Chapter 5

Accuracy

Amounts and other data relating to recorded transactions and events have been *recorded appropriately.*

Refer back to EarthWear Clothiers' financial statements included after Chapter 1. Identify any information on EarthWear's financial statements that might be verified through the use of confirmations.

*Amounts or Information Confirmed* 1. Cash balances 2. Accounts receivable 3. Lines of credit 4. Accounts payable 5. Lease assets 6. Common stock outstanding 7. Insurance coverage *Source of Confirmation* 1. Banks 2. Individual customers 3. Banks 4. Individual vendors 5. Leaseholders 6. Registrar/Transfer agent 7. Insurance company

What are management assertions?

*Assertions* are expressed or implied representations by management regarding the recognition, measurement, presentation, and disclosure of information in the financial statements and related disclosures.

What factors affect the auditor's judgment about the form, content, and extent of audit documentation for a particular engagement?

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 *size and complexity* of the entity. -The *nature of the audit procedures* to be performed. -*Identified risks* of material misstatement. -The *significance of the audit evidence* obtained. -The *nature and extent of exceptions* identified. -The *need to document a conclusion* or the basis for a conclusion *not readily determinable* from the documentation of the work performed or audit evidence obtained. -The *audit methodology* and tools used. -The *extent of judgment involved* in performing the work and evaluating the results.

List and describe the various types of audit documents.

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.

Tracing the prices used by the entity's billing program for pricing sales invoices to the entity's approved price list.

*Audit Process*: Inspection of records or documents/ Reperformance *Category*: Assertions about classes of transactions and events *Primary Assertion*: Accuracy

Evaluation

*Evaluation* involves the *effective use of professional skepticism, combined with the desire to obtain sufficient appropriate audit evidence*, similar to other auditing procedures. -The auditor should evaluate the results of the substantive analytical procedures to *conclude whether the desired level of assurance has been achieved.* -If the auditor obtains evidence that a misstatement exists and can be sufficiently quantified, the auditor makes note of his or her proposed adjustment to the client's financial statements.

When discussing the use of analytical procedures, what is meant by the "precision of the expectation"?

-*The quality of an expectation* is referred to as the *precision of the expectation.* -Precision is a measure of the *potential effectiveness of an analytical procedure*; it represents the *degree of reliance that can be placed on the procedure.* -Precision is a measure of *how closely the expectation approximates the unknown "correct" amount*. -The degree of desired precision will differ with the specific purpose of the analytical procedure. -The precision of the expectation is a *function of the materiality and required detection risk* for the assertion being tested. -If the assertion being tested requires a *low level of detection risk, the expectation needs to be very precise*. -However, the more precise the expectation, the more extensive and expensive are the audit procedures used to develop the expectation, resulting in a cost/benefit trade-off.

List the *assertions about account balances* at the period end. (CERV)

1. Existence 2. Rights and Obligations 3. Completeness 4. Valuation and Allocation

What are the functions of audit documentation?

Auditing standards 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 and (2) to aid in the planning, performance, and supervision of the audit.

The accounts and transactions that should be included are included; thus, the financial statements are complete.

Completeness

Analytical procedures

Consist of evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.

Recalculation

Consists of checking the mathematical accuracy of documents and records either manually or electronically.

Inspection of records or documents

Consists of examining internal and external records or documents that are in paper form, electronic form, or other media.

Inspection of tangible assets

Consists of physical examination of tangible assets

Observation

Consists of watching a process or procedure being performed by others

The assets and liabilities exist, and the recorded transactions have occurred

Existence or occurrence

For *completeness*, indicate an example of a misstatement that could occur for revenue transactions.

Goods shipped or services performed, revenue not recorded.

What procedures should the auditor perform if the difference between the expectation and the book value is greater than tolerable misstatement?

If the difference between the auditor's expectation and the book value is greater than the tolerable misstatement, the auditor should consider performing the following audit procedures: -Review the general journal and general ledger for any unusual entries. -Reevaluate the historical return rates. -Reevaluate the gross profit margin. -Ask the client to adjust the books.

Coverage Ratios

Provide information on the long-term solvency of the entity, including the *ability of the entity to continue as a going concern*.

Confirmation

Represents audit evidence obtained by the auditor from a third party in paper form or by electronic or other medium.

For *classification*, indicate an example of a misstatement that could occur for revenue transactions.

Revenue transaction not properly classified as revenue (i.e. improperly recorded as other income or as an offset to expenses).

The assurance bucket is filled with all of the following types of evidence *except* a. Test of controls. b. The audit report. c. Substantive analytical procedures. d. Tests of details.

The audit report.

Reperformance

The auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control, either manually or through the use of CAATs.

List the four categories of financial ratios that are presented in the chapter.

There are four categories of financial ratios discussed in the text: 1. Short-Term Liquidity Ratios 2. Activity Ratios 3. Profitability Ratios 4. Coverage Ratios.

Cutoff

Transactions and events have been recorded in the *correct accounting period*.

Classification

Transactions and events have been recorded in the *proper accounts.*

Occurrence

Transactions and events that have been recorded have occurred and pertain to the entity (sometimes referred to as *validity*).

Which of the following types of audit evidence is the *least* reliable? a. Prenumbered purchase order forms prepared by the entity. b. Bank statements obtained from the entity. c. Test counts of inventory performed by the auditor. d. Correspondence from the entity's attorney about litigation.

a. Prenumbered purchase order forms prepared by the entity.

For *authorization*, indicate an example of a misstatement that could occur for revenue transactions.

-Goods shipped or services performed for a customer who is a bad credit risk. -Shipments made or services performed at unauthorized prices or on unauthorized terms.

Discuss the *audit procedures* that obtain *medium relative reliability*

1. *Inspection of records and documents* 2. *Confirmation* 3. *Analytical procedures* 4. *Scanning* -The reliability of inspection of records and documents *depends primarily on whether a document is internal or external.* -Scanning depends on the *auditor's ability to identify anomalous items* using judgment or CAATs. -The form of the confirmation, *prior experience* with the entity, the *nature of the information* being confirmed, and the *intended respondent* affect the reliability of confirmations. -The reliability of analytical procedures may be affected by the *quality of the client's internal control system.*

In testing the existence assertion for an asset, an auditor ordinarily works from the a. Financial statements to the potentially unrecorded items. b. Potentially unrecorded items to the financial statements. c. Accounting records to the supporting documents. d. Supporting documents to the accounting records.

Accounting records to the supporting documents. (vouching)

Completeness

All assets, liabilities, and equity interests that *should have been recorded have been recorded.*

Authorization

All transactions and events have been properly *authorized*.

Explain why in most instances audit evidence is persuasive rather than convincing.

Audit evidence is usually persuasive rather than convincing for two reasons: 1. Since an audit must be *completed in a reasonable amount of time and at a reasonable cost*, the auditor examines *only a sample of the transactions* (sampling risk) that compose the class of transactions or account balance. 2. Due to the nature of evidence, auditors must often rely on *evidence that is not perfectly reliable*. -The types of audit evidence examined by the auditor have different degrees of *reliability*, and even highly reliable evidence has *weaknesses.* -Therefore, the evidence obtained by the auditor *seldom provides absolutely convincing evidence* about an audit objective.

Discuss the *audit procedures* that obtain *low relative reliability*

1. *Inquiry* 2. *Observation* -Generally low-reliability types of evidence since *both require further corroboration* by the auditor. -It should be understood, however, that levels of reliability for the types of evidence should be considered as general guidelines. -The reliability of the types of evidence may vary considerably across entities, and it is subject to a number of exceptions.

Audit evidence can come in different forms with different degrees of reliability. Which of the following is the *most* persuasive type of evidence? a. Bank statements obtained from the entity. b. Computations made by the auditor. c. Prenumbered entity sales invoices. d. Vendors' invoices included in the entity's files.

b. Computations made by the auditor.

Comparing the current-year gross profit percentage with the gross profit percentage for the last four years.

*Audit Process*: Analytical procedures *Category*: Assertions about account balances *Primary Assertion*: Valuation and allocation

Sending a written request to the entity's customers requesting that they report the amount owed to the entity.

*Audit Process*: Confirmation *Category*: Assertions about account balances *Primary Assertion*: Existence

Obtaining a letter from the entity's attorney indicating that there were no lawsuits in progress against the entity.

*Audit Process*: Confirmation *Category*: Assertions about account balances *Primary Assertion*: Valuation and allocation/ Completeness

Discussing the adequacy of the allowance for doubtful accounts with the credit manager.

*Audit Process*: Inquiry *Category*: Assertions about account balances *Primary Assertion*: Valuation and allocation

Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period.

*Audit Process*: Inspection of records or documents *Category*: Assertions about classes of transactions and events *Primary Assertion*: Cutoff

Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account.

*Audit Process*: Inspection of records or documents/ Reperformance *Category*: Assertions about account balances *Primary Assertion*: Completeness

Examining a new plastic extrusion machine to ensure that this major acquisition was received.

*Audit Process*: Inspection of tangible assets *Category*: Assertions about account balances *Primary Assertion*: Existence

Watching the entity's warehouse personnel count the raw materials inventory.

*Audit Process*: Observation *Category*: Assertions about account balances *Primary Assertion*: Completeness/Existence

Performing test counts of the warehouse personnel's count of the raw material.

*Audit Process*: Reperformance *Category*: Assertions about account balances *Primary Assertion*: Completeness/Existence

Reviewing the general ledger for unusual adjusting entries.

*Audit Process*: Scanning *Category*: Assertions about account balances *Primary Assertion*: Valuation and allocation

Quantification

*Quantification* involves *determining whether the explanation or error can explain the observed difference.* -This may require the recalculation of the expectation after considering the additional information. For example, a client may offer the explanation that the inventory account increased by a certain percentage as compared to the prior year due to a 12 percent increase in raw materials prices. The auditor should compute the effects of the raw materials price increase and determine the extent to which the price increase explains (or does not explain) the increase in the inventory account.

Long-term debt agreements.

*Type of Evidence*: External *Level of Reliability*: High because it comes from an external party.

Bank statements

*Type of Evidence*: External *Level of Reliability*: High because it comes from an external party.

Vendors' invoices

*Type of Evidence*: External *Level of Reliability*: High because it comes from an external party.

Remittance advices

*Type of Evidence*: External *Level of Reliability*: High to moderate because the document has been circulated to a party outside the entity.

Overhead cost allocation sheets

*Type of Evidence*: Internal *Level of Reliability*: High if internal control is excellent, moderate to low otherwise.

Purchase orders

*Type of Evidence*: Internal *Level of Reliability*: High if internal control is excellent, moderate to low otherwise.

Shipping documents

*Type of Evidence*: Internal *Level of Reliability*: High if internal control is excellent, moderate to low otherwise.

Payroll checks

*Type of Evidence*: Internal *Level of Reliability*: High to moderate because the document has been circulated to a party outside the entity.

Duplicate copies of sales invoices

*Type of Evidence*: Internal *Level of Reliability*: High if internal control is excellent, moderate to low otherwise.

Materials requisition forms

*Type of Evidence*: Internal *Level of Reliability*: High if internal control is excellent, moderate to low otherwise.

Define audit evidence. Provide an example of evidence from accounting records and other information.

-*Audit evidence is the information used by the auditor in arriving at the conclusions on which the audit opinion is based*, and *includes the information contained in the accounting records underlying the financial statements* and other information. -*Accounting records include the records of initial entries and supporting records*, such as checks and records of electronic fund transfers; invoices; journal entries, and other adjustments to the financial statements that are not reflected in formal journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations, and disclosures.

Why is it necessary to obtain corroborating evidence for inquiry and for observation?

-*Corroborating evidence* is obtained for *inquiry and for observation* because these audit procedures typically are *not from independent sources* and therefore are *not considered to be highly reliable*. -For example, the auditor might follow up on the client's responses concerning the internal controls over the raw-material storeroom by conducting tests of the control procedures (corroborating evidence) to verify their existence and effectiveness.

In a situation that uses inspection of records and documents as a type of evidence, distinguish between vouching and tracing in terms of the direction of testing and the assertions being tested.

-*Vouching* refers to *first selecting an item for testing* from the accounting journals or ledgers and *then examining the underlying source document*. -Thus, the direction of testing is *from the journals or ledgers back to the source documents.* -Vouching *provides evidence that items included in the accounting journals or ledgers have occurred* (occurrence; are *valid).* -*Tracing* refers to *first selecting an accounting transaction* (a source document) and *then following it into the journal or ledger.* -The direction of testing in this case is *from the source documents to the journals or ledgers* and *tests whether transactions that occurred are recorded* (*completeness*) in the accounting records.

One of the allegations in a recent fraud was that confirmations of account balances to various banks were determined to be forgeries. Auditing standards state that "an audit rarely involves the authentication of documentation, nor is the auditor trained as or expected to be an expert in such authentication." What steps could the auditors have taken to ensure that bank confirmations were reliable?

-AU 500 indicates that even when audit evidence is obtained from sources external to the entity, *circumstances may exist that affect its reliability* -All responses carry some risk of interception, alteration, or fraud. -The auditor's consideration of the reliability of the information obtained through the confirmation process to be used as audit evidence includes consideration of the risks that: (a) the information obtained may not be from an authentic source, (b) a respondent may not be knowledgeable about the information to be confirmed, (c) the integrity of the information may have been compromised. -One of the most important steps is to *ensure that the confirmation process is adequately controlled*. -The auditor is required by AU 500 to determine whether to modify or add procedures to resolve doubts over the reliability of information to be used as audit evidence. -The auditor may choose to verify the source and contents of a response to a confirmation request by contacting the confirming party.

Corroboration

-Auditors must *corroborate explanations* for unexpected differences by *obtaining sufficient competent audit evidence linking the explanation to the difference* and *substantiating that the information supporting the explanation is reliable.* -This evidence should be of the *same quality as the evidence obtained to support tests of details*. -Common corroborating procedures include examination of supporting evidence, inquiries of independent persons, and evaluating evidence obtained from other auditing procedures.

For *occurance*, indicate an example of a misstatement that could occur for revenue transactions.

-Fictitious revenue. -Revenue recorded, goods not shipped, or services not performed.

Explain why the auditor divides the financial statements into components or segments in order to test management's assertions.

-In order to *make the audit more manageable*. -A *component* can be a financial statement *account* or a *business (transaction cycle) process.* -This approach allows the auditor to gather evidence by *examining the processing of related transactions* through the accounting system *from their origin to their ultimate disposition* in the accounting journals and ledgers. -Thus, the auditor can *examine an accounting transaction from the time it is initiated* by the entity *until its final recording* in the financial statement accounts.

Why are indexing and cross-referencing important to the documentation of audit working papers?

-It is important that the audit documentation or working papers be organized or indexed in such a way that *members of the audit team or firm can find relevant audit evidence*. -When the auditor performs audit work on one working paper and supporting information is obtained from another working paper, *the auditor cross-references the information on each working paper*. -This process of indexing and cross-referencing *provides a trail from the financial statements to the individual working papers that can be easily followed* by members of the audit team or firm. -Today, "linking" the information using electronic working papers facilitates much of this cross-referencing.

For *accuracy*, indicate an example of a misstatement that could occur for revenue transactions.

-Revenue transaction recorded at an incorrect dollar amount. -Revenue transactions not posted correctly to the sales journal or customers' accounts in accounts receivable subsidiary ledger. -Amounts from sales journal not posted correctly to general ledger.

How do management assertions relate to the financial statements?

-The *financial statements contain management's assertions about the various financial statement components.* -The auditor tests management's assertions by *conducting audit procedures* that provide evidence on whether each *relevant assertion is supported*. -The results from applying audit procedures *provide the evidence that supports the fair presentation* of management's assertions and the auditor's report

What does reliability of evidence mean? What types of audit evidence are typically more reliable ?

-The *reliability of evidence* refers to whether a particular type of evidence can be relied upon to signal the *true state of an assertion*. The reliability of evidence is influenced by its source and by its nature and is dependent on the individual circumstances under which it is obtained: 1. Independent source outside the entity. 2. Effectiveness of internal control. 3. Auditor's direct personal knowledge. 4. Documentary evidence. 5. Original documents.

Indicate whether the first or second type of evidence is more reliable. Provide a rationale for your choice: A bank confirmation versus observation of the segregation of duties between cash receipts and recording payment in the accounts receivable subsidiary ledger.

-The bank confirmation would be considered more reliable than the observation of segregation of duties because an independent external party provided the information. -Observation is not as reliable because the individuals performing the functions may act differently when someone is observing them.

Indicate whether the first or second type of evidence is more reliable. Provide a rationale for your choice: Physical inspection of common stock certificates held for investment versus physical examination of inventory components for a personal computer.

-The examination of the common stock certificates would generally be considered more reliable than a physical examination of inventory components for a personal computer because the stock certificates are prepared by an entity external to the client. -Additionally, the auditor may not be able to easily determine the quality or value of the computer components.

In applying "precision of the expectation" to an analytical procedure, how might an auditor calculate a tolerable difference?

-The second step in the substantive analytical procedures decision process is to *define or calculate a tolerable difference.* -Since the expectation developed by the auditor will *rarely be identical to the client's recorded amount*, the auditor must decide the amount of difference that would require *further investigation.* -The size of the tolerable difference depends on the significance of the account, the desired degree of reliance on the analytical procedure, the level of disaggregation in the amount being tested, and the precision of the expectation. -Auditors often use rules of thumb such as, *"tolerable difference is 10% of the predicted amount,"* OR *"5 percent of the entity's recorded amount, but not to exceed tolerable misstatement."*

Consider the "assurance bucket" analogy. Why are some of the buckets larger than others for particular assertions or accounts?

-The size of the assurance bucket can vary, *depending on the auditor's risk assessment* and the assertion being tested. -Obviously, *certain assertions will be more important or present bigger risks for some accounts than for others*. -For instance, existence (or validity) is typically more important for accounts receivable than it is for accounts payable. -After the auditor has determined the risks associated with the assertions for an account balance, s/he can determine the size of the assurance buckets (i.e., how much assurance is needed) and then begin filling the buckets by applying the "audit testing hierarchy."

Why does the "audit testing hierarchy" begin with tests of controls and substantive analytical procedures?

1. *Applying the audit testing hierarchy is more effective*: The auditor's understanding and testing of controls *influence the scope (nature, timing, and extent) of substantive testing* and *enhance the auditor's ability to hone in on areas where misstatements are more likely to be found*. If controls are highly effective, less extensive substantive procedures (i.e., substantive analytical procedures and tests of details) will need to be performed. 2. *Applying the audit testing hierarchy is more efficient*: Generally, tests of controls and substantive analytical procedures are *less costly* to perform than are tests of details. This is usually because tests of controls and substantive analytical procedures *provide assurance on multiple transactions*. In other words, by testing controls and related processes, the auditor generally gains a degree of assurance over thousands or even millions of transactions.

Discuss the *audit procedures* that obtain *high relative reliability*

1. *Inspection of tangible assets* 2. *Reperformance* 3. *Recalculation* Considered of high reliability because the auditor has *direct knowledge about them.*

Assertions about presentation and disclosure:

1. *Occurrence and rights and obligations*—disclosed events, transactions, and other matters have occurred and pertain to the entity. 2. *Completeness*—all disclosures that should have been included in the financial statements have been included. 3. *Classification and understandability*—financial information is appropriately presented and described, and disclosures are clearly expressed. 4. *Accuracy and valuation*—financial and other information is disclosed fairly and in appropriate amounts.

Examples of Expectations Formed by Analytical Procedures

1. Comparison of Current-Year Financial Information with Comparable Prior Period(s) after Consideration of Known Changes. 2. Comparison of Current-Year Financial Information with Budgets, Projections, and Forecasts. 3. Relationships among Elements of Financial Information within the Current Period. 4. Comparison of the Entity's Financial Information with Industry Data. 5. Relationships of Financial Information to Nonfinancial Information. 6. Plotting Trends over Multiple Periods.

List the audit procedures for *obtaining audit evidence.*

1. Inspection of records or documents 2. Inspection of tangible assets 3. Observation 4. Inquiry 5. Confirmation 6. Recalculation 7. Reperformance 8. Analytical procedures 9. Scanning

List the *assertions about classes of transactions and events* for the period under audit. (OCACAC)

1. Occurrence 2. Completeness 3. Authorization 4. Accuracy 5. Cutoff 6. Classification

Significant differences between the auditor's expectation and the entity's book value require explanation through

1. Quantification 2. Corroboration 3. Evaluation

The *current file* of the auditor's working papers should generally include a. A flowchart of the accounting system. b. Organization charts. c. A copy of the financial statements. d. Copies of bond and note indentures.

A copy of the financial statements.

Completeness

All transactions and events that *should have been recorded have been recorded*

Existence

Assets, liabilities, and equity interests *exist*.

Valuation and Allocation

Assets, liabilities, and equity interests are included in the financial statements at *appropriate amounts* and any resulting valuation or allocation *adjustments are recorded appropriately.*

The primary objective of final analytical procedures is to a. Obtain evidence from details tested to corroborate particular assertions. b. Identify areas that represent specific risks relevant to the audit. c. Assist the auditor in assessing the validity of the conclusions reached on the audit. d. Satisfy doubts when questions arise about an entity's ability to continue in existence.

Assist the auditor in assessing the validity of the conclusions reached on the audit.

Inquiry

Consists of seeking information of knowledgeable persons, both financial and nonfinancial, within the entity or outside the entity.

Activity Ratios

Indicate *how effectively the entity's assets are managed.*

Profitability Ratios

Indicators of the *entity's success or failure* for a given period.

Short-Term Liquidity Ratios

Indicators of the entity's ability to *meet its current obligations* when they become due.

An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n) a. Lead schedule. b. Supporting schedule. c. Audit control account. d. Working trial balance.

Lead schedule.

Provide an example of evidence from accounting records and other information.

Many times the entries in the accounting records are initiated, recorded, processed, and reported in electronic form. Other information is *audit evidence that includes*: -minutes of meetings; -confirmations from third parties; -industry analysts' reports; -comparable data about competitors (benchmarking); -controls manuals; -information obtained by the auditor from such audit procedures as inquiry, observation, and inspection; and -other information developed by, or available to, the auditor that permits the auditor to reach conclusions through valid reasoning.

The *permanent file* section of the working papers that is kept for each audit client *most* likely contains a. Review notes pertaining to questions and comments regarding the audit work performed. b. A schedule of time spent on the engagement by each individual auditor. c. Correspondence with the entity's legal counsel concerning pending litigation. d. Narrative descriptions of the entity's accounting system and control procedures.

Narrative descriptions of the entity's accounting system and control procedures.

An auditor would be *least* likely to use confirmations in connection with the examination of a. Inventory held in a third-party warehouse. b. Refundable income taxes. c. Long-term debt. d. Stockholders' equity.

Refundable income taxes.

For *cutoff*, indicate an example of a misstatement that could occur for revenue transactions.

Revenue transactions recorded in the wrong period.

The assets are the rights of the entity, and the liabilities are its obligations.

Rights and obligations

Indicate whether the first or second type of evidence is more reliable. Provide a rationale for your choice: An auditor's recalculation of depreciation versus examination of raw material requisitions.

The auditor's recalculation of depreciation is more reliable than the examination of the raw material requisitions because the auditor has direct personal knowledge of the outcome.

Indicate whether the first or second type of evidence is more reliable. Provide a rationale for your choice: A bank statement included in the entity's records versus shipping documents.

The bank statement would be considered more reliable than shipping documents because the bank statement was prepared by an entity that is external to the client.

Rights and Obligations

The entity holds or *controls the rights to assets*, and *liabilities are the obligations* of the entity.

The substantive analytical procedure known as trend analysis is *best* described by a. The comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data. b. Development of a model to form an expectation using financial data, nonfinancial data, or both to test account balances or changes in account balances between accounting periods. c. The examination of changes in an account over time. d. The comparison of common-size financial statements over time.

The examination of changes in an account over time.

List the factors that affect the reliability of confirmations.

The reliability of evidence obtained through confirmations is directly affected by factors such as: 1. The form of the confirmation. 2. Prior experience with the entity. 3. The nature of the information being confirmed. 4. The intended respondent. There are two types of confirmation requests: *(1) the positive form and (2) the negative form.* -Positive confirmations are generally considered more reliable because the respondent must reply to the requested information. -A nonresponse to a negative confirmation is assumed to be correct. -Prior experience with the client in terms of confirmation response rates, misstatements identified, and the accuracy of returned 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.

Scanning

The review of accounting data to identify significant or unusual items.

Assets, liabilities, equity, revenues, and expenses are appropriately valued and are allocated to the proper accounting period.

Valuation or allocation

Which of the following presumptions is *least* likely to relate to the reliability of audit evidence? a. The more effective internal control, the more assurance it provides about the accounting data and financial statements. b. An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost. c. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity d. The independent auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.

b. An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost.

Which of the following procedures would an auditor *most* likely rely on to verify management's assertion of completeness? a. Reviewing standard bank confirmations for indications of cash manipulations. b. Comparing a sample of shipping documents to related sales invoices. c. Observing the entity's distribution of payroll checks. d. Confirming a sample of recorded receivables by direct communication with the debtors.

b. Comparing a sample of shipping documents to related sales invoices.

Which of the following statements concerning audit evidence is *correct*? a. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. b. The measure of the reliability of audit evidence lies in the auditor's judgment. c. The difficulty and expense of obtaining audit evidence concerning an account balance are a valid basis for omitting the test. d. An entity's general ledger may be sufficient audit evidence to support the financial statements.

b. The measure of the reliability of audit evidence lies in the auditor's judgment.