## SA 500: Relevance, Reliability, Sufficiency & Appropriateness

### Quality of Audit Evidence

The quality of all audit evidence is affected by the relevance and reliability of the information on which it is based.

#### Relevance

Deals with the logical connection between the evidence and the assertion being tested.

> Evidence about existence does not automatically address valuation.

#### Reliability

Influenced by:

Source of the information
Nature of the information
Circumstances under which it is obtained
Controls over its preparation and maintenance

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### Five Generalisations on Reliability (Higher = More Reliable)

#	Principle
1	Evidence from independent external sources is more reliable than internal sources
2	Internally generated evidence is more reliable when entity's controls over preparation are effective
3	Evidence obtained directly by the auditor (e.g., observation) is more reliable than indirect evidence (e.g., inquiry)
4	Documentary evidence (paper/electronic) is more reliable than oral evidence
5	Original documents are more reliable than photocopies

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### Sufficiency vs. Appropriateness

	Sufficiency	Appropriateness
Measures	Quantity of audit evidence	Quality of audit evidence
Key question	Is there enough evidence?	Is the evidence relevant and reliable?

> These two are interrelated — high-quality evidence (appropriate) requires less of it (sufficient); poor-quality evidence requires more.

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### Factors Affecting Sufficiency (Quantity Required)

#### (a) Materiality

Less material assertions → less evidence needed
More material assertions → more evidence needed

#### (b) Risk of Material Misstatement (RMM)

RMM has two components at assertion level:

Component	Definition	Impact on Evidence
Inherent Risk (IR)	Susceptibility of an assertion to misstatement before considering any controls	Higher IR → more evidence
Control Risk (CR)	Risk that a material misstatement will not be prevented/detected/corrected by internal control	Higher CR → more evidence

Lower RMM → less evidence required
Higher RMM → more evidence required

#### (c) Size & Characteristics of Population

Smaller, homogeneous population → less evidence needed
Larger, heterogeneous population → more evidence needed

Worked example

### Example 1

Example — Relevance: An auditor tests inventory existence by attending the physical count (confirms items exist). This evidence is relevant to the existence assertion but not the valuation assertion — the auditor needs separate evidence (NRV testing, cost records) for valuation.

### Example 2

Example — Reliability Hierarchy: For verifying a bank balance of ₹10 crore: (1) Oral confirmation from the accountant (least reliable), (2) Bank statement downloaded by client (internal, low controls), (3) Bank statement directly obtained from the bank (external), (4) Original bank certificate directly mailed to auditor (most reliable — external + direct + original).

### Example 3

Example — Sufficiency and RMM: Company A has a simple, homogeneous debtors ledger with 50 customers, all paying within 30 days (low risk). The auditor selects 10 confirmations. Company B has 500 debtors, many overdue, with weak credit controls (high RMM). The auditor needs a much larger sample — perhaps 80-100 confirmations — to achieve the same comfort level.

### Example 4

Example — Materiality Impact: Testing petty cash expenses of ₹5,000 (immaterial) vs. testing long-term borrowings of ₹50 crore (material). The auditor applies minimal procedures to petty cash but extensive procedures — loan agreements, bank confirmations, board resolutions — to borrowings.

⚠️ Common exam mistakes

Treating sufficiency and appropriateness as independent — they are interrelated; a highly reliable piece of evidence may suffice where many unreliable pieces would not.
Confusing inherent risk with control risk — IR exists before any controls; CR is the residual risk after controls are considered.
Believing that more evidence always means better audit — appropriateness (quality) can compensate for quantity.
Ignoring population characteristics when deciding sample size — a heterogeneous population always requires a larger sample.
Assuming photocopies of documents are equally reliable as originals — they are not, per the SA's hierarchy.

Bare-Act text Note 1 under Q3 – Generalisations on Reliability of Audit Evidence · SA 500 – Audit Evidence · click to expand

(i) The reliability of audit evidence is increased when it is obtained from independent sources outside the entity. (ii) The reliability of audit evidence that is generated internally is increased when the related controls imposed by the entity are effective. (iii) Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference. (iv) Audit evidence in documentary form is more reliable than evidence obtained orally. (v) Audit evidence obtained as original documents is more reliable than audit evidence obtained as photocopies.

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Relevance, Reliability, Sufficiency and Appropriateness of Audit Evidence

Worked example

⚠️ Common exam mistakes