Auditing manual solution

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Unformatted text preview: anization who is a party to the transaction being documented. Internal documents are those that have been prepared and used within the client’s organization without ever being in the custody of an external party. The primary determinant of the auditor’s willingness to accept a document as reliable evidence is whether it is internal or external, and, when internal, whether it was created and processed under conditions of effective internal control. 72. challenging The auditor’s decisions regarding evidence accumulation can be broken into four subdecisions. One decision relates to determining the nature of the audit procedure to be used to collect the evidence; i.e., “which audit procedures to use.” Identify and discuss the remaining three audit evidence decisions that the auditor makes. Answer: The remaining three audit evidence decisions are: • What sample size to select for a given procedure . This decision relates to the extent of testing to be performed. Once the auditor has identified which procedure to perform, he or she needs to decide the appropriate number of items in the population to test— ranging from one to all items in the population. • Which items to select from the population. Once the auditor has decided the appropriate number of items to test, he or she needs to decide which particular items in the population to examine. • When to perform the procedures. This decision relates to the timing of the testing to be performed. Audit procedures related to balance sheet accounts which are performed close to the balance sheet date are generally considered more reliable than procedures performed during the interim period. 1-124 73. challenging The reliability of evidence refers to the degree to which evidence is considered believable or trustworthy. There are five factors that affect the reliability of audit evidence. One factor is the independence of the provider; i.e., evidence obtained from a source outside the client company is more reliable than that obtained within. Identify and discuss the remaining four factors that affect the reliability of evidence. Answer: The remaining four factors that affect the reliability of evidence are: • Effectiveness of client’s internal control. When a client’s internal controls are effective, evidence obtained from the client is more reliable than when controls are weak. • Auditor’s direct knowledge. Evidence obtained directly by the auditor is more reliable than information obtained indirectly. • Qualifications of individuals providing the information . Information obtained from persons not familiar with the business world would generally not be considered as reliable as information from an expert in a business-related field. • Degree of objectivity. Objective evidence is more reliable than evidence that requires considerable judgment to determine whether it is correct. 74. challenging Define the following terms commonly used in audit procedures: 1. Examine 2. Scan 3. Compute 4. Foot 5. Compare 6. Count 7. Vouch Answer: 1. Examine – A reasonably detailed study of a specific document or record to determine specific facts about it. 2. Scan – A less detailed examination of a document or record to determine whether there is something unusual warranting further investigation. 3. Compute – A calculation done by the auditor independent of the client. 4. Foot – Addition of a column of numbers to determine whether the total is the same as the client’s. 5. Compare – A comparison of information in two different locations. 6. Count – A determination of assets on hand at a given time. This is associated with evidence defined as physical examination. 7. Vouch – The use of documents to verify recorded transactions or amounts. 1-125 Other Objective Answer Format Questions 75. medium Type of Evidence Below are 12 audit procedures. Classify each procedure according to the following types of audit evidence: (1) physical examination, (2) confirmation, (3) documentation, (4) observation, (5) inquiry of the client, (6) reperformance, and (7) analytical procedure. Audit Procedures 1. Watch client employees count inventory to determine whether company procedures are being followed. 2. Count inventory items and record the amount in the audit files. 3. Trace postings from the sales journal to the general ledger accounts. 4. Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross margin relative to the preceding year. 5. Obtain information about the client’s internal controls by asking questions of client personnel. 6. Trace column totals from the cash disbursements journal to the general ledger. 7. Examine a piece of equipment to make sure a recent purchase of equipment was actually received and is in operation. 8. Review the total of repairs and maintenance for each month to determine whether any month’s total was unusually large. 9. Compare vendor names and amounts on purchases invoices with ent...
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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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