Audit Procedures for Obtaining Audit Evidence Evidence Gathering Techniques. An auditor obtains audit evidence by one or

Fantastic news! We've Found the answer you've been seeking!

Question:

Audit Procedures for Obtaining Audit Evidence

Evidence Gathering Techniques. An auditor obtains audit evidence by one or more of the following evidence gathering techniques: inquiry, observation, inspection, reperformance, recalculation, confirmation, and analytical procedures.

Required :

For each of the evidence gathering technique give an example of a substantive test procedure.

10.19 Inquiry, Analytical Procedures, and Observation. In the examination of financial statements, auditors must judge the validity of the audit evidence they obtain. For the following questions, assume that the auditors have considered internal control and found it satisfactory.

Required :

A. In the course of examination, the auditors ask many questions of client officers and employees.

1 Describe the factors that the auditors should consider in evaluating oral evidence provided by client officers and employees.

2 Discuss the validity and limitations of oral evidence.

B. Analytical procedures include the computation of various balance sheet and operating ratios for comparison to prior years and industry averages. Discuss the validity and limitations of ratio analysis as evidential matter.

C. In connection with an examination of the financial statements of a manufacturing company, the auditors are observing the physical inventory of finished goods, which consists of expensive, highly complex electronic equipment. Discuss the validity and limitations of the audit evidence provided by this procedure.

10.20 Inspection. Discuss what you would accept as satisfactory documentary evidence in support of entries in the following?

A. Sales journal.

B. Sales returns register.

C. Voucher or invoice register. D. Payroll register.

E. Check register.

10.21 Accounts Receivable Confirmations Positive and Negative. In work on accounts receivable, use of confirmations is of great importance.

A. What is an audit confirmation?

B. What characteristics should an audit confirmation possess if an auditor is to consider it as sufficient appropriate audit evidence?

C. Distinguish between a positive and a negative accounts receivable confirmation.

D. In confirming a clients accounts receivable, what characteristics should be present in the accounts if the auditor is to use negative confirmations?

10.22 Attendance at Physical Inventory Counting. A processor of frozen foods carries an inventory of finished products consisting of 50 different types of items valued at approximately $2,000,000. About $750,000 of this value represents stock produced by the company and billed to customers prior to the audit date. This stock is being held for the customers at a monthly rental charge until they request shipment and is not separate from the company's inventory.

The company maintains separate perpetual ledgers at the plant office for both stock owned and stock being held for customers. The cost department also maintains a perpetual record of stock owned. The above perpetual records reflect quantities only.

The company does not take a complete physical inventory at any time during the year, since the temperature in the cold storage facilities is too low to allow one to spend more than 15 minutes inside at a time. It is not considered practical to move items outside or to refreeze the cold storage facilities for the purpose of taking a physical inventory. Because of these circumstances, it is impractical to test count quantities to the extent of completely counting specific items. The company considers as its inventory valuation at year-end the aggregate of the quantities reflected by the perpetual record of stock owned, maintained at the plant office, priced at the lower of cost or market.

Required :

A. What are the two principal problems facing the auditor in the audit of the inventory?

Discuss briefly.

B. Outline the audit steps that you would take to enable you to render an unqualified opinion with respect to the inventory. (You may omit consideration of tests of unit prices and clerical accuracy.)