Audit Evidence And Essentials Of Good Audit Evidence

In this tutorial, we will learn about audit evidence, and the essentials of good audit evidence provide grounds for believing that a particular thing is right or not by providing support for a fact or a point in question.

Audit evidence is obtained by auditors during a financial audit and recorded in the check audit notebook.

Auditors need audit evidence to see if a company has the correct information considering their financial transactions so that a Certified Public Accountant can confirm their financial statements.
Audit evidence is the information that they (auditor) considers for the appointment in the audit engagement acceptance or reappointment stage. E.g., change in the entity control environment, inherent risk and nature of the entity business, and scope of audit work.
Evidence is the information that the auditor must consider for the most effective and efficient audit approach in the audit planning stage. E.g., the reliability of internal control procedures and analytical review systems.
In the control testing stage, audit evidence is the information that the auditor is to consider for the mix of audit test of control and audit substantive tests.
Audit evidence is the information that the auditors need to support the appropriation of financial statement assertions in the functional testing stage. E.g., existence, rights and obligations, occurrence, completeness, valuation, measurement, presentation, and disclosure of a particular transaction or account balance.
In the conclusion and opinion formulation stage, audit evidence is information that the auditor must consider whether the financial statements as a whole presents completeness, validity, accuracy, and consistency with the auditor’s understanding of the entity.

Tools of audit evidence are

a) Working papers

b) Audit notebook

The auditor has to obtain sufficient and appropriate evidence to substantiate his opinion on financial statements. The audit evidence provides grounds for believing that a particular thing is right or not by providing support for a fact or a point in question. The testimonies collected by the auditor must support the contents of the auditor’s report.

ESSENTIALS OF GOOD AUDIT EVIDENCE:

Sufficient:

The audit evidence is said to be adequate when they are inadequate quantity. The audit evidence enables the auditor to form an opinion on the financial information—sufficient evidence obtained by test checking instead of 100% checking.

Reliable:

The auditor obtains the evidence that is persuasive rather than conclusive; therefore, evidence cannot be 100% authentic. The reliability of audit evidence depends.

Source:

Whether the evidence obtained within the organization, i.e., internal and received from outside, i.e., external confirmation by the third party.

Nature:

Whether the explanation is a verbal explanation from client staff, visual, physical verification of stock, or documentary bills attached to vouchers.

Relevant:

It obtained audit evidence that must connect to the matter being checked. For example, .e.g., the balance stock in hand is correct, and then the relevant evidence shall provide the physical verification.

THUMB RULES:

The following rules of thumb have proven helpful in judging the appropriateness of evidence:

Documentary evidence is usually better than testimonial evidence.
Audit evidence is more reliable when the auditor obtains consistent evidence from different sources of different nature.
Original documents are better than photocopies.
Evidence from credible third parties may be better than evidence generated within the audited organization.
The evidence made through the auditor’s direct observation, inspection, and computation is usually better than evidence obtained indirectly.
The quality of information generated by the audited organization is directly related to the strength of the organization’s internal control; the auditor should have a good understanding of internal controls as they relate to the objectives of the audit.

Disadvantages or Demerits of Auditing

In this tutorial, we will learn about the disadvantages or demerits of auditing has to depend upon books of accounts and other records presented before him. He never thinks of the intentions of those who have prepared them.

The auditor has to depend upon the book of accounts and other records presented before him. He never thinks of the intentions of those who have prepared them. If these intentions are malaise and there is manipulation in the accounts, the auditor will not be able to bring them to light. He has also to depend upon experts’ opinions as he is not an expert in all fields like technical, legal, or others. It isn’t easy to find the accounts as complete and genuine everywhere. Some other limitations of an audit are as follows:

Higher Cost Burden:

Due to the higher cost burden, the auditor limits his scope of work to selective testing and sampling; thus, in-depth checking of the book of accounts is not possible.

Based On Test Checks:

An auditing exercise is based on test checking. Inferring a result based on test check always need to be true.

Based On Information Provided By The Management

The audit opinion is based on the management’s information. Hence outsiders cannot entirely rely on the auditor’s report.

Based On Estimates:

In an inherent part of the accounting process, and no one, including auditors, can foresee the outcomes of uncertainties. Estimates range from the allowance for doubtful accounts and an inventory obsolescence reserve to impairment tests of fixed assets and goodwill. An audit cannot add exactness and certainty to financial statements when these factors do not exist.

Inconclusiveness Of Evidences:

The evidence obtained by an auditor is persuasive rather than conclusive. For example, an architect’s certificate of valuation for a newly constructed building of a client may not be convincing evidence of the correct value of a building.

Insufficient Time:

Generally, an auditor needs to release the report up to a specified timeline. Sometimes this timeline becomes a constraint for an auditor in carrying out the auditing exercises. Moreover, there is a relatively short time available for resolving uncertainties existing at the financial statement date.

The problems are being complicated day-by-day unless an auditor is familiar with the recent changes; he cannot perform his functions with ability and prudence. Hence, capable persons are needed in every country to complete the audit work so that the business may be directed appropriately and administered. It will depend upon the cooperation, especially between the businessman, the government, and the person conducting an audit.

PARTICULARS	AUDITING	INVESTIGATION
Meaning	An audit is an independent examination of financial information of an entity when such an examination is conducted with a view to express an opinion thereon.	Investigation implies the systematic, critical, and special examination of the records of a business for a specific purpose.
Mandatory nature	Mandatory for companies, for others it is voluntary	Voluntary
Conducted by	A Chartered Accountant within the meaning of the Chartered Accountant Act 1949	Any person who may not be a Chartered Accountant
Appointment agency	Owners or shareholders of the enterprise	Owners or management or even third parties may appoint the investigator
Evidence	Much of audit evidence is persuasive rather than conclusive	Seeks conclusive or corroborative evidence
Form of reporting	The matters to be covered in the audit report are sometimes prescribed by law.	There is no statutory form of the investigation report.
Pre-conceptions	An audit is not based on suspicion unless circumstances exist to arouse suspicion.	Its essence lies going into the matter with some pre-conceived notion suited to the objective.
Period covered	Generally one financial year.	Not necessarily restricted to one financial year. It can extend for a period consisting of several years.
Protection of interests	Work is carried out on behalf of the owners even if the power of appointment is delegated to say, a board of directors.	Work is carried out from the viewpoint of the appointing agency
Scope and coverage	General- when compared to investigation seeks, to form an opinion on the financial statements.	Specific- seeks to answer only those questions laid down in the engagement letter.

Efficiency Of Audit

In this tutorial, we will learn about the efficiency of audit how well an organization uses its resources to produce goods and services.

An economy and efficiency audit, or only efficiency audit, focuses on the resources and practices of a program or department, according to the “Encyclopedia of Public Administration and Public Policy,” which provides descriptions of typical audit activities. An economy and efficiency audit might analyze the procurement, maintenance, and implementation of resources, such as equipment, to identify areas that require improvement. Alternately, it might examine the practices of a department or program to find inefficient or wasteful processes.

Efficiency is the ratio of a system’s outputs to inputs and is strictly a limiting example of an idea of productivity in that an efficient system is one in which this ratio is optional.

Two categories of efficiency should be given below:

Economic efficiency, which arises when the cost of inputs minimized for a given level mix of information and technical ability, occurs when the output maximized for a given volume and mix of information.

Effectiveness denotes accomplishment of objectives, and efficiency indicates the fulfillment of purpose with minimum sacrifice of available scarce resources. An efficiency audit is an audit that ensures that every rupee invested yields optimum results.

In essence, ability indicates how well an organization uses its resources to produce goods and services. It focuses on resources (inputs), goods and services (outputs), and the rate (productivity) at which data used to produce or deliver the outputs. To understand the meaning of “efficiency,” it is necessary to understand the following terms:

Inputs are resources such as human, commercial equipment, material, facilities, information, energy, and land used to produce outputs.
Outputs are the goods and services provided to meet client needs. Outputs are defined in terms of quantity and quality and delivered within parameters relating to the service level.
Supply refers to the amount, volume, or several outputs produced.
Condition refers to various attributes and characteristics of productions such as reliability and accuracy, timeliness, service courtesy, safety, and comfort.
Productivity is the ratio to the number of acceptable goods and services produced to the amount of the resources used to create them. Richness expressed in the form of a rate, such as a cost or time per unit of output.

It is a relative concept. It is measured by comparing achieved productivity with a desired norm, target, or standard. Output quantity and quality reached, and the level of service provided is also compared to objectives or rules to determine the extent to which they have caused changes inefficiency. Efficiency is improved when more outputs of a given quality are produced with the same or fewer resource inputs or when the same amount of production will provide with fewer resources.

An efficiency audit refers to comparing the actual results with the desired or projected results. It will be directed towards the measurement of whether plans have expertly executed. May concerned with the utilization of the resources in an economical and most remunerative manner to achieve the objectives of the concern.

Objectives Of The Audit Plan

In this tutorial, we will learn about the objectives of the audit plan is a vital area of the audit primarily conducted at the beginning of the audit process to ensure that appropriate attention.

It is devoted to essential areas, potential problems promptly identified, work is completed expeditiously, and work appropriately coordinated.

Terms of engagement and any statutory responsibilities:

While framing an audit plan auditor should ascertain his terms of appointment and duties cast by various legislation on him. The auditor should prepare his audit plan based on what he is required to do so.

Nature and timing of report or other communications:

The auditor should determine the form and the timing of the announcement. It will help the auditor to determine the scope and schedule of the audit.

Establishing and coordinating staffing requirements:

The auditor should determine the staff’s exact needs along with the broad estimate of the time required by each staff member so that the audit work will complete on time.

Work of internal auditors:

The statutory auditor must review the work done by the internal auditors to determine the extent of their reliance. It will help the auditor to determine the scope of the work under the audit plan.

Nature and extent of audit evidence:

The nature and extent of audit evidence will vary in different auditing situations. For example, in one position, the auditor may rely more on physical examination and confirmation from third parties. In contrast, in other cases, he may rely more on the analysis of documentary evidence.

Degree of reliance expected to be placed on the accounting system and internal control:

While laying down an audit plan, the auditor shall assess the effectiveness of accounting systems and internal control. The auditor must decide whether he will do test checking or more extensive checking of transactions and balances based on assessments.

Test of materiality levels for audit purposes:

At the planning stage, the auditor sets the materiality levels. For example, the auditor may decide that in case of an audit of sales, he will examine all sales transactions Rs5000.

Identification of significant audit areas:

The auditor needs to identify the areas which involve higher audit risk so that the audit can plan in such a way that the overall audit risk will be less. More risky areas should check in detail and vice versa.

Requirements:

Any change in accounting and auditing standards may affect the audit’s scope or how conducted. Therefore these should be carefully considered while drawing up an audit plan.

Accounting policies followed by the enterprise and change in those policies:

Accounting policies developed by the enterprise affect the audit plan. While preparing an audit plan, due consideration may give to the areas where there is any change in accounting policies.

Disadvantages Of An Audit Program

In this tutorial, we will learn about the disadvantages of an audit program that is mechanical and ignores many other aspects like internal control.

Every entity has its problems; thus, staff members cannot make changes in the audit plan and cannot make suggestions. Audit work becomes mechanical when it ignores other aspects like internal control.

Rigidity:

The audit program loses its flexibility as it cannot be the same for different types of organizations. Each business has separate problems, so a single or same audit program cannot be laid down for every kind of business.

Reduces the initiative of efficient staff:

It kills the effort of capable persons. The Assistant cannot suggest any improvements in the plan.

Audit works become mechanical:

The audit program is automatic that ignores many other aspects like internal control.

New areas may be overlooked:

With time, new problems arise during the audit that may ignore in the audit program.

The remedy of disadvantages:

The remedy in such situations is that the audit program should be flexible must always be opened to changes and improvements.
Audit staff should be encouraged to draw the auditor’s attention to any defects in the program.
The audit staff should be encouraged to explore thoroughly unusual transactions and not get restricted to the audit program.
The audit program is not much use in the case of a small audit where the books to be audited are very few.
The audit program may not complete because certain items may be left from being checked.
The periods and the records, which are required to be tested, may not be varied systematically.
Even a detailed audit program cannot consider every minute work involved during the audit of a business.
Inefficient and careless auditors may sometimes try to conceal their weaknesses and defects based on the audit program.
The audit staff tends to go ahead with the work as per the audit program. Therefore, there is no scope for adopting new techniques or additional procedures, which are necessary according to the circumstances, which arise during the audit.

Audit Plan	Audit Program
Lays down the audit strategies for conducting business.	It is an outline of how the audit is to be done, who is to do what works, and within what time.
Plans should be made to cover, among other things:	It lays down the following audit procedures to follow:
Acquiring knowledge of accounting systems, policies and internal control procedures	Checking of overall disclosure and presentation of all items in the final accounts.
Establishing the expected degree of reliance to be placed on internal control.	Verification and valuation of assets and liabilities and ledger scrutiny.
Determining the nature, timing, and extent of the audit procedures to be performed.	Evaluation of internal control and preparation and submission of an audit report.