The Competence of the Audit Evidence
Competence refers to the quality of the audit evidence, regardless of whether the evidence is written, oral, or observed. Written evidence includes the client’s books, records, and other information such as meeting minutes and internal control manuals. Oral evidence is gathered during your initial and subsequent inquiries of the client’s employees and management. Observed evidence includes watching the client take the physical inventory.
The term competence also refers to whether the audit evidence is relevant to the work you’re doing and whether it’s reliable. Relevant and reliable are two standard auditing terms. They both focus on the quality of the supporting documentation and the audit tests performed.
You measure relevance by assessing the relationship between the documentation and the management assertion you’re testing. For example, to see whether a sale is complete, you don’t just look at the sales contract. A sales contract signed by your client and the customer is relevant only if you’re trying to confirm that the sale exists.
Relevant supporting documents for this transaction would consist of confirmation that goods or services were delivered to the customer. Also, you trace the proof of shipping to the invoices sent to the customer for payment. Finally, you check the sales journal to make sure this invoice is properly recorded and thus completed.
You measure reliability by deciding whether the evidence is credible. As an auditor, you should adopt an attitude of professional skepticism. Just keep in mind that you must challenge any evidence that’s less than convincing.
A third party can verify reliable evidence. For example, to verify that your client made a payment, you need more than a copy of a check or a check stub. Look for a canceled check that shows endorsement by the person or business to which it was payable (the payee).
Another technique to help you assess the reliability of the evidence is to interview employees and conduct walk-throughs of the process being audited in order to identify whether the associated internal controls are strong or weak. If the client’s internal controls in a certain area are strong, you can view evidence pertaining to this area as reliable.
Keep these facts about reliability in mind:
Original source documents are more reliable than copies; copy machines simplify the process of altering original documents.
Written documentation is more reliable than oral.
Your direct knowledge of a process is more reliable than an employee’s description of it.