Amendments to paragraphs .B1 and .B2 have been adopted by the PCAOB and approved by the U.S. Securities and Exchange Commission. The standard as amended will be effective for audits of financial statements for fiscal years ending on or after December 15, 2024. See PCAOB Release No. 2022-002, SEC Release No. 34-95488. View the standard as amended.
Summary Table of Contents
- .01 Introduction
- .03 Objective
- .04 Sufficient Appropriate Audit Evidence
- .11 Financial Statement Assertions
- .13 Audit Procedures for Obtaining Audit Evidence
- .22 Selecting Items for Testing to Obtain Audit Evidence
- .29 Inconsistency in, or Doubts about the Reliability of, Audit Evidence
- Appendix A - Using the Work of a Company's Specialist as Audit Evidence
- Appendix B - Audit Evidence Regarding Valuation of Investments Based on Investee Financial Results
.01 This standard explains what constitutes audit evidence and establishes requirements regarding designing and performing audit procedures to obtain sufficient appropriate audit evidence.
.02 Audit evidence is all the information, whether obtained from audit procedures or other sources, that is used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Audit evidence consists of both information that supports and corroborates management's assertions regarding the financial statements or internal control over financial reporting and information that contradicts such assertions.
.03 The objective of the auditor is to plan and perform the audit to obtain appropriate audit evidence that is sufficient to support the opinion expressed in the auditor's report.1
.04 The auditor must plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion.
.05 Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence needed is affected by the following:
- Risk of material misstatement (in the audit of financial statements) or the risk associated with the control (in the audit of internal control over financial reporting). As the risk increases, the amount of evidence that the auditor should obtain also increases. For example, ordinarily more evidence is needed to respond to significant risks.2
- Quality of the audit evidence obtained. As the quality of the evidence increases, the need for additional corroborating evidence decreases. Obtaining more of the same type of audit evidence, however, cannot compensate for the poor quality of that evidence.
.06 Appropriateness is the measure of the quality of audit evidence, i.e., its relevance and reliability. To be appropriate, audit evidence must be both relevant and reliable in providing support for the conclusions on which the auditor's opinion is based.
Relevance and Reliability
.07 Relevance. The relevance of audit evidence refers to its relationship to the assertion or to the objective of the control being tested. The relevance of audit evidence depends on:
- The design of the audit procedure used to test the assertion or control, in particular whether it is designed to (1) test the assertion or control directly and (2) test for understatement or overstatement; and
- The timing of the audit procedure used to test the assertion or control.
.08 Reliability. The reliability of evidence depends on the nature and source of the evidence and the circumstances under which it is obtained. For example, in general:
Evidence obtained from a knowledgeable source that is independent of the company is more reliable than evidence obtained only from internal company sources.
Note: See Appendix A of this standard for requirements related to the evaluation of evidence from a company's specialist.
- The reliability of information generated internally by the company is increased when the company's controls over that information are effective.
- Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly.
- Evidence provided by original documents is more reliable than evidence provided by photocopies or facsimiles, or documents that have been filmed, digitized, or otherwise converted into electronic form, the reliability of which depends on the controls over the conversion and maintenance of those documents.
Note: If a third party provides evidence to an auditor subject to restrictions, limitations, or disclaimers, the auditor should evaluate the effect of the restrictions, limitations, or disclaimers on the reliability of that evidence.
.09 The auditor is not expected to be an expert in document authentication. However, if conditions indicate that a document may not be authentic or that the terms in a document have been modified but that the modifications have not been disclosed to the auditor, the auditor should modify the planned audit procedures or perform additional audit procedures to respond to those conditions and should evaluate the effect, if any, on the other aspects of the audit.
Using Information Produced by the Company
.10 When using information produced by the company as audit evidence, the auditor should evaluate whether the information is sufficient and appropriate for purposes of the audit by performing procedures to:3
- Test the accuracy and completeness of the information, or test the controls over the accuracy and completeness of that information; and
- Evaluate whether the information is sufficiently precise and detailed for purposes of the audit.
.11 In representing that the financial statements are presented fairly in conformity with the applicable financial reporting framework, management implicitly or explicitly makes assertions regarding the recognition, measurement, presentation, and disclosure of the various elements of financial statements and related disclosures. Those assertions can be classified into the following categories:
- Existence or occurrence—Assets or liabilities of the company exist at a given date, and recorded transactions have occurred during a given period.
- Completeness—All transactions and accounts that should be presented in the financial statements are so included.
- Valuation or allocation—Asset, liability, equity, revenue, and expense components have been included in the financial statements at appropriate amounts.
- Rights and obligations—The company holds or controls rights to the assets, and liabilities are obligations of the company at a given date.
- Presentation and disclosure—The components of the financial statements are properly classified, described, and disclosed.
.12 The auditor may base his or her work on financial statement assertions that differ from those in this standard if the assertions are sufficient for the auditor to identify the types of potential misstatements and to respond appropriately to the risks of material misstatement in each significant account and disclosure that has a reasonable possibility4 of containing misstatements that would cause the financial statements to be materially misstated, individually or in combination with other misstatements.5
.13 Audit procedures can be classified into the following categories:
- Risk assessment procedures,6 and
- Further audit procedures,7 which consist of:
- Tests of controls, and
- Substantive procedures, including tests of details and substantive analytical procedures.
.14 Paragraphs .15-.21 of this standard describe specific audit procedures. The purpose of an audit procedure determines whether it is a risk assessment procedure, test of controls, or substantive procedure.
.15 Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or physically examining an asset. Inspection of records and documents provides audit evidence of varying degrees of reliability, depending on their nature and source and, in the case of internal records and documents, on the effectiveness of the controls over their production. An example of inspection used as a test of controls is inspection of records for evidence of authorization.
.16 Observation consists of looking at a process or procedure being performed by others, e.g., the auditor's observation of inventory counting by the company's personnel or the performance of control activities. Observation can provide audit evidence about the performance of a process or procedure, but the evidence is limited to the point in time at which the observation takes place and also is limited by the fact that the act of being observed may affect how the process or procedure is performed.8
.17 Inquiry consists of seeking information from knowledgeable persons in financial or nonfinancial roles within the company or outside the company. Inquiry may be performed throughout the audit in addition to other audit procedures. Inquiries may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process.9
Note: Inquiry of company personnel, by itself, does not provide sufficient audit evidence to reduce audit risk to an appropriately low level for a relevant assertion or to support a conclusion about the effectiveness of a control.
.18 A confirmation response represents a particular form of audit evidence obtained by the auditor from a third party in accordance with PCAOB standards.10
.19 Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically.
.20 Reperformance involves the independent execution of procedures or controls that were originally performed by company personnel.
.21 Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. Analytical procedures also encompass the investigation of significant differences from expected amounts.11
.22 Designing substantive tests of details and tests of controls includes determining the means of selecting items for testing from among the items included in an account or the occurrences of a control. The auditor should determine the means of selecting items for testing to obtain evidence that, in combination with other relevant evidence, is sufficient to meet the objective of the audit procedure. The alternative means of selecting items for testing are:
- Selecting all items;
- Selecting specific items; and
- Audit sampling.
.23 The particular means or combination of means of selecting items for testing that is appropriate depends on the nature of the audit procedure, the characteristics of the control or the items in the account being tested, and the evidence necessary to meet the objective of the audit procedure.
Selecting All Items
.24 Selecting all items (100 percent examination) refers to testing the entire population of items in an account or the entire population of occurrences of a control (or an entire stratum within one of those populations). The following are examples of situations in which 100 percent examination might be applied:
- The population constitutes a small number of large value items;
- The audit procedure is designed to respond to a significant risk, and other means of selecting items for testing do not provide sufficient appropriate audit evidence; and
- The audit procedure can be automated effectively and applied to the entire population.
Selecting Specific Items
.25 Selecting specific items refers to testing all of the items in a population that have a specified characteristic, such as:
- Key items. The auditor may decide to select specific items within a population because they are important to accomplishing the objective of the audit procedure or exhibit some other characteristic, e.g., items that are suspicious, unusual, or particularly risk-prone or items that have a history of error.
- All items over a certain amount. The auditor may decide to examine items whose recorded values exceed a certain amount to verify a large proportion of the total amount of the items included in an account.
.26 The auditor also might select specific items to obtain an understanding about matters such as the nature of the company or the nature of transactions.
.27 The application of audit procedures to items that are selected as described in paragraphs .25-.26 of this standard does not constitute audit sampling, and the results of those audit procedures cannot be projected to the entire population.12
.28 Audit sampling is the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.13
.29 If audit evidence obtained from one source is inconsistent with that obtained from another, or if the auditor has doubts about the reliability of information to be used as audit evidence, the auditor should perform the audit procedures necessary to resolve the matter and should determine the effect, if any, on other aspects of the audit.
.A1 This appendix describes the auditor's responsibilities with respect to using the work of a specialist, employed or engaged by the company ("company's specialist"), as audit evidence to support a conclusion regarding a relevant assertion of a significant account or disclosure. The requirements in this appendix supplement the requirements of this standard.
Note: For purposes of this standard, a specialist is a person (or firm) possessing special skill or knowledge in a particular field other than accounting or auditing. This appendix does not apply when the auditor uses the work of a person with specialized skill or knowledge in income taxes1 or information technology as audit evidence.2
Note: This appendix does not apply to information provided by a company's attorney concerning litigation, claims, or assessments that is used by the auditor pursuant to AS 2505, Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments. This appendix applies when an auditor uses the work of a company's attorney as audit evidence in other matters relating to legal expertise, such as when a legal interpretation of a contractual provision or a legal opinion regarding isolation of transferred financial assets is necessary to determine appropriate accounting or disclosure under the applicable financial reporting framework.
.A2 The requirements in AS 2110, Identifying and Assessing Risks of Material Misstatement, for obtaining an understanding of the company's information system relevant to financial reporting include obtaining an understanding of the work and report(s), or equivalent communication, of the company's specialist(s) and related company processes and controls.3
Assessing the Knowledge, Skill, and Ability of the Company's Specialist and the Specialist's Relationship to the Company
.A3 The auditor should obtain an understanding of the professional qualifications of the company's specialist in the particular field, and the entity that employs the specialist (if other than the company), and assess the level of knowledge, skill, and ability of the specialist in the particular field. Factors that are relevant to the assessment of the specialist's knowledge, skill, and ability include the following:
- The professional certification, license, or professional accreditation of the specialist in the particular field;
- The specialist's experience in the type of work performed, including applicable areas of specialty within the specialist's field; and
- The reputation and standing of the specialist in the particular field.
.A4 The auditor should assess the relationship to the company of the specialist and the entity that employs the specialist (if other than the company)—specifically, whether circumstances exist that give the company the ability to significantly affect the specialist's judgments about the work performed, conclusions, or findings (e.g., through employment, financial, ownership, or other business relationships, contractual rights, family relationships, or otherwise).
Note: Examples of potential sources of information that could be relevant to the auditor's assessment include, but are not limited to:
- Information obtained by the auditor from procedures performed pursuant to AS 2410, Related Parties;
- Engagement contracts between the company and the specialist, or the specialist's employer;
- Responses to questionnaires provided to the specialist regarding relationships between the specialist, or the specialist's employer, and the company;
- Information provided by the employer of a specialist regarding relationships with the company; and
- Disclosures about relationships with the company in the specialist's report, or equivalent communication, pursuant to requirements promulgated by the specialist's profession or by legislation or regulation governing the specialist.
.A5 The necessary evidence to assess the level of knowledge, skill, and ability of the company's specialist and the specialist's relationship to the company in paragraphs .A3–.A4 depends on (1) the significance of the specialist's work to the auditor's conclusion regarding the relevant assertion and (2) the risk of material misstatement of the relevant assertion. As the significance of the specialist's work and risk of material misstatement increases, the persuasiveness of the evidence the auditor should obtain for those assessments also increases.
Evaluating the Work of the Company's Specialist
.A6 Evaluating the work of a company's specialist involves evaluating:
- The data, significant assumptions, and methods used by the specialist; and
- The relevance and reliability of the specialist's work and its relationship to the relevant assertion.
Note: Paragraphs .16–.17 of AS 2101, Audit Planning, describe the auditor's responsibilities for determining whether specialized knowledge or skill is needed. This includes determining whether an auditor's specialist is needed to evaluate the work of a company's specialist.
.A7 The necessary evidence from the auditor's evaluation of the specialist's work to support a conclusion regarding a relevant assertion depends on:
- The significance of the specialist's work to the auditor's conclusion regarding the relevant assertion;
- The risk of material misstatement of the relevant assertion;
- The level of knowledge, skill, and ability of the specialist; and
- The ability of the company to significantly affect the specialist's judgments about the work performed, conclusions, or findings.
Note: When evaluating the specialist's work, the auditor should obtain more persuasive evidence as the significance of the specialist's work, the risk of material misstatement, or the ability of the company to affect the specialist's judgments increases, or as the level of knowledge, skill, and ability possessed by the specialist in the particular field decreases.
.A8 The auditor should:
- Test the accuracy and completeness of company-produced data used by the specialist,4 and evaluate the relevance and reliability5 of data from sources external to the company that are used by the specialist;
- Evaluate whether the significant assumptions6 used by the specialist are reasonable as follows:
For significant assumptions developed by the specialist, the auditor should take into account the consistency of those assumptions with relevant information.
Note: Examples of information that, if relevant, should be taken into account include: (1) assumptions generally accepted within the specialist's field; (2) supporting information provided by the specialist; (3) industry, regulatory, and other external factors, including economic conditions; (4) the company's objectives, strategies, and related business risks; (5) existing market information; (6) historical or recent experience, along with changes in conditions and events affecting the company; and (7) significant assumptions used in other estimates tested in the company's financial statements.
- For significant assumptions provided by company management and used by the specialist, the auditor should look to the requirements set forth in paragraphs .16–.18 of AS 2501, Auditing Accounting Estimates, Including Fair Value Measurements.
- If a significant assumption is based on the company's intent and ability to carry out a particular course of action, the auditor should look to the requirements set forth in AS 2501.17; and
- Evaluate whether the methods used by the specialist are appropriate under the circumstances, taking into account the requirements of the applicable financial reporting framework.
Note: Evaluating whether the methods are appropriate includes evaluating whether the data (paragraph .A8a) and significant assumptions (paragraph .A8b) are appropriately applied under the applicable financial reporting framework.
.A9 The auditor should evaluate the relevance and reliability of the specialist's work and whether the specialist's findings support or contradict the relevant assertion. Factors that affect the relevance and reliability of the specialist's work include:
- The results of the auditor's procedures over data, significant assumptions, and methods performed pursuant to paragraph .A8;
- The nature of any restrictions, disclaimers, or limitations in the specialist's report or equivalent communication; and
- The consistency of the specialist's work with other evidence obtained by the auditor and the auditor's understanding of the company and its environment.
.A10 If the specialist's findings or conclusions appear to contradict the relevant assertion or the specialist's work does not provide sufficient appropriate evidence, the auditor should perform additional procedures, as necessary, to address the matter.
Note: Examples of situations in which additional procedures ordinarily are necessary include: (1) the specialist's findings and conclusions are inconsistent with (i) other information, if any, in the specialist's report, or equivalent communication, (ii) other evidence obtained by the auditor, or (iii) the auditor's understanding of the company and its environment; (2) the specialist's report, or equivalent communication, contains restrictions, disclaimers, or limitations regarding the auditor's use of the report or communication; (3) exceptions were identified in performing the procedures described in paragraph .A8 above related to data, significant assumptions, or methods; (4) the auditor has doubt about the specialist's knowledge, skill, and ability, or about the company's effect on the specialist's judgments; or (5) the specialist has a conflict of interest relevant to the specialist's work.
.B1 For valuations based on an investee's financial results, the auditor should obtain sufficient appropriate evidence in support of the investee's financial results. The auditor should read available financial statements of the investee and the accompanying audit report, if any. Financial statements of the investee that have been audited by an auditor whose report is satisfactory, for this purpose,1 to the investor's auditor may constitute sufficient appropriate evidence.
.B2 If in the auditor's judgment additional evidence is needed, the auditor should perform procedures to gather such evidence. For example, the auditor may conclude that additional evidence is needed because of significant differences in fiscal year-ends, significant differences in accounting principles, changes in ownership, changes in conditions affecting the use of the equity method, or the materiality of the investment to the investor's financial position or results of operations. Examples of procedures the auditor may perform are reviewing information in the investor's files that relates to the investee such as investee minutes and budgets and cash flows information about the investee and making inquiries of investor management about the investee's financial results.
.B3 If the investee's financial statements are not audited, or if the investee auditor's report is not satisfactory to the investor's auditor for this purpose, the investor's auditor should apply, or should request that the investor arrange with the investee to have another auditor apply, appropriate auditing procedures to such financial statements, considering the materiality of the investment in relation to the financial statements of the investor.
.B4 If the carrying amount of the security reflects factors that are not recognized in the investee's financial statements or fair values of assets that are materially different from the investee's carrying amounts, the auditor should obtain sufficient appropriate evidence in support of these amounts.
Note: The auditor should look to the requirements of AS 2501, Auditing Accounting Estimates, Including Fair Value Measurements, and the applicable financial reporting framework with respect to auditing fair value measurements and evaluating asset impairment.
.B5 There may be a time lag in reporting between the date of the financial statements of the investor and that of the investee. A time lag in reporting should be consistent from period to period. If a time lag between the date of the entity's financial statements and those of the investee has a material effect on the entity's financial statements, the auditor should determine whether the entity's management has properly considered the lack of comparability. The effect may be material, for example, because the time lag is not consistent with the prior period in comparative statements or because a significant transaction occurred during the time lag. If a change in time lag occurs that has a material effect on the investor's financial statements, an explanatory paragraph, including an appropriate title, should be added to the auditor's report because of the change in reporting period.2
.B6 The auditor should evaluate management's conclusion about the need to recognize an impairment loss for a decline in the security's fair value below its carrying amount that is other than temporary. In addition, with respect to subsequent events and transactions of the investee occurring after the date of the investee's financial statements but before the date of the investor auditor's report, the auditor should read available interim financial statements of the investee and make appropriate inquiries of the investor to identify subsequent events and transactions that are material to the investor's financial statements. Such events or transactions of the type contemplated in paragraphs .05–.06 of AS 2801, Subsequent Events, should be disclosed in the notes to the investor's financial statements and (where applicable) labeled as unaudited information. For the purpose of recording the investor's share of the investee's results of operations, recognition should be given to events or transactions of the type contemplated in AS 2801.03.
.B7 Evidence relating to material transactions between the entity and the investee should be obtained to evaluate (a) the propriety of the elimination of unrealized profits and losses on transactions between the entity and the investee that is required when the equity method of accounting is used to account for an investment under the applicable financial reporting framework and (b) the adequacy of disclosures about material related party transactions.
Footnotes (AS 1105 - Audit Evidence):
1AS 2810, Evaluating Audit Results, establishes requirements regarding evaluating whether sufficient appropriate evidence has been obtained. AS 1215, Audit Documentation, establishes requirements regarding documenting the procedures performed, evidence obtained, and conclusions reached in an audit.
2Paragraph .A5 of AS 2110, Identifying and Assessing Risks of Material Misstatement.
3When using the work of a company's specialist, see Appendix A of this standard. When using information produced by a service organization or a service auditor's report as audit evidence, see AS 2601, Consideration of an Entity's Use of a Service Organization, and for integrated audits, see AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements.
4There is a reasonable possibility of an event, as used in this standard, when the likelihood of the event is either "reasonably possible" or "probable," as those terms are used in the FASB Accounting Standards Codification, Contingencies Topic, paragraph 450-20-25-1.
5For an integrated audit, also see AS 2201.28.
7AS 2301, The Auditor's Responses to the Risks of Material Misstatement.
8AS 2510, Auditing Inventories, establishes requirements regarding observation of the counting of inventory.
9AS 2805, Management Representations, establishes requirements regarding written management representations, including confirmation of management responses to oral inquiries.
10AS 2310, The Confirmation Process.
11AS 2305, Substantive Analytical Procedures, establishes requirements on performing analytical procedures as substantive procedures.
12If misstatements are identified in the selected items, see AS 2810.12-.13 and AS 2810.17-.19.
13AS 2315, Audit Sampling, establishes requirements regarding audit sampling.
Footnotes (Appendix A of AS 1105 - Audit Evidence):
1 A note to AS 2505.08 describes the auditor’s responsibility regarding the use of written advice or opinion of a company’s tax advisor or a company’s tax legal counsel as audit evidence.
2 This is consistent with the treatment of persons with specialized skill or knowledge in income taxes and information technology who are employed or engaged by auditors. See Appendix C of AS 1201, Supervision of the Audit Engagement, and AS 1210, Using the Work of an Auditor-Engaged Specialist.
3 See AS 2110.28A.
4 See paragraph .10 of this standard.
5 See paragraphs .07 and .08 of this standard.
6 See AS 2501.15 for procedures to perform when identifying significant assumptions. For purposes of identifying significant assumptions, the company's assumptions include assumptions developed by a company's specialist.
Footnotes (Appendix B of AS 1105 - Audit Evidence):
1In determining whether the report of another auditor is satisfactory for this purpose, the auditor may consider performing procedures such as making inquiries as to the professional reputation and standing of the other auditor, visiting the other auditor and discussing the audit procedures followed and the results thereof, and reviewing the audit program and/or working papers of the other auditor.
2See AS 2820, Evaluating Consistency of Financial Statements.