Review Questions 6-2 are: The four major audit evidence decisions that must be made on every audit

1. 2. 3. 4. 6.3 Which audit procedures to use. What sample size to select for a given procedure. Which items to select from the population. When to perform the procedure.

An audit procedure is the detailed instruction for the collection of a type of audit evidence that is to be obtained. Because audit procedures are the instructions to be followed in accumulating evidence, they must be worded carefully to make sure the instructions are clear

6-4 An audit program for accounts receivable is a list of audit procedures that will be used to audit accounts receivable for a given client. The audit procedures, sample size, items to select, and timing should be included in the audit program. 6.5 Auditors should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. There are two major phrases of the standard. Sufficiency deals with the quantity of evidence. Appropriateness is the measure of the quality of the evidence, its relevance, reliability and timeliness. What is sufficient and appropriate depends on the circumstances, and is affected by assessments of inherent and control risk, materiality, results from previous audits, results from other procedures, and the source and reliability of information available. 6-6 There are two primary reasons why the auditor can only be persuaded with a reasonable level of assurance, rather than be convinced that the financial statements are correct: The cost of accumulating evidence. It would be extremely costly for the auditor to gather enough evidence to be completely convinced. 2. Evidence is normally not sufficiently reliable to enable the auditor to be completely convinced. For example, confirmations from customers may come back with erroneous information, which is the fault of the customer rather than the client. 6-7 The two determinants of the persuasiveness of evidence are competency and sufficiency. Competency refers to the degree to which evidence can be considered believable or worthy of trust. Competency relates to the audit procedures selected, including the timing of when those procedures are performed. Sufficiency refers to the quantity of evidence and it is related to sample size and items to select. 1.

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Following are seven characteristics that determine competence and an example of each.
EXAMPLE OF COMPETENT EVIDENCE Trace inventory items located in the warehouse to their inclusion in the inventory subsidiary ledger Confirmation of a bank balance Use of duplicate sales invoices for a large wellrun company Physical examination of inventory by the auditor

FACTOR DETERMINING COMPETENCE Relevance

Independence of provider Effectiveness of client's internal controls Auditor's direct knowledge Qualifications of provider

Letter from a solicitor dealing with the client's affairs Degree of objectivity Count of cash on hand by auditor Timing Observe inventory as of the last day of the fiscal year

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TYPES OF AUDIT EVIDENCE EXAMPLES 1. 2. Physical examination Confirmation Count petty cash on hand Examine fixed asset additions Confirm accounts receivable balances of a sample of client customers Confirm client's cash balance with bank Examine presented cheques returned with bank statement Examine vendors invoices supporting a sample of cash payment transactions throughout the year

3.

Documentation

4.

Observation

Observe the taking of inventory Observe the preparation of the monthly bank reconciliation Inquire of management whether there is obsolete inventory Inquire of management regarding the collectibility of large accounts receivable balances Recalculate invoice total by multiplying item price times quantity sold Foot the sales journal for a one-month period and compare all totals to the general ledger Evaluate reasonableness of receivables by calculating and comparing ratios Compare expenses as a percentage of net sales with prior year's percentages

5.

Inquiries of the client

6.

Reperformance

7.

Analytical procedures

6-18 Roger Morris performs his ratio and trend analysis at the end of every audit. By that time, the audit procedures are completed. If the analysis was done at an interim date, the scope of the audit could be adjusted to compensate for the findings. Standard requires that analytical procedures be performed in the planning phase of the audit and near the completion of the audit. The use of ratio and trend analysis appears to give Roger Morris an insight into his client's business and affords him an opportunity to provide excellent business advice to his client. 6-23 1. 2. (5) inquiry of client (4) observation

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

(1) (2) (6) (2) (3) (7) (5) (6) (4) (1) (7) (3) (5) (7) (3) (6) (1) (2)

physical examination confirmation reperformance confirmation documentation analytical procedures inquiry of client reperformance observation physical examination analytical procedures documentation inquiry of client analytical procedures documentation reperformance physical examination confirmation