What Is IPE in Auditing and Why Is It Important?

Auditing financial statements involves gathering and evaluating information to ensure they accurately represent an entity’s financial position and performance. Auditors rely on various sources of information during this process to form an opinion. A significant category of information central to nearly every audit engagement is referred to as Information Produced by the Entity, commonly known as IPE. This information originates from the client’s own systems and processes.

Defining Information Produced by the Entity (IPE)

Information Produced by the Entity (IPE) refers to any data, reports, or documentation generated by an organization’s internal systems or processes. This information is created by the entity itself, rather than coming from external, independent sources or being directly prepared by the auditor. IPE can exist in various forms, ranging from structured electronic files to manually compiled reports.

Examples of IPE include the general ledger, which summarizes all financial transactions, and subsidiary ledgers such as accounts receivable or accounts payable ledgers, which provide detailed breakdowns. Reconciliations prepared by the entity, like bank reconciliations or intercompany account reconciliations, are also considered IPE. These documents demonstrate how different accounts or balances are brought into agreement.

System-generated reports, such as daily sales reports, inventory listings at a specific date, or payroll registers, fall under the umbrella of IPE. Even detailed schedules supporting financial statement line items, prepared by the client’s accounting department, are classified as IPE.

Why IPE is Crucial for Audits

IPE is important in the audit process as it serves as the basis for many audit procedures. Auditors often use this internally generated information as a primary source of audit evidence to support their conclusions about the financial statements.

The information contained within IPE is regularly used for substantive testing, where auditors examine transaction details and account balances to detect material misstatements. Analytical procedures, which involve comparing financial data to identify unusual relationships or trends, also heavily rely on IPE. Auditors utilize this data to gain a comprehensive understanding of the entity’s financial position, operational results, and cash flows.

The reliability of the auditor’s opinion on the financial statements is directly linked to the trustworthiness of the IPE used as evidence. If the underlying data is inaccurate or incomplete, any audit procedure based on it may yield misleading results. Auditors ensure the reliability of this internal information.

Assessing IPE Reliability

Auditors do not simply accept Information Produced by the Entity (IPE) at face value; instead, they undertake specific procedures to assess its reliability. The extent and nature of these procedures are tailored based on the auditor’s assessment of risk and the inherent characteristics of the IPE itself. The goal is to determine if the IPE is reliable enough for audit evidence.

One primary approach involves testing the internal controls related to the generation, accuracy, and completeness of the IPE. Auditors evaluate controls over data input, ensuring transactions are accurately entered into the systems. They also assess controls over data processing, which includes verifying that information is correctly calculated, summarized, and transferred within the systems. Controls over output are also reviewed.

Auditors may also perform procedures to directly test the IPE itself. This can involve reconciling the IPE to other independent sources of information, such as bank statements or external vendor invoices, to identify any discrepancies. They might also recalculate certain figures presented in the IPE to verify mathematical accuracy or trace specific data points back to original source documents to confirm their validity and proper authorization.

Reconciliation involves comparing IPE to information from external parties or other internal records. For instance, an auditor might compare a client’s accounts receivable aging report (IPE) to confirmations received directly from customers. This ensures IPE is internally consistent and aligns with external realities, providing a basis for audit conclusions.