The main objective of auditing is the verification of accounting data besides determining the accuracy and reliability of the accounting and financial statements and reports of any business enterprise. Verification does not exactly mean that there is certainty in connection with the data and financial statements being audited. It means seeking for sufficient evidence to satisfy oneself as the auditor that the statements and accounts show true and fair view. Sufficient evidence depends on the experience, knowledge and expertise of the auditor. The auditor is required to obtain evidential material to support the accounts and financial statements. The evidence available to the auditor varies in reliability, and the auditor must consistently be aware of this fact.
Types of Evidence
Various classifications of evidence are presented in this section together with relative reliability of each type of evidence and the factors that affect the reliability. These types are discussed here below
The source of the figures in the financial statements of any business enterprise is the general ledger. The general ledger receives its figures from the various types of journals and it is these books of account that form the primary source of evidence. The auditor has a primary role of ascertaining whether the financial statements and records agree with the primary source of data. The auditor must ascertain that the figures in the journals originate from the source documents and they tally with the figures in the financial statements and accounts. He must ascertain the double entry rules have been followed to the letter. Once the auditor is satisfied that the figures are in an agreement, then the next step is to look to the propriety, validity and accuracy of the ledger balances and the entries in the journals
The amount of supporting evidence to be consulted by the auditor in corroboration with the books of accounts will be the inverse relation to internal control that entered into the preparation of these records. The strong the internal control the more reliable the supporting evidence and vice versa. There are two types of supporting evidence. These are:
- Physical evidence
The physical evidence is somewhat limiting in that it can only be used in tangible assets. The examination of the asset is clear indication that the asset really exists.
- Documentary Evidence
The type of evidence most commonly consulted by the auditor is documentary evidence. This is evidence that is found in documents and such sources. Documents vary widely in terms of their reliability as evidence. Documentary evidence can further be classified as follows:
- Externally created documents sent directly to the auditor – these documents prepared by third parties but sent directly to the auditors such bank statements.
- Externally created documents in the clients possession – these documents prepared by the third parties but the client has the possession of these documents such as sales orders
- Evidence originating from within the client’s organisation – the auditor is likely to gather evidence from within the client’s organisation. This evidence may be verbal or written, formal or informal.
- Internal evidence circulating outside business – information from the client but is the hands of external parties.
- Internal evidence circulating within the organisation – this is information circulating within the business only.
- Circumstantial Evidence
This is that form of evidence is indirect evidence either presented knowingly and unknowingly. This form of evidence involves circumstances from which a reasonable inference can be drawn of the existence of a given fact or occurrence of a given event.
Techniques of Collecting Evidence
There are several methods of collect audit evidence. These methods are:
- Physical Examination and counting
- Confirmation from third parties either verbally or formally
- Examination of original documents
- Re – computation of figures
- Retracing book – keeping records