Activity Based Risk Evaluation Model of Auditing

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Relevance of audit evidence

Auditors gather sufficient appropriate audit evidence in order to form their opinion on the financial statements. Sufficiency refers to the quantity of evidence whereas appropriateness refers to its quality. Evidence quality refers to the relevance and reliability of the evidence. The relevance of evidence refers to its relevance to the audit objective and in particular, to the assertion under consideration.

Although the reliability of evidence is variable, there are no degrees of relevance. Evidence either is or is not relevant to an assertion, and it is important that auditors are able to make this distinction ^[fn]. Auditors only gather evidence that is relevant.

Confusion sometimes arises when considering the assertions of completeness and validity. For example, assume the auditor assesses the risk of material misstatement [RMM] relating to, say, the completeness of retail inventory as high. In other words, there is a risk that not all items of inventory physically on hand are included in the accounting records. In this instance, the auditor selects a sample of inventory items physically on hand and vouches the details of the items selected with the inventory records to ensure these items are included in the accounting records. This is evidence that is relevant to the assertion cf completeness (as well as accuracy). The auditor does not, however, select a sample of items from the inventory records and then vouch the details with the items physically on hand. This latter evidence is not relevant to the assertion of completeness as the evidence is never be able to include items that are not included in the accounting records. This latter evidence, however, is relevant evidence if the RMM relating to the validity of retail inventory is high and the auditor is gathering evidence as to whether all inventory included in the accounting records physically exists.

Other examples are:

• Vouching details (of customer's name, date, quantity and product delivered) on customer delivery advices to sales invoices is evidence that is relevant to the completeness and accuracy of sales transactions, but not to their validity.
• vouching details (of supplier's name, date, product supplied and monetary value) from accounts payable records to suppliers' invoices is evidence that is relevant to the validity and accuracy of accounts payable but not to its completeness.
• vouching details (of employees' names, hours worked, and dates worked) from summarized payroll records to employees' time cards is evidence that is relevant to the validity and accuracy of payroll expense, but not to its completeness.
• vouching details (of employees' names, hours worked, and dates worked) from employees' time cards to summarized payroll records is evidence that is relevant to the completeness and accuracy of payroll expense, but not to its validity.

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