An auditor has to determine both the reliability and the relevance of potential audit evidence in order to determine that appropriate audit evidence is gathered.
a. Explain the difference between relevance and reliability.
b. How does an auditor determine the reliability of potential audit evidence?
c. For each of the following items (labeled 1. through 6. below), identify whether or not the auditor has made a judgment error, and if there is a judgment error whether the error relates to evi- dence reliability or relevance. Organize your answer as follows:
Judgment Error Nature of Error Explanation
Yes or No Relevance, Reliability, or Both
Description of error
1. The auditor receives only 20% of the confirmations that were sent to customers to verify their account balance. The auditor responds by taking another sample of receivables to send out in place of the first sample. The auditor is convinced the first sample is not representative of the population as a whole.
2. The auditor sent a confirmation to an independent warehouse to confirm the existence of inventory owned by the audit client. There was no response. The auditor decided to visit the ware- house to independently inspect the inventory on hand.
3. The auditor decides to test the completeness of accounts payable by taking a sample of recorded accounts payable and tracing to the source document evidencing receipt of the goods or services. No exceptions were noted so the audit or does not expand the audit work.
4. An auditor wishes to test the valuation of a marketable security and inquires about management's intent for using the securities. Management indicates that they are intending to hold the securities as a long-term investment. The audi- tor decides that no further evidence is needed and that the securities are properly valued at cost.
5. The auditor notes that there are some problems with segregation of duties over accounts receivable that could affect the existence assertion. The client is aware that the auditor normally sends out accounts receivable confirmations. The auditor decides to expand the audit work by sending additional confirmations.
6. During the observation of inventory, the auditor notes a number of items that look old and apparently not used. The auditor discusses each item with the marketing manager to determine whether or not the item is considered saleable at normal prices.