In his examination of financial statements, an auditor must judge the validity of the audit evidence he obtains.

Required:

a. In the course of his examination, the auditor asks many questions of client officers and employees.
1. Describe the factors that the auditor should consider in evaluating oral evidence provided by client officers and employees.
2. Discuss the validity and limitations of oral evidence.

b. An auditor's examination may include computation of various balancesheet and operating ratios for comparison to prior years and industry averages. Discuss the validity and limitations of ratio analysis.

c. In connection with his examination of the financial statements of a manufacturing company, an auditor is 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.