The auditor needs evidence that is sufficient — in quantity — and appropriate — in kind and reliability. More quantity does not make up for poor quality.
1 The reliability of evidence
| Evidence | Reliability | Why |
|---|---|---|
| A confirmation from a bank or customer sent directly to the auditor | Very high | An independent external source, received directly |
| What the auditor obtains personally (counting, recalculation) | High | Direct knowledge with no intermediary |
| An external document held by the entity (a supplier invoice) | Medium to high | External, but it passed through the entity |
| An internal document with strong controls around it | Medium | Internal, but supported by the control environment |
| A verbal statement from management | Low | Needs corroboration by other evidence |
Three rules of reliability
External evidence beats internal · what the auditor obtains personally beats what is handed to them · written beats verbal.
2 Procedures for gathering evidence
Inspection
Inspecting records and documents
Physical inspection
Physically examining assets
Observation
Watching a procedure as it is performed
Confirmation
Corroboration from an external party
Recalculation
Verifying the arithmetical accuracy
Reperformance
Independently executing the control
Analytical procedures
Studying relationships and trends
Plus inquiry — always useful, but never sufficient on its own as evidence
3 Two procedures of particular importance
External confirmations: sent directly by the auditor to the bank, the customer or the supplier, and returned directly to the auditor without passing through the entity. That condition is the secret of their strength — if they pass through the entity, they lose their independence.
Attending the physical count: where inventory is material, the auditor attends the count to observe the procedures, count samples personally, and verify the condition of the goods and cut-off.
The objective: to verify the existence and accuracy of the customer balance at period end.
| Step | Detail |
|---|---|
| Selection | The 15 largest balances + 10 selected at random from the rest |
| Sending | From the auditor directly to the customers, with a reply address back to the auditor |
| Replies | 20 agree · 3 with differences · 2 no reply |
| Differences | Investigated: payments in transit, or credit notes not yet recorded |
| No reply | Alternative procedures: subsequent receipts testing, shipping documents and invoices |
Note that “no reply” is not left as a gap; it is addressed with alternative procedures that reach the same level of satisfaction.
4 Sampling and documentation
- Sample size rises as risk rises and as reliance on controls falls.
- Deviations found are evaluated: are they isolated, or a sign of a systemic failure?
- Documentation must enable another experienced auditor to understand the nature of the procedures, their results and the conclusions.
- The audit file is assembled and retained for the professionally and legally required period.
A common mistake
Relying on a schedule prepared by the entity without verifying its completeness and accuracy. Building a conclusion on a report management exported from its own system, without testing the source, is building on sand.
Lesson summary
- Evidence must be sufficient in quantity and appropriate in kind.
- External beats internal, and what the auditor gathers personally beats what is handed over.
- Seven procedures for gathering evidence — and inquiry alone is not enough.
- Confirmations are sent and received directly by the auditor; a non-reply is handled with alternative procedures.
- Documentation makes the work re-traceable by another auditor.
5 Test your understanding
Three quick questions
Pick the answer you believe is correct and you will see the result immediately.
1. The entity received the confirmation replies and then handed them to the auditor. What is the verdict?
The strength of a confirmation depends on it being outside the entity’s control, both when sent and when received.
2. Which evidence is strongest for verifying the existence of inventory?
Direct inspection by the auditor is more reliable than an internal report or a verbal statement.
3. A customer did not reply to the confirmation. What should be done?
Alternative procedures achieve the same objective; dropping the item or delegating it to the entity strips the evidence of its value.