Evidence in auditing

After the preliminary planning stage, auditors proceed to the task of specifying procedures for gathering evidence. The accounting records (journals, ledgers, computer files, and the like) are evidence of the bookkeeping-accounting process but are not sufficient, competent supporting evidence for the financial statements. Evidence corroborating these records must be obtained through auditor’s direct personal knowledge, examination of documents, and the enquiry of company personnel.

To be considered competent, evidence must be valid, relevant, and unbiased. The following hierarchy of evidential matter will help understand the relative competence and persuasive power of different kinds of evidence.

1. An auditor’s direct, personal knowledge, obtained through physical observation and his or her own mathematical computations, is generally considered the most competent evidence.
2. Documentary evidence obtained directly from independent external sources (external evidence) is considered very competent.
3. Documentary evidence that has originated outside the client’s data processing system but which has been received and processed by the client (external-internal evidence) is generally considered competent. However, the circumstances of internal control quality are important.
4. Internal evidence consisting of documents that are produced, circulated, and finally stored in the client’s information system is generally considered low in competence. However, internal evidence is used extensively when it is produce under satisfactory conditions of internal control. Sometimes, internal evidence is the only kind available.
5. Verbal and written representations given by the client’s officers, directors, owners, and employees are generally considered the least competent evidence. Such representations should be corroborated with other types of evidence.

Auditors must be very careful about the competence of evidence. When specifying audit procedures for gathering evidence, the best approach is first to seek the evidence of the highest competence. If physical observation and mathematical calculation are not relevant to the account or are impossible or too costly, then move down the hierarchy to obtain the best evidence available.