Determining The Size Of Audit Evidence | ECPA

The audit evidence helps the auditor to transform assumptions into proven evidence and to correct deviations in the financial statements.

Amer Ibrahim - • External audit and audit

Determining The Size Of Audit Evidence

Determining the size of the audit evidence

We often get questions about the auditor's work and how he can find audit evidence. What are the types of evidence? What procedures, tools, and means do the auditor use to obtain sufficient evidence.

This article will discuss some of the most common questions accountants, and business owners have about audit evidence. Then, I'll try to answer all of your questions simplified.

As we all know, the auditors' main task is to examine the financial records and books for errors. The extent of their validity and the indications of a company's actual financial position can be found.

To confirm the validity and the reality of the financial position, the auditor needs evidence to help him. This evidence is called audit evidence.

Hence, we understand that the Audit is the process of collecting evidence to ensure the authenticity and validity of financial statements. Typically, auditors come up with conclusions based on their findings by many years of previous experience, ensuring that everything goes as planned. 

The concept of audit evidence

Evidence, in general, is the facts that people use to decide on a particular subject, helping them judge, dismiss and make the right decisions. This concept does not differ much from reality for accounting.

We can define the concept of audit evidence as facts and information that an auditor can get to that allows an auditor to judge whether or not a company’s financial reports are accurate.

To avoid getting confused, I can summarize the concept of audit evidence by knowing two main points. The first point to understand is the difference between presumptions and evidence, which I will explain below. The other point is knowing the different types of audit evidence. 

What is the difference between evidence and clues?

Audit evidence

These are methods and foundations that enable the auditor to convert their uncertain assumptions and beliefs into proven and accurate facts and evidence.

The clues for auditor

It means using it for consistent and honest matters to obtain a reasonable opinion on a particular matter that is different in it. If proven true, the clues can turn into audit evidence.

Types of audit evidence

We can divide evidence into two main types:

  • Firm, conclusive 
  • Secondary evidence is uncertain and cannot be relied upon to confirm the validity of a specific presumption that is considered a presumption .

As we have seen followers of our website “ECPA,” there is a remarkable similarity between the presumption and the evidence. Still, the auditor can distinguish them according to the relative importance they give to the presumption, but what types of evidence can the auditor rely on?

  • The subject of the Audit is if it exists on the ground and can be physically examined by the auditor.
  • Documents and books that support the Registrar with lists and these documents may be sourced inside or outside the facility.
  • Letters and statements that the auditor can obtain himself or her assistance.
  • Documents and certificates provided by the facility management to references.
  • Correlation between accounts and data examined by the auditor.
  • High-level internal control.
  • Operations performed during the examination process.
  • The auditor himself performed calculations .

Validity of audit evidence

Some points must be found in the audit evidence so that the auditor can consider it a solid and competent guide and take it into account before making the final audit report. These powers include:

  • To help the auditor determine the validity and accuracy of the financial statements.
  • Several sources of evidence should be used and not based on one type.
  • The auditor is primarily responsible for collecting evidence.
  • The auditor is responsible for auditing the source of evidence and ensuring that it is entirely safe before relying on it.
  • Evidence shows its impact in the audit report.
  • If relying on false and undocumented evidence will result in wrong decisions and a real crisis for the facility .

Characteristics of audit evidence

To consider the validity of a directory strong enough, the directory must have more than one feature such as:

Validity and safety of access to evidence

An auditor needs to examine several lists, each list needs evidence, and each evidence has means to obtain it. Before trusting the evidence, you must ensure the integrity of the means obtained.

For example, an actual inventory has rules that must be followed to obtain evidence. If it is not complied with, the validity of the evidence is invalidated.

Nature and quality of the guide

References must rely on the source of documented evidence, such as viewing assets and ensuring their actual existence and take into account non-reliance on opinions or opinions.

The confidence strength available in the source provided for the guide

Trust is one of the essential elements that the auditor relies on, for example, obtaining external reports about the facility from a reliable source that is better than those obtained from within it.

The way the auditor will get the guide

The auditor must rely on himself or one of his assistants to obtain evidence and not rely on other individuals, especially those within the facility’s management.

What is the strength of the relationship between evidence and examination subject?

Of course, the greater the relationship between the guide and the audit subject, the stronger and better the evidence argument.

Is the timing of evidence appropriate for the examination issue or not?

Some evidence loses strength as time changes. For example, taking existing cash as evidence is not valid.

Factors Affecting Audit Evidence

For the auditor to decide, he must collect as much evidence as possible. Still, there are several factors that affect the number of evidence by increasing and decreasing, including:

Relative importance

  Relative importance means the amount of omission or misrepresentation in accounting statements within the financial statements, which may affect the judgment of the person who properly relies on these statements when making their decisions.

Most importantly, relative importance is the value that, if an error or any misrepresentation occurs more or less, leads to changes in financial statements and their appearance in a misleading manner to the user and, of course, has the most significant impact on the decisions made by the auditor.

The auditor calculates their estimated value with a value ranging from% 1.5% of the value of the company's assets or revenues, whichever is greater.

The size of evidence can be calculated by the following formula:

Potential forgery and fraud

If the auditor suspects that there is fraud or fraud in the lists, he needs a large number of accounting evidence to prove fraud. Perhaps the most oversized item in which theft and fraud occur is the cash clause, so the professional auditor is keen to audit it more than once. 

Time and effort

Access to evidence takes a lot of time and effort, so the auditor should have a wise decision and study the benefit of audit evidence and compare it to the cost and whether it is worth it. 

Internal control

The internal control system found in major facilities is one of the most critical factors that help references. The better and better internal control, the less evidence required by the auditor and vice versa. 

How To Find Out The Size Of Audit Evidence

Risk equation This equation means the degree of assurance that the auditor feels about the risk that the audit file may contain. Therefore, the auditor's amount of effort and cost to determine the validity of the financial statements will be known.

It can be expressed in an arithmetic way:

To understand more, we will try in our website ECPA Simplify the topic by auditing an example as follows: One auditor identified the risk of the Audit and, after studying the factors that affect each risk, assessed the following result: 

  • The average risk is 20%, ranging from 10% to 100%.
  • The control rate is 80%, ranging from 10% to 100%.
  • The possible risk was 4% acceptance, ranging from 2% to 5%.

Assuming that the financial statements to be audited will include the following statements: 

  • Total company assets = 3 million pounds
  • Total Revenue = 5 Million Pounds

Because relative importance should range from 0.5% to 1.5%. (According to auditor’s vision through his study of the audit file) 

Based on it, relative importance will be calculated as follows: 

  • The documents amount to 200 invoices, and the financial value of total revenues was 5 million pounds.
  • Five bills worth 1 million pounds were excluded under invoices of a unique nature.
  • One hundred ninety-five invoices were valued at 4 million, which is the remaining number of invoices and represents the sample community .

Thus, the sample community value of the revenue item is 4 million pounds. 

Let’s conclude the following law:

The work of an auditor needs a lot of experience, study, and complete knowledge of the essential aspects that help him accomplish his work and the first audit evidence, which was the subject of our article today. If you need to understand any accounting topic, please feel free to contact us and share it in the comments. And to a meeting soon.

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