Reliability of Evidence refers to the degree to which evidence can be believable or worthy of trust. Like relevance, if evidence is considered reliable, it is a great help in persuading the auditor that financial statements are fairly stated. For example, if an auditor counts inventory, that evidence is more reliable than if managements gives the auditor its own count amounts.
Reliability, and therefore appropriateness, depends on the following six characteristics of reliable evidence:
Independence of provider. Evidence obtained from a source outside the entity is more reliable than that obtained from within. Communications from banks, attorneys, or customers are generally considered more reliable than answers obtained from inquiries of the client. Similarly, documents that originate from outside the client’s organization, such as an insurance policy, are considered more reliable than those that originate within the company and have never left the client’s organization, such as a purchase requisition.
Effectiveness of client’s internal controls. When a client’s internal controls are effective, evidence obtained is more reliable than when they are weak. For example, if internal controls over sales and billing are effective, the auditor can obtain more reliable evidence from sales invoices and shipping documents than if the controls were inadequate.
Auditor’s direct knowledge. Evidence obtained directly by the auditor through physical examination, observation, recalculation, and inspection is more reliable than information obtained indirectly. For example, if the auditor calculates the gross margin as a percentage of sales and compares it with previous periods, the evidence is more reliable than if the auditor relies on the calculations of the controller.
Qualifications of individuals providing the information. Although the source of information is independent, the evidence will not be reliable unless the individual providing it is qualified to do so. Therefore, communications from attorneys and bank confirmations are typically more highly regarded than accounts receivable confirmations from persons not familiar with the business world. Also, evidence obtained directly by the auditor may not be reliable if the auditor lacks the qualifications to evaluate the evidence. For example, examining an inventory of diamonds by an auditor not trained to distinguish between diamonds and glass is not reliable evidence for the existence of diamonds.
Degree of objectivity. Objective evidence is more reliable than evidence that requires considerable judgment to determine whether it is correct. Examples of objective evidence include confirmation of accounts receivable and bank balances, the physical count of securities and cash, and adding （footing） a list of accounts payable to determine whether it agrees with the balance in the general ledger.
Examples of subjective evidence include a letter written by a client’s attorney discussing the likely outcome of outstanding lawsuits against the client, observation of obsolescence of inventory during physical examination, and inquiries of the credit manager about the collectability of noncurrent accounts receivable. When the reliability of subjective evidence is being evaluated, it is essential for auditors to assess the qualifications of the person providing the evidence.
Timeliness. The timeliness of audit evidence can refer either to when it is accumulated or the period covered by the audit. Evidence is usually more reliable for balance sheet accounts when it is obtained as close to the balance sheet date as possible. For example, the auditor’s count of marketable securities on the balance sheet date is more reliable than a count 2 months earlier. For income statement accounts, evidence is more reliable if there is a sample from the entire period under audit, such as a random sample of sales transactions for the entire year, rather than from only a part of the period, such as a sample limited to only the first 6 months.
The quantity of evidence obtained determines its sufficiency. Sufficiency of evidence is measured primarily by the sample size the auditor selects. For a given audit procedure, the evidence obtained from a sample of 100 is ordinarily more sufficient than from a sample of 50.
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