What constitutes sufficient, competent evidential matter?

By Raymond J. Locke
MACPA Peer Review Committee

An auditor walks into the controller's office and asks, "Why did sales increase by 25 percent over last year?"

The controller responds, "Well, we developed a new product and it's been selling really well."

The auditor documents the controller's response in the audit workpapers.

How many times have you seen responses such as this documented in the analytical review workpapers? Is this audit evidence?

At your firm's next A&A meeting, read this scenario and ask the question, "Is this audit evidence?" Take a survey of the responses.

I recently did this. Every auditor in the room responded, "No, this is not audit evidence."

I disagree.

I'm not saying the controller's response, in and of itself, is sufficient, competent evidential matter. But I do believe this is audit evidence.

The third standard of fieldwork states, "Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit."

What constitutes sufficient, competent evidential matter? How much evidence is too much? Too little? Just right? There are no easy answers to those questions. Ultimately, the answers are a function of that mysterious thing named "auditor's judgment." Therefore, the answers depend on the facts and the circumstances of the engagement.

The circumstances of the engagement should be the overriding factor in determining whether the evidence you've gathered meets the criteria of sufficient and competent. Your understanding of the economy, the industry and the business, your "feel" for the honesty and integrity of management, the skill and experience of your audit staff, the inherent risk of the area under audit and your reliance on internal controls — all of these factors should have an effect on the quality and quantity of audit evidence that gives you that warm and fuzzy "I've done a good audit" feeling.

Think of it this way. It's a beautiful, springtime Friday night. As you drag home from work and are happy just to get to your front door, your teen-ager is heading out the door the other way. After a quick hello (if you're lucky), your teen-ager says, "I'm going to Cassie's house." How do you respond? "Have fun." "No way!" "Did you talk to you mother about this?"

Doesn't your response to that statement depend on your teen-ager's past behavior, who Cassie is, what you know about Cassie, what you know about Cassie's parents, whether Cassie is a male or female, what you sort of half-heard about some kind of party or something going on, among many other things?

Shouldn't your requirements for audit evidence be based on the same thought process? How you follow up on what you've been told (or what was represented to you in a financial statement) is a function of similar questions: the client's integrity; the industry the client is in; the industry's performance; bigger issues in that industry; how easy is it to verify the representations; and the buzz you've heard from meetings with the client, the client's business associates and in the client's lunch room.

As you review the audit workpapers, think about all of these factors. Sometimes in the rush to get things done, we lose sight of the big picture and how all of these pieces of evidence fit together. We need to make certain that they do fit together solidly.

Let's look at our scenario one more time. What if, prior to asking the controller about the sales increase, you:

had learned on the Internet that your client's industry was bucking the current economic slowdown?
had read in the local newspaper about your client's hot new product?
had seen your client's product prominently displayed as you walked in the door of Office Depot?
had spoken to the sales manager about the sudden increase in commissions expense?
had spoken to the production manager about the increase in the number of production personnel?

Now, does the controller's response look more like audit evidence?

The quantity and quality of evidence needed in the audit of a financial statement are a function of the auditors' judgment. In making that judgment, the auditor needs to consider the circumstances of the engagement while viewing the big picture of that engagement as a whole.

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