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The Sufficiency of the Audit Evidence

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

The sufficiency of audit evidence is the amount or quantity of audit evidence. You determine the amount of audit evidence you need by considering the risk of material misstatement and the overall quality of the evidence you receive.

The risk of material misstatement is your determination of the likelihood that the financial statements contain large mistakes due to inadvertent errors or fraud. The higher the probability of material misstatement, the more audit evidence you need to support your conclusions.

Most of the time, you rely on evidence that’s persuasive rather than convincing. What’s the difference?

  • Persuasive evidence tips the scale one way or the other and provides you with a basis beyond a reasonable doubt for forming an opinion.

    Here’s an example: Your job is to verify the current accounts receivable balance of $50,000. To accomplish this, you send confirmation letters to the client’s 20 largest customers. The sum of these customers’ accounts receivable balances is $37,500, which is 75 percent of the total — the percentage your senior associate told you to check.

    If all the customers reply with positive responses (meaning they confirm that they owe your client the amounts shown in accounts receivable), you have enough persuasive evidence to issue an opinion on the accuracy of the overall accounts receivable balance.

  • Convincing evidence is perfectly reliable. You’d have to look at all the client’s records to achieve this level of assertion — something that’s never done during an audit. Reaching this level of evidence isn’t feasible, because you have to complete an audit during a limited amount of time and for a reasonable cost. If you sent confirmation letters to all customers and pursued all customers until they responded, you’d have convincing evidence.

Carefully document the work you do during the audit. Your audit opinion must be fact-based and retraceable so that an independent review of the audit evidence would draw the same conclusions. In other words, a person with limited knowledge in the area reviewing the same audit evidence should draw the same conclusion as the auditor.