ACT501 Chap.6 Audit Evidence: Sufficiency, Appropriateness, Reliability
Audit Evidence: Sufficiency, Appropriateness, Reliability
What the word covers
Audit evidence is everything the auditor draws on when weighing the claims management has made in the accounts and settling the conclusion the opinion rests on. The objective attached to it is to design and perform procedures in a way that lets the auditor obtain sufficient appropriate evidence, and so draw reasonable conclusions to base the opinion on.
The definition does not restrict evidence to documents, to numbers, or to anything the client produced, and it does not restrict it to one phase: evidence accumulates throughout the whole process, from preliminary engagement activities to completion.
Three questions, asked in order
What information can be used as evidence. What quality of evidence has to be gathered. And how it is collected.
The third is a separate topic in its own right. The first two are this one, and keeping them apart matters because students routinely answer a question about sufficiency by describing a procedure, which answers the third question in the clothes of the second.
What can be used
Evidence splits into what the accounting records behind the accounts contain, and what comes from anywhere else.
The accounting records take in the first entries and the papers that back them up, such as cheques, transfer records, invoices and contracts; the nominal and detailed ledgers, the journal entries and any further adjustment that reaches the accounts without a journal behind it; and the working sheets and spreadsheets sitting behind cost allocations, calculations, reconciliations and disclosures.
The other sources include minutes of meetings, the internal control manual, confirmations with independent third parties, industry analysts' reports, and information the auditor obtains by inquiry, observation and inspection.
Two of those are easy to overlook and both have cost marks: a spreadsheet nobody can reproduce is an audit problem, and an adjustment reaching the statements without a journal behind it is exactly where a late unsupported entry hides.
Sufficiency and appropriateness
Sufficiency measures quantity. Appropriateness measures quality and splits in two.
Relevance is whether an item bears on the claim under test, or on what the control under test is meant to achieve. Reliability asks whether evidence of that kind is a dependable signal of the real state of the claim. Together they determine how persuasive the evidence is.
The relevance example worth memorising is that confirming receivables with customers is relevant to existence, since it establishes that the sale took place, but not to accuracy and valuation, since a customer agreeing that it owes money says nothing about whether it will pay.
Five rules that rank reliability
Reliability depends on source, on nature, and on the circumstances of obtaining.
Evidence from a knowledgeable source independent of the company beats evidence from internal sources alone. Internally generated evidence is more reliable when the entity's controls over that information are effective. Evidence obtained directly by the auditor beats evidence obtained indirectly or by inference. Original source documents beat photocopies, facsimiles and material converted into electronic form.
And documentary evidence, paper or electronic, beats an oral representation.
Each is a comparison rather than an absolute, and the lecture pairs them with an instruction to apply scepticism while assessing evidence, asking whether what you hold is subject to management bias or another cognitive bias.
The category that fails in real files
External-internal evidence is the one to watch: a document an outside party prepared that reached the auditor through the client, demoted because there is always a possibility the client altered it.
A bank statement handed over by the finance team is external in origin and external-internal in practice; the same statement obtained directly from the bank is external. Nothing about the paper changed, only the route.
How much is enough
Sufficiency and appropriateness are interrelated, because the amount needed is affected both by the risk of material misstatement and by the quality of the evidence.
Higher assessed risk calls for more evidence and more reliable evidence; higher quality calls for less. The risk of material misstatement is the likelihood that a material misstatement, from error or fraud, exists before the auditor's work is considered, and at the assertion level it has two components, inherent risk and control risk.
What this chapter covers
- 01
The definition of evidence, and what it deliberately does not exclude
- 02
Three questions, and which of them this topic answers
- 03
The accounting records, item by item
- 04
Information from other sources, internal and external
- 05
Sufficiency as quantity, appropriateness as quality
- 06
Relevance judged before reliability
- 07
Five comparisons that rank reliability
- 08
External-internal evidence and why route demotes it
- 09
Risk and quality as the two levers on how much is enough
Rank four items on one file, and repair the weakest
- 3Classify each item by who prepared it.
- 3Classify each item by how it reached the auditor.
- 2Name the change that would move one item up the ranking.
Key terms
- Audit Evidence
- Everything the auditor draws on when weighing the claims management has made in the accounts and settling the conclusion the opinion rests on.
- Sufficiency
- How much evidence there is, driven by the assessed risk of material misstatement and by how good that evidence turns out to be.
- Appropriateness
- How good the evidence is, made up of whether it bears on the claim under test and whether it signals the real position dependably.
- Relevance
- How far an item bears on the claim under test, or on what the control under test is meant to achieve.
- External-Internal Evidence
- A document prepared by an outside party that reached the auditor through the client, demoted in reliability because the client had an opportunity to alter it.
- Persuasiveness
- The overall weight of evidence, produced jointly by its sufficiency and its appropriateness rather than by either alone.
Audit Evidence: Sufficiency, Appropriateness, Reliability FAQ
Is more evidence always better?
Only within a type. Quantity compensates for quality up to a point, but a hundred internally generated documents produced by an uncontrolled process still tell you only what that process produced.
That is why the usual response to a high assessed risk is a change of procedure rather than a larger sample of the procedure already chosen, and why the two levers on sufficiency are the assessed risk and the quality of the evidence rather than sample size alone.
Which is judged first, relevance or reliability?
Relevance, and the order matters because highly reliable evidence about the wrong assertion is worth nothing. Confirming a receivable balance with a customer is strong evidence of existence and no evidence at all of collectability, since a customer agreeing that it owes money says nothing about whether it will pay.
An answer praising a confirmation as strong evidence without naming the assertion it is strong for has skipped the first test, and the omission is visible to a marker.
Does a bank statement count as external evidence?
It depends entirely on how it reached the file. Obtained directly from the bank it is external evidence and ranks high. Handed over by the client's finance team it is external-internal, because the client had the opportunity to alter it before it arrived. The information printed on it is identical in both cases, which is exactly the point: origin and route are two separate questions and the second one decides the demotion.
What does applying scepticism to evidence actually mean here?
Asking, item by item, whether what you hold is subject to management bias or to some other cognitive bias before you weigh it. A schedule prepared by the person whose work is under test, an explanation that closes off a contradiction, a confirmation returned by a respondent who does not maintain the records in question: each is evidence of something, and none is evidence of what the file may claim.
The reliability rules are comparisons, so the circumstances of obtaining always have to be read alongside them.
Exam move
Take one caption you know and list every item of evidence a real file would hold for it, then rank the list using only the two questions of origin and route. Where two items tie, write the circumstance that separates them. This is faster than memorising the five rules and it produces the sentence an examiner is looking for, which is always a comparison rather than a label.
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