SITUATION

Instructions: Read and analyze the situation below. Answer the following items on the space provided.

Louie, a CPA, is engaged to audit the financial statements of Judah Company for the year ended December
31, 201A. Louie obtained and documented an understanding of internal control relating to the purchasing
process and set control risk at the maximum level. Louie requested and obtained from Judah a schedule
analyzing prepaid insurance as of December 31, 201A, and sent confirmation request to Judah’s broker.

a. What substantive procedures should Louie conduct in verifying the schedule of prepaid insurance and to
respond appropriately to the following assertions?
1) Existence and completeness -- Examine supporting source documentation and confirm policy with
insurance broker.

2) Rights and obligations -- Check with the insurance company to make sure the policy beneficiary is
right.

3) Valuation or allocation --Determine the part of the policy that hasn't expired and the cost of
insurance.

4) Presentation and disclosure – Determine if the overall presentation of the financial statements,
including relevant disclosure, complies with the applicable financial reporting framework.

b. What is the importance of the audit evidence gathered from the audit procedures?

Audit evidence is significant because it includes all of the information gathered by an auditor in
order to form an audit opinion on an organization's financial statements and/or internal control
environment. It is important to the audit and internal controls processes because it helps public
corporate executives to trust the opinions of their auditors. A number of policies and guidelines
state unequivocally that it is the executives of public corporations, not the auditors, who are
responsible for maintaining internal control over financial statements, as well as determining the
efficacy of such internal controls.