Essentials of good audit evidence:
(a) Sufficient: The audit evidence are said to be sufficient when they are in adequate quantity. The audit evidence enables the auditor to form an opinion on the financial information. Sufficient evidence can be obtained by test checking instead of 100% checking.
(b) Reliable: Evidences obtained by auditor are persuasive rather than conclusive in nature therefore evidence cannot be100% reliable. The reliability of audit evidence is depends upon:
(i) Source: whether the evidence obtained within the organisation i.e. internal and obtained from outside i.e. external (confirmation by third party)
(ii) Nature: whether the evidence is verbal (explanation from clients staff), visual (physical verification of stock) or documentary (bills attached to vouchers)
(c) Relevant: The obtained audit evidence must be relevant to the matter being checked. For e.g. the balance stock in hand to be checked then the relevant evidence shall the physical verification.
The following rules of thumb have proven helpful in judging the appropriateness of evidence:
(a) documentary evidence is usually better than testimonial evidence;
(b) audit evidence is more reliable when the auditor obtains consistent evidence from difference sources or of a different nature.
(c) original documents are better than photocopies;
(d) evidence from credible third parties may be better than evidence generated within the audited organization;
(e) the quality of information generated by the audited organization is directly related to the strength of the organization’s internal controls (the auditors should have a good understanding of internal controls as they relate to the objectives of the audit); and
(f) evidence generated through the auditor’s direct observation, inspection and computation is usually better than evidence obtained indirectly.
Important factors to be considers while obtaining audit evidence:
– the quality of the evidence (its relevance, reliability and validity);
– the level of materiality (Rupees terms) or the significance of the observation or conclusion (in general, the higher the level of significance or materiality, the higher the standard that evidence will have to meet);
– whether an audit level of assurance (high) or a review level of assurance(moderate) is required (for example, a higher level of assurance is required for evidence to support observations than is required to support contextual information included in the report);
– the risk involved in making an incorrect observation or reaching an invalid conclusion (as an example, if any risk of legal action against the auditee results from reporting an observation, the standard of evidence demanded will be high); and
– the cost of obtaining additional evidence relative to likely benefits in terms of supporting observations and conclusions (as in most things, diminishing returns apply in gathering audit evidence at some point, incurring the cost of obtaining more evidence will not be justified by changes in the persuasiveness of the total body of evidence).