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CA Intermediate · Auditing and Ethics · Audit Evidence

During the audit of Mehta Pharma Pvt Ltd, the auditor obtains two pieces of evidence about the same closing inventory quantity: (i) a count sheet signed by the store manager, and (ii) the auditor's own observation of the physical count with test counts. Under SA 500, what is the correct view on their reliability?

The auditor's own observation of the count is more reliable. SA 500 holds that evidence obtained directly by the auditor, such as through observation or inspection, is more reliable than evidence obtained indirectly or by inference, such as a count sheet prepared and signed by entity management.

  1. ABoth are equally reliable because both relate to the same quantity
  2. BThe count sheet is more reliable because it is a document prepared by the entity
  3. CThe auditor's own observation is more reliable because evidence obtained directly by the auditor is more reliable than evidence obtained indirectly or by inferenceCorrect
  4. DNeither is reliable unless confirmed by a management representation

Explanation

SA 500 states that evidence obtained directly by the auditor (observation, inspection) is more reliable than evidence obtained indirectly or by inference. Internally generated documents are less reliable than externally sourced evidence, and management representation cannot replace other appropriate evidence. Hence option C is correct and B is wrong.

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