CPA EXAMINATION ON AUDIT EVIDENCE

The following are examples of documentation typically obtained by auditors:

1. Vendors’ invoices (eks)

2. General ledger files (int)
3. Bank statements (eks)
4. Cancelled payroll checks (int)
5. Payroll time records (int)
6. Purchase requisitions (int)
7. Receiving reports (documents prepared when merchandise is received) (int)
8. Minutes of the board of directors (it)
9. Remittance advices (eks)
10. Signed W-4s (Employee’s Withholding Exemption Certificates) (int)
11. Signed lease agreements (ekst)
12. Duplicate copies of bills of lading (ekst)
13. Subsidiary accounts receivable records (int)
14. Cancelled notes payable (ekst)
15. Duplicate sales invoices (int)
16. Articles of incorporation (int)
17. Title insurance policies for real estate (eks)
18. Notes receivable (int)

Required:

a. Classify each of the preceding items according to type of documentation: (1) internal or (2) external.
b. Explain why external evidence is more reliable than internal evidence.
CPA EXAMINATION ON AUDIT EVIDENCE

The following are examples of audit procedures:

1. Review the accounts receivable with the credit manager to evaluate their collectibility. (5)
2. Compare a duplicate sales invoice with the sales journal for customer name and amount. (3)
3. Add the sales journal entries to determine whether they were correctly totaled. (6)
4. Count inventory items and record the amount in the audit files. (1)
5. Obtain a letter from the client’s attorney addressed to the CPA firm stating that the attorney is
not aware of any existing lawsuits. (2)
6. Extend the cost of inventory times the quantity on an inventory listing to test whether it is
accurate. (6)
7. Obtain a letter from an insurance company to the CPA firm stating the amount of the fire
insurance coverage on buildings and equipment. (2)
8. Examine an insurance policy stating the amount of the fire insurance coverage on buildings and
equipment. (3)
9. Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross
margin relative to the preceding year.(4)
10. Obtain information about internal control by requesting the client to fill out a questionnaire. (5)
11. Trace the total in the cash disbursements journal to the general ledger. (7)
12. Watch employees count inventory to determine whether company procedures are being
followed. (8)
13. Examine a piece of equipment to make sure that a major acquisition was actually received and
is in operation. (8)
14. Calculate the ratio of sales commission expense to sales as a test of sales commissions. (4)
15. Examine corporate minutes to determine the authorization of the issue of bonds. (3)
16. Obtain a letter from management stating that there are no unrecorded liabilities. (5)
17. Review the total of repairs and maintenance for each month to determine whether any month’s
total was unusually large. (3)
18. Obtain a written statement from a bank stating that the client has $15,671 on deposit and
liabilities of $500,000 on a demand note. (2)

Required:

Classify each of the preceding items according to the eight types of audit evidence: (1) physical
examination, (2) confirmation, (3) documentation, (4) analytical procedures, (5) inquiries of the client,
(6) recalculation, (7) reperformance, and (8) observation.