Information that is collected in the review of an entity’s financial transactions to certify the financial statements as being fairly represented Show What is Evidence in an Audit?Evidence in an audit is information that is collected and required in the review of an entity’s financial transactions, balances, and internal controls to certify the financial statements as being fairly represented. Evidence is used by auditors and certified public accountants (CPAs) in determining whether an audit results in an unqualified or clean opinion. An unqualified opinion means that the auditor has found reasonable assurance that an entity’s accounting statements are not materially misstated. Auditing ExplainedAuditing is the process of checking and verifying an entity’s financial statements for accuracy and fairness. Transactions that are recorded within the financial records of an entity must be a fair representation of the entity’s financial positioning and actual operations. Financial statements are generated internally within a company. The process introduces a level of risk for manipulation or fraudulent behavior from insiders who can alter information when preparing the financials. Auditing is an essential process that ensures that manipulation or fraudulent behavior is not being conducted. Audits are also important in ensuring that an entity is complying with relevant accounting standards, be it the International Financial Reporting Standards (IFRS), Generally Accepted Accounting Principles (GAAP), or other applicable accounting standards. Public companies are required to provide fully audited financial statements to owners and shareholders periodically. Therefore, auditing is important in maintaining the transparency and accuracy of the financial records to protect shareholders. Evidence in an Audit ExplainedEvidence in an audit protects investors by allowing auditors to issue accurate, transparent, and independent audit reports. Within the United States, the Public Company Accounting Oversight Board (PCAOB) created the Sarbanes-Oxley Act of 2002 to enforce proper auditing and in response to the Enron/Arthur Andersen scandal. In the Enron scandal, billions of dollars of debt were hidden by using several accounting loopholes. The auditors, Arthur Andersen, allowed the fraudulent behavior to occur. Evidence is a very important aspect of auditing. Financial statements can easily be misstated. It is required by auditors to verify the truth within financial records. Evidence provides support and verifies financial information that is provided by internal members of an entity, such as management and internal finance teams. On the other hand, evidence can contradict the information that is provided by internal members, and it is an indication of errors or fraud. Characteristics of Evidence in an AuditEvidence in an audit requires a few characteristics to be considered valid. The characteristics are as follows:
Examples of Evidence in an AuditEvidence in an audit is collected to complete the auditing process. Some examples include:
The compilation of the items of evidence is used to conclude whether financial statements have been accurately presented. Evidence in an Audit ExampleConsider a company that has enlisted the auditing services of a professional services firm to audit its financial statements for a fiscal year. The company has prepared its financial statements and will rely on the professional services firm to provide a fair opinion. The professional services firm will request information regarding the company’s revenues, expenses, and bank balances. For compiling accurate and reliable information, the auditing team requests all sales receipts, invoices, and a physical examination of inventories. All bank statements and balances are collected from the company’s bank as well. All of the information is considered auditing evidence for the audit process. Related Readings CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:
What is evidence gathering in audit?The evidence-gathering process involves the following steps: designing the audit procedures or tests; carrying out the audit procedures or tests and/or gathering evidence; analyzing evidence and drawing conclusions, which may also involve evaluating performance against the audit criteria; and.
Why do the auditor need to identify and gather the correct types of audit evidence?The auditor uses that evidence to assess how well the client organization is adhering to internal controls, following processes, and fulfilling requirements. Audit evidence is collected through audit procedures. The evidence might either support the organization's claim of achieving compliance or disprove that claim.
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