Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based, and includes the information contained in the accounting records underlying the financial statements and other information.
WHAT MAKES THE EVIDENCE PERSUASIVE?
In GAAP, the third standard of field work requires that the auditor to seek competent evidentiary matter. The evidence must be both competent and sufficient.
Competence means that the evidence must be believable or worthy of trust. The seven characteristics of competent evidence include:
1. Relevance : to the audit objective that the auditor is testing;
2. Independence of the ...view middle of the document...
1. Physical examination : of a tangible asset such as inventory, cash, or fixed assets. Your text points out that some items, such as checks, are assets only during that period when they have inherent value; prior to execution and after cashing, checks are classified as documents. Physical examination is a way to verify that an asset exists, or to verify its condition, but not to determine whether the client owns the asset.
2. Confirmation : is the receipt of a written or oral response from and independent third party verifying information requested by the auditor. Because of the independence of the third party, confirmations are a highly desirable, though costly, type of evidence. SAS 67 (AU 330) describes two types of confirmations. A positive confirmation asks the respondent to provide an answer in all circumstances, while a negative confirmation asks for a response only if the information is incorrect. As you might predict, negative confirmations are not as competent as positive confirmations. Note that SAS 67 requires confirmation of a sample of accounts receivable due to the materiality of receivables for most companies. Note the proviso that confirmations must be under the control of the auditor for maximum reliability of the evidence.
3. Documentation : consists of the client's business documents used to support accounting events. A strength of documentation is that it is prevalent and available at a low cost. Documents can be internal or externally generated. Internal documents provide less reliable evidence than external ones, particularly if the client's internal control is suspect. Documents that are external and have been prepared by qualified individuals such as attorneys or insurance brokers provide additional reliability. The use of documentation in support of a client's transactions is called vouching. It is important to note that electronic records are considered valid documents, per SAS 80.
4. Analytical procedures : are comparisons of account balances and relationships as a check on reasonableness. Analytical procedures are required during the planning and completion phases of all audits and may be used for the following purposes: 1) to better understand the client's industry and business; 2) assess the client's ability to continue as a going concern; 3) to indicate the possibility of misstatements ("unusual fluctuations")in the client's financial statements; 4) to reduce the need for detailed audit tests
5. Inquiries of the client directly from the auditor.
6. Reperformance (rechecking) of samples of computations or information made by the client.
7. Observation by the auditor during the course of the audit.
Physical examination and confirmation are the two most expensive types of evidence, while documentation and analytical procedures are only moderately costly. Observation, inquiries of the client, and reperformance are the least costly type of evidence. The evidence must be persuasive in...