The third standard of field work requires that the auditor obtain sufficient competent evidence to provide a reasonable basis for the opinion rendered. This requires that the auditor obtain evidence regarding the five management assertions embodied in financial statement components. AU Section 326 of the AICPA Professional Standards lists the following five management assertions:

• Existence or occurrence - management has only included items in an account or transaction class that actually have occurred or exist.
• Completeness - management has included in an account or transaction class all items that should be included.
• Rights and obligations - management has only included in asset accounts those items for which the company has a legal right and only included in liability accounts those items for which the company has a legal obligation.
• Valuation or allocation - management has included items in an account or transaction class at the correct amount and those items have been properly summarized.
• Presentation and disclosure - management has properly classified and disclosed all items included in the financial statements.

Sufficient competent evidence to provide a reasonable basis for the opinion can be obtained through the performance of tests of controls and substantive tests. As previously noted, tests of controls are directed towards testing the effectiveness of entity controls. For example, an auditor could review a bank reconciliation of an entity to assess whether the entity's control effectively reduces the likelihood of misstatement. Techniques used by auditors to test the effectiveness of entity controls can include: inquiry of entity personnel, observation of entity personnel, inspection of entity documents and records, and reperformance of entity controls.

Substantive tests are audit procedures directed towards finding material misstatements. Substantive tests can be classified into three broad categories:

• Analytical Tests - test management assertions by studying and comparing relationships among data. For example, an auditor could test the management assertion of completeness of cost of goods sold by developing an estimate based on the previous years relationship of sales to cost of goods sold. Data used in the performance of analytical tests can include: prior year financial data, current year financial data, non-financial operating data, entity budget data, and industry data.
• Substantive Tests of Transactions - test management assertions by examining evidence supporting classes of transactions. For example, an auditor could test the valuation of sales by comparing amounts recorded on sales invoices to the amounts recorded in the sales journal. Techniques used by auditors to test transactions for material misstatements can include: inquiry of entity personnel, inspecting documents and records, recalculating amounts, confirming transactions, and physically examining assets.
• Tests of Balances - test management assertions by examining evidence supporting account balances. For example, an auditor could test the existence of accounts receivable by confirming the year-end balances with customers. Techniques used by auditors to test balances for material misstatements can included: inquiry of entity personnel, inspecting documents and records, confirming balances, and physically examining assets.

Again, the objective when determining the nature, timing, and extent of audit tests is to select that mix that provides a reasonable basis for the auditor's opinion at the lowest cost. AU Sections 312, 319, and 350 of the AICPA Professional Standards recognize that the higher the assurance provided by one audit test the lower the assurance needed from other audit tests. For example, the higher the assurance provided for the existence of sales and accounts receivable from substantive tests of transactions the lower the needed assurance from tests of balances.

The assurances provided by audit tests is a function of the amount (sufficiency) and quality (competence) of the evidence obtained. AU Sections 313 and 326 of the AICPA Professional Standards suggest that the following characteristics affect the competence of evidence: relevance of information, source of information, effectiveness of internal controls, objectivity of information, and timing of information.