Question

Identify an example to explain the importance of information reliability and independence.

Answer 1

One example which could easily explain the importance of information reliability and independence is when any taxation or civil case is pending against the company in court and we have been showing that amount as a contingent liability.

Now when we audit such cases, we usually take the status of the cases and assess the likelihood of the company winning or losing such case. Accordingly we determine if we need to recognize a liability in the books or just a contingent liability if there are more than 50% chances that they will win the case.

Suppose Mr. X is auditing this area for ABC Corporation. Now Mr. X's friend and relatives have invested in shares of ABC Corporation heavily. Suppose Mr. X comes across a new case for which a major demand was raised during the year which could heavily impact the profit of the company if recognized as a liability in the books. Accordingly, if ABC Corporation reports lower profits the share price will fall and Mr. X's friends and relatives will end up bearing huge losses. So, what Mr. X does here is he takes a confirmation from ABC Corporation in form of a representation letter that they are of the view that they will win the case instead of taking a proper external confirmation about view of the lawyers regarding the case.

Hence we observe in the above example that since Mr. X was not independent and objective, he has not exercised professional skill and due care and also he has used unreliable information to hide important facts known to him. An auditor should always use reliable evidences and information such as external confirmations, written evidences over oral etc.