While audits can be seen as challenging and inconvenient, they play a critical role in promoting transparency, accountability, and trust in financial reporting. Audits might be required by a regulator, board of directors, bank, or potential buyer or be a prerequisite before going public. Organizations may fear the extra work entailed in an audit and for their existing processes and procedures to be challenged, not to mention the cost burden of an audit; however, this should be viewed as an opportunity to identify areas for improvement in their financial processes and controls. Everyone wants to be done with the audit as soon as possible.
Auditors must evaluate whether sufficient and appropriate evidence has been obtained to opine on an audit. What procedures do they perform? And how can a client help facilitate the process? Keep reading to find out.
What procedures do auditors perform to obtain audit evidence?
Audit evidence is all information the auditors receive to help them conclude and opine on the financial statements. Audit evidence is obtained from the management of the audit client or external parties.
Audit evidence includes, but is not limited to:
- Accounting records (journal entries, checks, invoices, contracts, subledgers, reconciliations)
- Information obtained by the auditor from
- Analytical procedures
- External confirmations
- Board meeting minutes
Quality of Audit Evidence
While sufficiency of audit evidence is a quantitative measure, appropriateness is the measure of quality. Obtaining more of the same type of audit evidence may not compensate for the lack of appropriateness, but evidence generally decreases the need for more. The quality of audit evidence depends on its relevance and reliability in supporting the auditor’s conclusions.
What do we mean by relevance? For example, a building inspection may provide relevant evidence of its existence; however, it does not satisfy the auditor’s need to verify the client’s rights to the building, but a title would.
When it comes to the reliability of audit evidence, it depends on the nature and source of the audit evidence and the circumstances under which it is obtained. Generally, the information obtained from credible external parties is considered more reliable as it is less susceptible to management bias. Another good example of reliable audit evidence is information in documentary form (i.e., paper or electronic), as it is usually more reliable than evidence obtained through oral inquiries.
What can audit clients do to improve the audit evidence?
6 helpful tips for an auditee
- Enforce procedures that require a trail of documentation – Are you seeking management’s approval to send a quote to a customer, bind business contracts, or process payments beyond personnel’s authority? Do so in writing to have an internal documentation trail to provide a clear and auditable record of the organization’s activities.
- Reconciliation and tie-out – Reconcile all schedules and calculations to the trial balance before providing them to the auditors. Ensure that all supporting documents tie-out to the recorded amounts. This step is critical for validating the accuracy and completeness of financial information.
- Store source documents – Maintain and store source documents that support the recorded transactions in the financial statements. When auditors request evidence for specific items, providing underlying source documents, such as contracts, invoices, and agreements, strengthens the credibility of the financial information.
- Put any agreements in writing – Put agreements in writing and have them signed by all parties. Avoid verbal agreements, which can lead to misunderstandings and difficulties in proving their existence and may raise questions during the audit.
- Avoid screenshots – Providing screenshots of audit evidence, such as bank statements or clauses of contracts, raises doubt about the authenticity and completeness of information. Screenshots of calculations in an Excel workbook are also difficult to follow. Therefore, providing the full documents, including the Excel formulas, helps auditors better understand and assess the evidence.
- Cooperate and communicate with auditors – Establish open and transparent communication with the auditors throughout the audit process. Respond promptly to audit inquiries and provide additional information as requested. Cooperation and communication facilitate a smoother and more efficient audit.
These six tips aim to assist accounting personnel in enhancing the quality of evidence they provide to auditors, leading to time and cost savings.