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.

Objectives Of Management

In this tutorial, we will learn about the objectives of management, which are the solicited outcome of any action. They must be received from the first view of the business to achieve maximum profit with minimum efforts.

  1. To optimize the use of resources.
  2.  The smooth and coordinated functioning of an enterprise.
  3.  Human betterment and social justice.

Any organization, have different objectives and management which has to achieve all objectives effectively and efficiently.

These objectives of management can be classified into three categories:

1. Organizational objectives

2. Social objectives

3. Personal objectives

Let’s discuss these objectives one by one.

Objectives of management:

Organizational Objectives

Management is responsible for setting and achieving objectives for the organization. The main objective of any organization should be to utilize human and material resources to the maximum possible advantage, i.e., to fulfill the economic objectives of a business.

  • Survival: The basic objective of any business is survival. To survive, an organization must earn enough revenues to cover costs.
  • Profit: Management has to ensure that the organization makes a profit. Profit provides a vital incentive for the continued successful operation of the enterprise.
  • Growth: To remain in the industry, management must exploit fully the growth potential of the organization. There are many indicators of growth such as sales volume, increase in the of employee count, the number of products or the increase in capital investment

Social Objectives

As a part of society, every organization whether it is business or non-business has a social obligation to fulfill which is to consistently create economic value for various constituents of society. This includes:

  • Environmental friendly methods of production
  • Giving employment opportunities to the disadvantaged sections of society
  • Providing basic amenities like schools and crèches to employees

Personal Objectives

The organization consists of different types of individual who joins it to satisfy their diverse needs. The individual may seek to satisfy needs such as:

  • Competitive salaries and perks
  • Peer recognition
  • personal growth and development

Management has to reconcile personal goals with organizational objectives for harmony in the organization.

Getting maximum results with minimum efforts – 

The main objective of management is to secure maximum outputs with minimum resources. Management is concerned with thinking & utilizing human, material & financial support to result in the best combination. This combination results in the reduction of various costs.

Increasing the efficiency of factors of production – 

Through proper utilization of various elements of production, their energy can be increased to a great extent which can be obtained by reducing spoilage, wastage, and breakage of all kinds, this, in turn, leads to saving of time, effort, and money which is essential for the growth & prosperity of the enterprise.

Maximum prosperity for employer & employees – 

Management ensures the smooth and coordinated functioning of the enterprise. In turn, it helps provide maximum benefits to the employee in the shape of the right working conditions, suitable wage system, incentive plans on the one hand, and higher profits to the employer on the other side.

Human betterment & social justice – 

Management serves as a tool for the upliftment as well as the improvement of the society. Through increased productivity & employment, control ensures better standards of living for the organization. It provides justice through its uniform policies.

Importance of management:

  1. Management directs group efforts towards the achievement of predetermined goals.
  2. Proper management yields minimum input into maximum output, which reduces the overall cost of the enterprise.
  3. Management helps in attaining equilibrium.

Efficient management helps to better economic production and welfare of people, reduces wastage of scarce resources, and improves living standards. 

The objectives of management are defining specific objectives within an organization that management can convey to organization members and then deciding how to achieve each goal in sequence.

This process allows managers to take work that needs to be done one step at a time to allow for a calm yet productive work environment.

This process also helps organization members see their accomplishments as they achieve each objective, reinforcing a positive work environment and a sense of achievement.

The system management by objectives can describe as a process whereby the superior and subordinate jointly identify common goals, define each individual’s significant areas of responsibility in terms of the results expected of him/her and use these measures as guides for operating the unit and assessing the contribution of each of its members.

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.

PARTICULARSAUDITINGINVESTIGATION
MeaningAn 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 natureMandatory for companies, for others it is voluntaryVoluntary
Conducted byA Chartered Accountant within the meaning of the Chartered Accountant Act 1949Any person who may not be a Chartered Accountant
Appointment agencyOwners or shareholders of the enterpriseOwners or management or even third parties may appoint the investigator
EvidenceMuch of audit evidence is persuasive rather than conclusiveSeeks conclusive or corroborative evidence
Form of reportingThe matters to be covered in the audit report are sometimes prescribed by law.There is no statutory form of the investigation report.
Pre-conceptionsAn 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 coveredGenerally one financial year.Not necessarily restricted to one financial year. It can extend for a period consisting of several years.
Protection of interestsWork 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 coverageGeneral- 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.

Management As An Art

In this tutorial, we will learn about management as art that implies applying knowledge and skill to trying about desired results. Painting may define as a personalized application of general theoretical principles for achieving the best possible results.

Management is a process that involves the use of knowledge, how and skills—that direct towards the accomplishment of concrete results. Science and Art are not mutually exclusive but are complementary. The theory and practice of management are mutually helpful.

Art implies the application of knowledge & skill to trying about desired results. A painting may be defined as a personalized application of general theoretical principles for achieving the results. Art has the following characters are as given below –

Practical Knowledge: 

Every art requires practical knowledge; therefore, learning of theory is not sufficient. It is vital to know the practical application of theoretical principles. E.g., to become a good painter, the person may not only be knowing different colors and brushes but different designs, dimensions, situations, etc. to use them appropriately. A manager can never be successful just by obtaining a degree or diploma in management; he must have also know how to apply various principles in real situations by functioning in the capacity of manager.

Personal Skill: 

Maybe the same for every artist, each has his style and approach towards his job. That is why the level of success and quality of performance differs from one person to another. E.g., there are several qualified painters, but M.F. Husain recognized for his style. Similarly, management as an art is also personalizing. Every manager has his way of managing things based on his knowledge, experience, and personality. That is why some managers are known as good managers (like Aditya Birla, Rahul Bajaj), whereas others are bad.

Creativity: 

Every artist has an element of creativity in line. That is why he aims to produce something that has never existed before, which requires a combination of intelligence and imagination. Management is also creative, like any other art. It combines human and non-human resources in a useful way to achieve desired results. It tries to produce sweet music by efficiently combining chords.

Perfection through practice: 

Practice makes a man perfect. Every artist becomes more and more proficient through constant practice. Similarly, managers learn through the art of trial and error initially, but the application of management principles over the years makes them perfect for managing.

Goal-Oriented: 

Every art is result oriented as it seeks to achieve concrete results. In the same manner, management is direct towards the accomplishment of predetermined goals. Managers use various resources like men, money, material, machinery & methods to promote the growth of an organization.

Thus, we can say that management is an art; therefore, it requires the application of certain principles; instead, it is an art of the highest order because it deals with molding the attitude and behavior of people at work towards desired goals.