What Does IPE Stand For in Auditing?

Information Produced by the Entity (IPE) is a core concept in financial statement auditing. Auditors rely on IPE as a significant source of evidence to support their opinions on a company’s financial health and reporting accuracy. Understanding IPE is essential for comprehending the audit process and the reliability of financial information.

Defining Information Produced by the Entity (IPE)

IPE refers to any data, reports, or other information generated by an audited entity’s internal systems or processes that an auditor uses as evidence. This includes both financial and non-financial data. The information originates from the company’s own operational and accounting systems, as opposed to external sources.

The purpose of IPE is for the entity’s financial reporting, operational management, or internal control activities. Its format can vary significantly, ranging from structured reports and spreadsheets to system logs and database extracts. For example, a company’s general ledger report, which summarizes all financial transactions, is a form of IPE.

IPE is distinct from documentation provided by the client (PBC) at the auditor’s specific request, though IPE can be part of PBC. IPE is information the entity uses in its day-to-day operations, not solely for audit purposes. The integrity of this internally generated information is important for both management and auditors.

Why IPE is Critical in Auditing

IPE is important because it forms the underlying basis for account balances, disclosures, and operational assertions within a company’s financial statements. Auditors depend on IPE’s reliability to draw conclusions about the accuracy and fairness of these statements. The audit opinion, which assesses whether financial statements are presented fairly in all material respects, relies on the quality of the evidence gathered, much of which is IPE.

If IPE is unreliable due to inaccuracies, incompleteness, or manipulation, it introduces a significant risk of material misstatements in the financial statements. This unreliability can lead to an incorrect audit opinion, undermining the credibility of financial reporting. For instance, if an inventory listing (a form of IPE) is incomplete, the reported inventory balance could be materially understated, misleading investors and other stakeholders.

The Public Company Accounting Oversight Board (PCAOB) emphasizes IPE’s importance, particularly in the context of Sarbanes-Oxley (SOX) compliance, to minimize audit risks associated with flawed data. Reliable IPE supports the auditor’s testing of internal controls, which are designed to ensure the accuracy and integrity of financial information. It also serves as evidence for substantive testing, where auditors directly examine account balances and transactions.

Auditor Procedures for IPE

Auditors undertake procedures to assess the completeness, accuracy, and appropriate use of IPE. These procedures ensure the information is suitable for audit purposes. The auditor’s work involves understanding the entity’s processes for generating IPE, including the underlying IT environment and controls.

To test the completeness of IPE, auditors ensure that all relevant data has been included. This might involve tracing a sample of source documents to the IPE report to confirm their inclusion, or reconciling report totals to control accounts. For example, an auditor might verify that all sales transactions for a period are captured in the sales report used for revenue recognition.

Testing the accuracy of IPE involves verifying that the data within the information is correct and free from material error. This can include reconciling IPE to source documents, recalculating totals or specific data points, and testing system logic or programming that generates the IPE. An auditor might re-perform calculations on a payroll report to confirm its accuracy or compare individual entries to supporting documentation.

Auditors assess the appropriate use of IPE by determining if it is relevant to the specific audit assertion being tested and if the entity’s processes for generating it are sound. This includes understanding the parameters or filters used to create the IPE and ensuring they are appropriate for the audit objective. For instance, if an aging report is used to assess the collectability of accounts receivable, the auditor will confirm that the report’s date range and criteria are relevant to the period under review.

Common Examples of IPE

Auditors encounter numerous types of IPE during an engagement, each serving a specific purpose in supporting financial statement assertions. These examples highlight the varied forms that internally produced information can take.

General ledger reports provide a detailed record of all financial transactions and account balances. Auditors use these reports to trace transactions and verify account totals. Accounts receivable aging reports categorize outstanding customer invoices by their due dates, helping auditors assess the collectability of receivables and the adequacy of the allowance for doubtful accounts.

Inventory listings detail a company’s physical inventory on hand, including quantities, descriptions, and values. This IPE is important for verifying the inventory balance on the balance sheet. Fixed asset registers provide information on a company’s property, plant, and equipment, including acquisition dates, costs, and accumulated depreciation, which auditors use to test asset existence and valuation.

Payroll reports summarize employee earnings, deductions, and net pay, which auditors examine to verify payroll expenses and related liabilities. Sales reports track revenue generated from product or service sales, allowing auditors to test revenue recognition. Trial balances, which list all general ledger accounts and their balances, are foundational IPE used to prepare financial statements and reconcile accounts. System-generated reconciliations, such as bank reconciliations or intercompany reconciliations, are also IPE, providing evidence of management’s review and resolution of discrepancies.