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6-21 audit evidence: evaluating inquiry and oral evidence

6-21
(Audit evidence) In an audit of financial statements, an auditor must judge the validity of the audit evidence obtained.

Required
a) In the course of an audit, the auditor asks many questions of client officers and employees. Describe the factors that the auditor should consider in evaluating inquiry and oral evidence provided by client officers and employees. Discuss the validity and limitations of inquiry and oral evidence.

b) An audit may include computation of various balance sheet and operating ratios for comparison to prior years and industry averages. Discuss the validity and limitations of ratio analysis in an audit.

c) In connection with his audit of the financial statements of a manufacturing company, an auditor is observing the physical inventory of finished goods, which consists of expensive, highly complex electronic equipment. Discuss the validity and limitations of the audit evidence provided by the procedure.

Solution Preview

A. In the course of an audit, the auditor asks many questions of client officers and employees.
Describe the factors that the auditor should consider in evaluating inquiry and oral evidence provided by client officers and employees. Discuss the validity and limitations of inquiry and oral evidence.

Inquiry (oral evidence) is the weakest form of evidence and if given by the client should typically be followed up and verified by better evidence. Inquiry of outside parties (like the bank) can be more convincing.

Evidence from inquiry should be based on how knowledgeable the parties are about the business and procedure. Often the client will tell you what ...

Solution Summary

Your discussion is 432 words and explains how the position and type of inventory dictate how persuasive inquire and observation are.

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