Question

    I. Evidence should be relevant and reliable to be appropriate. Define the terms “Relevance” and

         “Reliability”.

   II. For each situation presented below, indicate which means of gathering evidence would be

         considered more reliable (#1 or #2) AND indicate a reason from the following list:

      A. Independent source of the information (Independence of provider);

      B. auditor’s direct knowledge;

      C. Knowledgeable source (qualifications of individual providing the information);

      D. degree of objectivity versus subjectivity; and

      E. Functioning system of internal controls.

   DO NOT DISCUSS your answer. CHOOSE ONLY ONE LETTER.

a. The auditor considers evidence relating to 1. The estimate of bad debts expense; or 2. The cost of

      land acquired five years ago.

b. 1 The auditor relies on an analysis prepared by the controller of gross margin to sales for the current

      and prior periods.; or (2) The auditor calculates gross margin to sales and compares to similar data

      for prior periods .

c. Evidence involving audit judgement is considered by a member of the audit team. The individual is

     1. An intern; or 2. The audit senior assigned to the engagement.

d. The auditor considers the quantity and valuation of 1. An inventory of cement blocks; or

     2. An inventory of precious gems.

e. Auditor tests two segments of the company. (1) In the first segment, employees check another

    employee’s work; or (2) In the second segment, no one checks the work of employees.

Answer 1

The reliability of audit evidence depends on its source - internal or external and on its nature - visual, documentary or oral. While the reliability of audit evidence is dependent on the circumstances under which it is obtained, the following generalizations may be useful in assessing the reliability of audit evidence:

a) External evidence (e.g. confirmation received from a third party) is generally more reliable than internal evidence;(b) Internal evidence is more reliable when related internal control is satisfactory;
b) Evidence in the form of documents and written representation is usually more reliable than oral representations;(d) Evidence obtained by the auditor himself is more reliable than that obtained through the entity.

A)2
B)2
C)2
D)1
E)2