and appropriateness by performing various substantive and analytical procedures and controls testing as well.

3 examples of audit evidence are as follows :

i) For purchase of raw material or finished goods - Audit evidence which needs to be obtained includes the purchase invoice and the goods receive note. This is because purchase invoice shows that the actual purchase has taken place which also contains various terms and conditions such as details of items purchased, payment terms etc. Goods received note is considered as an audit evidence because it shows that the goods have actually been received by the company.

ii) For sale of goods - Audit evidence which needs to be obtained includes the sales invoice and the goods dispatch note. Following the logic as stated in (i) above, sales invoice shows evidence of sales actually occurring and various terms and conditions and goods dispatch note shows that the goods have actually been dispatched from the warehouse of the company. Instead of the goods dispatch note one could also look at a proof of delivery acknowledged by the customer.

iii) For purchase of fixed assets, we need to check the additions made in the fixed assets register and corroborate that with the actual invoice for such purchase. We can also check the purchase order raised by the department for which asset is purchased and if any quotes were received first before deciding which vendor to purchase the asset from.

b. Two attributes of audit evidence include "Sufficiency" and "Appropriateness"

Sufficiency : Sufficiency of audit evidence refers to the quantity of the audit evidence obtained. Depending on the risk of material misstatement assessed by the auditor, auditor needs to obtain sufficient audit evidence to reduce its overall audit risk to an acceptable level.

For example : Let's say we are auditing accounts receivable balance of $100,000. Now we need to send confirmations to various debtors for the same and we have now sent 3 confirmations to debtors amounting to only $20,000 which is 20% of the total balance. This much evidence is not sufficient as it is covering only 20% and hence we need to send more confirmations to obtain sufficient audit evidence to support our opinion

Appropriateness : Appropriateness of audit evidence refers to the quality of the audit evidence obtained. Quality here means the relevance and reliability of the audit evidence to support the audit opinion. Audit evidence should always be reliable. Reliability of the evidence depends on various factors such as whether it is written or oral; obtained from external or internal party etc.

Example : Instead of sending a confirmation to a debtor constituting a major part of the accounts receivable balance, we just ask the client to provide a confirmation that the balance is correct and we include it in the management representation letter as well. This is incorrect as this has been directly obtained from the client and the client may falsify the evidence to show a better position. Hence we should obtain a direct written confirmation from the debtor to make the evidence appropriate.