ACCOUNTING
7-44 (Alternative Sources of Evidence) The following situations present the auditor with alternative sources of evidence regarding a particular situation.
Required
a. For each of the following situations, identify the assertion(s) the auditor is most likely testing with the procedure.
b. For each situation, identify which of the two sources presents the most persuasive evidence and briefly indicate the rational for your answer.
Source of Audit Evidence
1. Confirming accounts receivable with business organizations vs. confirming receivables with customers.
2. Visually inspecting an inventory of electronic components vs. performing an inventory turnover and sales analysis by products and product lines.
3. Observing the counting of a client’s year –end physical inventory vs. confirming the inventory held at an independent warehouse b y requesting a confirmation from the owner of the warehouse.
4. Confirming a year-end bank balance with the client’s banking institution vs. reviewing the client’s year-end bank statement vs. having a cut-off bank statement as of January 20 for all activity from December 31 to January 20 sent to the auditor.
5. Observing the client’s inventory composed primarily of sophisticated radar detectors and similar electronic equipment vs. observing the client’s inventory composed primarily of sheet metal.
6. Confirming the client’s year-end bank balance with the bank vs. confirming the potential loss due to a lawsuit with the client’s outside legal counsel.
7. Testing the client’s estimate of warranty liability by obtaining a copy of the client’s spreadsheet used for calculating the liability and determining the accuracy of the spreadsheet’s logic by entering new data into the spreadsheet and independently calculating the result vs. developing an independent spreadsheet and using regressing analysis to develop an independent estimate of the warranty liability using client sales and warranty return data.
8. Reviewing all payments made to vendors and suppliers after year end to determine if they were properly recorded as accounts payable vs. requesting vendor statements at year end for all significant vendors from which the client made purchases during the year.
9. For a financial institution, testing the organization’s controls for recording customer savings deposit, including the existence of an independent department to explore any inquiries by customer vs. confirming year-end savings account balances with customers.
10. For a financial institution, testing the organization’s controls for making and recording loans vs. confirming year-end loan balances directly with customers.
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