Understanding how auditors verify account balances and transactions is important as it can help organizations  reduce disruptions during audit fieldwork and potentially boost the effectiveness of financial statement audits. Here’s a summary of the types of ‘substantive evidence’ auditors gather to help them form opinions regarding your financial statements.

Original Source Documents
Auditors can verify an account balance or record by vouching (or comparing) it to third-party documentation. For example, an auditor might verify the existence of a machine on your company’s fixed asset register by reviewing the invoice from the seller. Vouching enables an auditor to evaluate the accuracy of the amount recorded and whether the transaction was entered correctly in the accounting system.

Physical Observations
Seeing 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 Letters
Auditors send letters to third parties — such as customers, banks, or vendors — asking them to verify amounts recorded in a company’s books. There are two types of confirmations: A positive confirmation requests that the recipient complete a form confirming account balances (for example, how much a customer owes the company). A negative confirmation requests that the recipient respond only if the balance is inaccurate.

Comparisons To External Market Data
For assets actively traded on the open market, auditors may research pricing data to confirm the amounts claimed on the company’s financial statements. For example, if a company invests in marketable securities that it plans to sell within the year, the auditor could analyze the prevailing market prices to confirm their book value. Likewise, a random sample of parts inventory could be compared to online pricing sheets to confirm that items are reported at the lower of cost or market value.

Independent Calculations
Auditors may verify internally prepared schedules and reports by re-creating them. If the auditor’s work matches the client’s version, it confirms that the underlying accounts appear reasonable. Auditors often rely on this procedure for such items as bank reconciliations and schedules of payroll-related expenses (for example, overtime, benefits, and tax payments).

Collaboration Is Critical
An effective audit requires coordination between the audit team and the client, and it’s helpful to review the types of substantive evidence that were used for each major financial statement category. This process can identify potential bottlenecks in the auditing process and help you anticipate document requests and inquiries, making your next audit more efficient.