Audit Evidence Collection and Quality Control

Zongyun Xie

Doctor Melissa Carlisle

Attestation and Assurance 314

4 December 2015

Audit Evidence Collection and Quality Control

Audit Evidence and Its Importance

        Audit evidence is the information obtained during audit work and used by auditors “in arriving at the conclusions on which the auditor's opinion is based” (PCAOB, A8-1). Basically, audit evidence includes the information contained in accounting records that financial reports are based on and other relevant information.

        As business becomes international and diversified, auditing is increasingly complex and extensive. Audit evidence is deemed to be the core of auditing and the foundation of audit conclusions and reports. Therefore, the collection, evaluation and quality control of audit evidence is vital for the quality of audit work. Only when audit evidence is properly collected and is of high quality will the audit reports be convincing.

Audit Evidence Collection

Classification of Audit Evidence        

        As mentioned before, audit evidence collection is an important part of auditing, which directly affects the result of audit work. One of the important preconditions of collection is the proper classification of evidence. There are types of evidence available for audit work but they are not equally relevant or useful. The purpose of classifying the evidence is to organize and systemize the evidence so that auditors can properly and effectively take full advantage of it.         

        Basically, audit evidence can be divided into eight major types. The physical examination is the evidence that auditors obtain by inspecting or counting tangible assets of clients. Confirmation means that auditors will ask a third party to provide documents directly for them in order to make sure the financial reports are correct. Documentation is the auditors’ inspection of supporting evidence from client’s documents, files, and records. Inquiries involves asking knowledgeable people within or outside the clients for answers to specific questions. Reperformance requires that auditors independently reperform the accounting procedures done by the clients. Recalculation refers to rechecking clients’ arithmetical accuracy. Observation means that auditors observe how the activities are done by clients. The last type of evidence is the analytical procedures that examine the relationship among all the data.

Principles of Evidence Collection

        In order to properly collect all relevant and useful audit evidence, three principles should be strictly followed.

        Firstly, evidence should be accurate and timely. Timeliness is very important for audit evidence because some evidence might disappear in a short period of time due to specific factors. When auditors find possible substantial misstatement, they should immediately protect the documents and obtain relevant evidence, including both oral and written information.

        In addition, auditors should figure out what evidence they really need before they start collecting evidence so that they will not waste time. Different accounts or assertions require different types of audit evidence (discussed before). For example, physical examination, in most cases, is associated with cash and inventory, but it can be hardly used for accounts payables. Instead, external confirmation is often used in audit of accounts payables. Auditors obtain subsequent cash disbursement from the bank to check whether a client’s accounts receivables have been completely recorded. Focusing on the most useful and relevant evidence can make audit work more efficiently and effectively.

        Moreover, completeness and objectivity of audit evidence is crucial. Completeness means that auditors should collect all relevant evidence within their scope of responsibilities. Objectivity requires that auditors collect evidence according to what situation they are in and that they remain unbiased. They are not supposed to exaggerate or overlook any of the evidence.

Quality Control of Audit Evidence

Quality of Audit Evidence        

        Evidence quality is also vital to audit work so that it should be controlled throughout the entire work.  PCAOB defines “quality” as sufficiency and appropriateness, and appropriateness means relevance and reliability.

        “Sufficiency is the measure of the quantity of audit evidence” (PCAOB, A8-1). In other words, audit evidence should be sufficient so that auditors can draw convincing conclusions accordingly. However, only focusing on the quantity of evidence may mislead the work. As a consequence, auditors should consider other factors together with sufficiency. The first one is the significance of both the accounts being audited and the evidence obtained. For the accounts, the more significant the accounts, the higher level of sufficiency required. For the evidence, significance means how the evidence will influence auditors’ opinions. The second one is the risk of misstatement. Auditors will collect more evidence when they believe there is a high risk that the financial statement is misstated.  Moreover, the cost of collecting evidence should also be taken into account. Auditors are supposed to find out a balance between sufficiency and cost.

        Relevance is the key element of audit evidence because any irrelevant evidence is useless in audit. It is a prerequisite for an audit plan. For instance, examining the list of transactions can check the existence of accounts payables, but it cannot help test the completeness of accounts payables. Consequently, auditors should make sure that the evidence they use is related to the accounts and assertions being audited. Reliability requires that audit evidence be real, objective, and reliable. The more reliable the evidence, the more convincing the audit opinions.

Possible Problems of Audit Evidence Used

        The first problem may be insufficiency. Some auditors, influenced by personal habits or preference, are likely to collect evidence according to their own experience without systematically analyzing the problems and properly making decisions. Therefore, they may not be able to collect sufficient evidence from different aspects. In addition, some working papers only contain numbers from clients’ financial statements. However, the sources and related information are missing.

        Additionally, the evidence obtained by auditors may be irrelevant and disorganized. Specifically, sometimes auditors collect too many documents and records, but some of these document have nothing to do with the audit work. The worse thing is that the excessive and evidence takes auditors a huge amount of time to collect and organize, which is very time-consuming and makes audit work inefficient.

        Another problem could be the lack of evidence of client’s internal control, accounting information system, and other factors that can affect the audit work. Obtaining an understanding of clients is involved in every engagement, and understanding the internal control of clients is one of the most important parts. The purpose is to help auditors assess the risks of material misstatements in financial statements and then make proper audit plans. However, sometimes this type of evidence might be overlooked or insufficient, negatively impacting the audit work.