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AC516 Navarro, Ma. Christie M.

January 14, 2013

BSMA-3

MW 9:00-12:00am

REVIEW QUESTIONS:
9. Required: A. What are the purposes or primary functions of audit documentation? The following are the more specific purposes of audit documentation:

Assisting auditors to plan and perform the audit; Assisting those responsible to direct, supervise, and review the work performed; Providing and demonstrating the accountability of those performing the work (i.e., compliance with applicable standards); Assisting quality-control reviewers to understand and assess how the engagement team reached and supported significant conclusions; Enabling internal and external inspection teams and peer reviewers to assess compliance with professional, legal, and regulatory standards and requirements; and Assisting successor auditors.

B. Who owns the documentation, the auditor or the client? The auditors provide auditing services in their capacity as principal, not agent: hence, working papers are the property of the auditors and clients have no rights to demand access. C. What important planning information might an auditor learn when reviewing the prior-year audit documentation of a client? A review of prior year documentation can provide important information that can be used in the current years audit engagement. Some of the information that might be obtained includes: 1. Major adjustments as a result of the audit representing areas of misstatement and therefore providing some indication of audit risk. 2. Time budget and actual time spent by audit area providing information on overall allocation of audit time and areas that demanded additional time because of problems encountered in the audit. 3. Assessment of control risk and major deficiencies in the client's overall control structure. The existence of control risk provides input in determining whether the audit should focus primarily on minimizing

AC516 Navarro, Ma. Christie M. January 14, 2013

BSMA-3

MW 9:00-12:00am

detection risk, and thus developing procedures consistent with this assessment. 4. Previous audit personnel's encountered in the audit. assessment of risks and problems

5. Identification of potential adjustments not made. The auditor may choose not to make some adjustments to the financial statements because the amounts are not material and the client does not wish to have the adjustments recorded. However, some of these misstatements, when coupled with current period misstatements, could amount to material misstatements on the income statement. The auditor should consider both beginning and end-of-period misstatements in determining potential materiality. 6. Other items of continuing audit significance, some of which are identified in the permanent file, others in memos by audit executive personnel.

EXERCISES:
1. Testimonial Evidence: A. Confirmation is received from customers as to the balance of accounts receivable shown by the client. 2 Corroborative Evidence B. Management is optimistic that all items in a product line will be sold at normal prices in spite of a temporary downturn in sales. 1 Alternative Source of Evidence C. Management intends to hold investments in marketable securities with an intent to convert cash needed arise. 1 Alternative Source of Evidence D. Management tells the auditor that the Bureau of Food and Drugs has approved its new drug for commercial sale. 2 Corroborative Evidence

AC516 Navarro, Ma. Christie M. January 14, 2013

BSMA-3

MW 9:00-12:00am

E. The auditor interviews the production manager, who candidly identifies quality-control problems and points out substantial pieces of inventory that should be reworked before shipment. 1 Alternative Source of Evidence 2. A. Bank statement 5 Audit evidence is more reliable when it is obtained from independent sources outside the entity. B. Board of director minutes signed by the corporate secretary 8 Evidence created by the client. C. Canceled check 6 Audit evidence is more reliable when it is obtained from independent sources outside the entity.

D. Client-prepared depreciation worksheet 10 Evidence created by the client. E. Client-prepared inventory count sheet 11 Evidence created by the client. F. Client-prepared purchase order for merchandise 12 Evidence created by the client. G. Client-prepared receiving report from merchandise 13 Evidence created by the client. H. Copy of client articles of incorporation 16 Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies and facsimiles. I. Copy of client sales invoice 17 Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies and facsimiles.

AC516 Navarro, Ma. Christie M. January 14, 2013

BSMA-3

MW 9:00-12:00am

J. Cut-off bank statement received directly by the auditor 1 Direct evidence. K. Journal entry to correct an account classification 9 Evidence created by the client. L. Oral client representation 15 Audit evidence is more reliable when it exists in documentary form. M. Positive accounts receivable confirmation 4 Audit evidence is more reliable when it is obtained from independent sources outside the entity . N. Representation letter from clients attorney 2 Evidence received directly from external sources. O. Request for travel advance 7 Evidence created by the client. P. Vendor invoice for merchandise purchased 3 Evidence created by external sources but received from the client. Q. Written client representations 14 Audit evidence is more reliable when it exists in documentary form.

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