Audit evidence can include physical evidence, testimonial material, and analysis of information. Together, the body of evidence should allow an auditor to make an authoritative statement. Auditors may find evidence of irregularities, information that suggests accounting practices are sound, or inconclusive evidence that makes it difficult to take a firm position. In the audit report, the auditor will discuss the evidence and its sources so anyone who reviews the report can understand how the auditor arrived at a given conclusion.
In terms of physical evidence, auditors have several kinds of evidence available to them. One is documentary in nature; a firm should have hard copy accounting records as well as electronic ones, and this information can be very useful. Furthermore, audit evidence can include a physical inspection of assets. If a firm claims to own a piece of real estate, for example, the auditor can go to look at it and determine whether the property matches the description in accounting documentation.
Testimonial evidence includes confirmations, or third party responses to queries sent out by an auditor. The auditor could ask a bank for information about a company, for example, or request an assessment of the value of an asset from an expert. Auditors also make direct client inquiries and use this as part of the audit evidence. Responses from a client can provide important insight into accounting practices and client attitudes. Observation is another form of audit evidence, where the auditor looks at how the client behaves to contextualize the audit findings.
Analysis of information is a key part of an audit. This includes going through other forms of evidence to come up with a coherent narrative and to identify areas of concern, like accounting statements that do not match. Auditors can also engage in re-performance, where they check calculations and transfers for accuracy. Errors can reveal a problem with accounting practices, or a simple mistake that compounded into a bigger issue when it was not caught.
The source of audit evidence can be important when evaluating the validity of an audit. External evidence and audits tend to be stronger, as reviewers assume third parties do not have a specific interest in the outcome of the audit. Internal evidence and audits can be valuable, but may also be biased in nature. Auditors aim for a mixture of sources in their evidence to create a balanced picture of a company's overall financial situation.