Inquiry, Analytical Procedures and Observation. In the examination of financial statements, auditors must judge the validity of the audit evidence they obtain. For the following questions, assume that the auditors have considered internal control and found it satisfactory.

Required

A. In the course of examination, the auditors ask many questions of client officers and employees.

1 Describe the factors that the auditors should consider in evaluating oral evidence provided by client officers and employees.

2 Discuss the validity and limitations of oral evidence.

B. Analytical procedures include the computation of various balance sheet and operating ratios for comparison to prior years and industry averages. Discuss the validity and limitations of ratio analysis as evidential matter.

C. In connection with an examination of the financial statements of a manufacturing company, the auditors are observing the physical inventory of finished goods, which consists of expensive, highly complex electronic equipment. Discuss the validity and limitations of the audit evidence provided by this procedure.