Five Common Sources of Substantive Audit Evidence

When performing an audit of your firm’s financials, an auditor must verify account balances and transactions to arrive at an opinion regarding your financial statements. Understanding what to anticipate in terms of document requests and inquiries prior to the start of audit fieldwork can minimize disruptions and maximize the effectiveness of your audit. See below for common sources of “substantive evidence” that auditors gather when they visit your firm.

1. Confirmation letters. Auditors send letters to third parties, such as customers or vendors, asking them to verify amounts recorded in the company’s books. There are two types of confirmations: A positive confirmation requests that the recipient complete a form confirming account balances (for example, how much a customer owes the company). A negative confirmation requests that the recipient respond only if the balance is inaccurate.
2. Original source documents. Auditors can verify an account balance or record by vouching (or comparing) it to third-party documentation. For example, an auditor might verify the existence of a vehicle on your fixed asset list by reviewing the invoice from the seller. Vouching enables an auditor to evaluate the accuracy of the amount claimed by the company and whether the company recorded the transaction correctly in its accounting system.
3. Physical observations. Seeing is believing. So, auditors sometimes verify the existence of assets through physical observations and inspections. For example, inventory audit procedures typically include observing or conducting a physical inventory count, inspecting the process to record incoming and outgoing inventory, and analyzing the inventory obsolescence process.
4. Comparisons to external market data. For assets actively traded on the open market, auditors may confirm the amounts claimed on the company’s financial statements by researching pricing data. For example, if the company invests in marketable securities that it plans to sell within one year, an auditor could analyze the prevailing market price to confirm their book value. Likewise, a random sample of parts inventory could be compared to online pricing sheets to confirm that items are reported at the lower of cost or market value.
5. Recalculations. Auditors may verify in-house schedules and records by re-creating them. If the auditor’s work matches the client’s work, it confirms that the underlying accounts appear reasonable. Auditors often rely on this procedure for such items as bank reconciliations and schedules of payroll-related expenses (for example, overtime, benefits and tax payments).

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Coordinating with your auditor ahead of time to understand the types of substantive evidence needed for each major financial statement category can help the process go more smoothly and efficiently. If you have questions or are looking for audit assistance, JLK Rosenberger can help. For more information, call us at 949-860-9902 or click here to contact us.

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