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invoices, cancelled checks, cancelled notes payable, and insurance policies.
External documents are regarded as more reliable evidence than internal documents. 67.
medium Identify the three common types of confirmations used by auditors. Indicate which type is most
reliable and explain your answer. In addition, indicate which type is least reliable and explain
In order of reliability, the three common types of confirmations used by auditors are:
• positive confirmation with a request for information to be supplied by the recipient.
• positive confirmation with the information to be confirmed included on the form.
• negative confirmation.
The positive confirmation with a request for information to be supplied by the recipient is
the most reliable because the recipient must supply the information from his or her
records. If this information agrees with the information in the client’s records, the
likelihood that the information is correct is high. The positive confirmation with the
information to be confirmed included on the form is not as reliable as the first type
because the recipient may sign and return the confirmation without carefully examining
the information. The negative confirmation is the least reliable because a nonresponse
could be due to either the recipient agreeing with the information or the recipient ignoring
the confirmation request. 1-122 68.
medium There are four important purposes of analytical procedures. Identify each of these four purposes
and, for each purpose, give a specific example of an analytical procedure that an auditor might
Four important purposes of analytical procedures are:
• To help the auditor understand the client’s industry and business, the auditor might
analyze recent trends in the client’s gross margin percentages to assess the effects of
competition in the industry.
• To aid in the assessment of the client’s ability to continue as a going concern, the
auditor might analyze several of the client’s key ratios including the ratio of long-term
debt to net worth, the ratio of profits to total assets, and the current ratio.
• To indicate the presence of possible misstatements in the financial statements, the
auditor might compare the current year’s unaudited account balances with the
previous year’s audited balances.
• To reduce the extent of detailed tests, the auditor might perform a simple analytical
procedure such as multiplying the client’s monthly rent times 12 as a test of the
client’s rent expense account. If the product agrees with the balance in rent expense,
no additional testing of the account may be necessary. 69.
medium Discuss how each of the following influences the persuasiveness of evidence.
2. Independence of provider
3. Effectiveness of client’s internal controls
4. Auditor’s direct knowledge
5. Degree of objectivity
1. Relevance – Evidence must pertain to the audit objective if it is to be persuasive.
Relevance must be considered in terms of specific audit objectives as evidence may
be relevant to one objective and not another.
2. Independence of provider – Evidence obtained from a source outside the entity is
more reliable and persuasive than that obtained from within.
3. Effectiveness of client’s internal controls – When a client’s internal controls are
effective, evidence obtained is more reliable than when they are weak.
4. Auditor’s direct knowledge – Evidence obtained directly by the auditor through
physical examination, observation, computation and inspection is more competent
than information obtained indirectly.
5. Degree of objectivity – Objective evidence is more reliable than evidence that
requires considerable judgment to determine whether it is correct. 1-123 70.
medium Give two examples of relatively reliable documentation and two examples of less reliable
documentation. What characteristics distinguish the two?
Examples of relatively reliable documents include vendors’ statements, cancelled notes
payable, insurance policies, and bank statements. Examples of less reliable documents
include duplicate sales invoices, employees’ time reports, inventory receiving reports, and
The primary characteristic that distinguishes the two is whether the document is an
external document (the document has been in the hands of someone outside the client’s
organization who is a party to the transaction), or an internal document. External
documents are considered to be more reliable than internal documents. 71.
medium Discuss the auditor’s use of documentation as evidence.
Documentation is the auditor’s examination of the client’s documents and records to
substantiate the information that either is included or should be included in the financial
statements. Documents that the auditor examines may either be classified as external
documents or internal documents. External documents are those that have been in the
hands of someone outside of the client’s org...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.
- Fall '13