What Does IPE Mean in an Audit & Why Is It Important?

Auditing financial statements involves a detailed examination of an organization’s financial records and processes, with a significant aspect relying on Information Produced by the Entity (IPE). IPE refers to any data, reports, or other information generated by the client’s internal systems that auditors use as evidence to support their conclusions. Modern audits heavily depend on this information due to the volume and complexity of transactions and data within today’s businesses. Reliability is paramount for auditors to form an accurate opinion on the financial statements. Without reliable IPE, the audit process is compromised.

Defining Information Produced by the Entity

Information Produced by the Entity (IPE) encompasses a wide array of internally generated data and reports that an organization creates and uses in its daily operations and financial reporting. This information serves as direct evidence in an audit, differentiating it from external information or data obtained independently by the auditor. IPE can exist in various forms, including electronic data, printed reports, or system screenshots.

Examples of IPE include detailed general ledgers, which provide a comprehensive record of all financial transactions. Sub-ledgers, like accounts receivable aging reports or inventory listings, are common forms of IPE. Trial balances, which summarize all ledger accounts, and reconciliations prepared by the entity, like bank reconciliations, fall under this category. System-generated reports, such as sales reports or payroll registers, are further instances of IPE. Data extracts from enterprise resource planning (ERP) systems also constitute IPE, providing auditors with raw data for analysis.

Importance of IPE as Audit Evidence

IPE is central to the audit process as primary evidence for many financial statement assertions. Auditors often cannot independently verify every transaction due to high volumes and intricate financial systems. Instead, they must rely on the accuracy and completeness of the data generated by the entity’s internal systems.

IPE forms the basis for analytical procedures and substantive tests. Analytical procedures involve evaluating financial information through analysis of plausible relationships among financial and non-financial data. Substantive tests are designed to detect material misstatements in the financial statements. Without reliable IPE, an auditor’s ability to draw sound conclusions is hindered, potentially leading to an inaccurate audit opinion.

Auditor’s Approach to IPE Reliability

Auditors assess IPE reliability to ensure it provides sufficient audit evidence. A fundamental step is understanding the entity’s information systems. This includes comprehending the flow of data, processes for data input, how data is processed, and controls surrounding data output.

Testing internal controls over IPE production is crucial. This involves evaluating controls such as access restrictions to systems, change management protocols for system modifications, and automated controls embedded within the software. Auditors may also reconcile IPE with independent sources, such as comparing accounts receivable listings to external confirmations from customers or matching general ledger balances to bank statements.

Auditors also directly test IPE data accuracy and completeness. This can involve selecting samples from IPE reports and tracing them back to underlying source documents to verify reported details. Auditors may also reperform calculations presented in the IPE to confirm their mathematical accuracy. Completeness ensures all relevant data is included, while accuracy confirms data is correct. Information Technology General Controls (ITGCs) ensure the integrity and reliability of systems generating IPE. Strong ITGCs, including controls over program development, changes, operations, and data access, ensure IPE is consistently produced accurately and completely.

IPE in Different Audit Areas

IPE is integral across financial statement cycles, providing specific data sets for auditors. In the revenue cycle, auditors frequently use sales reports, accounts receivable aging reports, and customer master data as IPE. Sales reports provide details on recognized revenue, while accounts receivable aging helps assess the collectibility of outstanding balances.

For the purchasing cycle, IPE includes vendor master data, purchase order listings, and accounts payable aging reports. These documents allow auditors to verify the existence and accuracy of liabilities and expenses. In the payroll cycle, auditors rely on payroll registers, employee master files, and timekeeping records to test the accuracy and completeness of compensation and related expenses.

Inventory audits utilize IPE such as perpetual inventory records, physical inventory count sheets, and cost of goods sold calculations. These help auditors verify inventory existence, valuation, and the proper recording of inventory movements. For the cash cycle, bank reconciliations and cash receipts and disbursement journals are IPE examples examined to confirm cash balances and transactions.