Testing Information Obtained in an Audit
I have a lot of auditor friends (don’t be jealous) and I like to help them out from time to time! So, I wanted to write a blog to provide a few helpful reminders when it comes to testing information in an audit, especially if that information is being provided/produced by your client.
First, I wanted you all to know about the “audit-cratic” oath (it’s just like the Hippocratic oath for medical professionals)… “The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.” (This is referenced in multiple AU-C sections and PCAOB standards).
What is audit evidence?
Audit evidence is all the information used in an audit to conclude on procedures and form the audit opinion (e.g., a trial balance, a purchases listing generated out of SAP, contracts, invoices, confirmations, foreign exchange rates, bank statements, etc.). The concepts and requirements surrounding audit evidence are governed by PCAOB Auditing Standard (AS) 1105 and AU-C Section 326 (U.S. GAAS).
Check out our course on Audit Evidence if you want more information!
At the end of the day, audit evidence obtained must be sufficiently appropriate and be persuasive enough to meet the identified risks (e.g., as risk increases, the amount of evidence also increases). So how do you know if audit evidence is “sufficiently appropriate”? You determine whether the information (evidence) is sufficiently relevant and reliable! Testing information in an audit ensures that these criteria are met.
Information obtained in an audit
Relevant information means there is some type of connection between the information and the objective of the procedure (i.e., does the information received make sense to support the procedure?). And you’ll also want to make sure that the information is precise/detailed enough to meet the objective.
Reliable information means, can you rely on the information to support your procedure? Is it authentic? Accurate? Complete? Is it coming from a knowledgeable source? When assessing the reliability, think about where (source) you are obtaining the information, how (circumstance) you obtained the information (e.g., directly from your client), and what type (nature) of information you have (e.g., electronic report or original hard copy) because there are different degrees of reliability, which must directly correlate to the related risk of the procedure.
Scenario
Think about the following scenario:
- You are working through accounts receivable (AR) procedures at year-end. The AR sub-ledger report is emailed directly to you, and you upload it into your audit file. You compare the AR sub-ledger balance from the report directly to the trial balance (they agree!), so you sign off on that step and maybe move on to rollforward procedures.
But wait a minute! Let’s back it up. We are missing a CRITICAL step in performing this procedure.
This AR sub-ledger report would be considered information that is provided by the entity (IPE) (it is also referred to as information produced by the company). And both PCAOB auditing standards and U.S. GAAS require auditors to TEST the accuracy and completeness of any IPE (and evaluate whether its precise/detailed enough for the purpose of the procedure).
The days of completely relying on client information and doing nothing with a report are long gone – you have to ensure you are doing something around the completeness and accuracy of the information you receive.
You don’t have to assume the information is wrong or it’s not authentic but ensure to maintain that professional skepticism and appropriately design (and document) procedures with your team to assess the completeness and accuracy of the information (which will be driven by the related risk of the area you are testing).
Final thoughts
Testing the completeness and accuracy of information obtained in an audit is a critical step in performing a quality audit. It’s important to be aware of the various requirements, including the need to apply professional skepticism.
If you are looking for any other information on various auditing requirements, check out our comprehensive Audit eLearning library. Testing information in an audit is crucial when seeking accurate and reliable data.
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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.
