As the auditor requires greater assurance he or she

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Unformatted text preview: dors’ 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 your answer. Answer: 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 perform. Answer: 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. 1. Relevance 2. Independence of provider 3. Effectiveness of client’s internal controls 4. Auditor’s direct knowledge 5. Degree of objectivity Answer: 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? Answer: 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 internal memoranda. 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. Answer: 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.

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