Joyce Cover, CPA, was engaged to audit the financial statements of Extensive, Inc., a first time audit client, for the year ended December 31, 19X6. The assessment of control risk was conducted during the late fall of 19X6 and, with the exception of accounts receivable and sales, control risk was assessed at a low level. Extensive, Inc. compiled the following financial statement data as of December 31, 19X6 and for the year 19X6.

Required:

a. On which of the above accounts would evidence be obtained through (1) Inspection?
(2) Observation?
(3) Inquiry?
(4) Confirmation?
(The same account may be listed more than once. Give reasons for your listings.)

b. On which of the above accounts could evidence be obtained from independent outside sources? Name the independent outside sources for each listed account.

c. On which accounts would the evidence gathered be affected by the high level of control risk? Give reasons for your answers.

d. On which accounts is the evidence gathered likely to be most persuasive? Least persuasive? Give reasons for your answers.

e. On which accounts is the cost of obtaining evidence likely to be the highest? The lowest? Give reasons for your answers.

f. On which accounts is the evaluation of evidence likely to be the most subjective? The least subjective? Give reasons for your answers.

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Sales Cost of goods sold Gross margin Operating expenses: Salaries Depreciation Uncollectible accounts $ 60,000 10,000 20,000 Commissions Supplies Travel Miscellaneous Net income before tax Income tax expense Net income Current assets: Cash Marketable securities Accounts receivable (net of allowance for doubtful accounts of $22,000) Inventory Long-term assets: Equipment Less: Accumulated depreciation Other assets Total assets $800,000 500,000 $300,000 8,000 12,000 15,000 15,000 170,000 $130.000 60,000 70.000 Assets $ 2.000 5.000 78.000 50,000 $135.000 $200,000 80,000 120,000 17.000 $272.000 Liabilities and Equities