What should auditors do with info obtained in an audit?
Happy busy season to all my auditor friends! Or should I say good luck with busy season? Regardless, busy season is here and hopefully it will be over before you know it. But in the meantime, I wanted to provide a few helpful reminders when it comes to information being used in the audit, especially if that information is being provided/produced by your client.
First, I wanted all the readers 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).
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.
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!
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.
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 the PCAOB and AICPA 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).
As always, please feel free to contact us with any questions or topics you’d like to see/training you need. We are always here to help our fellow auditors and we wish you nothing but a successful busy season!
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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.
