Early in her audit career, Meredith Mednick, CPA, CA, received an assignment that sounded simple. She was auditing a midsize manufacturing company and needed evidence that its accounts payable balance was complete. If the company owed money at year-end, the liability needed to be on the books.
Meredith asked the AP manager whether any bills received before year-end had missed the system. The manager smiled and said, “No, I don’t think so.” Meredith wrote down the answer and thought she was finished.
She wasn’t.
Her senior reviewed the working paper and asked, “What else do you have?” Then she explained, “Inquiry alone is rarely enough. What would make you more confident that her answer is right?”
That question changed how Meredith viewed audit evidence. In Episode 3 of Audit Fundamentals, she explains AU-C 500, Audit Evidence, through a fictional client, Harborview Manufacturing. Her central lesson is evidence isn’t a pile of documents collected to complete a checklist. It is the basis for an independent, defensible conclusion.
Good evidence must pass two tests
AU-C 500 defines audit evidence as all the information an auditor uses to reach the conclusions behind the audit opinion. That includes invoices, contracts, bank statements, nonfinancial data, client responses, auditor calculations, and direct observations.
The crucial question isn’t whether something counts as evidence. It’s whether the evidence is sufficient and appropriate.
- Sufficiency means quantity. There is no magic sample size. The amount of evidence you need depends on the risk of material misstatement, the population size, the quality of the evidence, and whether initial testing found errors. Higher risk calls for more evidence.
- Appropriateness means quality. Appropriate evidence must be relevant to the assertion being tested and reliable based on its source and nature.
Evidence is also cumulative. To test Harborview’s accounts receivable, an auditor might use customer confirmations, year-over-year analysis, transaction testing, a review of the allowance for doubtful accounts, and subsequent cash receipts. Each procedure adds another piece to the case.
But more evidence isn’t always better. A large volume of weak or irrelevant material can’t support a strong conclusion. That makes the connection between the procedure and the assertion essential.
Match each procedure to the assertion
Before performing a procedure, ask, “What assertion am I testing?” and “Does this procedure provide evidence about that assertion?”
Harborview’s inventory shows why this matters:
- Existence: Observe the physical count and trace selected items from count sheets to the warehouse
- Completeness: Select goods from the warehouse floor and trace them to the count sheets and final inventory listing
- Valuation: Inspect cost records, recalculate standard costs, ask about obsolete inventory, and compare unit costs with the prior year
- Rights and obligations: Review purchase agreements and confirm consignment arrangements to determine which goods Harborview owns
Seeing inventory in the warehouse supports existence. It doesn’t prove Harborview owns the goods or valued them correctly.
AU-C 500 identifies eight evidence-gathering procedures:
- Inspection of records
- Inspection of tangible assets
- Observation
- Inquiry
- Confirmation
- Recalculation
- Reperformance
- Analytical procedures
Each has limits. Recalculation can confirm the math in a depreciation schedule, but it can’t prove the estimated useful lives are reasonable. Observation shows how a process worked while you watched, not how it operated all year.
Once you choose the right procedure, you still need to judge the reliability of the evidence it produces.
Stronger evidence comes from stronger sources
AU-C 500 provides a practical reliability hierarchy:
- External evidence is generally more reliable than internal evidence
- Evidence the auditor obtains directly is generally more reliable than evidence supplied by management
- Documentary evidence is generally more reliable than oral evidence
- Original documents are generally more reliable than copies
For example, a bank confirmation sent directly to the auditor is stronger than a cash reconciliation prepared by the controller. An auditor’s inventory test counts are stronger than a spreadsheet supplied by management.
This hierarchy helps auditors understand each source’s limits and decide when they need corroboration. Inquiry can point you toward useful evidence, but it rarely supports a conclusion by itself.
That need for corroboration leads directly to professional skepticism.
Professional skepticism starts with following up
AU-C 200 describes professional skepticism as a questioning mind, alertness to possible fraud or error, and critical assessment of evidence. Meredith prefers “remain open, but verify” to the familiar phrase “trust but verify.”
Red flags may include altered documents, unusual year-end transactions, delayed responses, incomplete records, changing explanations, or financial relationships that no longer make sense. For example, if revenue rises while cash collections remain flat, the auditor should investigate why.
The same rule applies to testing exceptions. If a customer confirmation is $15,000 below Harborview’s aging schedule, the difference might reflect timing, a disputed invoice, or a recording error. The auditor must determine which. An unexpected result is a signal, not a conclusion.
Following up is only part of the job. The work paper must also preserve the reasoning.
Document the path to your conclusion
Meredith identifies five common evidence mistakes:
- Relying on inquiry without corroboration
- Performing procedures without identifying the assertion
- Accepting copies without question
- Failing to resolve unexpected results
- Gathering evidence without documenting a conclusion
Under AU-C 230, a working paper should show the nature, timing, and extent of the procedures; the evidence and its source; the assertion tested; any exceptions and follow-up; and the conclusion.
Meredith suggests asking, “Could a peer reviewer understand, two years later, what you did and why you reached your conclusion?” If not, you’re not done with documentation.
Build confidence one conclusion at a time
After Meredith’s senior challenged her first AP working paper, they reviewed vendor statements and invoices received in January and February. Together, they searched for unrecorded liabilities. They found no material misstatement, but Meredith had evidence supporting a real conclusion. That’s more valuable than a checked box.
On your next working paper, name the assertion, choose procedures that address it, evaluate the reliability of your evidence, resolve every exception, and state your conclusion clearly.
For Meredith’s full walkthrough of AU-C 500, listen to Episode 3 of Audit Fundamentals.