Question

REQUIRED: FOR THE VALUATION ASSERTION, IDENTIFY THE RISKIER [THAT IS,LESS RELIABLE] PROCEDURE AND EXPLAIN WHY.
Procedure A		Procedure B	Which [if either] is Riskier?
1. Physically examine inventory of parts for the number of units on hand	versus	examine inventory for obsolescence.
2. Estimate a company's oil reserves with a geologist specializing in oil and gas	versus	Estimate the amount of oil stored in a tank farm
3 Confirm a bank balance with the bank	versus	examine the bank statements provided by the client.
4 Examine an original document	versus	Examine a copy of a document

Answer 1

1. Procedure B is less reliable and hence riskier.

Instead of physicaly verifying the inventories, checking for obsolescence will never give a true state. Checking ofr obsolescence will provide only one of the aspects of inventory. It will provide the basis for excluding those items which have become obsolete and as such, may not form part of the inventory. But this will not give if the inventoreis are overstated or understated in terms of quantity which involves a higher risk.

2. Again, Procedure B is less reliable and riskier.

Oil resrves of a company does not mean the oil stored in the tank. Oil stored is like a drop of water in the sea when we are talking about the sea. Oil resrves of a company, implies that the company is into the business of oil and gas and has reserves which are being exlored/ in the process of drilling ete etc.

Only an expert can tell the fair quantity in such cases and hence, procedure B involves a very high risk

3. Procedure B is less reliable.

To confirm bank balances, the bank statement provided by the client can not be relied and a confirmation letter from bank, which is an external source is always recommended. Procedure B is highly risky and prone to frauds.

4. Procedure B is less reliable.

Verifying the phototat copy of a document is fine but unless it is supported by the original of the smae, it can not be relied upon. Photostat copies can be photohopped / tampered with so thi procedure is le reliable and high risk.