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Seven different types of audit evidence

7-34 (Objective 7-4) Seven different types of evidence were discussed. The following questions concern the reliability (competence) of that evidence:
a. Explain why confirmations are normally more reliable evidence than inquiries of the client.
b. Describe a situation in which confirmation would be considered highly reliable and another in which it would not be reliable.
c. Under what circumstances is the physical observation of inventory considered relatively unreliable evidence?
d. Explain why reperformance tests are highly reliable but of relatively limited use.
e. Give three examples of relatively reliable documentation and three examples of less reliable documentation.What characteristics distinguish the two? Julie

f. Give several examples in which the qualifications of the respondent or the qualifications of the auditor affect the reliability of the evidence. Julie

g. Explain why analytical procedures are important evidence even though they are relatively unreliable by themselves.

Solution Preview

a. Explain why confirmations are normally more reliable evidence than inquiries of the client.
External evidence is always higher quality than internal documents because external parties have no incentive for fraudulent reporting (it doesn't benefit them).

b. Describe a situation in which confirmation would be considered highly reliable and another in which it would not be reliable.
Highly reliable: Arms length transaction
Not reliable: Related party transaction

c. Under what circumstances is the physical observation of inventory considered relatively unreliable evidence?
Observation is not reliable if the count is not down with good controls, such as control over the count tags, numbered count tags, reconciliation back to the inventory records in the general ledger or pricing is not valid (count ok but valuations are not ...

Solution Summary

In addition to responding to each question with a few sentence, the tutorial gives you rules for ordering the reliability of audit evidence.

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