Professional Documents
Culture Documents
QUESTION
‘Auditing is one of the prerequisites for an organization to achieve its objectives.
Discuss the statement using relevant examples
Audit evidence is the basis for the auditor’s option. Explain the importance of audit
evidence and how it should be recorded during practical audits
‘Auditing is one of the prerequisites for an organization to achieve its objectives.
Discuss the statement using relevant examples
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Auditing simply refers to the evaluation of business books of accounts & vouchers. It is
done to make sure whether all the financial transactions are accurately recorded. Auditing
aims at finding out the errors from books of accounts of the business.
It aims at the prevention of frauds. This examination is totally unbiased & conducted by an
independent person. The person doing auditing should be qualified for the job to perform it
with accuracy. This can be performed either by internal employees of a business or the person
who are external to business.
‘Auditing is one of the prerequisites for an organization to achieve its objectives in the
following ways
The credibility of financial statements
The regulatory body has made the auditor the only qualified person to carry out the
assignment of audit and report on the true and fair view of the client entity’s financial
statements so that users’ financial statements could rely on financial statements.
There are various stakeholders in the company’s financial statements. They may not have
sufficient knowledge of financial shenanigans.
They rely on the auditor’s independence and objectivity to ensure that audit opinion has been
expressed to reflect the books of account.
The auditor’s opinion creates a relationship of trust between the auditor and the stakeholders
which leads to the credibility of financial statements.
The opinion shall be credible and for this to happen, the independence and objectivity aspects
of the audit plan plays a huge role.
Hence, requirements are there for auditors to be independent of influences that could cloud
their professional judgment of auditors.
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Audit professionals help in the design of an internal control system to prevent fraud. The
important part of prevention is deterrence.
If the auditor has helped the company to have an effective audit system in place, the
reputation of such a system can alone prevent employees or vendors from attempting the
scheme of fraud in the company.
Cost of Capital
The cost of capital is an important aspect of a company regardless of its size. The cost of
capital consists of the risk associated with the investment. If the investment assumes more
risk, the investor has to cough for more rate of return to invest.
The employment of a strong audit mechanism reduces the variety of risks of an enterprise
including its information risk, the risk of fraud, and misappropriation of assets.
Further, it reduces the risk of underperforming management due to a lack of sufficient
information on its operations.
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Internal auditors regularly review the design of the internal controls suggesting improvements
all around it. They document any material deficiencies in the internal control by thorough
investigation and report to the appropriate level of management as and when required.
Check On Employees
Another important advantage provided by auditing is that it keeps a moral check on
employees and other staffs working within the organization. It avoids any instance of
dishonesty, irregularity and defraud on the part of employees. They all are under constant
scrutiny as they are aware that all accounts will be evaluated. It eventually leads to staff being
honest and responsible at all point of times.
Enhance Goodwill
Auditing plays an efficient role in improving the goodwill of the organization. It reveals real
profitability and financial position of business to public that creates their faith over enterprise.
All stakeholders are fully assured of all audited book of accounts which results in raising the
overall goodwill of organization
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Establishing Trust
The distinction between the stewards of a business and the shareholders and other
stakeholders means that not everyone has access to the same amount of information. The
latter have to rely on the former for a fair and balanced picture of the affairs of the company.
An audit heralds more trust between these two groups because a professional third party,
unrelated to either provides their opinion on the representations made by the caretakers of the
company. Auditors are bound by their professional bodies to maintain ethical standards that
do not compromise their judgement so their opinion remains unbiased and dependable by all.
The tasks of auditing enhance the credibility and value of the organization’s financial
statements. These financial statements prepared under a systematic auditing process increased
the confidence of the user and reduce the risk of the investor. The internal audit mainly
prevents the organization from frauds and mistakes. It also provides the scope to the
management for identifying the various kinds of accounting errors and irregularities. The
internal audit mainly focuses on the regulations, processes, and compliance. The activities of
internal auditing can also be outsourced which is identified as an external audit.
Audit evidence is the basis for the auditor’s option. Explain the importance of audit
evidence and how it should be recorded during practical audits
Audit evidence can be regarded as an increasingly important tool within the audit process,
primarily because of the reason that it really impacts the outcome of the audit process, in
terms of the report that is generated.
Therefore, it is of tantamount importance to ensure that these features are properly covered
and drafted by the auditors to provide their conclusion backed by proper analysis and
conclusion.
Audit evidence can be considered an increasingly important tool because it is basically all the
information that the auditor gathers to reach a conclusive opinion pertaining to organizations’
financial statements and the internal control environment.
Audit evidence can also be considered critical because it is formed as a basis of evidence for
banks and other investors pertaining to the existing viability of the organization.
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Investors and other bankers are supposed to rely on the auditor’s opinion it is not practical or
feasible for them to scrutinize all the financial statements all at once to arrive at a given
conclusion.
Audit evidence can broadly be categorized into two broad parts. They include internal
sources of audit evidence and eternal sources of audit evidence.
Speaking of internal sources of audit evidence, it can be seen that they include the company’s
documented processes, policy documents, accounting records, invoices, system logs, and
reports.
In the same manner, it can further be seen that external sources of audit evidence cannot
always include information from banks and other various external sources.
With both the given types of audit, it can be seen that it contributes positively towards the
audit process, essentially because of the reason that it helps the auditors to create a designed
and designated approach that can help them to execute the process, so that they are able to
reliable comment on the different parameters in the financial statements.
In the same manner, it can also be seen that audit evidence is something that forms the
backing of the auditor so that all the claims can be backed up with proper evidence.
The importance of audit evidence can further be gauged by the fact that it tends to help
people walk through the process, in terms of enabling them to create a proper trajectory, so
that the plan can be executed in a proper manner.
Furthermore, it can also be seen that it helps the auditors gauge truthfulness of the system,
within which these transactions are carried out.
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process so that all aspects are covered, and there is no ambiguity regarding assertions being
fulfilled.
Hence, audit evidence can be regarded as a part of the audit process that can help auditors
complete the audit faster, accurately, and much-organized.
In the case of high-risk audits, the importance of audit evidence also increases
proportionately because it helps them conduct the audit properly.
Conclusion
An audit can be considered as one of the most intriguing highlights within an organizations’
fiscal year. As a matter of fact, it can further be seen that numerous different steps and
techniques can be utilized in order to approach this process.
Given the overall high-level dependency pertaining to the audit report issued by the auditor, it
can be seen that the process is quite an important one, primarily because there are numerous
strings attached to the audit process.
Not only it directly impacts stakeholders and shareholders, but it also helps the company by
figuring out their strengths that need to be worked on in this regard.
Therefore, the importance of audit evidence mainly lies in the realms of ensuring that there is
substantial information on which subsequent decisions can be biased when it comes to audit
evidence.
In this regard, it is imperative that the audit report that is issued properly reflects groundwork
that is covered during the audit process, so that the possibility of unprecedented outcomes can
be minimized to a maximum.
Audit evidence is important because it is all the information that an auditor gathers to reach
his audit opinion about an organization’s financial statements and/or internal control
environment.
Audit evidence is critical to the audit and internal controls process because it allows
executives of public companies to trust the opinions of their auditors. There are a number of
laws and regulations that make it clear that the executives of public companies, not the
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auditors, are responsible for establishing and maintaining internal control over financial
reporting and assessing the effectiveness of those internal controls.
Audit evidence can be divided into internal and external sources. Internal sources of audit
evidence include a company’s documented processes, policy documents, accounting records,
invoices, system logs, and reports. External sources of audit evidence can include information
from banks, debtors, suppliers, stock exchanges, and the Internal Revenue Service.
An auditor has to collect all the possible audit evidence to establish the truthfulness of the
system to record these transactions. An auditor can verify the financial information on the
financial statements by reviewing the financial information from the various data sources,
including inventory reports, available receipts, and payments to suppliers.
Auditors use a number of audit procedures to obtain audit evidence and they frequently use a
combination of audit procedures. These include observation, inspection, confirmation,
recalculation, reperformance, and analytical procedures, along with asking questions.
Using data analytics can improve the quality of a financial statement audit by enabling
auditors to discover and analyse patterns, deviations, and inconsistencies. Data analytics can
also enable the auditors to obtain other helpful information in the data that underlies or is
related to the subject matter of an audit.
Analytical procedures are a type of audit evidence used during an audit that can indicate
potential issues with an organization’s financial records, which the auditors can then
investigate more completely. Auditors use analytical procedures to evaluate financial
information by analysing plausible relationships among financial information and
nonfinancial information.
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In most instances, these relationships should remain consistent over time. If that’s not the
case, the client’s financial records could be incorrect, maybe because of errors or fraudulent
financial reporting activity.
Two qualities of audit evidence that are related are sufficiency and the appropriateness of
audit evidence. The sufficiency of audit evidence is the amount or quantity of audit evidence.
The risks of misstatement the auditor assess to determine the quantity of audit evidence that
the auditor needs.
The higher the risks, the more audit evidence the auditor requires. But the higher the quality
of the audit evidence, the less evidence the auditor may need. However, a large amount of
audit evidence will likely not make up for the poor quality of the audit evidence.
Appropriateness is the measure of the quality of the audit evidence, i.e., the reliability and
relevance of the audit evidence. To be appropriate, the audit evidence must be reliable and
relevant to support the conclusions that the auditor uses to form the basis of his audit opinion.
The audit evidence should also be sufficient and appropriate to support and corroborate, or
contradict if necessary, the assertions of the executives as they pertain to specific transaction
classes, account balances, or financial statement disclosures.
AUDIT EVIDENCE
The outcome of an audit is a report, usually expressing an opinion. That report and opinion
must be supportable by the auditor, if challenged. Therefore, the auditor will collect evidence
on which to base his report and opinion. These evidences are called Audit Evidences. The
auditor carries out procedures known as ‘audit tests’ in order to generate this evidence. These
tests, the evidence and the conclusions drawn must be documented.
Auditor forum has already discussed Audit Evidence and Sufficient appropriate audit
evidence through Sufficient Appropriate Audit Evidence and related Question and Answers.
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METHODS OF COLLECTING AUDIT EVIDENCE
References
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Amat, O. (2008). "Earnings management and audit adjustments: An empirical study of IBEX
35 constituents". SSRN 1374232.
Gilbert W. Joseph and Terry J. Engle (December 2005). "The Use of Control Self-
Assessment by Independent Auditors". The CPA Journal. Retrieved 10 March 2012.
Power, Michael. 1999. The Audit Society: Rituals of Verification. Oxford: Oxford University
Press.
Loeb, Stephen E.; Shamoo, Adil E. (1989-09-01). "Data audit: Its place in
auditing". Accountability in Research. 1 (1): 23–32.
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