SCENARIO : During the final audit of Johnathan Plc for the year 31st December 2020, the audit team of M/S PSR Associates have come across the following financial and operational issue to identify the risk attached to the transactions and gather appropriate sufficient audit evidence to minimize audit risk.

Johnathan Plc is medical equipment manufacturing company in the same industry for the last 25 years. Recently, the receivables have increased in 5 time when compare to the year ended 31st December 2019. The credit policy has been revised to go in line with the competitors strategy by giving 3 months credit from earlier 1 month credit. The company also expanded its market to other countries to improve the overall sales under the special terms applicable than in the normal terms of contract.

The audit team has noted a huge list of customers were added in the current year and it has been noted that there is no formal credit review has been done by the finance department to grant the credit to the new customers. The question was raised by the auditor on what grounds that these new customers have been permitted to by equipment from Johnathan without the prior approval by the finance director. The sale division replied that these new customers are close associates of the CEO while he was studying foreign degree course in UK and they all have businesses all round the world. It has been sold based on the trust rather than having specific contract of sales.

The audit team has anticipated an element of high business and financial risk attached to the above transactions and call decided to do a detail check to gather the audit evidence.

Task 1: Comment which types of audit evidence are highly reliable and categorize the audit evidence that you will gather from the above situation. You are required to state which evidence are highly reliable and why?