Which of the following statements is, generally, correct about the reliability of audit evidence?

 Options:

a) To be reliable, evidence should conclusive rather than persuasive b) Effective internal control system provides reliable audit evidence c) Evidence obtained from outside sources routed through the client d) All are correct.

The Correct Answer Is:

b) Effective internal control system provides reliable audit evidence

Correct Answer Explanation

When assessing the reliability of audit evidence, several factors come into play to ensure accuracy and trustworthiness in the information gathered. The correct statement among the options provided is indeed:

b) Effective internal control system provides reliable audit evidence.

The effectiveness of internal controls significantly influences the reliability of audit evidence. Here’s why:

An effective internal control system refers to the measures and processes put in place by an organization to safeguard assets, ensure accuracy in financial reporting, and comply with regulations.

These controls include segregation of duties, authorization procedures, physical controls, and IT controls. When these controls are robust and well-functioning, they serve as a foundation for generating reliable audit evidence.

Internal controls contribute to the reliability of audit evidence in several ways:

• Accuracy and Completeness: Effective controls ensure that transactions are recorded accurately and completely. This accuracy improves the reliability of the financial data used as audit evidence. For instance, if there are checks and balances in place, the risk of errors or fraud decreases, enhancing the trustworthiness of the evidence.
• Credibility and Verifiability: When internal controls are strong, it becomes easier for auditors to verify the information provided by the company. This enhances the credibility of the evidence obtained. For example, if there are stringent authorization processes for financial transactions, it’s more reliable evidence than if such controls are weak or absent.
• Consistency and Comparability: A well-designed control system ensures consistency in financial processes and makes data comparable across different periods. This consistency enhances the reliability of evidence by allowing auditors to make meaningful comparisons and identify anomalies or irregularities more effectively.
• Risk Assessment: Internal controls help in identifying and managing risks within an organization. When risks are properly identified and mitigated, the audit evidence becomes more reliable as it’s based on a more thorough understanding of potential vulnerabilities.

Now, let’s examine why the other options are not entirely correct:

a) To be reliable, evidence should be conclusive rather than persuasive:

This statement doesn’t entirely capture the essence of reliability in audit evidence. While conclusive evidence might seem preferable, it’s not always feasible.

Reliable evidence in auditing can also be persuasive if it is relevant, reliable, and obtained from credible sources. The focus should be on relevance, reliability, and sufficiency rather than conclusiveness.

c) Evidence obtained from outside sources routed through the client:

This statement suggests a potential issue in terms of reliability. When evidence is obtained from sources external to the organization but routed through the client, it introduces a level of dependency on the client’s integrity and accuracy in transmitting that evidence.

This indirect route might compromise the reliability of the evidence as it could be altered or misrepresented by the client inadvertently or deliberately.

d) All are correct:

This option is incorrect because not all statements are entirely accurate regarding the reliability of audit evidence.

While internal controls significantly contribute to reliability, the other statements either miss the comprehensive nature of audit evidence reliability or introduce potential issues that could compromise its trustworthiness.

In conclusion, while different sources of evidence may be relevant in an audit, the effectiveness of internal controls within the audited entity plays a pivotal role in determining the reliability of the evidence obtained by auditors.

Strong internal controls enhance accuracy, credibility, and consistency in financial reporting, thereby contributing significantly to reliable audit evidence.

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