How are external confirmation procedures related to audit evidence?

How are external confirmation procedures related to audit evidence?

Procedures for Obtaining Audit Evidence Through External Confirmation 2. According to ISA 500, the trustworthiness of audit evidence is impacted by its source and character, as well as the specific conditions under which it is gathered. 4 This ISA also contains the following generalizations about audit evidence: 5 A Audit evidence that is relevant to an assessment objective will support that assessment objective. B Audit evidence that is not relevant to an assessment objective may or may not be included in the report. The auditor should understand the purpose for which the evidence is being collected so that he or she can determine whether the evidence is relevant.

C Even if evidence is found during an audit that would normally be considered relevant, it may be discarded if its significance is outweighed by other information available in the record (ISA 500). For example, if an auditor finds evidence of fraud when conducting an annual review of a company's financial statements, but there is also substantial evidence indicating that the company has a history of making fraudulent sales claims, the auditor would be justified in discarding the evidence of fraud discovered in the course of the annual review.

D If evidence is not retained for future use by an auditor, its usefulness is greatly reduced. Auditors should therefore consider the consequences of failing to retain relevant evidence and take steps to prevent this from happening.

Is some audit evidence better than other audit evidence?

Evidence from outside sources is more trustworthy. Direct observation, inspection, physical verification, and calculations by the auditor are superior than indirect observation, inspection, physical verification, and computations. Indirect evidence is acceptable as long as the primary evidence can be used to verify it.

Indirect evidence is evidence that cannot be seen or touched. Auditors use this type of evidence to determine information about an entity's financial state from documents found after a due diligence investigation. The four types of indirect evidence are: statistical evidence, analytical evidence, expert evidence, and narrative evidence.

Statistical evidence includes balance sheets, income statements, and cash flow statements. An auditor uses these financial reports to estimate results for items such as sales, expenses, assets, and liabilities. The accountant determines whether certain assumptions made in preparing the financial statements were reasonable based on knowledge obtained during the audit. If any assumptions were unreasonable, then additional adjustments may need to be made to the statistical evidence presented.

Analytical evidence includes opinions provided by independent experts. Analysts review the entity's financial statements and other data and then provide an opinion on them. Opinions are usually given in one of three forms: favorable, uncertain, or unfavorable. Favorable opinions are given when the analyst believes that there is a high probability that the financial statements comply with GAAP.

What is "external confirmation"?

External confirmation is the process of acquiring and analyzing audit evidence directly from a third party in response to a request for information regarding a specific issue influencing claims in financial statements or associated disclosures. The term refers to both auditors' and reviewers' efforts at confirming that no issues have been missed.

It is also called "independent verification". The term "independent" is used to indicate that there was no person involved who could have a conflict of interest with respect to the audit. The term "verification" is used to indicate that someone other than an employee of the company performed work on the financial statements or related documents. The term "confirmation" is used to indicate that additional work was done to provide additional assurance that all relevant issues were considered.

Audit evidence that external confirmations produce a conclusive opinion regarding the effectiveness of a company's internal control structure is important in determining whether to extend an opinion on the financial statements or not. If external confirmations do not give a conclusive opinion, then the auditor should perform additional procedures to obtain sufficient evidence to reach this conclusion.

Why are some items of audit evidence not reliable?

Furthermore, acquiring audit evidence from several sources or of a different character may suggest that a single piece of audit evidence is untrustworthy. Corroborating information provided from a source independent of the entity, for example, may strengthen the auditor's confidence in a management representation. Similarly, multiple sources providing similar evidence can be more convincing than a single source with less compelling evidence.

Reliable audit evidence comes from authoritative sources that are able to clearly describe what happened and who was involved. Such sources include people who were present at the time of an event, such as staff members or participants; public documents such as contracts or reports; and tangible objects such as security footage or handwritten notes. Reliable evidence is necessary because it provides the basis for an accurate understanding of what occurred during the financial period under review.

In some cases, certain evidence may be unreliable as it has been altered or exaggerated by someone seeking to create the impression of greater business activity or profitability than actually existed. For example, an accountant might conclude that sales figures contained in a company newsletter are not reliable because they were written by someone outside the company who had no knowledge of actual sales events. In another example, evidence derived from interviews with current or former employees may be considered less reliable if these individuals are represented by counsel prior to being questioned.

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Joe Vance

When Joe Vance was an agent, his life revolved around trying to predict what would happen next. It wasn't until he retired that he realized how wrong this mindset is. What if the world isn't predictable? How can you live safely in a chaotic world? That's when it hit him: teaching others how to live safely is the true path of safety. He's now on a mission to teach people in his community how they can keep themselves and their loved ones safe from harm during emergencies, disasters, or even cyber attacks.

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