by Audit evidence refers to the information used by the auditor to arrive at conclusions on which the audit opinion is based. SA 500, Audit Evidence deals with the auditor’s responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence. Sufficiency refers to the quantity of evidence, while appropriateness refers to its relevance and reliability. Audit evidence may be obtained through inspection, observation, external confirmation, recalculation, reperformance, analytical procedures and enquiry. It may include accounting records, invoices, contracts, bank statements, physical records and information obtained from external sources. The auditor evaluates the reliability of evidence by considering its source and nature. Evidence obtained from independent external sources may generally provide stronger assurance. The auditor should exercise professional judgement and professional scepticism while evaluating evidence and determining whether it adequately supports the audit conclusions.
Audit Procedures for Obtaining Evidence:
1. Inspection
Inspection involves examining records, documents, physical assets or other tangible items to obtain audit evidence. The auditor may inspect invoices, contracts, agreements, bank statements, purchase orders, accounting records and supporting documents. Physical inspection may also be used to verify the existence of assets such as inventory, machinery and property. Inspection provides evidence about different assertions depending on the nature of the item examined. However, inspection of records may provide stronger evidence about rights, obligations and accuracy than about completeness. Similarly, physical inspection mainly provides evidence regarding existence. Therefore, inspection is an important audit procedure, but the auditor should combine it with other procedures where necessary.
2. Observation
Observation involves watching a process or procedure being performed by others. The auditor may observe inventory counting, internal control procedures, cash handling or other activities carried out by employees. Observation provides evidence about the performance of a process at the time it is observed. It can help the auditor understand whether prescribed procedures are actually being followed. However, observation provides evidence only for the particular point in time when the activity is observed. Employees may also behave differently because they know they are being observed. Therefore, observation is useful for evaluating processes and controls but should generally be supported by other audit procedures.
3. External Confirmation
External confirmation involves obtaining information directly from an independent third party in response to a request from the auditor. It may be used to confirm bank balances, receivable balances, loans, investments or other relevant information. The auditor controls the confirmation process by selecting the information to be confirmed and communicating with the external party. Responses received directly by the auditor may provide reliable evidence because they originate outside the entity. However, the auditor should evaluate the authenticity and reliability of the response. External confirmation is particularly useful where independent evidence is relevant to specific financial statement assertions.
4. Recalculation
Recalculation involves checking the mathematical accuracy of documents or records by independently performing the calculations. The auditor may recalculate depreciation, interest, totals, tax amounts, provisions, payroll calculations or other financial information. This procedure helps determine whether calculations recorded by the entity are mathematically accurate. Recalculation provides direct evidence regarding the accuracy of numerical computations but may not by itself establish the underlying assumptions or validity of the information used in the calculation. Therefore, the auditor may need additional procedures to examine the supporting data and assumptions. Recalculation is particularly useful for verifying numerical accuracy in accounting records and financial statements.
5. Reperformance
Reperformance involves independently performing procedures or controls that were originally performed as part of the entity’s internal control system. For example, the auditor may independently perform a bank reconciliation or reperform an authorisation check to determine whether the control operated properly. Reperformance can provide strong evidence regarding the effectiveness of a control because the auditor directly performs the procedure rather than relying solely on management explanations. It is particularly useful when testing internal controls. The auditor should document the procedure performed, evidence obtained and conclusion reached. Therefore, reperformance helps assess whether relevant controls operated effectively during the audit period.
6. Analytical Procedures
Analytical procedures involve evaluating financial information by analysing relationships between financial and non financial data. The auditor may compare current year figures with previous years, budgets, industry information or expected relationships. Unexpected fluctuations or unusual relationships may indicate possible misstatements requiring further investigation. Analytical procedures can be used during risk assessment, as substantive procedures and near the end of the audit. Their effectiveness depends on the reliability of the underlying information and the auditor’s ability to develop appropriate expectations. Therefore, analytical procedures help identify unusual matters, assess financial information and provide evidence regarding certain balances and transactions.
7. Enquiry
Enquiry involves seeking information from knowledgeable persons within or outside the entity. The auditor may ask management, employees, legal advisers or other relevant persons about transactions, accounting policies, internal controls or unusual events. Enquiry is useful for obtaining explanations and understanding matters that may not be evident from documents alone. However, enquiry by itself generally does not provide sufficient appropriate audit evidence for many significant matters. The auditor should corroborate important responses with other evidence wherever necessary. Therefore, enquiry is an important audit procedure for obtaining information and clarification, but professional judgement is required to assess the reliability of the responses received.
8. Scanning
Scanning involves examining accounting records or documents for unusual or significant items that may require further investigation. The auditor may scan journals, ledgers, expense accounts or transaction listings to identify unusual amounts, unexpected entries or transactions outside normal business activities. It can help identify potential errors, fraud indicators or matters requiring additional audit procedures. Scanning is generally less detailed than complete examination and is often used as part of analytical or substantive audit procedures. The auditor should investigate significant unusual items identified through scanning. Therefore, scanning helps the auditor efficiently identify areas requiring greater attention without examining every individual transaction.
9. Tracing
Tracing involves selecting transactions or information from source documents and following them through the accounting records to their final recording. It is commonly used to test the completeness of transactions and ensure that relevant information has been properly recorded. For example, the auditor may select purchase invoices and trace them to the purchase journal and general ledger. Tracing helps identify omitted transactions or incomplete recording. The direction of testing is important because it determines the assertion being examined. Therefore, tracing is a useful audit procedure for evaluating the completeness of accounting records and determining whether transactions have been properly incorporated into the financial statements.
10. Vouching
Vouching involves examining supporting documents for transactions recorded in the books of account. The auditor may select entries from accounting records and examine invoices, receipts, contracts, delivery documents, payment records and other supporting evidence. Vouching helps establish whether recorded transactions actually occurred and whether they are supported by appropriate documentation. It is particularly useful for testing the occurrence and accuracy of recorded transactions. The auditor should also consider the authenticity and relevance of supporting documents. Therefore, vouching is an important substantive audit procedure that helps verify recorded transactions and identify possible fictitious, unauthorised or incorrectly recorded transactions.
Sources of evidence Reliability of Audit Evidence:
1. Evidence Obtained from External Sources
Evidence obtained directly from independent external sources is generally considered more reliable than evidence generated internally by the entity. Examples include bank confirmations, confirmations from customers and suppliers, legal confirmations and information obtained from government authorities. Such evidence is less likely to be influenced by the entity’s management. However, the auditor should still consider the competence, authority and independence of the external source and the method through which the evidence was obtained. Direct communication with the external party may strengthen reliability. Therefore, external evidence can provide strong audit support, particularly for significant balances and financial statement assertions.
2. Evidence Generated Internally
Internally generated evidence includes accounting records, invoices, receipts, payroll records, internal reports and other documents prepared by the entity. Its reliability depends significantly on the effectiveness of relevant internal controls. When controls are properly designed and operating effectively, internally generated records may provide reliable audit evidence. If internal controls are weak, the auditor may need to perform additional procedures to verify the information. The auditor should also consider whether the records are complete, accurate and properly authorised. Therefore, internal evidence can be useful and reliable, but its reliability is influenced by the quality of the entity’s internal control system.
3. Evidence Obtained Directly by the Auditor
Evidence obtained directly by the auditor is generally considered reliable because the auditor has personal control over the procedure used to obtain it. Examples include physical inspection of inventory, observation of a control, recalculation of depreciation and reperformance of a bank reconciliation. The auditor can determine how and when the procedure is performed and directly evaluate the results. However, the reliability still depends on the competence and objectivity of the auditor and the suitability of the procedure. Therefore, evidence obtained directly by the auditor can provide strong assurance when the procedure is appropriately designed and properly performed.
4. Documentary Evidence
Documentary evidence consists of written or electronic records supporting transactions and balances. Examples include invoices, contracts, bank statements, agreements, receipts and accounting records. The reliability of documentary evidence depends on its source and nature. Documents received directly from independent external parties may generally be more reliable than internally prepared documents. Original documents may also provide stronger evidence than unauthenticated copies, depending on the circumstances. The auditor should examine the authenticity and relevance of documents before relying on them. Therefore, documentary evidence is an important source of audit evidence, but its reliability should always be evaluated in the context of the audit.
5. Physical Evidence
Physical evidence is obtained through direct examination or observation of tangible assets. Examples include inventory, cash, machinery, buildings and other physical assets. Physical inspection generally provides strong evidence regarding the existence of an asset at the time of inspection. However, it may not by itself establish ownership, valuation or completeness. For example, seeing machinery does not necessarily prove that the entity legally owns it or that its recorded value is appropriate. The auditor should therefore combine physical evidence with documents and other procedures. Thus, physical evidence can be highly useful but generally supports only certain financial statement assertions.
6. Oral Evidence
Oral evidence is information obtained through enquiry and discussions with management, employees or other knowledgeable persons. It can help the auditor understand accounting policies, internal controls, unusual transactions and significant events. However, oral explanations are generally less persuasive than reliable documentary or independent evidence because they may be subjective or difficult to verify. Important oral information should therefore be corroborated through supporting documents or other audit procedures. The auditor should also document significant explanations received during the audit. Therefore, oral evidence is useful for obtaining information and clarification but should not ordinarily be relied upon alone for significant audit conclusions.
7. Evidence from Management
Management is an important source of audit evidence because management has detailed knowledge of the entity’s operations, transactions and financial statements. Management may provide explanations, representations, schedules, certificates and other information required by the auditor. However, management is responsible for preparing the financial statements, so the auditor should consider the possibility of bias or error. Management representations should generally be evaluated together with other audit evidence. Where appropriate, the auditor should seek independent corroboration. Therefore, evidence obtained from management can be useful, but its reliability depends on the circumstances and should be assessed with professional scepticism.
8. Evidence from Accounting Records
Accounting records include journals, ledgers, trial balances, subsidiary records and other records used to prepare financial statements. They provide important evidence about transactions and account balances. Their reliability depends on the accuracy, completeness and effectiveness of internal controls over recording and processing transactions. The auditor should test relevant records and reconcile them with supporting documentation and external evidence where appropriate. Accounting records alone may not be sufficient to establish all financial statement assertions. Therefore, they form an important foundation of audit evidence but should generally be evaluated along with other appropriate sources of evidence.
9. Evidence from Specialists
Evidence may be obtained with the assistance of specialists when the audit involves matters requiring specialised knowledge. Examples include valuation of complex assets, actuarial calculations, legal matters or technical assessments. The auditor should consider the competence, capabilities and objectivity of the specialist and evaluate whether the specialist’s work is appropriate for the audit purpose. The auditor remains responsible for the audit opinion and should understand the nature and significance of the specialist’s findings. Therefore, evidence obtained through specialists can be valuable for complex matters, provided their expertise and work are appropriately evaluated by the auditor.
10. Factors Affecting Reliability of Evidence
The reliability of audit evidence depends on several factors, including its source, nature, relevance, independence and method of obtaining it. Evidence obtained directly by the auditor and from reliable independent external sources may generally provide stronger assurance. Evidence generated internally may be more reliable when effective internal controls are operating. Original documents may provide stronger evidence than unauthenticated copies, subject to the circumstances. However, reliability should always be assessed in relation to the specific audit objective and financial statement assertion. Therefore, the auditor should use professional judgement and professional scepticism when evaluating the quality and reliability of audit evidence.
Methods of Obtaining Audit evidence:
1. Inspection
Inspection involves examining records, documents, or physical assets to obtain audit evidence, whether in paper form, electronic form, or other media. This includes reviewing invoices, contracts, minutes of meetings, and physically examining tangible assets like inventory or fixed assets. Inspection of records provides evidence of varying reliability depending on their nature and source; internally generated documents are generally less reliable than those obtained from independent external sources. Physical inspection of assets confirms existence but does not necessarily verify ownership or valuation. This method is widely used across most audit areas, as it provides direct, tangible evidence supporting specific financial statement assertions.
2. Observation
Observation involves the auditor watching a process or procedure being performed by others, such as observing the client’s staff conducting a physical inventory count or witnessing the operation of a specific internal control activity. This method provides audit evidence about the performance of a process at the specific point in time it is observed, but it has limitations since the people being observed may behave differently knowing they are being watched. Observation alone is rarely sufficient evidence and is often supplemented with other procedures like inquiry or inspection to corroborate findings and reduce the risk of unrepresentative results.
3. External Confirmation
External confirmation involves obtaining direct written evidence from an independent third party, in paper or electronic form, confirming specific information relevant to the audit, such as bank balances, accounts receivable balances, or details of loans. This method is considered highly reliable since the evidence comes directly from an independent source outside the client’s control, reducing the risk of manipulation. Common examples include bank confirmation letters and debtor confirmation requests. Auditors must maintain control over the confirmation process, from selection of items to receipt of responses, to preserve the integrity and reliability of the evidence obtained through this method.
4. Recalculation
Recalculation involves the auditor independently checking the mathematical accuracy of documents or records, either manually or through the use of computer-assisted audit techniques (CAATs). This includes verifying calculations such as depreciation, interest computations, or additions in ledgers and schedules. Recalculation provides highly reliable evidence since it is performed directly by the auditor rather than relying on client-prepared figures. This method is particularly effective for identifying arithmetic errors and is commonly used in conjunction with other procedures like inspection, ensuring that the underlying figures presented in financial statements are not just properly recorded but also mathematically accurate and correctly derived.
5. Reperformance
Reperformance involves the auditor independently executing procedures or controls that were originally performed as part of the entity’s internal control system or accounting process, to verify their proper functioning and outcome. For example, an auditor might reperform a bank reconciliation prepared by client staff to confirm its accuracy. This method provides strong, direct evidence about whether a control operates effectively, since the auditor personally carries out the same steps rather than merely observing or inspecting after the fact. Reperformance is particularly valuable when testing key controls that significantly influence the auditor’s overall risk assessment and audit approach.
6. Analytical Procedures
Analytical procedures involve evaluating financial information through analysis of plausible relationships among both financial and non-financial data, including comparisons with prior periods, budgets, and industry data. This method helps identify unusual fluctuations, trends, or relationships that may indicate potential misstatements requiring further investigation. Analytical procedures are used at various stages of the audit, including risk assessment and as substantive procedures. While efficient for identifying anomalies across large volumes of data, this method alone typically provides less persuasive evidence than direct testing and is often used to complement other more detailed audit procedures for higher assurance.
7. Inquiry
Inquiry involves seeking information from knowledgeable persons, whether financial or non-financial, within or outside the entity, to obtain audit evidence through discussion or written correspondence. While inquiry alone rarely provides sufficient audit evidence to detect material misstatements, it is a valuable procedure often used alongside other methods to corroborate or contradict evidence obtained. Responses to inquiries may provide new information or evidence that differs significantly from other information the auditor already possesses, prompting further investigation. Auditors must evaluate the reliability of responses received, considering the competence, independence, and objectivity of the individual providing the information.
Physical Verification of Audit evidence:
Physical verification refers to the audit procedure of physically inspecting and counting tangible assets, such as inventory, cash, and fixed assets, to confirm their existence and, to some extent, their condition at a given point in time. This procedure provides direct, first-hand evidence that assets recorded in the books actually exist, rather than relying solely on documentary evidence which could be fabricated or erroneous. Physical verification is particularly critical for assets prone to misappropriation or misstatement, such as cash and inventory. However, it primarily confirms existence and condition, not necessarily ownership, valuation, or rights over the asset.
1. Physical Verification of Inventory
Physical verification of inventory involves the auditor attending or observing the client’s physical stock count, either at the year-end or at an interim date with appropriate roll-forward procedures, as required under SA 501. The auditor evaluates management’s count instructions, observes whether procedures are followed consistently, performs test counts of selected items, and investigates significant differences between physical counts and book records. This procedure helps confirm the existence and condition of inventory, identify obsolete or damaged stock requiring write-down, and assess the reliability of the client’s inventory records and cut-off procedures surrounding the financial year-end.
2. Physical Verification of Cash
Physical verification of cash involves the auditor conducting a surprise or planned cash count of cash on hand, petty cash, and cash equivalents held by the entity at a specific point in time, reconciling the physical count with the recorded cash book balance. This procedure is particularly important given the liquid and easily misappropriated nature of cash, making it susceptible to theft or manipulation if inadequate controls exist. Auditors typically perform this verification unannounced to prevent manipulation of records beforehand, and any discrepancies identified must be investigated thoroughly to determine whether they result from timing differences, errors, or fraud.
3. Physical Verification of Fixed Assets
Physical verification of fixed assets involves the auditor inspecting tangible property, plant, and equipment to confirm their existence, physical condition, and continued use in business operations, corroborating amounts recorded in the fixed asset register. This procedure helps identify assets that may be obsolete, damaged, idle, or disposed of but not yet removed from the books, which could indicate potential overstatement of asset values. Auditors typically select a sample of significant or high-value assets for physical inspection rather than verifying the entire asset base, focusing particular attention on assets acquired or disposed of during the year under audit.
4. Limitations of Physical Verification
While physical verification provides strong evidence of an asset’s existence and condition, it has inherent limitations, as it does not by itself confirm ownership, legal title, or the appropriate valuation of the asset in the financial statements. For example, physically verifying inventory confirms its presence but not whether the entity holds clear ownership, particularly with goods held on consignment or under retention of title arrangements. Similarly, physical verification of fixed assets does not confirm whether the recorded value reflects appropriate depreciation or impairment. Auditors must therefore combine physical verification with other procedures like inspection of title documents and valuation testing.
