Audit Evidence, Written Representation

Audit evidence is the information obtained by auditors during an audit to draw conclusions on which the audit opinion is based. It is the foundation of the auditor’s work and is used to evaluate the financial information presented in the financial statements. Audit evidence is gathered through various audit procedures, and its sufficiency and appropriateness are crucial in forming the basis for the auditor’s opinion.

Audit evidence is crucial for forming the basis of the auditor’s opinion on the financial statements. It is obtained through various procedures, and its sufficiency and appropriateness are key considerations. Written representations, as a form of audit evidence, provide formal acknowledgment from management on specific matters and contribute to the overall assurance obtained during the audit. However, auditors must exercise professional skepticism and corroborate written representations with other audit evidence to ensure a comprehensive and reliable audit process.

Types of Audit Evidence:

1. Physical Examination:

Auditors may physically inspect assets, inventory, or other tangible items to verify their existence, condition, or ownership.

2. Confirmation:

Auditors may obtain third-party confirmations directly from external parties, such as banks, customers, or suppliers, to verify the accuracy of financial information.

3. Documentation:

Internal and external documents, such as invoices, contracts, bank statements, and internal reports, serve as important audit evidence.

4. Analytical Procedures:

These involve the analysis of financial information, ratios, and trends to identify inconsistencies or unusual fluctuations that may require further investigation.

5. Inquiry and Observation:

Auditors may interview personnel or observe certain processes to obtain information and assess the effectiveness of internal controls.

6. Reperformance:

Auditors may redo certain client procedures to verify the accuracy and reliability of the information.

7. Recalculation:

Auditors may independently recompute financial calculations to ensure accuracy.

8. Representation by Management:

Representations made by management are also considered as evidence, although they are not sufficient on their own.

Factors Affecting the Sufficiency and Appropriateness of Audit Evidence:

1. Relevance:

Audit evidence should be relevant to the assertions being tested and should directly contribute to the auditor’s objectives.

2. Reliability:

Reliable evidence is more trustworthy. The source, nature, and reliability of evidence should be considered.

3. Completeness:

The auditor needs to gather enough evidence to provide reasonable assurance without examining every single transaction or item.

4. Timeliness:

The timing of obtaining evidence is crucial. Some evidence may be more relevant and reliable at certain points in the audit process.

5. Consistency:

Consistent evidence from different sources or obtained through different methods enhances the reliability of the overall audit evidence.

6. Objectivity:

Audit evidence should be free from bias or manipulation and should be objective in nature.

7. Comparability:

The auditor may compare current-year information with prior periods or industry benchmarks to assess reasonableness.

Written Representations:

Written representations are formal written statements provided by management to the auditor to confirm certain matters or to support other audit evidence. They are considered a form of audit evidence and provide additional assurance to the auditor.

Aspects of Written Representations:

1. Management’s Responsibility:

Management is responsible for providing written representations to the auditor. These representations confirm management’s acknowledgment of its responsibility for the financial statements, internal controls, and the completeness of information provided to the auditor.

2. Scope of Representations:

Written representations may cover a range of matters, including the fairness of financial statements, the availability of records and supporting documentation, and management’s acknowledgment of its responsibility for the design and implementation of internal controls.

3. Preparation and Cooperation:

Management is expected to cooperate with the auditor by providing accurate and complete information for the preparation of written representations.

4. Impact on Auditor’s Opinion:

Written representations are considered in the context of other audit evidence. If the auditor receives written representations that are inconsistent with other audit evidence, the auditor may need to investigate further.

Examples of Written Representations:

• Management’s Acknowledgment of Responsibilities:

Management typically provides a representation letter acknowledging its responsibility for the preparation and fair presentation of the financial statements.

• Assertions Regarding Internal Controls:

Management may represent that it has disclosed all known internal control deficiencies and has provided all relevant information about the effectiveness of internal controls.

• Completeness of Information:

Management may confirm that it has provided the auditor with all necessary information and access to records and personnel.

• Legal Compliance:

Management may represent that the entity is in compliance with applicable laws and regulations.

Considerations and Limitations:

1. Reliability:

While written representations are a valuable form of audit evidence, their reliability may be influenced by factors such as management integrity and the overall control environment.

2. Corroboration:

Auditors should seek to corroborate written representations with other audit evidence to enhance the reliability of the information provided.

3. Professional Skepticism:

Auditors should maintain a level of professional skepticism and not solely rely on written representations. It is essential to consider the representations in conjunction with other evidence obtained during the audit.

4. Limited Assurance:

Written representations provide assurance, but they are not a substitute for other audit procedures. The auditor is still required to perform substantive testing and gather other audit evidence.