Chapter 7 - Chapter 7 Audit Evidence Review Questions 7-2...

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1 Chapter 7 Audit Evidence Review Questions 7-2 The four major audit evidence decisions that must be made on every audit are: 1. Which audit procedures to use. 2. What sample size to select for a given procedure. 3. Which items to select from the population. 4. When to perform the procedure. 7-4 An audit program for accounts receivable is a list of audit procedures that will be used to audit accounts receivable for a given client. The audit procedures, sample size, items to select, and timing should be included in the audit program. 7-7 The two determinants of the persuasiveness of evidence are appropriateness and sufficiency . Appropriateness refers to the relevance and reliability of evidence, or the degree to which evidence can be considered believable or worthy of trust. Appropriateness relates to the audit procedures selected, including the timing of when those procedures are performed. Sufficiency refers to the quantity of evidence and it is related to sample size and items to select. 7-8 Following are six characteristics that determine reliability and an example of each. FACTOR DETERMINING RELIABILITY EXAMPLE OF RELIABLE EVIDENCE Independence of provider Confirmation of a bank balance Effectiveness of client's internal controls Use of duplicate sales invoices for a large well-run company Auditor's direct knowledge Physical examination of inventory by the auditor Qualifications of provider Letter from an attorney dealing with the client's affairs Degree of objectivity Count of cash on hand by auditor Timeliness Observe inventory on the last day of the fiscal year (Note: Ah, this is the AIET Q ualifications and O bjectivity, isn t it?) 7-9 TYPES OF AUDIT EVIDENCE EXAMPLES 1. Physical examination Count petty cash on hand Examine fixed asset additions 2. Confirmation Confirm accounts receivable balances of a sample of client customers Confirm client’s cash balance with bank 3. Documentation Examine cancelled checks returned with cutoff bank statement Examine vendors’ invoi ces supporting a sample of cash disbursement transactions throughout the year 4. Analytical procedures Evaluate reasonableness of receivables by calculating and comparing ratios Compare expenses as a percentage of net sales with prior year’s percentages
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