Question

Assume that you are a newly appointed junior auditor in Ernst & Young, an auditing firm....

Assume that you are a newly appointed junior auditor in Ernst & Young, an auditing firm. After a 3-
month rigorous training on the job, you have been awarded the certificate of completion and is nowready to embark on your very first assignment. Today, your first job was to evaluate the audit
evidence gathered by your team from Shinas Trading and see if they are reliable or not based on ISA
500. The following are the evidences gathered in various forms:
a) You have been analyzing the cash balance of Shinas Trading and comparing it with the bank
balance. To properly analyze the difference, you asked for the bank reconciliation prepared
by the bookkeeper. She immediately gave it to you properly signed by the staff.
b) Your colleague, the auditor in-charge of observing the physical count of inventory, gave to
you their team’s report on their observation. You immediately filed it in the audit evidence
file.
c) During interview with the managing director of the company, she gave verbal confirmation
that Shinas Trading has a long-term loan from Bank Muscat and payments are updated.
d) Shinas Trading has a computerized system in its purchasing process. This is an indication of a
good internal control system. Part of the audit evidences filed are electronic copies of the
purchase order forms of the company.
e) Also filed in the audit evidence folder are a complete set of photocopies of payroll sheets
(salary sheets). Employee signatures contained in the sheets are also photocopies of the
original.
Required:
Evaluate the reliability of each of the documents above and identify the one that is considered the
most reliable and least reliable.

Homework Answers

Answer #1

As per Appendix A of ISA 500 Audit Evidence, Reliability of Audit Evidence is explained as under :

  1. Audit Evidence from an independent source is more reliable than obtained within the entity.
  2. Audit Evidence obtained directly by Auditor is more reliable than obtained indirectly.
  3. Audit Evidence are more reliable when Internal controls are effective.
  4. Audit Evidence in documentary form is more reliable than obtained orally.
  5. Audit Evidence in original document is more reliable than in photocopy.

In Case A : Obtained within the entity-Less Reliable (Refer point 1)
In Case B : Inventory count observed directly -More Reliable(Refer point 2) {Most Reliable}
In Case C : Oral Evidence-Less Reliable(Refer point 4) {Least Reliable}
In Case D : Internal Control is effective and documentary form-More Reliable(Refer point 3 & 4)
In Case E : Obtained photocopies-Less Reliable(Refer point 5)

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