Auditing Evidence: Definition, Characteristics, Example

What Is Auditing Evidence?

Auditing evidence is the information collected for review of a company's financial transactions, internal control practices, and other items necessary for the certification of financial statements by an auditor or certified public accountant (CPA). The amount and type of auditing evidence considered vary considerably based on the type of firm being audited as well as the required scope of the audit.

Understanding Auditing Evidence

The goal of any audit is to determine whether a company's financial statements comply with generally accepted accounting principles (GAAP), international financial reporting standards (IFRS), or another set of accounting standards applicable to an entity's jurisdiction. Publicly traded companies are generally required to present fully audited financial statements to shareholders periodically, and thus the compilation and organization of auditing evidence are essential for auditors and accountants to do their work. In short, auditing evidence is meant to provide auditors with the information for them to make the judgment on whether or not financial statements are accurate and true.

Auditing evidence is defined as a term to protect investors by promoting transparent, accurate, and independent audit reports. The Public Company Accounting Oversight Board (PCAOB), created by the Sarbanes-Oxley Act of 2002, defines auditing evidence as all the information that can be used by auditors to make their decision on the quality and accuracy of a company's financial statements. The auditing evidence supports and verifies the final information provided by management in the financial statements. It can also contradict it if there are errors or fraud.

Examples of auditing evidence include bank accounts, management accounts, payrolls, bank statements, invoices, and receipts. Some companies will perform continuous audits to ensure stability.

Characteristics of Auditing Evidence

Good auditing evidence can be measured by the extent of the following characteristics:

Sufficiency: Sufficiency takes into account whether or not the material provided is of an adequate quantity that would allow auditors to make an accurate judgment. If an auditor was given just one bank statement of a company, it would not be enough to make any determinations on the financial standing of that company.

Reliability: Reliability seeks to determine whether or not the material can be trusted and counted on for forming an opinion. Reliability typically factors from the source of the information.

Source: The source of accounting evidence can be obtained directly from the company or externally. Externally sourced information is generally regarded as more trustworthy and is therefore preferred.

Nature: Nature refers to the type of information that is received. For example, the information can be provided through legal documents, presentations, orally from employees, or through a physical confirmation.

Relevance: Depending on the type of audit being conducted, how pertinent the information received is in relation to the overall analysis is a guiding factor.

In general, auditors prefer information that is written as opposed to that which is provided orally. They also prefer:

• Information that is from a third-party source as opposed to that from inside the company
• Original documents as opposed to copies of those documents
• A strong understanding of the firm by the auditor to request appropriate auditing evidence
• Firsthand observations by the auditor as opposed to the documentation provided via another source

Example of Auditing Evidence

Company ABC has enlisted the auditing services of the accounting firm, Anderson Brothers, to have their financial statements from the fiscal year 2020 audited. The auditor begins working on the audit and requests information regarding reported revenues and bank balances. To obtain accurate and reliable information, regarding revenues, the auditor requests sales receipts and invoices and a physical examination of inventory. Regarding bank balances, the auditor requests all of the bank statements of the company directly from ABC's bank. All of this information; the receipts, invoices, physical observations, and bank statements are regarded as auditing evidence.