Question

Question

The following five situations each contain two means of accumulating evidence. For each of the situations state

whether the first or the second type of evidence is more reliable and provide reasons for your choice.

a. Confirmation of receivables with consumers versus confirmation of accounts receivables with business organizations

b. Physically examine inventory of parts for the number of units on hand versus examining them for the likelihood of inventory being obsolete

c. Confirm the oil and gas reserves with the geologists specializing in oil and gas versus confirming a bank balanced

. Physically count the clients' inventory held by an independent party versus confirming the account with an independent party

e. Discuss with the audit client the procedures client for performing a stock take versus attend the stocktake and observe the procedures.

Answer 1

a. Confirmation of receivables with consumers versus confirmation of accounts receivables with business organizations

Confirmation with business organisations is more reliable than confirmation with consumers due to qualificaitons of provider
A business organisation would have proper accounts department that would be maintaing accounts so the balances can be confirmed and relied upon.Wheres all the consumers may or may not be tracked down plus the reliability of the balances would not be reliable as the means of maintaining accounts of each individual would wary and hence not reliable

b.Physically examine inventory of parts for the number of units on hand versus examining them for the likelihood of inventory being obsolete

Examine inventory of parts for the number of units on hand , is better due degree of objectivity
if the auditor physcially counted or even observed stock take he will be clearly able to the see the condition of inventory which on his judgment he will be able to tell if inventory is obsolete or not so both the objectives will be met at the same time

c.Confirm the oil and gas reserves with the geologists specializing in oil and gas versus confirming a bank balance

Conirming bank balance -degree of onjectivity

Confirming a bank balance is must , because it is lifeline of business.so to check its existence , accuracy and completeness is utmost priority of auditor

Confirming the oil and gas reserves with geologists is a huge task which may or may not be completed in a timely manner alos the auditors may not have that much knowledge on this subject so relying on management is best in this case , plus the evidence will be vary in percentage of accuracy.

d.Physically count the clients' inventory held by an independent party versus confirming the account with an independent party

Physically count the client’s inventory-Auditor’s direct knowledge
When inventory is under the custody and control of a third party is material to fiancial statements the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition ot that inventory by peforming inspection or other audit procedures appropriate in circumstances

e.Discuss with the audit client the procedures client for performing a stock take versus attend the stocktake and observe the procedures.

Attend the stocktake and observe procedures-Independence of provider and auditor’s direct knowledge

When inventory is material to financial statements the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of ivnentory by
1)attendance at physical inventory counting
2)Inspect the inventory
3)perform test counts
4)performing audit procedures over the entity's final inventory records to determine whether they accurately reflect actual inventory count results