Chapter 21: Evaluation of Audit Evidence and Completion of the Audit

Review Questions

1. In the final stage of the risk-based audit process, how shall the engagement partner or
sole practitioner know that sufficient appropriate audit evidence has been obtained to
support the conclusions reached for the auditor’s report to be issued.
In this final phase, the auditor performs the final audit procedures required to obtain
sufficient audit evidence to form the auditor’s opinion. The auditor also reports the audit
findings to the client. By performing the final audit procedures, the auditor is able to
conclude on the audit objectives, form an opinion and report audit findings. Completion
phase procedures may include the following:
 Performs final analytical procedures;
 Reads minutes of recent board and committee meetings; Inquiry of entity’s legal
counsel;
 Inquiry of client to identify commitments and contingencies;
 Makes final materiality judgments;
 Summarizes and evaluates the audit findings;
 Reviews the working papers;
 Reviews the financial statement presentation and disclosures for adequacy;
 Assess appropriateness of management use of going concern assumption;
 Considers subsequent events; and
 Obtains management representation letters.
The above procedures require the exercise of considerable professional judgment and thus
are generally performed by the more senior members of the engagement team.

2. Explain briefly the relevance of the following areas in connection with the final
evaluation of the audit evidence obtained:
a. Materiality - The auditor shall assess whether the amounts established for overall and
performance materiality are still appropriate in the context of the entity’s actual
financial results. If a lower materiality than that initially set is appropriate, the auditor
is required to determine:
i. Whether it is necessary to revise performance materiality; and
ii. Whether the nature, timing and extent of the further audit procedures remain
appropriate.
b. Risk - The auditor shall determine whether in the light of the audit findings the
assessed risks of material misstatement at the assertion level is still appropriate. If not,
the risk assessments would be revised and further planned audit procedures modified.
c. Misstatements - The auditor shall determine the effect in the audit of identified
misstatements and whether there is a need to perform additional audit procedures.
Revisions to the audit strategy and detailed audit plans may be required when:
 The nature of circumstances of identified misstatements indicate that other
misstatement(s) may exist that, when aggregated with known misstatements,
could exceed performance materiality; or
 The aggregate if identified and uncorrected misstatements comes close to or
exceeds performance materiality.
d. Fraud - The auditor through the performance of analytical procedures shall assess
whether previously unrecognized risks of material misstatement due to fraud are
 present. Also, he/she shall determine whether the identified misstatements are
indicatives of fraud.
e. Evidence - The auditor shall determine whether sufficient appropriate evidence has
been obtained to reduce the risks of material misstatement in the financial statements
to an acceptably low level. He/ She shall consider whether there is a need for further
procedures to be performed.
f. Analytical Procedures - The auditor shall assess whether the analytical procedures
performed at the final review stage of the audit:
 Corroborate the audit findings; or
 Identify previously unrecognized risks of material misstatement

3. In what instances will the auditor be required to revise the audit strategy and detailed
audit plans.
The auditor should modify the overall audit strategy and the audit plan as necessary if
circumstances change significantly during the course of the audit, including changes due to
a revised assessment of the risks of material misstatement or the discovery of a previously
unidentified risk of material misstatement.

4. Give and explain briefly at least 8 sources of misstatements of financial statements

items.
1. Related Party Transactions - sometimes involve contracts for goods or services that are
priced at less (or more) favorable terms than those in similar arm's
length transactions between unrelated third parties.
2. Subsequent Events Review - The subsequent events review is an important audit
procedure to be performed up to the date of the auditor’s report. Due to the dynamism of
the businesses environment, the procedures provided in this Practical Guidance are not an
exhaustive list. Auditors need to bear in mind the business environment that the company
is operating in and his/her risk assessment of the company so as to enable him/her to
design and perform the appropriate and adequate audit procedures for subsequent events
review. Auditors also need to ensure that the audit documentation prepared in respect of
the audit procedures performed is in accordance with the requirements in SSA 230(R)
“Audit Documentation”.
3. Letter of Inquiry/review of contingent liabilities - An auditor should never assume
company management has always disclosed all contingent liabilities. This is particularly
true with legal expenses and unsettled taxes. Auditors have the authority to review
all Internal Revenue Service, or IRS, reports for possible undisclosed tax liabilities. All
legal expenses are to be accompanied by supporting documents. An auditor may not
always be a sufficient legal authority on a specific topic to understand the likelihood of
the expense. Also, the legalese may be written to be intentionally obtuse. In such cases,
the auditor can review precedent or consult with an expert before making a ruling on
possible contingencies.
4. Evaluating going concern status - To make your final going-concern assessment, you
reconsider the company's ability to remain in business. To make this evaluation, you
check out negative financial trends and consider the effect that outside events have on the
continuing success of the company.
5. Management representations - letter issued by a client to the auditor in writing as part of
audit evidences. The representations letter must cover all periods encompassed by the
audit report, and must be dated the same date of audit work completion.
6. Perform final analytical procedures – Analytical procedures are performed as an
overall review of the financial statements at the end of the audit to assess whether they are
 consistent with the auditor's understanding of the entity. Final analytical procedures are
not conducted to obtain additional substantive assurance.
7. Review the minutes of stockholders and Board of Directors – Board meeting minutes are
more than a general accounting of board discussions; they serve as an official and
legal record of the meeting of the Board of Directors. Minutes are used in a variety of
ways including tracking progress, detailing future plans, and serving as a reference point.
8. Evaluating findings, formulating an opinion and drafting the audit report - When
completing the audit, the auditor must reconsider materiality and determine a material
amount to be used in evaluating the estimated misstatement in the financial statement. In
evaluating whether the statements are presented fairly, an auditor should aggregate any
uncorrected misstatement to be able to consider them in relation to the financial statement
as a whole. If audit risk increases due to numerous events and conditions while the audit
is being undertaken, the auditor should evaluate whether additional substantive procedures
need to be performed.

5. Give and explain at least 8 factors to consider in evaluating the sufficiency and
appropriateness of audit evidence.
1. Relevance and Reliability - The relevance of audit evidence refers to its relationship to
the assertion or to the objective of the control being tested. The relevance of audit
evidence depends on:
a. The design of the audit procedure used to test the assertion or control, in particular
whether it is designed to (1) test the assertion or control directly and (2) test for
understatement or overstatement; and
b. The timing of the audit procedure used to test the assertion or control.
The reliability of evidence depends on the nature and source of the evidence and the
circumstances under which it is obtained. For example, in general:
 Evidence obtained from a knowledgeable source that is independent of the company
is more reliable than evidence obtained only from internal company sources.
 The reliability of information generated internally by the company is increased when
the company's controls over that information are effective.
 Evidence obtained directly by the auditor is more reliable than evidence obtained
indirectly.
 Evidence provided by original documents is more reliable than evidence provided by
photocopies or facsimiles, or documents that have been filmed, digitized, or otherwise
converted into electronic form, the reliability of which depends on the controls over
the conversion and maintenance of those documents.
2. Materiality of misstatements – Is a misstatement in the assertion being addressed
significant, and what is the likelihood of it having a materially affect (individually or
combined with other potential misstatements) on the financial statements?
3. Management responses – Is management responsive to audit findings, and how effective
is the internal control in addressing risk factors?
4. Quality of information – Are the sources of available information reliable and appropriate
for supporting the audit conclusions?
5. Persuasiveness – Is the audit evidence persuasive or convincing?
6. Previous experience – What has been the previous experience in performing similar
procedures, and were any misstatements identified?
7. Results of performed audit procedures – Do the results of performed audit procedures
support the objectives, and is there any indication of fraud or error?
 8. Understanding the entity – do the evidences obtained support or contradict the results of
the risk assessment procedures (which were performed to obtain an understanding of the
entity and its environment, including internal control)?

6. Give examples of audit matters that should be communicated by the auditor to those
charged with governance.
The auditor should communicate the audit matter to those charged with governance
the effect of uncorrected misstatements related to prior periods on the relevant classes of
transactions, account balances or disclosures, and the financial statements as a whole.

Problems

Problem 1
The field work for the June 30, 20X7, audit of Tracy Brewing Company was finished
August 19, 20X7, and the completed financial statements, accompanied by the signed audit
reports, were mailed September 6, 20X7. In each of the highly material independent events (a
through i), state the appropriate action (1 through 4) for the situation and justify your
response. The alternative actions are as follows:
1. Adjust the June 30, 20X7, financial statements.
2. Disclose the information in a footnote in the June 30, 20X7, financial statements.
3. Request the client to recall the June 30, 20X7, statements for revision.
4. No action is required.
The events are as follows:
a. On December 14, 20X7, the auditor discovered that a debut that a debtor of Tracy
Brewing went bankrupt on October 2, 20X7. The sale has taken place April 5, 20X7, but
the amount appeared collectible at June 30, 20X7 and August 19, 20X7.
b. On August 15, 20X7, the auditor discovered that a debtor of Tracy Brewing went
bankrupt on August 1, 20X7. The most recent sale had taken place April 2, 20X6, and
no cash receipts had been received since that date.
c. On December 14, 20X7, the auditor discovered that a debtor of Tracy Brewing went
bankrupt on July 15, 20X7 due to declining financial health. The sale had taken place
January 15, 20X7.
d. On August 16, 20X7, the auditor discovered that a debtor of Tracy Brewing went
bankrupt on July 30, 20X7. The cause of the bankruptcy was an unexpected loss of
major lawsuit on July 15, 20X7, resulting from a product deficiency suit by a different
customer.
e. On August 6, 20X7, the auditor discovered that a debtor of Tracy Brewing went
bankrupt on July 30, 20X7, for a sale that took place July 3, 20X7. The cause of the
bankruptcy was major uninsured fire on July 20, 20X7.
f. On May 31, 20X7, the auditor discovered an uninsured lawsuit against Tracy Brewing
that had originated on February 28, 20X7.
g. On July 20, 20X7, Tracy Brewing settled a lawsuit out of court that had originated in
2014 and is currently listed as a contingent liability.
h. On September 14, 20X7, Tracy Brewing lost a court case that had originated in 20X6 for
an amount equal to the lawsuit. The June 30, 20X7, footnotes state that in the opinion of
legal counsel there will be a favorable settlement.
i. On July 20, 20X7, a lawsuit was filed against Tracy Brewing for a patent infringement
action that allegedly took place in early 20X7. In the opinion of legal counsel, there is a
danger of a significant loss to the client.
Answer:
a. 4 - The amount appeared collectible at the end of the field work.
b. 1 - The uncollectible amount was determined before end of field work.
c. 3 - Amount should have been determined to be uncollectible before end of field work, but it
was discovered after the issuance of the statements. The financial statements should have
been known to be in error on 8-20-06.
d. 2 - The cause of the bankruptcy took place after the balance sheet date, therefore the balance
sheet was fairly stated. Account may be written off as uncollectible at 6-30-06, but they are
not required to do so. Footnote disclosure is necessary because the subsequent event is
material.
e. 2 - The sale took place after the balance sheet date but, since the loss was material and will
affect future profits, footnote disclosure is necessary.
f. 2 - The lawsuit originated in the current year, but the amount of the loss is unknown.
g. 1 - The settlement should be reflected in the 6-30-06 financial statements as an adjustment of
current period income and not a prior period adjustment.
h. 4 - The financial statements were believed to be fairly stated for 6-30-06 or 8- 19-06.
i. 2 - The cause of the lawsuit occurred before the balance sheet date and the lawsuit should be
included in the 6-30-06 footnotes.

Problem 2
In connection with his examination of Flowmeter, Inc., for the year ended December 31,
20X6, Flore, CPA, is aware that certain events and transactions that took place after December
31, 20X6, but before he issues his report dated February 28, 20X7, may affect the company’s
financial statements. The following material events or transactions have come to his attention:
1. On January 3, 20X7, Flowmeter, Inc., received a shipment of raw materials from
Laguna. The material had been ordered in October 2014 and shipped FOB shipping
point in November 20X6.
2. On January 15, 20X7, the company settled and paid a personal injury claim of a former
employee as the result if an accident that occurred in March 20X6. The company had
not previously recorded a liability for the claim.
3. On January 25, 20X7, the company agreed to purchase for cash the outstanding shares
of Porter Electrical Co. The acquisition is likely to double the sales volume of
Flowmeter, Inc.
4. On February 1, 20X7, a plant owned by Flowmeter, Inc., was damaged by a flood
resulting in an uninsured loss of inventory.
5. On February 5, 20X7, Flowmeter, Inc., issued and sold to the general public P2 million
in convertible bonds.
Required:
For each of the event or transactions just described, indicated the audit procedures that
should have brought the item to the attention of the auditor and the form of disclosure
required in the financial statements, including the reasons for such disclosures. Arrange your
answers in the following format:
Item No. Audit Procedures Required Disclosure and Reasons

Answer:
Item Audit Procedures Required Disclosure and Reasons
No.
1 Goods “in-transit” would be detected in the The receipt of the goods provides
 course of the auditor’s review of the year-end
“cutoff” of purchases. The auditor would
examine receiving reports and purchase
invoices to make certain that the liability to
suppliers had been recorded for all goods
included in inventory, and that all goods for
which the client was liable at year-end were
recorded in inventory.
2 Settlements of litigation would be revealed by
requesting from the company’s legal counsel a
description and evaluation of any litigation,
impending litigation, claims, and contingent
liabilities of which he has knowledge that
existed at the date of the balance sheet being
reported upon, together with a description and
evaluation up to the date the information is
furnished. A review of cash disbursements for
the period between the balance sheet date and
completion of field work may also reveal
evidence of the settlement.
3 The purchase would normally be revealed in
general conversations with the client and
would further be detected by reading the
minutes of meetings of stockholders, directors,
and appropriate committees. In addition,
because the amount paid is likely to be
unusually large in relation to other cash
disbursements, a review of cash disbursements
for the period between the balance sheet date
and completion of field work is likely to
reveal such an extraordinary transaction.
Moreover, because a purchase of a business
usually requires a formal purchase agreement,
the letter from the firm’s legal counsel would
probably have revealed the purchase.
additional evidence with respect to
conditions that existed at the date of the
balance sheet and hence the financial
statements should be adjusted to take into
account such additional information.
The settlement of litigation would require
an adjustment of the financial statements
since the events that gave rise to the
litigation had taken place prior to the
balance sheet date.
The purchase of a new business is not an
event that provides evidence with respect
to conditions existing at the balance sheet
date; hence, it does not require adjustment
in the financial statements. However,
such an event would normally be of such
importance that disclosure of it is
required to keep the financial statements
from being misleading. If the acquisition
is significant enough, it might be
advisable to supplement the historical
statements with pro forma statements
indicating the financial results if the two
firms had been consolidated for the year
ending December 31, 2005. Otherwise,
disclosure in footnotes to the statements
would be adequate. Occasionally, a
situation of this type may have such a
material impact on the entity that the
auditor may wish to include in his report
an explanatory paragraph directing the
reader’s attention to the event and its
effect.
4 Inventory losses attributable to a flood would
be brought to the auditor’s attention through
inquiries and discussions with corporate
officers and executives. Moreover, the auditor
would know the location of the plants and
warehouses of his client and upon becoming
aware of any major floods in such a location,
he would investigate to determine if his
client’s facilities had suffered any damage.
Losses attributable to floods subsequent
to the balance sheet date do not provide
information with respect to conditions
that existed at the balance sheet date;
hence, it does not require an adjustment
in the financial statements. However,
such an incident may be of sufficient
importance to require footnote disclosure.
Occasionally, a situation of this type may
have such a material impact on the entity
that the auditor may wish to include in his
report an explanatory paragraph directing
the reader’s attention to the event and its
effect.

5 The sale of bonds or other securities would
require a filing with the SEC in which the
auditor would presumably be involved. In
addition, the sale would be revealed by
reading the minutes of directors’ and finance
committee’s meetings, by corresponding with
the client’s attorneys and by examining the
cash receipts book in the period subsequent to
the balance sheet date for evidence of
unusually large receipts.
Sales of bonds or capital stock are
transactions of the type that do not
provide information with respect to
conditions that existed at the balance
sheet date; hence, adjustment of the
financial statement is not required.
However, such sales may be of sufficient
importance to require footnote disclosure.
Occasionally, a situation of this type may
have such a material impact on the entity
that the auditor may wish to include in his
report an explanatory paragraph directing
the reader’s attention to the event and its
effect.

Problem 3
In connection with your examination of the financial statements of Olars Mfg.
Corporation for the year ended December 31, 20X6, your review of subsequent events disclosed
the following items:
1. January 3, 20X7: The government approved a plan for the construction of an express
highway. The plan will result in the expropriation of a portion of the land owned by
Olar Mfg. Corporation. Construction will begin in late 20X7. No estimate of the
condemnation award is available.
2. January 4, 20X7: The funds for a P25,000 loan to the corporation made by Mr. Olars on
July 15, 20X6, were obtained by him by a loan on his personal life insurance policy. The
loan was recorded in the account “loan from officers”. Mr. Olars’ source of the funds
was not disclosed in the company records. The corporation pays the premiums on the
life insurance policy, and Mrs. Olars, wife of the president, is the beneficiary.
3. January 7, 20X7: The mineral content of a shipment of ore en route on December 31,
20X6, was determined to be 72 percent. The shipment was recorded at year-ended at an
estimated content of 50 percent by a debit to raw material inventory and a credit to
accounts payable in the amount of P20,600. The final liability to the vendor is based on
the actual mineral content of the shipment.
 4. January 15, 20X7: Culminating a series of personal disagreements between Mr. Olars,
the president, and his brother-in-law, the treasurer, the latter resigned, effective
immediately, under an agreement whereby the corporation would purchase his 10
percent share ownership at book value as of December 31, 20X6. Payment is to be made
in two equal amounts in cash on April 1, 20X7 and October 1, 20X7. In December, the
treasurer has obtained a divorce from his wife, who was Mr. Olars’ sister.
5. January 31, 20X7: As a result of reduced sales, production was curtailed in mid-
January and some workers were laid off. On February 5, 20X5, all the remaining
workers went on strike. To date the strike is unsettled.
6. February 10, 20X7: A contract was signed whereby Lopez Enterprises purchased from
Olars Mfg. Corporation all of the latter’s fixed assets (including rights to receive the
proceeds of any property condemnation), inventories, and the right to conduct business
under the name “Olars Mfg. Division”. The effective date of the transfer will be March
1, 20X7. The sale price was P500,000 subject to adjustment following the taking of a
physical inventory. The important factors contributing to the decision to enter into the
contract were the policy of the board of directors of Lopez Enterprises to diversify the
firm’s activities and the report of a survey conducted by an independent market
appraisal firm that revealed a declining market of Olars’ products.
Required:
Assume that the items described above came to your attention prior to completion of
your audit work on February 15, 20X7. For each item:
a. Give the audit procedures, if any, that would have brought the item to your attention.
Indicate other sources of information that may have revealed the item.
b. Discuss the closure that you would recommend for the item, listing all details that you
would suggest should be disclosed. Indicate those items or details, if any, that should not
be disclosed. Give your reasons for recommending or not recommending disclosure of
the items or details.

Answer:
1. The government’s approval of a plan for the construction of an express highway would have
come to the CPA’s attention through his inquiries of officers and key personnel, his examination
of the minutes of the meetings of the board of directors and stockholders, and his reading of local
newspapers. The details of the item would not have to be disclosed as a separate footnote because
all fixed assets of the corporation, including the right to the condemnation award, were to be sold
as of March 1, 2006 (see item 6).
2. It is improbable that the CPA would learn the source of the P25,000 unless it were revealed in a
discussion with the president or his personal accountant, or unless the auditor prepared the
president’s personal income tax return, in which case the interest charges would have led to his
investigation of the use to which the funds were put. Setting out the loan in the balance sheet as a
loan from an officer would be sufficient disclosure. The source from which the officer obtained
the funds would not be disclosed because it is the officer’s personal business and has no effect
upon the corporation’s financial statements. Indeed, disclosure of the funds’ source might be
construed as detrimental to the officer.
3. The additional liability for the ore shipment would have been revealed to the CPA in his scanning
of January transactions. His regular examination of 2001 transactions and related documents such
as purchase contracts would have caused him to note the time for subsequent follow up to
determine the final liability. In addition, the client’s letter of representation might have mentioned
the potential liability. The item would not require separate disclosure by footnote or otherwise
and would be handled by adjusting the financial statement amounts for purchases, ending raw
 materials inventory, and accounts payable by the amount of the additional charge, P9,064 {[(72 -
50) / 50] = 0.44; 0.44 x P20,600 = P9,064}.
4. The CPA might learn of the agreement to purchase the treasurer’s stock ownership through his
inquiries of management and legal counsel, examination of the minutes of the meetings of the
board of directors and stockholders and subsequent reading of the agreement. The absence of the
treasurer might also arouse the CPA’s curiosity. The details of the agreement would be disclosed
in a footnote because the use of company cash for the repurchase of stock and the change in the
amount of stock held by stockholders might have a heavy impact on subsequent years’ financial
statements. Usually, a management change, such as the treasurer’s resignation, does not require
disclosure in the financial statements. The details underlying the separation (personal
disagreements and divorce) should not be disclosed because they are personal matters.
5. Through inquiries of management, review of financial statements for January, scanning of
transactions, and observations, the CPA would learn of the reduced sales and of the strike.
Disclosure would not be made in the financial statements of these conditions because such
disclosure might create doubt as to the reasons therefore and misleading inferences might be
drawn.
6. The contract with Lopez Industries would come to the CPA’s attention through his inquiries of
management and legal counsel, his reading of the minutes of the meetings of the board of
directors and stockholders, and his examination of the contract. All important details of the
contract should be disclosed in a footnote because of the great effect upon the corporation’s
future. The factors contributing to the entry into the contract need not be disclosed in statements;
while they might be of interest to readers, they are by no means essential to make the statements
not misleading.

Problem 4
The following situations represent excerpts from the responses to audit inquiries of
external legal counsel of XYZ Co. during the annual audit of year 1 (“legal response”). For
each excerpt, select the most appropriate financial statement effect and audit response. Each
excerpt is independent. Responses may be used once, more than once, or not at all.
a. The client’s year-end is December 31, year 1.
b. The anticipated audit report date is February 15, year 2.
c. All amounts are material to the financial statements.
Financial Statement Effect Audit Response
1. No impact on financial statement 7. Legal responses is appropriately
amounts or notes. dated.
2. Disclosure in notes relating to nature 8. Update legal response.
of litigation, but no amount disclosed
3. Disclosure in notes relating to nature 9. Update audit report date.
of litigation, including loss amount.
4. Potential litigation settlement accrued
in financial statements.
5. Potential litigation settlement accrued
in financial statement, amount
disclosed in notes.
6. Verify amount due attorney is
recorded in financial statement
amounts.

Situations Financial Audit

 Statement Effect Response
Letter dated February 14, year 2: (a) No effect on (b) Legal
“I advise you that at and since December 31, year 1, I have financial response is
not been engaged to give substantive attention to, or statements or appropriately
represent, XYZ Co. in connection with any pending or notes dated
threatened litigation, claims, or assessment, nor am I
aware of any loss contingencies. No amounts were due to
this office for services provided at December 31, year 1.”
Letter dated January 21, year 2: (c) Verify amount (d) Update
“I advise you that and since December 31, year 1, I have due legal counsel legal
not been engaged to give substantive attention to, or is recorded in response
represent, XYZ Co. in connection with any pending or financial
threatened litigation, claims, or assessments, nor am I statements
aware of any loss contingencies. There were fees
outstanding of P3,675 due to this office for services
provided at December 31, year 1”
Letter dated February 26, year 2: (e) Disclosure in (f) Update
K Brosas v. XYZ Co: This matter commenced in notes relating to report date
December, year 1. The plaintiff alleges discrimination nature of
relating to his termination on November 17, year 1. The litigation, but no
company intends to defend this case vigorously. At this amount disclosed
time, we are unable to evaluated the likelihood of an
unfavorable outcome or estimate the amount or range of
potential loss.
Letter dated March 16, year 2: (g) Disclosure in (h) Update
J. Martin v. XYZ Co.: This matter commenced in March, notes relating to report date
year 2. The plaintiff alleges discrimination relating to his nature of
termination on November 17, year 1. The company litigation, but no
intends to defend this case vigorously. At this time, we are amount disclosed
unable to evaluate the likelihood of an unfavorable
outcome. The plaintiff is demanding P50,000.
Letter dated February 14, year 2: (i) Potential (j) Update
R. Red v. XYZ Co.: This matter commenced in November, litigation legal
year 1. The plaintiff alleges discrimination relating to his settlement not response.
termination on March 17, year 1. It is reasonably possible accrued in
that the case will be settled for approximately P35,000. financial
statement not
accrued in
financial
statement, amount
disclosed in
notes.
Letter dated February 14, year 2: (k) Potential (l) Update
L. Perez v. XYZ Co.: This matter commenced in litigation legal
November, year 1. The plaintiff alleges discrimination settlement response
relating to his termination on March 17, year 1. The case accrued in
is tentatively settled for P35,000 financial
statements.
Problem 5
For each of the account balances and associated assertions below, select the audit
procedure from the list provided that provides the most appropriate audit evidence for the
account assertion.
Account Assertion Procedure
Balances
1. Accounts Completenes a. Review confirmation of accounts receivable
receivable s balances and agree to accounts receivable sub
ledger.
b. Review list of accounts written-off during year.
c. Review schedule of bad debt expense.
d. Trace individual customer account transactions to
sales invoice.
e. Trace sales invoice and shipping documents just
before year-end to customer account transactions.
2. Inventory Valuation a. Examine invoices from suppliers.
and b. Examine invoices paid subsequent to year-end and
Allocation trace to subsidiary ledger.
c. Select items from inventory listing and locate the
items in the warehouse.
d. Select items located in the inventory warehouse
and trace to inventory listing.
e. Trace sales invoices and shipping documents just
before year-end to customer accounts.
3. Fixed Rights and a. Interview plant manager regarding fixed asset
assets Obligations additions during the year.
b. Recalculate partial year depreciation for fixed
asset acquisitions.
c. Trace fixed asset item to fixed asset master control
listing.
d. Vouch fixed asset acquisitions to purchase
invoices.
e. Vouch fixed asset acquisitions to related cash
disbursement.
4. Accounts Completenes a. Compare aging of accounts payable to prior
payable s periods.
b. Confirm accounts payable balance with suppliers.
c. Examine invoices paid subsequent to year-end and
trace to subsidiary ledger.
d. Trace individual payable transaction to purchase
order.
e. Vouch invoices for the purchase of suppliers to
receiving documents.
5. Cash Existence a. Agree bank statement to the subsidiary ledger.
b. Agree cash balance per the bank reconciliation to
the year-end bank statement.
c. Agree cash balance to online year-end bank
statement.
d. Recalculate bank statement balance including
interest receivable.
 e. Trace deposit per the bank statement to the cash
subsidiary ledger.

Answer:
1. Trace sales invoice and shipping documents just before year-end to customer account
transactions. - Testing for the completeness assertion asks the question, "Do the balances of
receivables contain all transactions for the period?" Tracing sales invoices and shipping
documents just before year-end to customer account transactions verifies that sales cut-off
procedures were performed correctly and that sales invoices and their associated accounts
receivable are recorded in the correct period.
2. Examine invoices from suppliers. - Testing for the valuation and allocation assertion asks the
question, "Is inventory valued at an applicable financial reporting framework, i.e., net
realizable value?" Examining invoices from suppliers verifies that the inventory was
purchased on a particular date at a specific price.
3. Vouch fixed asset acquisitions to purchase invoices. - Testing for the rights and obligation
assertion of fixed assets asks the question, "Does the client own the fixed assets?" Vouching
fixed asset acquisitions to purchase invoices verifies that the client purchased the fixed assets.
4. Examine invoices paid subsequent to year-end and trace to subsidiary ledger. - Testing for the
completeness assertion asks the question, "Do the balances of payables contain all
transactions for the period?" Examining invoices paid subsequent to year-end and tracing to
subsidiary ledger verifies that invoices were paid and recorded in the correct period.
5. Agree cash balance per the bank reconciliation to the year-end bank statement. -
Testing for the existence assertion asks the question, "Does the cash that the client has
recorded exist?" Performing or evaluating bank reconciliations for all accounts verifies that
the cash exists.