Chap004

Auditing and Assurance Services

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confirmations should be considered when assessing the reliability of confirmations. If response rates were low in prior audits, the auditor might consider obtaining evidence using alternative procedures. The nature and availability of the information being confirmed may directly affect the competence of the evidence obtained. The intended respondent to confirmations may vary from individuals with little accounting knowledge to highly qualified accounting personnel in large corporations. The auditor should consider the respondent's competence, knowledge, ability, and objectivity when assessing the reliability of confirmation requests. b. This is a difficult question, but one that is worth discussing with the students, at least preliminarily. From the information disclosed so far, we do not know how the false bank confirmations were created. There are a couple of possibilities. First, management could have had confederates at the banks that conspired to issue false confirmations. Second, management could have some how intercepted the auditor’s confirmations and returned them. Third, the auditors may have lost control of the confirmations during the audit process, allowing management the opportunity to create false bank confirmations. It would be very difficult for the auditor to detect the false confirmations due to the first two situations. 4-7
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Chapter 04 - Audit Evidence and Audit Documentation c. The following amounts or information included in EarthWear's financial statements could be confirmed. The source of the confirmation is also included. Amounts or Information Confirmed Source of Confirmation Cash balances Banks Accounts receivable Individual customers Lines of credit Banks Accounts payable Individual vendors Lease assets Leaseholders Common stock outstanding Registrar/Transfer agent Insurance coverage Insurance company 4-30 a. Auditing standards (AS 3 and AU 339) stipulate that working papers have two functions: (1) to provide principal support for the representation in the auditor’s report that the audit was conducted in accordance with GAAS (AU 339.03) and (2) to aid in the planning, performance, and supervision of the audit (AS 3 ¶2). b. The more common types of working papers include the audit plan and programs, working trial balance, adjusting and reclassification entries, account analysis and listings, and audit memoranda. c. The auditor should consider the following factors when determining the form and extent of the documentation for a particular audit area or auditing procedure: The auditing procedures to be performed and the nature of the evidence to be obtained. Risk of material misstatement associated with the assertion, account, or class of transactions. Extent of judgment involved in performing the work and evaluating the results. Significance of the evidence obtained to the assertion being tested.
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