Audit evidence: when is enough enough?

ISA (UK) 500 Audit Evidence requires the auditor to design and perform audit procedures which will result in the auditor obtaining sufficient appropriate audit evidence to draw conclusions on which the auditor’s opinion will be based.

The two emboldened words are ‘sufficient’ and ‘appropriate’. But what is sufficient appropriate audit evidence and how does the auditor know when they have obtained such evidence?

• Sufficiency – this relates to the QUANTITY of audit evidence
• Appropriateness – this relates to the QUALITY or RELEVANCE and RELIABILITY of the audit evidence.

Auditors must bear in mind that audit evidence would be persuasive rather than conclusive. This is one of the inherent limitations of an audit because the auditor does not test everything in the financial statements.

Sufficiency

The audit opinion must be based on the audit evidence obtained during the audit. Hence, there needs to be ‘enough’ audit evidence to support the conclusion. To that end, the auditor must consider:

• the risk of material misstatement
• the materiality of the item
• the client’s system of internal control
• whether tests of control have revealed operating weaknesses
• the auditor’s knowledge and experience of the client
• the size of the population being tested
• the size of the sample selected to test
• the reliability of the evidence obtained.

Appropriateness

Appropriate audit evidence is sub-divided into two components:

Reliability

Auditors should always try, where possible, to obtain audit evidence from the most trustworthy and dependable source possible. Audit evidence is generally considered to be more reliable when it is:

• obtained from an independent and external source
• generated internally by the client, but is subject to an effective system of internal control
• obtained directly from the auditor
• provided in documentary form, rather than orally
• an original document (not a photocopy or a scanned document).

The more reliable the audit evidence, the less of it the auditor will need. Keep in mind that if the audit evidence is unreliable, it will never be appropriate, no matter how much of it the auditor gathers.

Relevance

To be relevant, audit evidence must address the objective or purpose of an audit procedure.

For example, when attending the client’s year-end inventory (stock) count, tests will be performed in a two-way direction:

• selecting items from the count sheets to the physical stock confirms the existence of the stock count at the count date
• selecting items from the physical stock to the count sheets confirms the completeness of the stock at the count date.

While the procedures look similar in nature, their purpose (and hence their relevance) is to test different assertions (existence and completeness) concerning the year-end stock valuation.

Conclusion

There is no ‘hard and fast’ rule which states that the auditor has obtained sufficient appropriate audit evidence and this will, of course, be down to professional judgement to conclude upon. However, there are important factors that need to be borne in mind when gathering audit evidence to ensure the requirements of ISA (UK) 500 are met.

Steve Collings FCCA

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