Assertions and evidence - Sufficiency and appropriateness of...

Learning Outcomes

After reading this article, you should be able to identify and explain audit assertions, describe the difference between sufficiency and appropriateness of audit evidence, and evaluate how these qualities influence audit procedures. You will be equipped to judge whether evidence supports the auditor’s opinion and apply key principles to practical scenarios tested in the ACCA Audit and Assurance exam.

ACCA Audit and Assurance (AA) Syllabus

For ACCA Audit and Assurance (AA), you are required to understand how assertions and audit evidence underpin the audit process. In particular, focus your revision on:

• Explaining the purpose of assertions about transactions, balances, and disclosures, and applying them to practical audit scenarios.
• Describing sufficiency (quantity) and appropriateness (quality—reliability and relevance) of audit evidence and understanding how they interact.
• Assessing the factors that determine how much and what type of evidence is required.
• Identifying different audit procedures used to obtain evidence and evaluating their relevance and reliability for different assertions.
• Evaluating scenarios to decide whether the evidence obtained is sufficient and appropriate to form a valid audit opinion.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which two qualities must audit evidence always be assessed for before it can support an audit opinion?
2. Match the type of audit evidence to its most reliable source:
   • a) External confirmation
   • b) Inspection of client records
   • c) Enquiry of management
     Sources: A. Independent external party
     B. Documentary evidence generated by client
     C. Verbal explanation by client
3. True or false: Analytical procedures alone can always provide sufficient appropriate evidence for all balance sheet assertions.
4. Briefly explain why the relevance of audit evidence depends on the assertion being tested.
5. List three factors that influence how much audit evidence is required for a specific account balance.

Introduction

In every audit engagement, you must collect and evaluate audit evidence to support your opinion. Evidence alone is not enough; it must be both sufficient in quantity and appropriate in quality. Understanding the link between assertions (what management claims about the financial statements) and the audit evidence you collect is essential for ensuring a robust, defensible audit approach.

Key Term: Assertion
A statement or claim by management about the recognition, measurement, classification, or disclosure of transactions, balances, or disclosures in the financial statements.

Assertions in the Audit

Assertions specify what each financial statement item represents. Auditors use them to design procedures targeting the risks of material misstatement.

Transaction and event assertions include:

• Occurrence (the event actually happened)
• Completeness (all items that should be recorded are included)
• Accuracy (amounts and details are correct)
• Cut-off (recorded in the correct accounting period)
• Classification (recorded in the correct accounts)
• Presentation (clearly described and appropriately disclosed)

Account balance assertions include:

• Existence (asset, liability, or equity exists at period-end)
• Rights and obligations (the entity has control/ownership of assets and owes the liabilities)
• Completeness (all balances that should be recorded are included)
• Accuracy, valuation and allocation (amounts are recorded at appropriate value)
• Classification and presentation (correctly grouped and disclosed)

Key Term: Financial Statement Assertion
A specific representation by management about an aspect of the financial statements, guiding what the auditor tests.

Sufficiency and Appropriateness of Audit Evidence

Sufficiency

Sufficiency refers to the quantity of evidence obtained. More evidence is needed for areas with higher risk, more complex transactions, or where materiality is significant.

Factors affecting sufficiency:

• Risk of material misstatement (higher risk or complexity calls for more evidence)
• Effectiveness of client controls (strong controls may reduce the amount of evidence needed)
• Size and characteristics of the population (e.g., number of transactions)
• Results of previous procedures (if evidence is inconclusive, more is required)

Key Term: Sufficiency
The measure of the amount (quantity) of audit evidence obtained to support the audit conclusion.

Appropriateness

Appropriateness addresses the quality of evidence—its relevance (does it relate to the assertion being tested?) and reliability (can it be trusted as support?).

• Relevance: Is the evidence linked to the assertion? For example, tracing items from invoices to the ledger tests completeness; tracing ledger entries to invoices tests existence.
• Reliability: Evidence from external and independent sources is generally more dependable than evidence produced internally, especially if client controls are weak.

Hierarchy of reliability (from most to least):

1. Evidence from independent external sources (e.g., bank confirmations)
2. Evidence obtained directly by the auditor
3. Documentary evidence (originals are best)
4. Oral evidence from management

Key Term: Appropriateness
The measure of the quality (relevance and reliability) of audit evidence in supporting the auditor’s conclusion.

Key Term: Relevance
The extent to which audit evidence relates specifically to the assertion being tested.

Key Term: Reliability
The degree to which audit evidence can be trusted to provide genuine support for the assertion.

Balancing Quantity and Quality

There is a trade-off: high-quality (very reliable) evidence may reduce the quantity required. Conversely, if evidence is less reliable, you will need a larger volume to compensate—though low-quality evidence will never be made sufficient by sheer quantity alone.

Sources and Types of Audit Evidence

Common types of audit evidence include:

• Inspection: Reviewing documents or physical assets.
• Observation: Watching processes or procedures in action.
• External confirmation: Obtaining written confirmation from third parties.
• Enquiry: Asking questions of client staff or third parties (best when corroborated).
• Recalculation: Checking calculations for accuracy.
• Re-performance: Independently executing controls or procedures to test effectiveness.
• Analytical procedures: Assessing data trends, relationships, or ratios.

Each procedure must be chosen with the assertion and the required evidence quality in mind. For example, external confirmation is excellent for existence but not valuation; observation is strong for control operation but only proves activity at the time observed.

Worked Example 1.1

Question: You are auditing inventory. To test existence, you inspect several items selected from the inventory listing to the warehouse. What assertion is addressed and what type of evidence is this?

Answer:
This tests the existence assertion—do the items recorded in the records physically exist? The evidence is inspection of physical assets, typically considered reliable.

Worked Example 1.2

Question: An auditor receives a direct written bank confirmation, and separately reviews a bank reconciliation prepared by the client. Is this sufficient and appropriate evidence for the bank balance?

Answer:
These sources provide high-quality (reliable) evidence. Bank confirmations directly evidence existence; reviewing the reconciliation addresses completeness and valuation. Together, if no unexplained differences, they are typically considered both sufficient and appropriate.

Exam Warning

Audit evidence obtained solely from management (especially without corroborating documentation) is low reliability. Do not treat oral representations as primary evidence except when no alternative exists—and then explain the limitation in your working papers.

Evaluating Sufficiency and Appropriateness

You must evaluate the total body of evidence—not just isolated pieces—against the risks and materiality of each area. If the evidence gathered does not allow reasonable assurance that the assertions are met, you must perform additional procedures.

Factors indicating insufficient evidence:

• Contradictory results from different procedures
• Reliance on weak controls without substantive evidence
• Material items tested with only low-reliability procedures

Worked Example 1.3

Question: The auditor only obtains verbal confirmation from management that all contingent liabilities have been disclosed, with no supporting documentation or legal correspondence. Is this sufficient appropriate evidence?

Answer:
No. Management enquiry alone is insufficient and unreliable for completeness of contingent liabilities. The auditor should seek corroborating documentary or external evidence (e.g., legal letters, board minutes).

Summary Table: Reliability of Evidence

Revision Tip

Always link your audit procedures back to the specific assertion you want to test, and be ready to explain in ACCA exams why a particular form of evidence is reliable (or otherwise).

Key Point Checklist

This article has covered the following key knowledge points:

• Define assertions and explain their relevance to financial statement audits.
• Distinguish sufficiency (quantity) from appropriateness (quality) of audit evidence.
• Explain the factors that affect how much and what kind of evidence auditors need.
• Identify types and sources of audit evidence and their typical reliability.
• Evaluate whether evidence obtained is both sufficient and appropriate for forming an audit opinion.
• Recognize why evidence must be tailored to the assertion being tested, not gathered indiscriminately.

Key Terms and Concepts

• Assertion
• Financial Statement Assertion
• Sufficiency
• Appropriateness
• Relevance
• Reliability