HWCH4 - HW 4 7-34 a Confirmations are normally more...

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HW 4 7-34 a. Confirmations are normally more reliable evidence than inquiries of the client because of the independence of the outside party confirming the information. b. Confirmation of bank balances is considered highly reliable whereas confirmation of a department store charge account is often not considered reliable. Banks are accustomed to confirmations from auditors and normally maintain excellent accounting records, whereas most customers of department stores have neither characteristic. c. If an auditor is not qualified to distinguish between valuable inventory (e.g., diamonds) and worthless inventory (e.g., glass), the physical examination of inventory would not be considered to be reliable evidence. d. Recalculation tests are highly reliable because the auditor is able to gain 100% assurance of the accuracy, but the tests only verify whether the recorded amounts are accurately totaled. These tests do not uncover omissions or fictitious amounts. e. Relatively reliable documentation examples include: vendor statements, bank statements, and signed lease agreements. Relatively unreliable documentation examples may be: copies of customer invoices, internal memoranda and other communications, and a listing of fixed asset additions. The difference between reliable and unreliable documentation examples above is whether they originate from outside or inside the client's organization. External information is considered more reliable than internal documentation. f. 1. Confirmation of accounts receivable - Corporation accustomed to confirmations compared to a member of the general public. 2. Examination of the corporate minutes - Experienced partner compared to a new assistant. 3. Physical observation of inventory - Auditor knowledgeable in the client's inventory compared to one who is not. 4. Attorney's letter - General counsel compared to an attorney involved only with patents. g. Analytical procedures are evidence of the likelihood of misstatements in the financial statements, but they are rarely sufficient by themselves to conclude that the statements are misstated. Other supportive evidence is needed to determine whether apparent misstatements are actually material.
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8-29 a. A related party transaction occurs when one party to a transaction has the
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