Audit Evidence
Audit evidence is the information an auditor uses to reach the conclusions on which an opinion is based. It has to be both sufficient in quantity and appropriate in quality, and quality turns on relevance and reliability. Evidence obtained directly by the auditor, such as an item counted personally, is generally more reliable than evidence produced by the entity being audited about itself.
What Is Audit Evidence?
Not all information carries the same weight, and the ranking is what an auditor spends most of their judgement on. What an auditor gathers first-hand outranks anything handed over by the entity under examination, since the latter is a party speaking about itself. Evidence from an independent outside source is stronger than internally generated evidence, and original documents are stronger than copies or summaries prepared for the purpose.
Sufficiency and appropriateness work together rather than substituting for each other. A large quantity of weak evidence does not become strong through accumulation, and a single piece of strong evidence may still not cover enough of the population to support a conclusion. This is why a physical count matters so much in an inventory audit: it is one of the few procedures producing evidence the auditor generated personally, about the physical world, rather than reading a record the client prepared. It is also why management representations are recorded as what they are and never treated as evidence of existence.
Audit Evidence Under Indian Law
Position: two tests apply together. There has to be enough evidence, and it has to be of the right character, which turns on relevance and on how far it can be relied upon.
- The standard sets out how reliability varies. Evidence obtained from independent sources outside the entity is more reliable than evidence generated within it. Evidence the auditor obtains directly is more reliable than evidence obtained indirectly or by inference. Evidence in documentary form outranks oral representation, and an original document outranks a copy.
- Source: Standard on Auditing 500, Audit Evidence, together with its application material on the reliability of sources.
- Note: these are principles applied with professional judgement rather than a ranking to be followed mechanically. Evidence from a poorly controlled external source can be weaker than evidence from a well-controlled internal one.
What an Auditor Accepts as Evidence of Audit Evidence
What is accepted here is the working paper trail itself, since the file has to show how a conclusion was reached.
- Accepted: procedures documented before they were performed, source documents rather than summaries prepared for the purpose, and observations recorded at the time with the date and the person identified.
- Accepted: confirmations received directly from outside parties, which carry weight precisely because they did not pass through the entity being examined.
- Rejected: a schedule prepared by the entity and adopted without testing, since adopting it makes the entity's assertion the auditor's conclusion.
- Rejected: a representation used to establish existence, which records what management asserts about something the work could not resolve.
- Retained: sufficient material that a reader who never attended could arrive at the identical view, which is precisely what a reviewer probes for.
How Audit Evidence Works in Practice
- The auditor identifies what has to be established about a balance: for inventory, that it exists, is owned, is in saleable condition and is carried at a supportable value.
- Procedures are chosen for each assertion. Attendance at a count addresses existence; purchase records and storage agreements address ownership; inspection addresses condition; market evidence addresses value.
- Information is gathered and weighed rather than merely collected. What the auditor obtained personally outranks what the entity supplied, an outside source outranks an internal one, and originals outrank summaries.
- Sufficiency is then assessed against the risk. A material, high-risk area needs more and better evidence than a small routine one, and volume never compensates for weakness.
- What is retained in the working papers has to let somebody who was not present reach the same conclusion, which is the practical test applied when the file is reviewed.
Audit Evidence: A Worked Example
| Source | Strength | Why |
|---|---|---|
| Auditor's own count | Strongest | Obtained directly, not through the client |
| Bank confirmation of stock held | Strong | External, independent of management |
| Supplier invoice from the client's file | Moderate | External in origin, client-held |
| Store ledger printout | Weaker | Internal, produced by the party being checked |
| Verbal assurance from the storekeeper | Weakest | Internal, unrecorded, uncorroborated |
A verification at a Ranchi steel stockist gathers all five sources on the same stock.
They are not interchangeable, and the ranking is about who produced the record and how it reached the file rather than about how convincing it sounds. A ledger printout can be neatly produced and still be the weakest paper in the file, because the party under examination made it. Where a strong source and a weak source disagree, the stronger one prevails unless there is a specific reason to doubt it. The practical consequence is that an exception supported only by the bottom two rows will not survive review, so corroboration is sought before the visit closes rather than afterwards.
Common Mistakes With Audit Evidence
The common errors are about quality rather than quantity.
- Accumulating a large volume of weak material and treating the volume as strength, since piling up thin material never converts it into something an opinion can rest on.
- Accepting a system report as evidence of physical existence, when it repeats what the system was told and cannot corroborate itself.
- Relying on copies or summaries prepared by the entity when originals were available, which discards the more reliable version for convenience.
- Treating a management representation as evidence that unlocated items exist, when it records an assertion about a population the work could not resolve.
- Gathering sufficient evidence over an immaterial area while leaving a material one thin, which satisfies the file and not the opinion.
- Treating an entity-prepared schedule as independent because it was requested formally, when the source is unchanged by the request.
Need Help With Audit Evidence?
This page explains the idea. The practical question begins when evidence over an inventory balance is what is actually needed, and settling it means fieldwork of the kind inventory audit sets out. Scope is built from the sites involved and the state of the underlying records.