Question

PART A

          Every audit procedure obtains one or more of the following types of      

           evidence:    

1. PHYSICAL EXAMINATION
2. CONFIRMATION
3. INSPECTION /DOCUMENTATION
4. ANALYTICAL PROCEDURES
5. INQUIRES OF CLIENT
6. RECALCULATION
7. REPERFORMANCE
8. OBSERVATION

For each of the following audit procedures, classify each according to the eight types of audit evidence above   

1. Inquire of management whether there is any obsolete inventory on hand at the balance sheet date
2. Examine a sample of vendor’s invoices to determine whether the goods or services received are reasonable and of the type normally used by the client’s business
3. Re-compute the unit sale price times the number of units for a sample of duplicate sales invoices and compare the totals with the calculation
4. Count a sample of 100 inventory items and compare quantity and description to client’s accounts
5. Obtain a letter from the client’s attorney addressed to the CPA firm stating the attorney is not aware of any existing lawsuits
6. Add the sales journal entries to determined whether they were correctly totaled
7. Read the minutes of a Board of Directors’ meeting and summarize all information that is pertinent to the financial statements in an audit file
8. Compute inventory turnover ratios and compare with those of previous years as a test of inventory obsolescence
9. Examine an insurance policy stating the amount of fire insurance coverage on buildings and equipment
10. Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross margin relative to the preceding year
11. Observe whether the two inventory count teams independently count and record inventory counts
12. Foot the sales journal for a one-month period and compare all totals with the general ledger                                   
13. Vouch a sample of recorded acquisition transactions to vendors’ invoices and receiving reports
14. Examine corporate minutes to determine the authorization of the issue of bonds
15. Review the total of repairs and maintenance for each month to determine whether any month’s total was unusually large

Answer 1

Type of Audit Evidence	Audit Procedure
Physical Examination	Count a sample of 100 inventory items and compare quantity and description to client’s accounts
Confirmation	Obtain a letter from the client’s attorney addressed to the CPA firm stating the attorney is not aware of any existing lawsuits
Inspection Documentation	Examine a sample of vendor’s invoices to determine whether the goods or services received are reasonable and of the type normally used by the client’s business
	Read the minutes of a Board of Directors’ meeting and summarize all information that is pertinent to the financial statements in an audit file
	Examine an insurance policy stating the amount of fire insurance coverage on buildings and equipment
	Examine corporate minutes to determine the authorization of the issue of bonds
Analytical Procedures	Compute inventory turnover ratios and compare with those of previous years as a test of inventory obsolescence
	Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross margin relative to the preceding year
	Review the total of repairs and maintenance for each month to determine whether any month’s total was unusually large
Inquiries of Client	Inquire of management whether there is any obsolete inventory on hand at the balance sheet date
Recalculation	Re-compute the unit sale price times the number of units for a sample of duplicate sales invoices and compare the totals with the calculation
	Add the sales journal entries to determined whether they were correctly totaled
Reperformance	Count a sample of 100 inventory items and compare quantity and description to client’s accounts
	Foot the sales journal for a one-month period and compare all totals with the general ledger
Observation	Observe whether the two inventory count teams independently count and record inventory counts