What Is IPE in Audit and Why Is It Important?

Information Produced by the Entity (IPE) refers to any data, reports, or other information generated by a company’s own systems and processes that auditors use as evidence during a financial statement audit. This information serves as a foundation for auditors to form conclusions about the accuracy of financial records and the effectiveness of internal controls. Its reliability directly impacts the quality of audit findings, making its proper assessment central to a thorough and credible audit process.

Understanding Information Produced by the Entity (IPE)

IPE encompasses all internally produced information, regardless of source or format, that an auditor uses to support conclusions on financial statements or internal control over financial reporting. Auditors rely on IPE for various procedures, including testing controls and performing substantive analytical procedures.

IPE can manifest in numerous forms, reflecting diverse operations and systems. Common examples include:
General ledgers and sub-ledgers
Trial balances
Aging reports for receivables or payables
Inventory reports
Payroll registers
Internal management reports
Detailed transaction listings
Data extracts from ERP systems or other financial software
This information can exist as electronic files, paper documents, or directly within databases.

IPE is distinct from “Provided by Client” (PBC) documents, which are any documents explicitly requested by the auditor, such as contracts. IPE specifically relates to information generated by the entity’s systems for its daily operations, even if not created for the audit. Its reliability is paramount, forming the basis for assessing internal controls and financial reporting.

Auditor’s Assessment of IPE Reliability

Auditors must perform specific procedures to evaluate the reliability of IPE. The Public Company Accounting Oversight Board (PCAOB) mandates that auditors test the accuracy and completeness of IPE or evaluate controls over its generation when using it as audit evidence.

A primary procedure involves testing the completeness and accuracy of the IPE itself. Auditors often reconcile IPE to source documents, such as invoices or bank statements, to confirm that all relevant data has been included and correctly recorded. They may also compare IPE to other reliable data sources within the entity’s systems or externally to identify discrepancies.

Evaluating controls over IPE is another fundamental step. Auditors gain assurance by understanding and testing the entity’s internal controls that generate and maintain the information. This includes assessing Information Technology General Controls (ITGCs), which relate to the overall control environment of an entity’s IT systems. Effective ITGCs provide a foundation for reliable IPE by ensuring data integrity and system security.

Beyond ITGCs, auditors also focus on application controls, which are automated or manual procedures within specific software applications designed to ensure accurate and complete processing of transactions. Examples include input validation checks, sequence number checks, and embedded reconciliation procedures. Strong application controls directly contribute to IPE reliability by preventing or detecting errors during data processing. If controls over IPE are deemed effective, auditors may reduce the extent of direct testing on the IPE itself.

Auditors also perform substantive analytical procedures using IPE to identify unusual trends or relationships that might indicate misstatements. This involves comparing current period data to prior periods, industry data, or expected results to assess the reasonableness of financial information. For example, an auditor might analyze the gross profit margin calculated using IPE to determine if it is consistent with expectations.

In certain situations, auditors may replicate or recalculate IPE to verify its accuracy. This involves independently recreating reports or performing their own calculations based on the underlying source data from the entity’s systems. This method provides direct evidence of the IPE’s accuracy.

When data is extracted from systems, auditors must ensure its completeness and accuracy. This involves confirming the entire population was extracted without omission or alteration, often by observing the process, reviewing system logs, or reconciling totals. The nature and complexity of IPE influence the audit approach, sometimes requiring specialized software or IT audit specialists.

Entity’s Role in Ensuring IPE Reliability

The audited entity holds significant responsibility for ensuring the reliability of the Information Produced by the Entity (IPE) it provides to auditors. This responsibility primarily revolves around establishing and maintaining robust internal controls over the processes that generate IPE. The quality of the IPE directly reflects the strength of the entity’s internal control environment.

Maintaining accurate and complete source data is a foundational element. The integrity of IPE begins at the point of data input, requiring diligent practices to ensure that all transactions are captured correctly and fully. Errors or omissions at this initial stage will propagate through the system, compromising the reliability of any subsequent IPE.

Implementing effective Information Technology General Controls (ITGCs) is essential for the overall integrity of IPE. These controls govern the IT environment and include areas such as access controls, which restrict unauthorized access to systems and data that produce IPE. Program change management controls ensure that only authorized and tested changes are made to applications, preventing unintended alterations to data processing.

Establishing strong application controls within the systems that process data is equally important. These controls, which can be automated or manual, operate at the transaction level to ensure data accuracy and completeness. Examples include data validation rules that prevent incorrect entries, automated reconciliations that flag discrepancies, and segregation of duties within financial processes. Such controls help to ensure that the data flowing into and out of systems remains reliable.

Regular reconciliation and review processes are internal checks that significantly contribute to IPE reliability. Entities should routinely compare data from different sources or systems to identify and resolve inconsistencies. These internal reviews provide an ongoing assurance mechanism.

Clear documentation of IPE generation processes outlines how data is captured, processed, and reported, providing transparency and consistency. This documentation helps ensure IPE is generated uniformly, reducing errors. Comprehensive data governance and quality initiatives encompass policies and procedures for managing data throughout its lifecycle.