Audit season is just around the corner for calendar-year entities. Understanding the types of source documents your audit team might request can minimize disruptions during audit fieldwork and maximize your audit's effectiveness. Here are some common sources of "substantive evidence" that auditors gather to help them form an opinion regarding your financial statements.
Original source documents Auditors can verify account balances or records by vouching for them (or comparing them to third-party documentation). For example, an auditor might verify the existence of a vehicle on your company's fixed asset list by reviewing the seller's invoice. This process allows auditors to evaluate the accuracy of the company's claims and whether transactions are recorded correctly in its accounting system.
Physical observationsSeeing is believing. Auditors sometimes verify the existence of assets through physical observations and inspections. For example, inventory audit procedures typically include:
• Observing or conducting a physical inventory count,
• Inspecting the process to record incoming and outgoing inventory and
• Analyzing the inventory obsolescence process.
Confirmation lettersAuditors commonly send confirmations to third parties, asking them to verify such items as cash, accounts receivable, accounts payable, employee benefit plans and pending litigation. There are three types of confirmations:
1. Positive. Recipients are requested to reply directly to the auditor and make a positive statement about whether they agree or disagree with the information included.
2. Negative. Recipients are requested to reply directly to the auditor only if they disagree with the information presented in the confirmation.
3. Blank. This type of request doesn't state the amounts (or other information). Instead, it requests recipients to complete a blank confirmation form.
In the past, auditors sent confirmation letters through the U.S. Postal Service. Although written confirmations are still permitted, auditors routinely use electronic confirmations today. These may be in the form of an email submitted directly to the respondent by the auditor or a request submitted through a designated third-party provider. Some financial institutions no longer respond to paper confirmation requests and will respond only to electronic confirmation requests.