3600-Audit Evidence

 

In adhering to the Standards for the Professional Practice of Internal Auditing regarding performance of audit work, auditors should:

 

         . . . collect, analyze, interpret and document information to

      support audit results.

 

      The process of examining and evaluating information is

      as follows:

 

                  .1 Information should be collected on all matters related

                  to the audit objectives and scope of work.

 

                  .2 Information should be sufficient, competent, relevant

                  and useful to provide a sound basis for audit findings

                  and recommendations.

 

                              a. Sufficient information is factual, adequate

                              and convincing so that a prudent, informed person

                              would reach the same conclusions as the auditor.

 

                              b. Competent information is reliable and the

                              best attainable through the use of appropriate

                              audit techniques.

 

                              c. Relevant information supports audit findings

                        and recommendations and is consistent with

            the objectives for the audit.

 

                              d. Useful information helps the organization

                              meet its goals.

 

Evidence concerning the design of the internal accounting control system is of major interest to the auditor. To be familiar with the design and function of the accounting system, the auditor reviews evidence acquired from discussions with officials and with operating employees; evidence acquired by reviewing policy statements, procedure manuals and job descriptions; and, evidence acquired by observing the activities of the employees during the normal course of operations. Practically all types of evidence contribute to the auditor's understanding of the functioning of the accounting system.

Internal Accounting Control

Internal accounting control is the plan of organization and the procedures and records designed to give assurance that an organization's transactions are executed in accordance with management's authorization and that the transactions are recorded in a manner to permit preparation of proper financial statements. Additionally, the records should be maintained in a manner to provide accountability for the assets, and the control system should provide for assets to be used only in accordance with management's authorization. The auditor's study and evaluation of an organization's system of internal control serves two major purposes: (1) to indicate the level of reliability of the accounts and financial statements produced by the accounting system, and (2) to determine the extent of the other auditing procedures necessary in the conduct of the audit. Internal accounting control, therefore, is a major form of evidence in itself as well as an indicator of how much additional evidence is necessary.

 

To evaluate an internal accounting control system, an auditor examines other forms of evidence to determine how well the system is designed and how well it is functioning. The auditor should review system documentation, organization charts, procedure manuals and system flowcharts to learn how the control system should work. Discussions with deans, directors, department heads, business managers and key employees form another type of evidence giving insight into the design of the internal accounting control system.

 

Before an auditor relies upon an internal accounting control system as evidence, he or she normally makes tests to verify understanding of the system as well as tests of compliance to determine the extent to which the design of the system is implemented in the actual operations. The tests of understanding and of compliance make use of several other types of evidence since the auditor examines supporting documents for selected transactions, traces these transactions through the journals and ledgers, observes employees at work and questions employees about actual duties performed.

 

It should be obvious that, in order to use internal accounting control as a form of evidence, many other types of evidence are also considered. These other types of evidence are reviewed to determine the design of the accounting control system and the degree of compliance therewith. The auditor evaluates the degree of reliance that can be placed on the control system and, consequently, decides on the amount of additional evidence that must be reviewed in the substantive tests. The evidence reviewed in the substantive testing is the same type of evidence reviewed in the tests of understanding and tests of compliance. For any area of weakness in the accounting control system, the auditor should require compensating evidence of another type. The quantity or quality of additional evidence should be in direct relationship to the degree of risk produced by the weakness in the control system. Stated in reverse form, the stronger the internal accounting controls, the less additional evidence the auditor needs to examine.

 

 

Audit evidence is the information internal auditors obtain through observing conditions, interviewing people and examining records. Audit evidence should provide a factual basis for audit opinions, conclusions and recommendations. Audit evidence has been categorized as physical, testimonial, documentary and analytical.

 

Physical Evidence

Physical evidence is obtained by observing people, property and events. The evidence can take the form of photographs, charts, maps, graphs or other pictorial representations. Graphic evidence is persuasive. A picture of an unsafe condition is far more compelling than a written description. All observations should, if possible, be supported by documented examples. When the observation is the sole evidence, it is preferable to have two or more auditors make important physical observations. If possible, representatives of the auditee should accompany the auditors on such inspections.

 

Testimonial Evidence

Testimonial evidence takes the form of letters or statements in response to inquiries or interviews. These, standing alone, are not conclusive; they should be supported by documentation if possible. Auditee statements can be important leads not always obtainable by independent audit testing.

 

Documentary Evidence

This is the most common form of audit evidence. It may be external or internal. External documentary evidence includes letters or memorandums received by the auditee, suppliers' invoices and packing sheets. Internal documentary evidence originates within the auditee organization. It includes accounting records, copies of outgoing correspondence, receiving reports and the like.

 

The source of documentary evidence will affect its reliability. An external document obtained directly from its source (a confirmation, for example) is more reliable than a document obtained directly from the auditee. The possibility always exists that internal documents can be altered. Other matters affecting reliability include the circulation of documents through outside parties (canceled checks), satisfactory internal review procedures and corroboration by other evidence.

 

Internal procedures have an important effect. For example, the reliability of a time card is significantly improved if employees are prohibited from punching a fellow employee's card, supervisors review the cards, the payroll section checks time cards against job tickets and surprise floor checks are made.

Analytical Evidence

This type of evidence stems from analysis and verification. The sources of such evidence are computations; comparisons with prescribed standards, past operations, similar operations, and laws or regulations; reasoning; and breaking down information into its components.

 

 

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