In this episode of THE SAMPLE, Leita Hart-Fanta, CPA discusses the three types of audit evidence and gives an example of each.
Welcome to The Sample, a quick discussion of auditing concepts and terms that will help you do your work. Conducting an audit in accordance with auditing standards is no small feat and I want to support you. We’ll be referring to the GAO, IIA and AICPA literature to bolster our conversations. Let’s get started.
Types of Audit Evidence
In this episode we answer the question, “What are the three types of audit evidence?”
Now I love the auditing profession because we are a fact-based profession. We don’t say things unless we can back it up with evidence, and I love that. We also are making a promise to the readers of our audit report that our opinions and conclusions are valid.
Look at this paragraph that we put into our audit reports. If you’re a performance auditor following Yellow Book standards, even if you’re not, it’s worth looking at the second sentence.
YB 2018 9.03 We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
We’re promising here that we plan to perform this audit to obtain sufficient, appropriate evidence as a basis for our findings and conclusions based on our objectives.
Now there’s a lot of learning that can come out of that sentence, but today let’s just work on the evidence piece.
Let’s say that we’re auditing a transit system for a city, and we want to put a number in our audit report that tells the reader how many people ride the bus on a monthly basis. We could go after the first type of audit evidence, which is testimonial evidence. We can ask the managers of the bus system, “How many people ride the bus?”
Or, we could look at reports that they generate, so let’s say that when people ride the bus, they use a bus card and then they compile that data, electronic data. There’s an analyst that does that and creates a monthly report of how many people ride the bus. That is documentary evidence.
Or we could get physical evidence. We could sit at a bus stop and observe how many people get on different lines or different routes, or we could actually sit on a bus for a while and see how many people get on and off.
Drawbacks for each type of evidence
As you can tell, all of these types of evidence have a drawback.
The testimonial drawback is so big you could, excuse the pun, drive a bus through it, right?
Because you put a number in your report, let’s say, you say it’s 80,000 (just making up a number). You put in the report and the client could later say, “Where’d you get that number?” And you say, “Well, I got it from you.” And they could say, “I never said that. When did you ask for that?” And you say, “Well, I asked for it here.” And they say, “Oh, I didn’t even understand what you were asking for.” Right? So testimonial evidence, not so good.
Documentary evidence is questionable too, because maybe that analyst who compiles the report would really like those numbers to look little bit better for the EPA or maybe for the city who’s funding the bus system and so might manipulate the numbers.
Now the drawback with the third type of evidence, physical evidence, is it’s often pretty expensive to get. Sitting on the bus, sitting at the bus stop, that’s pretty time consuming. And they might act right on the day that you observe, especially if you let them know in advance that you’re going to observe. So this would be pretty extreme, but let’s imagine that you tell them, “I’m going to ride bus number five and I’m going to ride it on Thursday.” Well, they have their friends and family come out and ride the bus on Thursday, route five, so those numbers look better. So you can be misled with physical evidence.
But if you can get all three of those pieces to align, it does make it stronger and that’s known as corroborating evidence. You’ve got the pieces all aligning and telling you the same story.
But it’d be even better if you could get someone that’s not the auditee to give you the information. Get information, get your evidence from an objective third party who will not be harmed if they tell the truth. The managers at the bus system cannot be completely trusted to tell the truth because they probably need the numbers to look a certain way. So maybe you could interview the owner of a store that’s near a very busy bus intersection and you could ask them, “Okay, what times of day do you see the most people hanging out out there? Are there any times of day that are kind of dead?” Whatever you want to ask them just to get that extra little assurance that those numbers are right by going to an objective third party.
Then you also want your evidence to cover more ground, and you want to get as much evidence as you possibly can. Because if you complain that the ridership was down on just one day out of the month and it did not match their projections, then they’re going to say, “Well, that was kind of a special day. That was the day before a holiday.” Or, “School was out that day.” They will wiggle out of that number and what you want is you want them to go along with it, agree with the number, by getting more days sampled, more locations, more routes, pick up more data.W
What the standards have to say
The GAO has some great guidance on evidence. Sections 8.90 through 8.115 of the 2018 Yellow Book are well worth your time.
That wraps it up…
That wraps it up for another episode of The Sample. True to the nature of a sample, we didn’t talk about everything, so you’ve probably got questions. Write to me firstname.lastname@example.org and I’ll do my best to fill in the blanks. Thanks for playing.
For More Info:
Choosing the Best Audit Test plus Audit Documentation – Video Course
Government Audit Training – 10 Video Series
Essential Audit Skills and Techniques for the Government Auditor