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Baruch College, CUNYACCT 440Final Study Guide

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Evidence: Sufficiency and Competence I. Requirement for evidence a. 3rd standard of field work states: sufficient, competent, evidential matter is to be obtained… to afford a basis for an opinion... regarding the financial statement II. Competence: Definition a. Refers to quality and reliability of evidence obtained b. Evidence obtained from outside company more competent and reliable than internal evidence 1. Vendor invoice more reliable than purchase order c. Strong internal controls increase quality and reliability of evidence d. Direct evidence more reliable than indirect evidence 1. Observation better than inquiry III. Sufficiency: Definition a. Refers to quantity of evidence needed to support auditor’s opinion b. Inverse relationship between sufficiency and competence of evidence 1. If quality of evidence is good, less evidence will be needed than if evidence is bad IV. Types of evidence a. Internal control 1. strong internal control reduces amount of substantive testing require b. Physical evidence 1. refers to actual observation 2. limitations a. can’t determine ownership by observation b. can’t determine quality of item by observation c. Documentary evidence 1. created outside client and transmitted to auditor a. most reliable type of documentary evidence b. examples: bank confirmations and A/R confirmations 2. created outside client and held by client a. less reliable b. examples: Bank statements and vendor invoices 3. created by client and held by client a. least reliable b. examples: sales invoices c. exception: cancelled checks (have been endorsed by payee and perforated by bank) d. Accounting records 1. Reliability depends upon strength of internal control2. Agree amounts in ledgers with journals e. analytical review procedures 1. Analyze relationships among data for consistency -current period to prior period -current actual with budget 2. Investigate cause of any unusual fluctuations in financial relationships f. oral evidence 1. Low degree of reliability g. Client representations (required under SAS Statement of Auditing Standards 85) 1. purposes -provide written evidence of inquiry and client replies to inquiry -clarifies to management that they are primary responsible for fairness of financial statements 2. Contents a. acknowledges managements responsibility for fairness of financial statements in accordance with GAAP b. assures auditors regarding availability and completeness of information furnished to them c. all required disclosures have been made -no irregularities -no deficiencies in financial reporting practices [Show More]

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