Balance Sheet and Relatively Reliable Documentation
Chapter 7 # 30
a. Give three examples of relatively reliable documentation and three examples of less reliable documentation. What characteristics distinguish the two?
Examples of relatively reliable documentation are: vendor statements, bank statements. And signed lease agreements.
Examples of relatively unreliable documentation are: copies of customer invoices, internal memoranda and other communications, and a listing of fixed asset additions.
The difference between the two is whether they were originated from outside or inside the client’s organization. External information is considered more reliable than internal documentation.
b. Explain why confirmations are normally more reliable evidence than inquiries of the client.
Confirmations are normally more reliable evidence than inquiries of the client because of the independence of the outside party confirming the information.
c. Explain why recalculation tests are highly reliable but of relatively limited use.
Recalculation tests are highly reliable because the auditor is able to gain 100% assurance of the accuracy, but the tests only verify whether the recorded amounts are accurately totaled. There tests do not uncover omissions or fictitious amounts.
d. Explain why analytical procedures are important evidence even though they are relatively unreliable by themselves.
Analytical procedures are evidence of the likelihood of misstatements in the financial statements, but they are rarely sufficient by themselves to conclude that the statements are misstated. Other supportive evidence is needed to determine whether apparent misstatements are actually material.
e. Describe a situation in which confirmation will be considered highly reliable and another in which it will not be reliable.
Confirmation of bank balances is considered highly reliable whereas confirmation of a department store charge account is often not considered reliable. Banks are accustomed to confirmations from auditors and
a. Give three examples of relatively reliable documentation and three examples of less reliable documentation. What characteristics distinguish the two?
Examples of relatively reliable documentation are: vendor statements, bank statements. And signed lease agreements.
Examples of relatively unreliable documentation are: copies of customer invoices, internal memoranda and other communications, and a listing of fixed asset additions.
The difference between the two is whether they were originated from outside or inside the client’s organization. External information is considered more reliable than internal documentation.
b. Explain why confirmations are normally more reliable evidence than inquiries of the client.
Confirmations are normally more reliable evidence than inquiries of the client because of the independence of the outside party confirming the information.
c. Explain why recalculation tests are highly reliable but of relatively limited use.
Recalculation tests are highly reliable because the auditor is able to gain 100% assurance of the accuracy, but the tests only verify whether the recorded amounts are accurately totaled. There tests do not uncover omissions or fictitious amounts.
d. Explain why analytical procedures are important evidence even though they are relatively unreliable by themselves.
Analytical procedures are evidence of the likelihood of misstatements in the financial statements, but they are rarely sufficient by themselves to conclude that the statements are misstated. Other supportive evidence is needed to determine whether apparent misstatements are actually material.
e. Describe a situation in which confirmation will be considered highly reliable and another in which it will not be reliable.
Confirmation of bank balances is considered highly reliable whereas confirmation of a department store charge account is often not considered reliable. Banks are accustomed to confirmations from auditors and