Chapter 15 - answer.pdf

CHAPTER 15

AUDIT EVIDENCE

 Review Questions

1.

Refe Referr to page page 614, 614, 2nd and 4th paragraphs of the textbook.

2.

Refe Referr to page page 614, 614, 3rd paragraph of the textbook.

3.

Refe Referr to page page 616, 616, 3rd paragraph of the textbook.

4.

Refe Referr to to pag pagee 6177 6177,, 1st paragraph of the textbook.

5.

Refe Referr to page page 617, 617, 2nd paragraph of the textbook.

6.

Refe Referr to page page 618, 618, 4th paragraph of the textbook.

7.  External documentary evidence  evidence  is evidential matter obtained from the other part to an arm!s"leng arm!s"length th transa#ti transa#tion on or from o$tside independent independent agen#ies agen#ies.. %xternal eviden#e rea#hes the a$ditor dire#tl and does not pass thro$gh the hands of the #lient.  External-internal  External-internal documentary evidence is evidence  is do#$mentar material that originates o$tside the bo$nds of the #lient!s data pro#essing sstem b$t &hi#h has been re#eived and pro#essed b the #lient.  Internal documentary evidence #onsis #onsists ts of do#$me do#$menta ntar r materi material al that that is prod$#ed, #ir#$lates, and is finall stored & ithin the #lient!s information sstem. '$#h eviden#e is not to$#hed b o$tside parties at all or is several steps removed from third"part attention. 8.

($ditors ($ditors #an #an help the effe#t effe#tivene iveness ss of #onfirma #onfirmation tion re)$e re)$ests sts b* a. b.

#.

+aving +aving the #onfirma #onfirmation tion lette letters rs printed printed on the the #lient!s #lient!s letter letterhead head and signed signed b a #lient offi#er. eing eing #aref$l #aref$l to be ass$red ass$red of relia reliable ble addresse addressess for re#ipien re#ipientsts- that that is, being being ass$red that the #onfirmations are not misdire#ted for example, to a #lient!s a##ompli#es in fra$d/. (ski (sking ng #onf #onfir irma mati tion on of info inform rmat atio ion n that that re#i re#ipi pien entt #an #an s$pp s$ppl l,, like like the the amo$nt of a balan#e or the amo$nts of spe#ified invoi#es or notes not the

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Solutions Manual – Public Accountancy Profession

d. e.

balan#es of homeo&ners! mortgages or finan#ial amo$nts, like #ertifi#ates of deposit &ith a##r$ed interest, for &hi#h people $s$all do not keep their o&n a##o$nting re#ords/. 0ontrolling the mailing and ret$rn of #onfirmations so the #lient #annot tamper &ith them. Re#eiving the repl dire#tl, so the #lient #annot inter#ept and alter them.

.  Factual evidence is dire#t eviden#e, in that #on#l$sions ma be dra&n from the eviden#e &itho$t f$rther #orroboration. (n example of fa#t$al a$dit eviden#e is phsi#al observation of inventor for existen#e.  Inferential evidence is indire#t, in that dire#t #on#l$sions #annot be dra&n from the eviden#e. he a$ditor tpi#all examines other eviden#e to f$rther #orroborate the inferen#es dra&n. (n oral statement b a prod$#t manager that one or more prod$#ts are f$ll saleable and not obsolete is an example of inferential eviden#e. he a$ditor ma perform inventor t$rnover tests andor determine the date of last sale of the prod$#t to f$rther #orroborate the prod$#t manager!s statement. 1. '$ffi#ien# of a$dit eviden#e is a matter of a$dit $dgment. aterialit and the )$alit of internal #ontrol are important ingredients in determining s$ffi#ien#. f internal #ontrol prod$#es over sales pro#essing and #ash re#eipts, for example, are effe#tive, the a$ditor ma ele#t to #onfirm fe&er #$stomers! a##o$nts re#eivables than $nder #onditions of &eak internal #ontrol. 11. hsi#al eviden#e tests the existen#e assertion. %xamples of phsi#al eviden#e are inventor observation, examination of se#$rities, inspe#tion of plant asset additions, and #o$nt of #ash on hand. 12. he )$alit of existing internal #ontrol is the maor fa#tor s$pporting the strength of do#$mentar eviden#e. ( vo$#her prod$#ed $nder #onditions of strong internal #ontrol over the pro#essing of vendors! invoi#es, for example, possesses greater validit and is therefore stronger eviden#e than vo$#hers prod$#ed $nder &eak #ontrol #onditions. 13. ($diting standards define an accounting estimate  as 9an approximation of a finan#ial statement element, item or amo$nt.: %stimates are $sed be#a$se 1/ an amo$nt is $n#ertain pending spe#ifi# f$t$re events or 2/ relevant data #annot be a##$m$lated on a timel, #ost"effe#tive basis. %xamples of a##o$nting estimates in#l$de allo&an#e for $n#olle#tible a##o$nts, obsolete inventor, $sef$l lives and resid$al val$es of fixed assets, nat$ral reso$r#es and intangibles, a##r$als for taxes on real and personal propert, a##r$als based on a#t$al ass$mptions in pension plans, #ontra#t reven$e $sing per#entage of #ompletion method, litigation losses, fair val$es in nonmonetar ex#hanges, and #$rrent val$es in personal finan#ial statements.

 Audit Evidence

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14. n eval$ating the reasonableness of a##o$nting estimates, an a$ditor sho$ld #onsider the internal #ontrols related to the estimates in order to red$#e the likelihood of material misstatements in the estimates, &hether the a##o$nting estimates are reasonable given the sit$ation, and &hether the a##o$nting estimates are presented in a##ordan#e &ith appropriate a##o$nting prin#iples. 15. %viden#e is pers$asive if the a$ditor #onsiders the eviden#e to be s$ffi#ient and #ompetent eno$gh to afford a reasonable basis for an opinion.  Multiple Choice Questions

1. 2. 3.

d d #

4. 5. 6.

# a d

7. 8. .

d b d

1. 11. 12.

d a b

13.

b

Cases

1.

2.

a.

%vidential matter obtained from independent so$r#es o$tside an enterprise provides greater ass$ran#e of reliabilit #ompeten#/ than that &hi#h is se#$red solel &ithin the enterprise.

b.

(##o$nting data and finan#ial statements developed $nder satisfa#tor #onditions of internal #ontrol are more reliable #ompetent/ than those &hi#h are developed $nder $nsatisfa#tor #onditions of internal #ontrol.

#.

;ire#t personal kno&ledge obtained b the independent a$ditor thro$gh phsi#al examination, observation, #omp$tation, and inspe#tion is more pers$asive than information obtained indire#tl.

1.

pes of eviden#e  Evidential items/sources d.