Sufficient and Appropriate Evidence

• Review: Management makes assertions (claims) about account balances,

transactions and disclosures that make up the financial statements:
 Existence or occurrence, completeness, valuation or allocation, Rights
and obligations, presentation and disclosure etc.
• Auditors collect audit evidence  Support their opinion about the financial
statements
• Evidence refers to the information that an auditor relies on to form the basis
of their audit opinion and reach a final conclusion.
• The evidence could be in written form, electronic as well as observable assets
or activities
• Not any type of evidence: Sufficient and Appropriate.
 Persuasiveness of evidence: Sufficient and Appropriate

• The persuasiveness of evidence refers to the degree to which the evidence can
be relied upon to support the truthfulness and accuracy of a particular assertion
or statement.
• Auditors are required to gather
1. Sufficient (deals with volume, how much to collect) and
2. Appropriate (right type of evidence)
1. Relevant
2. reliable
 Persuasiveness of evidence: Sufficiency
• Sufficiency of evidence (volume, how much?)
• Remember: Sampling is not testing 100%.
The sample size that is considered sufficient is affected by factors:
1. The auditor’s expectation of misstatements. Susceptibility of misstatement More or less?
2. The effectiveness of the client’s internal controls. More or less?
3. Large dollar value (fixed assets: 4 or 5 items)
 Example: Relevance of Evidence
• An auditor wants to check that all goods shipped were actually billed to
customers (no missing sales). Completeness:
• 1. Not relevant: Starting with the sales invoices and then checking if there is a
related shipping document won't help. This is because even if all invoices have
shipping documents, there might still be shipments that were never invoiced
(missing sales).
• 2. Relevant: Instead, the auditor should start with the shipping documents
(proof that goods were sent to customers) and check if there is a corresponding
sales invoice for each shipment. This way, the auditor can make sure that every
shipment resulted in a bill to the customer, ensuring no sales are missing.
 Appropriateness of Evidence: Relevance
1. Relevance of evidence to the audit objective
1. evidence must pertain to or be relevant to the audit objective that is
being tested
2. This ensures that the evidence meaningfully contributes to the auditor's
conclusion.
3. For example
 Appropriateness of Evidence: Reliable (2
of 2)
• Reliability of evidence refers to the degree to which evidence is believable or
worthy of trust.
• Not all evidence is equal!
1. Independence of provider (external v. insider): Bank statement vs cash ledger,
insurance policy vs prepaid accounts.
2. Effectiveness of client’s internal controls. Better I/C more reliable
3. Auditor’s direct knowledge. Count inventory rather than accept management count.
4. Qualifications of individuals providing the information. Lawyers (legal cases) and
bankers (loans).
5. Degree of objectivity. Bank confirmation is more objective than client attorney
6. Timeliness. Balance sheet account close to year end, I/S throughout the year. 2 to 3
weeks to get evidence!
 Persuasiveness Of the Evidence
• The persuasiveness of audit evidence is determined by evaluating both its
appropriateness and sufficiency in combination.
• Combined Effect
• Outside (just because!) evidence if not relevant  not persuasive
• Bank statement for a loan balance
• Evidence that’s relevant to what I want but not objective  not persuasive
• Small number of high quality evidence  not sufficient  not persuasive
 Cost of Evidence
• When making decisions about audit evidence, auditors must weigh both
the persuasiveness of the evidence and the associated costs.
• However, cost should not serve as a valid justification for skipping a
necessary audit procedure or for failing to collect a sufficiently large and
representative sample.
 MCQ from Farhat Lectures
• Which of the following statements regarding audit evidence is
correct?

A-An example of highly persuasive audit evidence is the client’s employee

responses to the auditor’s questions.
B-Absolute assurance is a requirement in audit evidence.
C-The auditor must gather evidence to determine whether the financial
statements are fairly presented.
D-All audit evidence collected by the auditor must be highly persuasive.