CHAPTER 13

AUDIT EVIDENCE

I. Review Questions

1. Refer to page 494, 2nd and 4th paragraphs of the textbook.

2. Refer to page 494, 3rd paragraph of the textbook.

3. Refer to page 496, 3rd paragraph of the textbook.

4. Refer to page 497, 1st paragraph of the textbook.

5. Refer to page 497, 2nd paragraph of the textbook.

6. Refer to page 498, 4th paragraph of the textbook.

7. External documentary evidence is evidential matter obtained from the other

party to an arm’s-length transaction or from outside independent agencies.
External evidence reaches the auditor directly and does not pass through the
hands of the client.

External-internal documentary evidence is documentary material that originates

outside the bounds of the client’s data processing system but which has been
received and processed by the client.

Internal documentary evidence consists of documentary material that is

produced, circulates, and is finally stored within the client’s information system.
Such evidence is not touched by outside parties at all or is several steps removed
from third-party attention.

8. Auditors can help the effectiveness of confirmation requests by:

a. Having the confirmation letters printed on the client’s letterhead and signed
by a client officer.
b. Being careful to be assured of reliable addresses for recipients; that is, being
assured that the confirmations are not misdirected (for example, to a client’s
accomplices in fraud).
c. Asking confirmation of information that recipient can supply, like the
amount of a balance or the amounts of specified invoices or notes (not the
balances of homeowners’ mortgages or financial amounts, like certificates
13-2 Solutions Manual - Principles of Auditing and Other Assurance
Services
of deposit with accrued interest, for which people usually do not keep their
own accounting records).
d. Controlling the mailing and return of confirmations so the client cannot
tamper with them.
e. Receiving the reply directly, so the client cannot intercept and alter them.

9. Factual evidence is direct evidence, in that conclusions may be drawn from the
evidence without further corroboration. An example of factual audit evidence is
physical observation of inventory for existence. Inferential evidence is indirect,
in that direct conclusions cannot be drawn from the evidence. The auditor
typically examines other evidence to further corroborate the inferences drawn.
An oral statement by a product manager that one or more products are fully
saleable and not obsolete is an example of inferential evidence. The auditor may
perform inventory turnover tests and/or determine the date of last sale of the
product to further corroborate the product manager’s statement.

10. Sufficiency of audit evidence is a matter of audit judgment. Materiality and the
quality of internal control are important ingredients in determining sufficiency.
If internal control produces over sales processing and cash receipts, for example,
are effective, the auditor may elect to confirm fewer customers’ accounts
receivables than under conditions of weak internal control.

11. Physical evidence tests the existence assertion. Examples of physical evidence
are inventory observation, examination of securities, inspection of plant asset
additions, and count of cash on hand.

12. The quality of existing internal control is the major factor supporting the
strength of documentary evidence. A voucher produced under conditions of
strong internal control over the processing of vendors’ invoices, for example,
possesses greater validity and is therefore stronger evidence than vouchers
produced under weak control conditions.

13. Auditing standards define an accounting estimate as “an approximation of a

financial statement element, item or amount.” Estimates are used because (1) an
amount is uncertain pending specific future events or (2) relevant data cannot be
accumulated on a timely, cost-effective basis. Examples of accounting estimates
include allowance for uncollectible accounts, obsolete inventory, useful lives
and residual values of fixed assets, natural resources and intangibles, accruals
for taxes on real and personal property, accruals based on actual assumptions in
pension plans, contract revenue using percentage of completion method,
litigation losses, fair values in nonmonetary exchanges, and current values in
personal financial statements.

14. In evaluating the reasonableness of accounting estimates, an auditor should

consider the internal controls related to the estimates in order to reduce the
 Audit Evidence 13-3
likelihood of material misstatements in the estimates, whether the accounting
estimates are reasonable given the situation, and whether the accounting
estimates are presented in accordance with appropriate accounting principles.

15. Evidence is persuasive if the auditor considers the evidence to be sufficient and
competent enough to afford a reasonable basis for an opinion.

II. Multiple Choice Questions

1. d 4. c 7. d 10. d 13. b
2. d 5. a 8. b 11. a
3. c 6. d 9. d 12. b

III. Comprehensive Cases

Case 1. a. Evidential matter obtained from independent sources outside an

enterprise provides greater assurance of reliability (competency) than that
which is secured solely within the enterprise.

b. Accounting data and financial statements developed under satisfactory

conditions of internal control are more reliable (competent) than those
which are developed under unsatisfactory conditions of internal control.

c. Direct personal knowledge obtained by the independent auditor through

physical examination, observation, computation, and inspection is more
persuasive than information obtained indirectly.

Case 2. 1. Types of evidence

Evidential items/sources in reliability rank

d. Letter from creditor 1. External
a. Monthly statements 2. External-internal
b. Voucher register 3. Internal
c. Audit computation of discounts 4. Mathematical (based on
unaudited data)

2.
c. Audit computation of expense 1. Mathematical (based on
amounts unaudited data)
a. Letter from bond trustee 2. External
d. Cancelled checks 3. External-internal
b. Minutes of directors’ meetings 4. Internal
13-4 Solutions Manual - Principles of Auditing and Other Assurance
Services