CHAPTER 6

Audit Evidence
Learning Check
6-1.

6-2.

a.

Audit evidence is all the information used by the auditor in arriving at the conclusion on
which the audit opinion is based. Audit evidence includes (1) the accounting records
underlying the financial statements and (2) other information that corroborates the
accounting records and supports the auditors logical reasoning about fair presentation
in the financial statements.

b.

Any information that is obtained by the auditor to arrive at conclusions on which the
audit is based is audit evidence. Information obtained while performing risk
assessment procedures supports many important audit conclusions. Hence, this is
important audit evidence and needs to have the traits of sufficient, competent evidence.
In many cases the auditor uses knowledge and information from the prior year to make
preliminary risk assessments. However, the auditor usually updates those conclusions
with additional evidence from the current year.

a.

Accounting records generally include the records of initial entries and supporting
records. For example accounting records would include:
Checks and records of electronic funds transfers,
Invoices,
Contracts,
The general and subsidiary ledgers,
Journal entries, and other adjustments to the financial statement that are not
reflected in formal journal entries,
Records such as worksheets and spreadsheets supporting cost allocations,
computations, and reconciliations, and
Disclosures.
Example, accounting records associated with the sales and collections cycle might
include:

b.

c.

Sales orders
Bills of lading and other shipping documents
Sales invoices
The sales journal
A remittance advice
A prelisting of cash receipts
Deposit slips
The cash receipts journal

Accounting records alone do not provide sufficient evidence on which to base an audit
opinion on the financial statements. The auditor must corroborate information in the

accounting records with other sources of evidence such as confirmation from third
parties, the auditors own observation, tests of controls, and information obtained
through other audit procedures.
6-3.

a.

Other information includes evidence such as:

b.

6-4.

a.

b.

Minutes of meetings,
Confirmation from third parties,
Analysts reports,
Comparable data about competitors (benchmarking),
Internal control manuals,
Information obtained through audit procedures such as inquiry, observation or
inspection of records or documents, and
Information developed by the auditor that permits the auditor to reach a conclusion
through valid logical reasoning.

Other information that is relevant to the sales and collections cycle might include:

Confirmation of third parties.

Inquiry and observation about internal controls.

Inspection of documents that have been validated externally such as a bill of lading,
a remittance advice, or a deposit slip.

Inspection of collection history for slow paying clients.

Bank statements.

The five assertions for fixed assets can be stated as follows:

All fixed assets exist and recorded fixed asset transactions actually occurred during
the accounting period.

All fixed assets (including capital leases) are recorded.

The entity has rights to recorded fixed assets and the obligations associated with
fixed assets are the obligations of the entity.

Fixed assets are properly valued in the financial statements.

Information about fixed assets is properly presented and disclosed in the financial
statements.

The transaction class audit objectives for fixed assets can be stated as follows:

Occurrence. Fixed asset transactions and events that have been recorded have
occurred and pertain to the entity. For example, additions to fixed assets during the
period actually occurred and pertain the entity and items that were capitalized
should have been capitalized.

Completeness. All fixed asset transactions and events that should have been
recorded, are recorded. For example, all fixed assets that were acquired during the
period were recorded in the accounting records. Items that should have been
capitalized were not directly expensed during the period.

c.

d.

6-5.

Accuracy. Amounts and other data related to recorded fixed asset transactions and
events have been recorded accurately. For example, all fixed assets that were
recorded during the period were accurately recorded at the proper dollar amounts.

Cutoff. Fixed asset transactions and events have been recorded in the correct
accounting period. For example, all additions to fixed assets were recorded in the
correct accounting period.

Classification. Fixed asset transactions and events have been recorded in the
proper accounts. For example, acquired assets were properly classified as land,
buildings, equipment, or capital leases.

Account balance audit objectives for fixed assets can be stated as follows:

Existence. Recorded fixed assets actually exist. For example, equipment recorded
in the accounting records actually are for long-lived assets in place.

Completeness. All fixed assets that should have been recorded, are recorded. For
example, all fixed assets owned by the company are recorded.

Rights and Obligations. The entity holds or controls rights to fixed assets, and
liabilities are the obligations of the entity. For example, the entity actually holds
rights to fixed assets and capital leases and capital leases are the obligations of the
entity.

Valuation and Allocation. Fixed assets are included in the financial statements at
the appropriate amounts and any appropriate valuation adjustments are
appropriately recorded. For example, fixed assets are properly valued net of
accumulated depreciation and any fixed asset impairments have been recorded.

Disclosure audit objectives for fixed assets can be stated as follows:

Occurrence and Rights and Obligations. Disclosed fixed asset events and
transactions have occurred and pertain to the entity. For example, disclosures
regarding fixed assets represented purchases and sales that actually occurred and the
company has rights do fixed assets included in disclosures.

Completeness. All fixed asset disclosures that should have been included in the
financial statements have been included. For example, all fixed asset disclosures
required by GAAP are included in the financial statements.

Classification and Understandability. Fixed asset information is appropriately

presented and information in disclosures is clearly expressed. For example, the
footnote related to fixed assets is appropriately presented and clearly expressed.

Accuracy and Valuation. Fixed asset information is disclosed accurately and at

appropriate amounts. For example, footnote disclosures accurately include amounts
and values related to depreciation expense and any impairment of fixed asset values.

Factors that may affect the auditors judgment as to sufficiency of evidence include:
Materiality In general, more evidence is necessary for transaction classes, accounts and
disclosures that are material to the financial statements than for those that are immaterial.

Risk of Material Misstatement In general, more evidence will be necessary for assertions
that have higher inherent risk and /or control risk.
Size and characteristics of the population In general, a more homogeneous population will
allow for a smaller sample size.

6-6.

Relevance means that evidence must be pertinent to managements assertions in the financial
statements. Thus, if the auditor is examining the existence of fixed asset, the auditor can obtain
evidence by observing fixed assets in place. However, such evidence might not be relevant in
determining whether the assets goods are owned by the entity (rights and obligations).
Evidence related to one assertion is not a substitute for obtaining audit evidence regarding
another assertion.

6.7

a.

b.

The six factors that influence the reliability of evidence are:

The independence of the source of evidence

Whether the evidence is obtained directly by the auditor

The operating effectiveness of internal controls related to an assertion

The nature of written documents, such as whether they are sequentially numbered or
contain contemporaneous written notes that are relevant to an assertion

Whether documents are originals or copies

Evidence from different sources is consistent with each other.

Following is a series of examples related to the recording of sales that illustrate each of
the six factors described in a) above.

The independence of the source of evidence. For example, information obtained

from confirmations is independent of the audit client.

Whether the evidence is obtained directly by the auditor. For example,

confirmations should be received directly by the auditor from the customer.

The operating effectiveness of internal controls related to an assertion. For

example, information obtained from the accounting system is more reliable when it
comes from a system of internal control that operates effectively.

The nature of written documents, such as whether they are sequentially numbered or
contain contemporaneous written notes that are relevant to an assertion. For
example, written explanations of manual follow-up of item s that appear on
exception reports add credibility to the document. An exception report with no
written notes would not have the same degree of reliability.

Whether documents are originals or copies. For example, original bills of lading are
more reliability than photocopies of bills of lading.

Evidence from different sources is consistent with each other. For example, sales
invoice information is more reliable when it is consistent with customer
confirmations.

6-8.

a.

b.

6-9.

Documents that are externally generated are more reliable than internally generated
documents. In addition, documents (such as cancelled checks) that are created
internally, but are circulated externally and returned with notations by the client, are
more reliable that other internal documents that do not circulate outside the entity.
In the context of sales and accounts receivable a confirmation from a customer would
be considered a very reliable document. A sales invoice, which is internally created,
would not be considered reliable by itself. It would need corroborating evidence.

The following table identifies nine types of audit procedures and provides an example of each.
Audit Procedure
Inspection of documents and records
Inspection of tangible assets
Observation
Inquiry
Confirmation
Recalculation
Reperformance
Analytical procedures
Computer assisted audit techniques

Example
Inspecting bills of lading, sales orders and sales
invoices
Inspecting inventory during shipment or counting
cash
Observation of inventory being shipped or
observation of people performing internal controls
Making inquiries of personnel responsible for
approving credit about past due accounts
Obtaining a confirmation from a customer about
amounts owed to the audit client
Recalculating amounts on a sales invoice
Reperforming an internal control procedure
Calculating and analyzing accounts receivable
turn days
Totaling the detail of the accounts receivable
subsidiary ledger and comparing the total to the
general ledger or selecting accounts for
confirmation.

6-10. In vouching, the direction of testing is from the accounting records to the documents. Vouching
pertains to the existence or occurrence assertion. In tracing, the direction of testing is from
documents to the accounting records. Tracing pertains to the completeness assertion.
6-11. a.

Staffing decisions are about who on the audit team will initially collect and evaluate
evidence.

b.

For example, the auditor might assign someone with two or three years of audit
experience to evaluate the adequacy of an allowance for doubtful accounts. An audit
team might use an new audit staff member to audit routine transactions such as auditing
the results of confirmation when revenue recognition is straight forward.

c.

The audit team will usually assign more experienced individuals to assertions that have
a high degree of subjectivity or complexity. The auditor will consider the risk of
material misstatement when making decisions about audit staffing.

d.

When accounting records and corroborating evidence are available only in electronic
form the audit team should include a computer audit specialist who is capable of

addressing the complexity of internal controls over records that are available only in
electronic form.
6-12. a.

Decisions about the nature of evidence are about the choice of type of audit procedure
to perform.

b.

For example, an auditor could send a confirmation about the existence of accounts
receivable. Alternatively, the auditor could validate the existence of an accounts
receivable by looking at subsequent cash receipts and by looking that the documents
that support shipment before month end.

c.

The auditor will usually consider the risk of material misstatement when making
decisions about audit procedures. The auditor also needs to consider the types of
evidence that may be available when making decisions about audit procedures.

d.

When accounting records and corroborating evidence are available only in electronic
form the audit team may have to modify the procedures to understand the system, tests
controls and perform substantive test. The auditor may use computer assisted audit
technique to perform both tests of controls and substantive tests.

6-13. a.

Decision about the timing of audit procedures are about whether to perform tests as of
an interim date or as of year-end.

b.

For example, the auditor might modify the timing of tests by sending confirmations of
accounts receivable balances as of a date one or two months prior to year-end.

c.

The auditor might consider performing substantive tests at an interim date if internal
controls are strong and if the risk of material misstatement is low.

d.

When accounting records and corroborating evidence are available only in electronic
form the audit team might consider modifying the timing of tests to observe documents
during the short time that they are present before they are copied into a digital imaging
system.

6-14. a.

Decisions about the extent of audit procedures are decisions about sample size.

b.

For example, the auditor might choose between confirming 95% of dollar amount of
accounts receivable or send fewer confirmations and confirm only 60% of the dollar
amount of accounts receivable.

c.

The audit team will normally use larger sample sizes for assertions with a high risk of
material misstatement.

d.

If information about the assertion that the auditor wants to test is available in electronic
form the auditor can use computer assisted audit techniques to select audit samples.

6-15. Working papers may be defined as the records kept by the auditor of procedures applied, the
tests performed, the information obtained, and the pertinent conclusions reached in the audit.
Working papers provide the principal support for the auditor's report, evidence that the audit
was made in accordance with GAAS, and a means for coordinating and supervising the audit.
6-16. Four major types of working papers are (a) working trial balance, (b) schedules and analyses,
(c) audit memoranda and documentation of corroborating information, and (d) adjusting and
reclassifying entries.
6-1.

Five essential techniques of good working paper documentation are:

1. Heading. Each working paper should contain the name of the client, a descriptive title
identifying the content of the working paper, such as Bank Reconciliation---City National
Bank, and the balance sheet date or the period covered by the audit.
2. Index Number. Each working paper is given an index or reference number, such as A-1,
B-2, and so forth, for identification and filing purposes.
3. Cross-referencing. Data on a working paper that is taken from another working paper or
that is carried forward to another working paper should be cross-referenced with the
index numbers of those working papers.
4. Tick Marks. Tick marks are symbols, such as check marks, that are used on working
papers to indicate that the auditor has performed some procedure on the item to which the
tick mark is affixed, or that additional information about the item is available elsewhere
on the working paper. A legend on the working paper should explain the nature and extent
of the work represented by each tick mark or provide the additional information
applicable to the items so marked.
5. Signature and dates. Upon completing their respective tasks, both the preparer and
reviewer of a working paper should initial and date it. This establishes responsibility for
the work performed and the review.
6-18. Two categories of working paper files are (1) the current file and (2) the permanent file. The
current file contains corroborating information pertaining to the execution of the current year's
audit program. The permanent file typically includes such items as:

6-19.

Copies of the articles of incorporation and bylaws.

Chart of accounts and procedure manuals.
Organization charts.
Plant layout, manufacturing processes, and principal products.
Terms of capital stock and bond issues.
Copies of long-term contracts, such as leases, pension plans, and profit-sharing and bonus
agreements.
Schedules for amortization of long-term debt and depreciation of plant assets.
Summary of accounting principles used by the client.
a. Working papers belong to the auditor who is responsible for their custody and
safekeeping.
b. The AICPA's Code of Professional Conduct stipulates that a CPA shall not disclose any
confidential information obtained during the course of a professional engagement
without the consent of the client, except for certain circumstances as stated in the rule.
The latter include disclosing the contents of working papers in order to comply with a
validly issued and enforceable subpoena or summons or applicable law or government
regulation, making the working papers available for a quality or peer review under
AICPA, state CPA society, or Board of Accountancy authorization, or in responding to
any inquiry made by the Professional Ethics Division or Trial Board of the AICPA or a

duly constituted investigative or disciplinary body of a state CPA society or Board of

Accountancy

Comprehensive Questions
6-20

(Estimated Time 20 minutes)

a.

The books of original entry, general and subsidiary ledgers, related accounting manuals,
and less formal accounting records such as worksheets are the primary sources of
evidence supporting the financial statements. The auditor tests this data by analysis and
review, by retracing the procedural steps followed in the accounting process and in
developing the worksheets, by recalculation, and by reconciling related types and
applications of the same information.
While the underlying accounting data is absolutely necessary to form an opinion on the
financial statements, it is not, by itself, sufficient support. The auditor must gather and
examine corroborating evidence to support the underlying accounting data and
representations in the financial statements. This corroborating evidence includes
documentary material such as checks, invoices, contracts, and minutes of meetings;
confirmations and other written representations by knowledgeable people; information
obtained by the auditor by inquiry, observation, inspection, and physical examination;
and other information developed by or available to the auditor which permits reaching
conclusions through valid reasoning.
In determining how to gather sufficient competent evidential matter the auditor might
consider using statistical sampling techniques which have been found to be
advantageous in certain instances. The use of statistical sampling, however, does not
reduce the use of judgment by the auditor.
To be of any value in forming an opinion on the financial statements, the evidence must
be relevant to the situation and it must be valid. The validity of audit evidence is
primarily dependent upon the circumstances under which it is obtained.

b.

Evidential matter obtained from independent sources outside an enterprise provides

greater assurance of reliability than that which is secured solely within the enterprise.
Accounting data and financial statements developed under satisfactory conditions of
internal control are more reliable than those developed under unsatisfactory conditions
of internal control.
Direct personal knowledge obtained by the independent auditor through physical
examination, observation, computation, and inspection is more persuasive than
information obtained indirectly.

6-21. (Estimated Time 30 minutes)

a.

1.

An auditor should consider the following factors in evaluating oral evidence

provided by client officers and employees in response to his questions:

2.

The competence of the questioned individual concerning the topic. For

example, the perpetual inventory clerk would be more likely to know about
slow-moving inventory items than current market prices.
The disinterestedness of the questioned party. If internal control is strong,
more weight generally may be given to client responses.
The logic and reasonableness of the response. As an auditor becomes
familiar with the client's operations and personnel, he or she becomes more
adept at choosing the right person to question and evaluating the answer. He
or she also will observe a pattern of response forming and determine whether
it is internally consistent.

The auditor relies heavily upon the responses of client personnel, but must
recognize that this information may lack reliability. The reliance placed upon
such evidence will vary based upon the factors discussed above, but heavier
weight generally is accorded to evidence generated independently of the client.
The auditor should seek additional evidence in instances where he or she judges
a client's response to be uninformed or unreliable. In crucial matters, the auditor
should ask the client to confirm his representations in writing and also obtain
additional evidence from independent sources.

b.

The evidence provided by ratio analysis usually is classified as circumstantial. As such,

it ranks lower in reliability and validity than direct evidence such as that provided by
confirmation, physical observation, and inspection of original documents. However,
ratio analysis has an important supplemental role in the auditor's examination,
particularly in larger engagements where a relatively small portion of the direct
evidence is reviewed. The use of ratio analysis provides a broad overview and enables
the auditor to determine unusual areas where additional inquiry is necessary.

c.

Physical examination is one of the most reliable sources of audit evidence. Where
inventories are material, it is almost always necessary for the auditor to make or observe
some physical counts. In this case, where the inventory consists of individually valuable
items, it may be practicable and desirable for the auditor to inspect the entire inventory.
While inspection provides unequivocal evidence as to physical existence, the procedure
does have limitations. The presence of the electronic equipment on client premises does
not necessarily denote ownership by the client--this evidence must be provided by the
auditor's review of contracts and sales procedures, supplemented by inquiry and client
representation. Also, the auditor in this situation probably will not have the technical
competence to determine the complexity or value of the electronic equipment by
physical inspection. For this determination he or she may rely in part on a review of the
accumulation of inventory costs, but must establish that the goods inspected are those
that were manufactured and the relationship of manufacturing cost to market price.

6-22. (Estimated time - 20 minutes)

a.

1.
2.
3.

Directly from outsiders

Indirectly from outsiders
Entirely internal

7. Entirely internal
8. Indirectly from outsiders
9. Entirely internal

4.
5.
6.

Entirely internal
Entirely internal
Entirely internal

10. Internally but validated externally

11. Indirectly from outsiders
12. Entirely internal

b. AU326.19 states the following general presumption among others about the reliability of
various types of evidence: "When evidential matter can be obtained from independent
sources outside an enterprise, it provides greater assurance of reliability for the purposes
of an independent audit than that secured solely within the enterprise."
Using this presumption as a guide, the four sources of evidence listed in
requirement (a) may be ranked from most to least reliable as follows: (1) directly from
outsiders, (2) indirectly from outsiders, (3) internal but validated externally, (4) entirely
internal.
6-23. (Estimated time- 15 minutes)
The following table describes how various factors are associated with decisions about the
sufficiency of audit evidence.
Factor
Materiality
Risk of material misstatement
Size and characteristics of the
population

Relationship to the sufficiency of audit evidence.

Assertions that are more material to financial statement
users require more sufficient evidence.
Assertions that have a higher risk of material
misstatement require more sufficient evidence.
Larger, more heterogeneous populations require more
sufficient evidence.

6-24. (Estimated time - 25 minutes)

a.

Type of Audit Procedure

Observation

Assertion
Existence or occurrence, and
valuation and allocation
Confirmation
Existence or occurrence
Confirmation
Valuation or allocation
Recalculation
Valuation or allocation
Inquiry
Presentation and disclosure
Analytical procedures
Existence and occurrence,
completeness, or valuation and
allocation
Inspection of documents and records Rights and obligations
Inquiry
Presentation and disclosure
Inspection of documents and records Existence or occurrence
Observation
Existence or occurrence, and
completeness
Inspection of documents and records Completeness
Computer assisted audit techniques
Completeness

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
b.

1.

2, 3, 5

2.

1, 4, 10, 12

6-25. (Estimated time - 20 minutes)

Procedure
No.
1.
2.
3.
4.
5.
6.

Type of
Substantive Test
Analytical procedure
Test of transactions
Test of balances
Test of balances
Analytical procedure
Test of balances

7.
8.
9.
10.
11.
12.
13.

Test of transactions
Test of balances
Test of balances
Test of balances
Test of transactions
Test of balances
Tests of details of disclosures

Type of
Corroborating Information
Analytical procedures
Inspection of documents and records
Recalculation
Confirmation
Analytical procedures
Inspection of documents and records and
reperformance
Inspection of documents and records
Observation
Inspection of documents and records
Inquiry
Inspection of documents and records
Inquiry
Inspection of documents and records

6-26. (Estimated Time: 20 minutes)

a.

An audit program documents decisions about the audit procedures that the auditor
believes are necessary to obtain reasonable assurance that the financial statements are
presented fairly in all material respects. An audit program will usually list procedures
to be performed, identify who performed the procedures and the date that the
procedures were performed, and provide a cross reference to the working papers where
the procedures are documented.

b.

Auditors translate audit assertions into specific audit objectives in order to guide the
process of collecting evidence. Audit objectives are a refinement of assertions and each
audit objective requires unique evidence to support a conclusion about the audit
objective.

c.

Following is a list of the specific audit objectives that are relevant to the existence and
occurrence assertion in the context of sales and accounts receivable:

Occurrence: All sales that have been recorded during the period pertain to the
entity and revenue was appropriately recognized.
Cutoff: All sales have been recorded in the correct accounting period and revenue
has not been recognized for sales that should be earned in a subsequent period.
Existence: All accounts receivable actually exist (e.g., customers actually owe
receivables to the entity).

d.

Following is a list of the specific audit objectives that are relevant to the valuation and
allocation assertion in the context of sales and accounts receivable:

Accuracy: All sales and receivables have been accurately recorded in the correct
amount owed by customers.

Valuation and allocation: Accounts receivables are recorded at their net realizable
value, net of an appropriate allowance for doubtful accounts.

6-27. (Estimated time - 30 minutes)

a. 1. The functions of working papers are to aid the CPA in the conduct of his work and to
provide support for the opinion and compliance with auditing standards.
2.

Working papers are the CPA's records of the procedures followed, tests performed,
and conclusions reached in the audit. Working papers may include work programs,
analyses, memoranda, letters of confirmation and representation, abstracts of
company documents and schedules or commentaries prepared or obtained by the
auditor.

b. The factors that affect the CPA's judgment of the type and content of the working papers
for a particular engagement include:
1.
2.
3.
4.
5.
c.

The nature of the auditor's report.

The nature of the client's business.
The nature of the financial statements, schedules or other information upon which
the CPA is reporting and the materiality of the items included therein.
The nature and condition of the client's records and internal controls.
The needs for supervision and review of work performed by assistants.

Evidence which should be included in the working papers to support a CPA's compliance
with generally accepted auditing standards includes:
1.

Evidence that the financial statements or other information upon which the auditor
is reporting were in agreement or reconciled with the client's records.

2.

Evidence that the client's internal control structure was reviewed and evaluated to
determine the extent of the tests to which auditing procedures were restricted.

3.

Evidence of the auditing procedures followed and testing performed in obtaining

evidential matter for evaluation.

4.

Evidence of how exceptions and unusual matters disclosed by auditing procedures

were resolved or treated.

5.

Evidence of the auditor's conclusions on significant aspects of the engagement with

appropriate commentaries.

6-28. (Estimated time - 20 minutes)

Evidence found in the working papers to support the fact that the audit was adequately
planned and assistants were properly supervised would be:
Documentation indicating discussions with client personnel concerning developments
affecting the financial statements.
Documentation of a preaudit planning conference among audit firm personnel to develop
an audit strategy by considering matters noted in the review of prior years' working
papers, changes in accounting and auditing standards, etc.
An internal control write-up documenting that the internal control structure had been
studied.
Audit programs tailored to the strengths and weaknesses of the internal control structure.

Audit programs indicating steps that were assigned to and completed by individual
assistants.
A budget indicating the time to be spent in each audit area.

Individual working papers signed by reviewers to document review, approval, and

responsibility.
All questions raised by assistants were answered.
6-29. (Estimated time - 25 minutes)
1.
2.
3.
4.
5.
6.
7.

8.
9.
10

Office Supplies Expense

Office Supplies
Insurance Expense
Prepaid Insurance
Rent Income
Unearned Rent Income
Uncollectible Accounts Expense
Allowance for Uncollectibles
Advances to Suppliers
Accounts Payable
Interest Receivable
Interest Revenue
Machinery
Depreciation Expense
Accumulated Depreciation
Repairs Expense
Freight In
Freight Out
Accounts Receivable
Customers' Credit Balances
Bonds Payable
Current Maturities of Bonds Payable

700
700
6,200
6,200
5,000
5,000
8,000
8,000
10,400
10,400
600
600
6,000
150
50
6,000
5,000
5,000
15,000
15,000
50,000
50,000

Cases

6-30. (Estimate time 35 minutes)

a. See bank reconciliation working paper on following page.

Prepared by LK
Reviewed by RZ

Date 1/7/X2
Date 1/10/X2

Bold Inc.
City Bank- -General
12/31/X1
A-1
Acct. No. 102
Balance per Bank
Add: Deposit in Transit
Less: Outstanding Checks
Adjusted Balance per Bank

62,765.18
1,452.20

a
b

$64,217.38
2,529.14

$61,688.24
F

Balance per Books

Add: Note Collected by Bank (AJE 12)

$61,267.69
515.00
$61,782.69

Less: Bank Service Charge (AJE 13)

Book Error Check #2640 (AJE 14)

$ 4.45 g
90.00 h
94.45
$61,688.24
F

a
b
c
d
e
F
g
h
b.

Traced and agreed to bank confirmation

Traced to January bank statement
Traced to December check register
Agreed to December 31 ledger balance
Traced to bank credit memo and December bank statement
Footed
Examined debit memo
Compared check ($980) with entry $890

AJE 12
City Bank--General
Notes Receivable
Collection of note by bank
AJE 13
Miscellaneous Expense
City Bank--General
Record December bank charges

515.00
515.00

4.45
4.45

d
e

AJE 14
Accounts Payable
City Bank--General
Correct error in recording
Check #2640
c.

90.00
90.00

Bold Inc.
Cash Lead Schedule
12/31/XX

A
Acct.

Account
Title

W.P.
Ref.

Ledger
12/31/XX

Adjustments
Dr.
Cr.

Final Bal.
12/31/XX

No.
101

Petty Cash

A-2

5,000.00

102

City Bank-General

A-1

61,267.69

103

City Bank-Payroll

A-3

20,000.00

5,000.00
(12) 515.00

(13) 4.45
(14) 90.00

61,688.24
20,000.00

86,267.69

515.00

94.45

86,688.24
To AA-1

d.

Bold Inc.
Partial Working Trial Balance
AA-1
W.P.
Ref.

Account
Title

Ledger
12/31/XX

Cash

86,267.69

Adjustments
Dr.
Cr.
(12) 515.00

(13) 4.45
(14) 90.00

Final
12/31/XX
86,688.24

Professional Simulation
Research
Draft
Report

Situation

The following is a quote from AU 330.22, which provides a caution about the evidence provided by
unreturned negative confirmations.
.22

Although returned negative confirmations may provide evidence about the financial statement
assertions, unreturned negative confirmation requests rarely provide significant evidence
concerning financial statement assertions other than certain aspects of the existence assertion.
For example, negative confirmations may provide some evidence of the existence of third
parties if they are not returned with an indication that the addressees are unknown. However,
unreturned negative confirmations do not provide explicit evidence that the intended third
parties received the confirmation requests and verified that the information contained on them
is correct.

Draft
Report
Situation

Research

To:
Dustin Barker, Manager
Re:
Factors that influence the reliability of confirmations
From: CPA Candidate
AU 330.16-.27 describes certain factors that affect the reliability of confirmations. These factors are
summarized below:
The form of the confirmation request: Auditors may send either positive or negative
confirmations. Positive forms are often more reliable than negative confirmations. However,
positive confirmations provide audit evidence only when responses are received from the
recipients; nonresponses do not provide audit evidence about the financial statement assertions
being addressed. The auditor should also consider the risk that recipients of a positive form of
confirmation request with the information to be confirmed contained on it may sign and return
the confirmation without verifying that the information is correct. Blank forms may be used as
one way to mitigate this risk. Thus, the use of blank confirmation requests may provide a
greater degree of assurance about the information confirmed. However, blank forms might
result in lower response rates because additional effort may be required of the recipients;
consequently, the auditor may have to perform more alternative procedures.

Prior experience on the audit or similar engagements: The auditor may consider information
from prior years' audits or audits of similar entities in determining the effectiveness and
efficiency of employing confirmation procedures. The auditor might consider response rates,
knowledge of misstatements identified during prior years' audits, and any knowledge of
inaccurate information on returned confirmations.

The nature of the information being confirmed: The auditor should consider the types of
information respondents will be readily able to confirm, since the nature of the information
being confirmed may directly affect the competence of the evidence obtained as well as the
response rate. For example, certain respondents' accounting systems may facilitate the
confirmation of single transactions rather than of entire account balances. The auditor should
obtain an understanding of the substance of client arrangements and transactions to determine
the appropriate information to include on the confirmation request.
The auditor should also consider requesting confirmation of the terms of unusual agreements or
transactions, such as bill and hold sales, in addition to the amounts. The auditor also should
consider whether there may be oral modifications to agreements, such as unusual payment
terms or liberal rights of return. When the auditor believes there is a moderate or high degree of
risk that there may be significant oral modifications, he or she should inquire about the
existence and details of any such modifications to written agreements. One method of doing so
is to confirm both the terms of the agreements and whether any oral modifications exist.

The intended respondent: The auditor should direct the confirmation request to a third party
who the auditor believes is knowledgeable about the information to be confirmed. If
information about the respondent's competence, knowledge, motivation, ability, or willingness
to respond, or about the respondent's objectivity and freedom from bias with respect to the
audited entity comes to the auditor's attention, the auditor should consider the effects of such
information on designing the confirmation request and evaluating the results, including
determining whether other procedures are necessary. In addition, there may be circumstances
(such as for significant, unusual year-end transactions that have a material effect on the
financial statements or where the respondent is the custodian of a material amount of the
audited entity's assets) in which the auditor should exercise a heightened degree of professional
skepticism relative to these factors about the respondent. In these circumstances, the auditor
should consider whether there is sufficient basis for concluding that the confirmation request is
being sent to a respondent from whom the auditor can expect the response will provide
meaningful and competent evidence.