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Unformatted text preview: and that these terms have been satisfactorily completed. 7-18 Name and address of outside party. Other specific information would depend on the nature of the item and the reason the auditor feels it is necessary to confirm the item. 7-34 a. AUDIT PROCEDURE TYPE OF AUDIT EVIDENCE b. BALANCERELATED AUDIT OBJECTIVE 1. Test extend unit prices times quantity on the inventory list, test foot the list and compare the total to the general ledger. Recalculation Detail tie-in 2. Trace selected quantities from the inventory list to the physical inventory to make sure that it exists and the quantities are the same. Physical examination Existence and Accuracy 3. Question operating personnel about the possibility of obsolete or slow-moving inventory. Inquiry of the client Realizable value 4. Select a sample of quantities of inventory in the factory warehouse and trace each item to the inventory count sheets to determine if it has been included and if the quantity and description are correct. Physical examination Completeness and Accuracy 5. Compare the quantities on hand and unit prices on this year's inventory count sheets with those in the preceding year as a test for large differences. Analytical procedures Accuracy 6. Examine sales invoices and contracts with customers to determine whether any goods are out on consignment with customers. Examine vendors' invoices and contracts with vendors to determine if any goods on the inventory listing are owned by vendors. Documentation Rights 7. Send letters directly to third parties who hold the client's inventory and request they respond directly to us. Confirmation Existence, Completeness, and Accuracy 7-19 7-35 a. The six factors determining the reliability of evidence are: 1. Independence of provider 2. Effectiveness of client's internal controls 3. Auditor's direct knowledge 4. Qualifications of individuals providing the information 5. Degree of objectivity 6. Timeliness b. and c. SITUATION TYPE OF EVIDENCE THAT IS MORE RELIABLE FACTOR AFFECTING RELIABILITY 1 Confirmation with business organizations Qualifications of provider 2 Physically examine three-inch steel plates Qualifications of provider (in this case the auditor) 3 Examine documents when several competent people are checking each other's work Effectiveness of internal controls 4 Examine inventory of parts for the number of units on hand Degree of objectivity 5 Discuss potential lawsuits with CPA firm's legal counsel Independence of provider 6 Confirm a bank balance Degree of objectivity 7 Confirm a bank balance Independence of provider 8 Physically count the client's inventory Auditor's direct knowledge 9 Physically count the inventory Independence of provider and auditor's direct knowledge 7-36 PROCEDURE 1 2 3 4 5 6 7 8 9 10 a. APPROPRIATE TERM Observe (j) Compute (d) Foot (f), Trace (g) Scan (b) Inquire (k) Confirm (l) Count (i) Examine (a), Compare (h) Recompute (e) Read (c) 7-20 b. TYPE OF EVIDENCE Observation Analytical procedure Recalculation and reperformance Analytical procedure Inquiry of client Confirmation Physical examination Documentation Recalculation Documentation 7-37 a. The purposes of analytical procedures are: 1. 2. 3. 4. Understanding the client's industry and business. Assessment of the entity’s ability to continue as a going concern. Indication of the presence of possible misstatements in the financial statements. Reduction of detailed audit tests. b. Analytical procedures are required in the planning and completion phases of the audit because of their importance in planning the audit, and as a final review for potential misstatements. Auditors use analytical procedures extensively because of their relatively low cost and effectiveness in identifying potential misstatements. c. The extent to which the auditor will use the results of analytical procedures to reduce detailed tests depends on the effectiveness of the analytical procedure and whether it supports the correctness of the recorded account balance. The effectiveness of the analytical procedure is a function of the precision of the expectation developed by the auditor and whether it is based on objective data. 7-38 In general, the audit schedule is not set up in a logical manner to show what the auditor wants to accomplish. The primary objective of the audit schedule is to verify the ending balance in notes receivable and interest receivable. A secondary objective is to account for all interest income, cash received and cash disbursed for new notes, collateral as security, and other information about the notes for disclosure purposes. Specific deficiencies of the audit schedule presented in the question are included below. a. and b. a. DEFICIENCY b. IMPROVEMENT 7-21 1. Tick mark explanation "tested" does not indicate specifically what was done. Should have separate tick marks meaning: Agreed to confirmation Footed Traced to cash receipts journal Recomputed, etc. 2. Explanation of some tick marks is not given. Explain all tick marks on the same page of the audit schedule. 3. Classification of long-term portion indicat...
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