In a financial statement audit, an independent auditor must judge the validity of audit evidence obtained. Assume you have assessed a low level of control risk.

Required:

1. In the course of an audit, the auditor asks many questions of client officers and employees.

a. Describe the factors an auditor should consider in evaluating oral evidence provided bv officers and employees.

b. Discuss the validity and limitations of oral evidence.

2. An auditor's tests may include recomputation of various balance sheet and operating ratios for comparison with prior years and industry averages. Discuss the validity and limitations of ratio analysis.

3. An auditor is observing the physical inventory of a manufacturing company's finished goods, which consists of expensive, highly complex equipment. Discuss the validity and limitations of the audit evidence provided by observation.