Auditing Standard 15: Obtaining Sufficient Audit Evidence

Auditing Standard 15, “Audit Evidence,” is a directive established by the Public Company Accounting Oversight Board (PCAOB). This standard applies to the audits of public companies and outlines the principles for designing and executing audit procedures. Its purpose is to guide auditors in gathering a sufficient quantity of high-quality evidence. This evidence forms the basis for the auditor’s opinion on whether a company’s financial statements are presented fairly and free from material misstatement.

The Foundation of an Audit Opinion

The objective for an auditor, as outlined in AS 15, is to obtain “sufficient appropriate audit evidence” to support their conclusion. This standard of proof is not about achieving absolute certainty, which would be impractical. Instead, the goal is to attain reasonable assurance, a high but not absolute level of confidence that the financial statements are accurate.

This evidence is the bridge between a company’s financial records and the auditor’s report that investors and the public rely on. It includes all information used by the auditor, encompassing both data that confirms management’s assertions and any information that might contradict them. The quality and quantity of this evidence directly determine the credibility of the audit itself.

Assessing Evidence Sufficiency and Appropriateness

The concept of sufficient appropriate audit evidence is a combination of two distinct but interconnected ideas: quantity and quality. An auditor must exercise professional judgment to determine that both attributes have been met before concluding an audit. These judgments are directly influenced by the specific circumstances of the company being audited.

Sufficiency

Sufficiency refers to the quantity of audit evidence that must be obtained. The amount of evidence needed is a professional decision influenced by the auditor’s assessment of the risk of material misstatement. If an area has a high risk of being incorrect, the quantity of evidence required increases. Conversely, the quality of the evidence affects the quantity needed. If an auditor obtains very high-quality evidence, they may need less of it, such as a single confirmation from an independent third party versus dozens of internal documents.

Appropriateness

Appropriateness is the measure of the quality of audit evidence, which is determined by its relevance and reliability. For evidence to be considered appropriate, it must be both logically connected to the assertion being tested and trustworthy.

Relevance

Relevance pertains to the logical connection between the audit evidence and the financial statement assertion being tested. An assertion is a claim by management embedded in the financial statements, such as that all recorded revenue transactions occurred. For instance, if an auditor is testing that a company’s inventory exists, physically inspecting the inventory is relevant evidence, while examining a sales invoice from after the year-end would not be.

Reliability

Reliability refers to the dependability and trustworthiness of the evidence. AS 15 provides principles to help auditors judge reliability:

• Evidence is more reliable when obtained from knowledgeable, independent sources outside the company. For example, a bank statement obtained directly from the bank is more reliable than a copy from the company.
• Evidence that the auditor obtains directly is more reliable than evidence obtained indirectly or through inquiry alone.
• The form of the evidence matters; original documents are more reliable than photocopies or documents that have been altered.
• When information is generated internally, its reliability increases if the company’s internal controls over that information are effective.

Procedures for Obtaining Audit Evidence

To gather evidence, auditors perform actions known as audit procedures. Inspection involves examining records, documents, or tangible assets, like reviewing contracts or equipment. Observation consists of watching a process being performed, such as an inventory count. Inquiry involves seeking information from knowledgeable persons, while confirmation is a specific inquiry that obtains a direct written response from a third party.

Auditors also perform their own calculations and actions. Recalculation consists of checking the mathematical accuracy of records. Reperformance involves the auditor’s independent execution of procedures originally performed by company personnel. Analytical procedures involve evaluating financial information by studying plausible relationships among both financial and non-financial data.

Once auditors decide which procedures to use, they must determine how to apply them. The standard provides three methods for selecting items for testing. An auditor might select all items for examination, which is common when a population consists of a small number of high-value items. They can also select specific items, such as all transactions over a certain dollar amount. The third method is audit sampling, which involves applying a procedure to less than 100% of the items to evaluate the entire population.