An auditor is evaluating the sufficiency of audit evidence. Which of the following combinations of evidence would provide the HIGHEST level of assurance regarding the existence of inventory?

Answer options:

Management's representation letter and internal inventory tags.

The auditor's physical observation of inventory and confirmation of inventory held by third parties.

Inquiry of the warehouse manager and review of perpetual inventory records.

Analytical procedures comparing inventory turnover to prior years.

How to approach this question

Hierarchy of Evidence: 1. Direct Personal Knowledge (Observation), 2. External (Confirmation), 3. Internal (Records), 4. Oral (Inquiry).

Full Answer

B.The auditor's physical observation of inventory and confirmation of inventory held by third parties.✓ Correct

The hierarchy of audit evidence reliability places the auditor's direct personal knowledge (Physical Observation) at the top, followed by External evidence (Confirmation). Option B combines the two strongest forms of evidence for inventory existence.

Common mistakes

Overvaluing internal records or analytical procedures for existence testing.

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