Relevance And Reliability

Question 1

Relevance and reliability

Answer 1

ISA 500 outlines principles to help auditors assess the relevance and reliability of audit evidence. Here’s a summary of these principles:

1. Logical Connection:
   
   • Purpose of Audit Procedure: Relevance is determined by how logically connected the evidence is to the audit procedure and the assertion being tested.
   • Example: When testing for overstatement in accounts payable, testing recorded accounts payable is relevant. For understatement, testing subsequent disbursements, unpaid invoices, suppliers’ statements, and unmatched receiving reports is more relevant.
2. Assertions:
   
   • Specific Assertions: A set of audit procedures may be relevant to certain assertions but not others.
   • Example: Inspecting documents related to receivables collection after period end provides evidence for existence and valuation but not necessarily for cut-off.
3. Tests of Controls:
   
   • Operating Effectiveness: Designed to evaluate the effectiveness of controls in preventing or detecting and correcting material misstatements.
   • Example: Identifying conditions that indicate control performance and deviations.
4. Substantive Procedures:
   
   • Detecting Misstatements: Designed to detect material misstatements at the assertion level.
   • Example: Identifying conditions relevant to the test’s purpose that indicate a misstatement in the relevant assertion.

1. Independent Sources:
   
   • External Evidence: More reliable when obtained from independent sources outside the entity.
   • Example: Bank confirmations are more reliable than internal bank reconciliations.
2. Internal Controls:
   
   • Effective Controls: Internally generated evidence is more reliable when related controls are effective.
   • Example: Sales invoices are more reliable if the sales process has strong internal controls.
3. Direct Evidence:
   
   • Direct vs. Indirect: Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly or by inference.
   • Example: Observing inventory counts is more reliable than relying on inventory records.
4. Documentary Form:
   
   • Documentary Evidence: More reliable when it exists in documentary form, whether paper, electronic, or other medium.
   • Example: A written meeting record is more reliable than an oral representation.
5. Original Documents:
   
   • Original vs. Copies: Original documents are more reliable than photocopies or electronically transformed documents.
   • Example: Original contracts are more reliable than scanned copies.

Scenario: An auditor is verifying the existence and valuation of inventory.

Steps:
1. Relevance: The auditor inspects inventory records and performs physical counts to ensure the evidence is relevant to the existence and valuation assertions.
2. Reliability: The auditor prefers original inventory records and direct observation of inventory counts over internal reports or photocopies.

By following these principles, auditors can ensure they gather high-quality audit evidence to support their conclusions and provide a reliable audit opinion. If you have any further questions or need more detailed examples, feel free to ask!