Activity Based Risk Evaluation Model of Auditing

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Reliability of audit evidence

The reliability (or competence) of evidence gathered by auditors is variable. It is one aspect of the quality of audit evidence, the other being the relevance of evidence.

Generally, the greater the risk of material misstatement of an account balance, or underlying class of transactions, the more reliable needs to be the evidence gathered.

Factors affecting the reliability of the evidence include:

• who gathers and/ or evaluates the evidence. A more experienced or more competent auditor is less likely to make errors of judgement in gathering and evaluating audit evidence ^[fn]. Thus, evidence gathered or evaluated by an experienced and competent auditor may be more reliable than evidence gathered or evaluated by a less experienced or less competent auditor ^[fn]. This factor is particularly applicable to evidence gathered using analytical procedures and/or CAATs.
• when the evidence is gathered. This is referred to as the "timing" of an audit procedure and very much depends on the objective of the procedure used to gather the evidence. In some cases, evidence gathered subsequent to balance date is more reliable than evidence gathered either at or prior to balance date (e.g. where the objective is to gather evidence in relation to the net realizable value of current assets). In other cases, evidence gathered at balance date is more reliable than evidence gathered either subsequent to or prior to balance date (e.g. when the objective is to gather evidence in relation to the existence of physical assets). Finally, evidence gathered prior to balance date may be more reliable than evidence gathered at or subsequent to balance date (e.g. when the objective is to gather evidence of the continuity of operation of control procedures). Auditors require good judgement to plan when audit evidence is to be gathered. For this reason, the timing of an audit procedure is determined by a suitably experienced and competent auditor.
• source of the evidence. Auditors consider evidence obtained directly from independent third parties (such as a customer or supplier) to be more reliable than evidence than evidence obtained from the client. Additionally, where the evidence is obtained from the client, externally sourced evidence (such as an invoice from a supplier) is considered more reliable than internally sourced evidence (such as an internally generated purchase order).
• effectiveness of related internal control procedures. The effectiveness of internal control procedures related to the account balance under consideration is a relevant factor whenever evidence is obtained from the client. It is particularly applicable to evidence gathered using analytical procedures and/or CAATs. If internal controls relating to a particular account balance assertion are not effective or not known to be effective, then auditors do not consider audit evidence gathered relating to that account balance using, for example, analytical procedures, to be reliable evidence.
• type of audit procedure used to gather the evidence. This is an aspect of the "nature" of audit procedures used in relation to the natrure, timing and extent of audit procedures. Auditors consider evidence gathered using analytical procedures is generally considered less reliable than evidence gathered using tests of detail.
• method of gathering the evidence. Within each type of audit procedure (tests of control, tests of detail, analytical procedures) there are a number of methods of gathering evidence. (This is a further aspect of the "nature" of audit procedures used in relation to the natrure, timing and extent of audit procedures.) Some methods gather evidence of greater reliability than others. For example, auditors consider evidence gathered through one type of test of detail, physical examination, to be more reliable than evidence gathered through another type of test of detail, vouching.

Type of audit procedure	Method of gathering evidence	Relative reliability	Comments
Tests of control	Observation	High	Only provides evidence in relation to the effectiveness of a control at, or near to, the point in time the procedure was observed.
	Inspection	Moderate	Depends on the reliability of the evidence that is inspected. Refer to source of the evidence above.
	Inquiry	Low to very low	Can be the least reliable form of evidence.
Tests of detail	Physical examination	High	See who gathers and/or evaluates evidence above.
	Recomputation	High	See who gathers and/or evaluates evidence above.
	Confirmation	High	Consider the appropriateness of the authority [and the integrity] of the person signing the confirmation.
	Vouching	Moderate	Depends on the reliability of the evidence that is vouched. Refer to source of the evidence above.
	Cut-off tests	Moderate	See who gathers and/or evaluates evidence above.
	Inquiry	Low to very low	Can be the least reliable form of evidence.
Analytical procedures	Reasonableness tests	Moderate	See who gathers and/or evaluates evidence above.
	Other analytical procedures	Moderate to zero	Consider the effectiveness of related internal control procedures above.

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