Which Of The Following Statements Concerning Audit Evidence Is Correct

Which of the Following Statements Concerning Audit Evidence is Correct? A Deep Dive into Audit Procedures and Assurance

The cornerstone of a successful audit lies in the quality and sufficiency of the audit evidence gathered. Understanding what constitutes acceptable audit evidence and how to assess its reliability is crucial for auditors. This article will explore the nuances of audit evidence, dissecting common statements concerning its nature and application to determine their correctness. We'll delve into various audit procedures, discuss the hierarchy of audit evidence, and examine how auditors assess the reliability and sufficiency of evidence to form an informed opinion.

Understanding Audit Evidence: A Foundation for Reliable Audits

Audit evidence is any information used by the auditor to arrive at the conclusions on which the audit opinion is based. It's the raw material that underpins the auditor's judgment and allows them to express an opinion on the fairness of a company's financial statements. This evidence isn't limited to just numbers; it encompasses a broad range of information, both quantitative and qualitative.

Key Characteristics of Reliable Audit Evidence

Several characteristics contribute to the reliability of audit evidence. These include:

• Relevance: The evidence must directly relate to the assertion being tested. For example, evidence regarding the existence of inventory is irrelevant when testing the completeness of accounts receivable.

• Reliability: The reliability of evidence depends on its source and nature. Evidence obtained directly from independent external sources is generally more reliable than evidence obtained solely from the client.

• Sufficiency: The auditor must obtain sufficient evidence to support their conclusions. This involves considering both the quantity and quality of the evidence. A small sample size of high-quality evidence might be insufficient, just as a large sample size of low-quality evidence would also be insufficient.

• Objectivity: The evidence should be free from bias. Evidence obtained directly from independent external sources tends to be more objective than information obtained from internal sources.

Analyzing Statements Concerning Audit Evidence

Let's now analyze some common statements about audit evidence and determine their correctness. These statements often appear in professional accounting exams and represent critical concepts in auditing practice.

Statement 1: "Audit evidence is more persuasive if it is obtained from independent sources external to the entity."

Correctness: True. Evidence obtained from independent external sources, such as bank confirmations or vendor statements, generally carries higher reliability. These sources are less susceptible to manipulation or bias compared to internally generated evidence. The objectivity increases the persuasiveness of the evidence.

Statement 2: "The auditor should always obtain the maximum amount of audit evidence possible."

Correctness: False. While sufficient evidence is essential, obtaining the maximum amount is neither practical nor efficient. Auditing is a cost-benefit exercise; the cost of obtaining excessive evidence might outweigh the incremental benefit of increased assurance. Auditors must apply professional judgment to determine the appropriate level of evidence required based on the assessed risk.

Statement 3: "Physical examination of inventory provides compelling evidence of its existence and condition."

Correctness: True. Physical examination, a direct audit procedure, allows the auditor to directly observe and verify the existence of assets like inventory. This provides strong evidence concerning existence and, to some extent, condition. However, it's crucial to remember that this procedure alone doesn't guarantee the accuracy of quantities or valuation.

Statement 4: "Confirmation of accounts receivable provides conclusive evidence that the receivables are collectible."

Correctness: False. While positive confirmations (where the recipient is asked to confirm the balance regardless of its accuracy) from debtors offer compelling evidence of the existence of accounts receivable, they do not guarantee collectibility. Debtors might confirm a balance without acknowledging its potential uncollectibility. Further procedures, like reviewing aging of receivables and assessing the debtor's creditworthiness, are necessary to assess collectibility.

Statement 5: "Analytical procedures are rarely used as substantive audit procedures."

Correctness: False. Analytical procedures, which involve comparisons and analysis of financial data, are increasingly used as substantive audit procedures. They can provide significant evidence about the reasonableness of financial statement balances and help identify potential misstatements. While not a substitute for other procedures, they are a valuable tool in the auditor's arsenal.

Statement 6: "The auditor's reliance on internal control should influence the nature, timing, and extent of audit procedures."

Correctness: True. A strong internal control system reduces the risk of material misstatements. The auditor's assessment of internal controls determines the nature, timing, and extent of substantive audit procedures. Strong controls allow the auditor to rely more heavily on internal controls and potentially reduce the extent of substantive testing. Conversely, weak controls necessitate more extensive testing.

Statement 7: "Audit evidence is always sufficient, appropriate, and reliable."

Correctness: False. The quality and sufficiency of audit evidence are crucial considerations. Evidence can be appropriate (relevant and reliable) yet insufficient in quantity. Conversely, an abundance of inappropriate evidence won't support a reliable audit opinion. Auditors must exercise professional judgment to assess both the quality and quantity of evidence collected.

Statement 8: "Documentation of audit evidence is not a critical component of the audit process."

Correctness: False. Thorough documentation of audit procedures, findings, and conclusions is critical for the audit process. Audit documentation serves as a record of the auditor's work, supporting the audit opinion and demonstrating compliance with auditing standards. It allows for review and quality control, and is essential for potential legal defense.

Hierarchy of Audit Evidence Reliability

The reliability of audit evidence varies significantly. A general hierarchy can be established, although the specific ranking can depend on the context:

1. Auditor's direct personal knowledge: This is the most reliable type of evidence, such as physically counting inventory or observing internal controls in operation.

2. External, independent evidence: This includes bank confirmations, vendor invoices, and confirmations from customers.

3. Internal evidence with strong internal controls: Documentation generated internally can be reliable if internal controls are strong and there's evidence of appropriate authorization and oversight.

4. Internal evidence with weak internal controls: This type of evidence is less reliable and requires further corroboration.

5. Oral evidence: While sometimes necessary, oral evidence is the least reliable and should be corroborated by other types of evidence.

Conclusion: The Critical Role of Audit Evidence

The reliability and sufficiency of audit evidence are paramount in the auditing process. Auditors must meticulously plan and execute audit procedures to obtain appropriate evidence. The statements examined highlight the importance of understanding the characteristics of reliable audit evidence and the factors influencing its reliability and persuasiveness. By adhering to professional standards and exercising sound judgment, auditors can ensure the quality and integrity of their audit opinions, ultimately contributing to the public's trust in financial reporting. Remember, the process is continuous, involving careful planning, execution, review, and documentation to ensure that the audit opinion is well-supported and defensible. The quality of the audit evidence directly impacts the quality of the audit opinion, making this aspect of auditing fundamentally critical.