Question

Question 4 (20 marks)

During an examination of financial statements, an auditor verifies management’s assertions ie.existence, completeness, rights, valuation etc. In doing so, the auditor must choose the quality and quantity of evidence, and the timing of the tests to be performed.

Required:
(a) Select and justify your choice as to which of the followings are considered higher quality audit evidence:
(i) Bank confirmation versus bank statement.
(ii) Observation of inventory count on 31 October 2019 versus observation of inventory count on 31 December 2019 for a company with a 31 December year end.

(b) Under what conditions (if any) would a large sample of low-quality evidence be persuasive to an auditor?

(c) Describe the highest quality form(s) of evidence an auditor would normally obtain to verify each of the following assertions:

(i)ownership of share certificates held in a safe deposit box

(II) valuation of gross trade accounts receivable

(III) completeness of additions of fixed assets

(iv) validity of trade accounts payable

(v) valuation of finished goods inventory

Answer 1

a) Bank statements would be higher quality audit evidence as compared to bank confirmation as the bank statement itself would show the bank balance as per bank confirmation only by which we can reconcile our cash balance as per books.

Observation of inventory count on the year end would be a higher quality audit evidence as compared to the physical inventory count of another company having the same period as a year end. The other company's inventory count would be of none of worth because the observation of the physical inventory of the year end of our company would be useful to tie out the closing inventory balance as per books and we can easily detect any descrepancies.

b) The persuasiveness of audit evidence can be determined only after considering the combination of appropriateness and sufficiency.A large sample of evidence provided by an independent party is not persuasive unless it is relevant to the audit objective being tested.A large sample of evidence that is relevant but not objective is also not persuasive.

c) i) Safekeeping certificates

ii)Confirmations from the customers

iii)Vouching the additions to fixed assets and also the minutes of the board meetings for its approval

iv)Confirmation from the suppliers

v)Physical inventory count