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Unformatted text preview: of adjusting journal entries are automatically carried
through to the trial balance and financial statements, making lastminute adjustments easier to make. Tick marks and review notes can be entered directly into
computerized files. Data can be imported and exported to other applications. For example,
a client’s general ledger can be downloaded into ACE and tax
information can be downloaded into a commercial tax preparation
package after the audit is completed. Multiple Choice Questions From CPA Examinations 7-27 a. (2) b. (1) c. (4) d. (4) 7-28 a. (3) b. (3) c. (4) d. (4) 7-12 Discussion Questions And Problems 7-29 a. 1.
External Even though these may be signed or initialed by employees,
they are still internal documents.
Bills of lading are ordinarily signed by the freight company.
That signature will be included on the top of the bill of lading,
therefore, it is an external document. b. External evidence is considered more reliable than internal evidence
because external evidence has been in the hands of both the client
and another party, implying agreement about the information and
the conditions stated on the document.
inquiry of client
2. (8) observation
3. (1) physical examination
4. (2) confirmation
5. (6) recalculation
6. (2) confirmation
7. (3) documentation
8. (4) analytical procedures
9. (5) inquiry of client
10. (7) reperformance
11. (8) observation
12. (1) physical examination
13. (4) analytical procedures
14. (3) documentation
15. (5) inquiry of client
16. (4) analytical procedures
17. (3) documentation
18. (6) recalculation
19. (1) physical examination
20. (2) confirmation 7-13 7-31 Examples of audit evidence the auditor can use to support each of the
a. Examine invoice from vendor
Direct confirmation with vendor
b. Physical examination
Direct confirmation with custodian
c. Direct confirmation with customer
Examine cash receipts journal and bank deposits for subsequent
d. Examine title for ownership of asset
Examine invoice from vendor
e. Direct confirmation with vendor
Examine client's copy of vendor's statement
f. Physical examination
Examine sales invoice of subsequent sale of goods showing
marked down sale price
g. Count petty cash
Direct confirmation with custodian
b. c. d. e. Confirmations are normally more reliable evidence than inquiries of
the client because of the independence of the outside party
confirming the information.
Confirmation of bank balances is considered highly reliable whereas
confirmation of a department store charge account is often not
considered reliable. Banks are accustomed to confirmations from
auditors and normally maintain excellent accounting records, whereas
most customers of department stores have neither characteristic.
If an auditor is not qualified to distinguish between valuable
inventory (e.g., diamonds) and worthless inventory (e.g., glass), the
physical examination of inventory would not be considered to be
Recalculation tests are highly reliable because the auditor is able to
gain 100% assurance of the accuracy, but the tests only verify
whether the recorded amounts are accurately totaled. These tests
do not uncover omissions or fictitious amounts.
Relatively reliable documentation examples include: vendor
statements, bank statements, and signed lease agreements.
Relatively unreliable documentation examples may be: copies of
customer invoices, internal memoranda and other communications,
and a listing of fixed asset additions.
The difference between reliable and unreliable documentation
examples above is whether they originate from outside or inside the
client's organization. External information is considered more reliable
than internal documentation. 7-14 7-32 (continued)
f. Confirmation of accounts receivable - Corporation accustomed to
confirmations compared to a member of the general public. 2. Examination of the corporate minutes - Experienced partner
compared to a new assistant. 3. Physical observation of inventory - Auditor knowledgeable in the
client's inventory compared to one who is not. 4.
g. 1. Attorney's letter - General counsel compared to an attorney
involved only with patents. Analytical procedures are evidence of the likelihood of misstatements
in the financial statements, but they are rarely sufficient by
themselves to conclude that the statements are misstated. Other
supportive evidence is needed to determine whether apparent
misstatements are actually material. 7-33
CASH IN BANK FROM WHOM
TO BE CONFIRMED All banks in which Star
had deposits during the
year including those
which may have had an
account that was closed
out during the year. 7-15 Name and address of the bank.
The amount on deposit for each
account as of the balance sheet date
plus the name of each account, the
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- Fall '13