7-27 (continued)
ACCOUNT
NAME
FROM WHOM
CONFIRMED
INFORMATION
TO BE CONFIRMED
NOTES
RECEIVABLE
A selected sample of
notes receivable
outstanding at the
balance sheet date.
If a note receivable was
written off during the
year, the balance written
off should be confirmed.
Name and address of the debtor.
Date of the note.
Due date.
Unpaid balance at balance sheet date.
Payment arrangements.
Interest rate.
Date of last interest payment.
Collateral, if any, to secure the note.
INVENTORIES
Public warehouses or
other outside custodians
(if any).
Name and address of public
warehouse or other outside
custodian.
The inventory date.
Detailed lists of inventory stored.
Under auditing standards, direct
confirmation is acceptable provided
supplemental inquiries are made that
the inventory is the property of the
company, unless the amount is a
significant percent of current or total
assets.
TRADE
ACCOUNTS
PAYABLE
Suppliers from whom
substantial purchases
have been made during
the year, regardless of
the balances of their
accounts at the balance
sheet date.
Name and address of the supplier.
The amount due and the amount of
any purchase commitments as of
the balance sheet date. When
internal controls are considered
effective, the confirmation can be at
an interim date; however, a
thorough review must then be made
of changes in the major accounts
the balance sheet date rather than send
an accounts payable confirmation.
7-27 (continued)
ACCOUNT
NAME
FROM WHOM
CONFIRMED
INFORMATION
TO BE CONFIRMED
MORTGAGES
PAYABLE
Mortgagee for each
mortgage that has a
balance at the balance
sheet date.
Name and address of mortgagee.
Original amount.
Date of note.
Maturity date.
Balance due at balance sheet date.
Payment arrangements.
Interest rate.
Interest payment dates.
Date of last interest payment.
Nature of defaults and if any events
of default are known to mortgagee.
Location of mortgaged property.
CAPITAL
STOCK
If Star uses an outside
transfer agent and
registrar, confirmations
should be sent to both.
Name and address of transfer agent
and registrar.
Number of shares of common stock
authorized, issued, outstanding, and
held as treasury shares for the
company as of the balance sheet
date.
LEGAL FEES
All of Star’s major
attorneys. Letters should
also be sent to attorneys
that the independent
auditor knows the client
has used extensively in
prior years.
The auditor should request a letter from
each attorney as to litigation being
handled as of and subsequent to the
balance sheet date. For each case, the
attorney should give a description, report
on its status as of the balance sheet date
and as of the date of the letter, and give
his or her opinion as to the ultimate
liability. The attorney should also state
Star’s indebtedness to him or her as of
the balance sheet date.
SALES AND
EXPENSE
ACCOUNTS
Occasionally, confirmation
may be requested from
an outside party for
individual transactions.
This may be true where a
major item is based on a
formal contract and the
auditor wants
Name and address of outside party.
Other specific information would
depend on the nature of the item and
the reason the auditor believes it is
necessary to confirm the item.
7-13
7-28
AUDIT PROCEDURE
a.
TYPE OF
AUDIT EVIDENCE
b.
TRANSACTION-
RELATED
AUDIT OBJECTIVE
1. Trace from receiving reports to
vendors’ invoices and entry in
the acquisitions journal.
Inspection
Completeness
2. Add the sales journal for the
month of July and trace
amounts to the general ledger.
Recalculation
Posting and
summarization
3. Examine expense voucher
packages and related vendors’
invoices for approval of expense
account classification.
Inspection
Classification
4. Observe opening of cash
receipts to determine that cash
receipts are promptly deposited
and recorded.
Observation
Timing and
Completeness
5. Ask the accounts payable clerk
about procedures for verifying
prices, quantities, and
extensions on vendors’ invoices.
Inquiries of client
Accuracy
6. Vouch entries in sales journal
to sales invoices and related
shipping documents.
Inspection
Occurrence
7-29
AUDIT PROCEDURE
a.
TYPE OF
AUDIT EVIDENCE
b.
BALANCE-
RELATED
AUDIT OBJECTIVE
1. Select a sample of inventory
items in the factory warehouse
and trace each item to the
inventory count sheets to
determine if it has been included
and if the quantity and
description are correct.
Physical examination
Completeness
and Accuracy
2. Trace selected quantities from
the inventory list to the physical
inventory to make sure that it
exists and the quantities are the
same.
Physical examination
Existence and
Accuracy
3. Compare the quantities on hand
and unit prices on this year’s
inventory count sheets with
those in the preceding year as a
test for large differences.
Analytical procedures
Accuracy
4. Test the extension of unit prices
times quantity on the inventory
list for a sample of items, test
foot the list, and compare the
total to the general ledger.
Recalculation
Detail tie-in
5. Send letters directly to third
parties who hold the client’s
inventory, and request they
respond directly to the auditor.
Confirmation
Existence,
Completeness,
and Accuracy
6. Examine sales invoices and
contracts with customers to
determine whether any goods
are out on consignment with
customers. Examine vendors’
invoices and contracts with
vendors to determine if any
goods on the inventory listing
are owned by vendors.
Inspection
Rights
7. Question operating personnel
about the possibility of obsolete
or slow-moving inventory.
Inquiries of the client
Realizable value
7-30 a. The six factors determining the reliability of evidence are:
1. Independence of provider
2. Effectiveness of client’s internal controls
3. Auditor’s direct knowledge
4. Qualifications of individuals providing the information
5. Degree of objectivity
6. Timeliness
b.
and
c.
SITUATION
b.
TYPE OF EVIDENCE
THAT IS MORE RELIABLE
c.
FACTOR
AFFECTING RELIABILITY
1
2
3
4
5
6
7
8
9
Confirmation with business
organizations
Physically examine three-inch
steel plates
Examine documents when
several competent people are
checking each other’s work
Examine inventory of parts for the
number of units on hand
Discuss potential lawsuits with
CPA firm’s legal counsel
Confirm a bank balance
Confirm a bank balance
Physically count the client’s
inventory
Physically count the inventory
Qualifications of provider
Qualifications of provider
(in this case the auditor)
Effectiveness of internal controls
Degree of objectivity
Independence of provider
Degree of objectivity
Independence of provider
Auditor’s direct knowledge
Independence of provider and
auditor’s direct knowledge
7-31
PROCEDURE
a.
APPROPRIATE TERM
b.
TYPE OF EVIDENCE
1
2
3
4
Recompute (e)
Observe (j)
Compute (d)
Foot (f), Trace (g)
Recalculation
Observation
Analytical procedure
Recalculation and reperformance
7-16
7-32 a. The purposes of analytical procedures are:
1. Understanding the client’s business and industry.
2. Assessment of the entity’s ability to continue as a going concern.
financial statements.
4. Reduction of detailed audit tests.
b. Analytical procedures are required in the planning and completion
phases of the audit because of their importance in planning the
c. The extent to which the auditor will use the results of analytical
procedures to reduce detailed tests depends on the effectiveness
of the analytical procedure and whether it supports the correctness
7-33
STATEMENT
RELATED STAGE OF AUDIT
1. Should focus on enhancing the
auditor’s understanding of the
client’s business and the
transactions and events that have
occurred since the last audit date.
a. Planning the audit
2. Should focus on identifying areas
that may represent specific risks
relevant to the audit.
a. Planning the audit
3. Require documentation in the
working papers of the auditor’s
expectation of the ratio or account
balance.
b. Substantive testing
4. Do not result in detection of
misstatements.
d. Statement is not correct concerning
analytical procedures
5. Designed to obtain evidential matter
about particular assertions related to
account balances or classes of
transactions.
b. Substantive testing
6. Generally use data aggregated at a
lower level than the other stages.
b. Substantive testing
7-17
7-33 (continued)
STATEMENT
RELATED STAGE OF AUDIT
7. Should include reading the financial
statements and notes to consider the
adequacy of evidence gathered.
c. Overall review
8. Not required during this stage.
b. Substantive testing
9. Involve reconciliation of confirmation
replies with recorded book amounts.
d. Statement is not correct concerning
analytical procedures
10. Use the preliminary or unadjusted
working trial balance as a source of
data.
a. Planning the audit
7-34 a. The company’s financial position is deteriorating significantly. The
company’s ability to pay its bills is marginal (quick ratio = 0.97), and
its ability to generate cash is weak (days to convert inventory to
cash = 266.7 in 2016 versus 173.8 in 2012). The earnings per share
figure is misleading because it appears stable while the ratio of net
b.
ADDITIONAL INFORMATION
REASON FOR ADDITIONAL INFORMATION
1. Debt repayment
requirements, lease payment
requirements, and preferred
dividend requirements
To project the cash requirements for the next several
years in order to estimate the company’s ability to
meet its obligations.
2. Debt to equity ratio
To see the company’s capital investment and ability of
the company to exist on its present investment.
3. Industry average ratios
To compare the company’s ratios to those of the
average company in its industry to identify possible
problem areas in the company.
7-18
7-34 (continued)
ADDITIONAL INFORMATION
REASON FOR ADDITIONAL INFORMATION
4. Aging of accounts
receivable, bad debt history,
and analysis of allowance for
uncollectible accounts
To see the collection potential and experience in
accounts receivable. To compare the allowance for
uncollectible accounts to the collection experience
and determine the reasonableness of the allowance.
5. Aging of inventory and
history of markdown taken
To compare the age of the inventory to the markdown
experience since the turnover has decreased
significantly. To evaluate the net realizable value of
the inventory.
6. Short- and long-term liquidity
trend ratios
To indicate whether the company may have liquidity
problems within the next five years.
1. Ability of the company to continue to acquire inventory, replace
2. Reasonableness of the allowance for uncollectible accounts
increase in days to collect receivables.
3. Reasonableness of the inventory valuation based on the
4. Computation of the earnings per share figure. It appears