We all know that audit safeguards the financial interests of those who are not directly associated with a company’s management such as shareholders, creditors, and external agencies. There is no doubt that audited financial statements increase the credibility of financial information. But audit comes with certain inherent limitations too. One such limitation is that the evidence obtained by an auditor is persuasive rather than conclusive. In this blog, we have thrown light on the persuasiveness and conclusiveness of audit evidence.
Meaning of persuasive evidence
Persuasive evidence means something that has the intent or power to induce action or belief, i.e., something which is convincing for the auditor.
Persuasive evidence vs conclusive evidence
Persuasive evidence is what causes a person to believe a fact.
On the other hand, conclusive evidence is one that is capable of forming an “end”. Especially in the context of an audit, it means something that can put an end to doubt or a question. When such kind of conclusive proof is available, it is said that the evidence is conclusive. It is more decisive and leaves no room for doubt.
Audit evidence is persuasive rather than conclusive. Why?
During an audit, most of the evidence obtained by an auditor is persuasive rather than conclusive.
This is because auditors get the best evidence that is available to them and form their judgement accordingly. In fact, while carrying out an audit, it is sometimes very difficult and at times impractical to gather conclusive evidence. This can be both on account of time as well as cost constraints.
SA 200 on “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing” also seconds this view. It states that most of the audit evidence based on which the auditor draws his conclusions and gives his opinion is persuasive in nature rather than conclusive.
For example, when an auditor relies on a certificate of valuation issued by an architect for a newly constructed building of the client, it may not be conclusive evidence of the correct value of the building. The auditor will only be able to draw reasonable conclusions from such evidence. Neither is it possible for the auditor to evaluate the value of the building himself given the cost and time constraints. Also, he is not a valuer or an expert. The maximum that should be expected of him is that before relying on any such certificate of valuation, he must ensure that proper methods of valuation have been employed and generally accepted accounting principles have been duly followed. As long as he exercises reasonable care and skill in relying upon the evidence available to him, he shall be deemed to have adopted appropriate audit procedures.
Here are some more examples of evidence available to an auditor. Again, there are generally persuasive in nature:
- Holding Q & A sessions with the client’s senior leadership team to inquire about the business operations of the client.
- Inspecting title deeds to verify the ownership of fixed assets and checking that the deeds are in order. (Since an auditor is not an expert in legal documentation, he can only assess whether they are in order or not. Further, it may not necessarily provide evidence regarding the rights & obligations of the client, value of assets, their existence, etc.)
- Relying on the assessment of internal controls to determine the extent to which they are reliable (Test of controls).
- Obtaining information from the client and making inquiries from employees & internal management to assess the collectability of balances, timely payment to outsiders, etc.
- Obtaining management representations in relation to contingent liabilities and off-balance sheet items.
In this regard, it must be remembered that a piece of evidence can be made more persuasive when it is obtained from a variety of places. When an auditor obtains certain evidence from a variety of different sources, be it internal or external, and the results are consistent with one another, the evidence becomes more persuasive. Thus, the degree of persuasiveness can be increased or decreased depending upon how the evidence is collected and the sources from where it is collected.
Wrapping up: “Persuasive and conclusive evidence”
Since evidence obtained by an auditor is persuasive and not conclusive, he is not expected to, and cannot, reduce the audit risk to zero. This means that he cannot obtain an absolute assurance that the financial statements of his client are free from material misstatements due to error or fraud. Auditors are not expected to provide 100% assurance about the correctness of financial information. Owing to the inherent limitations of an audit like lack of time, use of sampling, etc., there is always an unavoidable risk that some misstatements may go undetected. This has also been laid down under SA 240 on “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”.
And this also explains why an auditor gives an opinion rather than giving some form of guarantee or certificate.
All that he can say is that he exercised his professional judgement and obtained the evidence that he thought to be adequate and best available, carefully examined the assertions made in financial statements, and based on that evidence, he formed his opinion on the reliability of financial statements.
Moreover, the persuasiveness of evidence is also one of the grounds based on which auditing is differentiated from an investigation. An investigation is a critical and special examination of records of a business for a specific purpose. Unlike an audit, it seeks to obtain conclusive and corroborative evidence. An investigator does not merely have to give an opinion rather he has to seek answers to a lapse already existent so that the responsibility for those involved in such lapse can be fixed.
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