b) Write a brief explanatory notes on the following terms in relation to audit evidence:
i. Relevance. (2 marks)
ii. Reliability. (2 marks)
Relevance of audit evidence
– Relevance refers to the ability of the evidence to assist the auditor in testing management‘s assertions or to test the audit objective;
– Relevance of audit evidence should be considered in relation to the overall audit objective of forming an opinion and reporting on the financial statements. To achieve this objective the auditor needs to obtain evidence to enable him to draw reasonable conclusions on various management assertions made in preparing the financial statements.
Reliability of audit evidence
The reliability of audit evidence refers to the credibility of the evidence.
This credibility is influenced its source; whether from internal sources or external sources and its nature; whether visual, documentary or oral. Reliability of the evidence depends on individual circumstances but we can make the following generalizations:
Audit evidence from external sources e.g. a third party (e.g. a debtor) confirming amount owing to the company is more reliable than evidence generated internally;
Audit evidence generated internally e.g. from accounting records is more reliable when the related accounting and internal controls are effective;
Evidence obtained the auditor himself is more reliable than that obtained from the entity;
Evidence in the form of documents and written representations is more reliable than oral representations.
Sufficiency of audit evidence
– Sufficiency is the measure of the quantity of audit evidence;
– Sufficiency is therefore the question of how much information is needed to be able to conclude on the financial statements.