What is audit evidence? A guide for company directors

During a statutory audit, your auditor may ask you for invoices, contracts, bank statements and clarifications. They may also obtain information from third parties or recalculate figures independently.

All these requests serve the same purpose. They help the auditor obtain enough reliable audit evidence to support an independent opinion on your financial statements.

This guide explains what audit evidence is, why auditors ask for it and what happens if the evidence available is incomplete or unreliable.

What is audit evidence?

Audit evidence is the information an auditor uses to reach the conclusions on which their audit opinion is based.

It includes information within the accounting records such as invoices, ledgers and reconciliations. However, it can also come from other sources. Examples include bank confirmations, contracts, board minutes, stock counts and information supplied by external experts.

The Financial Reporting Council’s ISA (UK) 500 sets out the requirements for obtaining and evaluating audit evidence. The standard requires auditors to gather sufficient appropriate evidence before reaching their conclusions.

Evidence can support information provided by management. It can also contradict it or raise further questions. In some cases, the absence of expected information may itself be relevant to the audit.

Why do auditors need audit evidence?

An auditor provides an independent opinion on whether your financial statements give a true and fair view. To reach that opinion, they must obtain and evaluate audit evidence rather than rely solely on what management tells them.

This does not mean that your auditor automatically distrusts you. Independence requires them to verify important information rather than accept it without further work.

Examples of audit evidence

The evidence requested will depend on your business, its systems and the areas that present the greatest risk.

Common examples of audit evidence include:

No fixed list applies to every audit. Your auditor will tailor their requests to the risks and circumstances of your company.

For a broader list of records to prepare, see THP’s statutory audit checklist.

How do auditors obtain audit evidence?

You may have heard people refer to the “seven types of audit evidence”. These are common procedures that auditors use to obtain evidence.

Auditors often combine several procedures. An explanation from a member of staff may be useful, but an oral answer will not normally provide enough evidence on its own. The auditor may need documents, calculations or independent confirmation to support it.

What does sufficient appropriate audit evidence mean?

The phrase sufficient appropriate audit evidence appears frequently in auditing standards and reports.

The two words have different meanings:

• Sufficient relates to quantity. Has the auditor obtained enough evidence?
• Appropriate relates to quality. Is the evidence relevant and reliable?

The amount of evidence required depends on the risk of material misstatement. The greater the risk that a figure or disclosure is materially wrong, the more evidence the auditor is likely to need.

Quality also affects quantity. Strong evidence may reduce the amount needed. However, gathering more weak or irrelevant information does not compensate for its poor quality.

What makes audit evidence reliable?

Reliability depends on the source, nature and circumstances of the information.

As a general rule:

• Evidence from an independent external source may be stronger than information generated internally
• Evidence obtained directly by the auditor may be stronger than information obtained indirectly
• Documentary evidence may be more reliable than an oral explanation
• Original records may be more reliable than copies
• Information that has been produced internally is likely to be more reliable when strong controls govern its preparation and maintenance

These are general principles rather than automatic rules. A third-party source may still provide inaccurate information. Similarly, well-controlled internal records may offer strong evidence.

An auditor must judge each item in context.

Why might your auditor ask for more evidence?

A further request does not necessarily mean that the information you first provided was wrong.

Often, one piece of evidence proves only part of what the auditor needs to establish. Seeing an item of stock may confirm that it exists, for example. It does not necessarily prove that the company owns it or that the value in the accounts is reasonable.

The same applies to financial records. A sales invoice may confirm that a transaction was entered in the ledger. It may not prove that the goods were delivered before the year end or that the customer is likely to pay.

The auditor might therefore examine a dispatch record, the customer contract and a payment received after the year end. Together, these provide evidence about different aspects of the same sale.

Your auditor may also ask more questions when:

• Evidence from two sources does not agree
• Information is incomplete or unclear
• An unexpected transaction has taken place
• Figures differ significantly from previous years or forecasts
• The original request did not produce reliable evidence
• The assessed audit risk has increased

Where evidence conflicts, the auditor must investigate and decide what additional work is necessary.

What happens if audit evidence is missing?

Missing or incomplete audit evidence does not automatically affect the audit opinion.

First, your auditor will usually consider whether a different procedure can provide the evidence needed.

However, the position becomes more serious if no suitable alternative is available. The auditor may then be unable to reach a conclusion about part of the financial statements.

The effect on the audit opinion depends on how serious and widespread the possible effects could be. Possible effects are material if they could reasonably be expected to influence decisions made by users of the financial statements. They are pervasive if they are not confined to a specific part of the accounts, could affect a substantial proportion of them or are fundamental to users’ understanding of the financial statements.

If the auditor concludes that the possible effects could be material but not pervasive, they must issue a qualified opinion. If the possible effects could be both material and pervasive, they must disclaim an opinion.

We explain these outcomes in more detail in our guide to qualified and other audit opinions.

How can you make providing audit evidence easier?

Good preparation can reduce delays and limit repeated requests.

Make sure your accounting records are complete and reconciled before the audit begins. Keep supporting documents in a consistent place and provide clear explanations for unusual transactions.

It also helps to agree at the outset what information the auditor will need and when it should be provided. Depending on the size of the audit, one person or a small team may coordinate the responses and check that everything has been supplied.

Most importantly, speak to your auditor if requested information is unavailable or cannot be produced. Telling them early gives them time to consider whether another procedure can provide the evidence they need.

Need help with your statutory audit?

Audit evidence provides the foundation for the auditor’s opinion. The process should be thorough, but it should also be well planned and clearly explained.

THP’s experienced Audit Services team works closely with directors and finance teams throughout the process. We agree clear timetables, explain our requests and aim to keep disruption to a minimum.

Get in touch with our friendly team today to discuss an upcoming audit or get an instant audit fee estimate.