DISCUSSION QUESTIONS AND PROBLEMS
7-27 (OBJECTIVE 7-4) The following are examples of documentation typically obtained by
auditors:
1. Duplicate sales invoices
2. Receiving reports
3. Minutes of the board of directors
4. Signed W-4s
5. Subsidiary accounts receivable records
6. Vendors’ invoices
7. General ledgers
8. Title insurance policies for real estate
9. Notes receivable
10. Bank statements
11. Cancelled payroll checks
12. Cancelled notes payable
13. Payroll time cards
14. Purchase requisitions
15. Articles of incorporation
16. Remittance advices
17. Signed lease agreements
18. Duplicate copies of bills of lading
a. Classify each of the preceding items according to type of documentation: (1) internal
or (2) external.
b. Explain why external evidence is more reliable than internal evidence.
7-28 (OBJECTIVE 7-4) The following are examples of audit procedures:
1. Watch employees count inventory to determine whether company procedures are
being followed.
2. Count a sample of inventory items and record the amount in the audit files.
3. Calculate the ratio of sales commission expense to sales as a test of sales commissions.
4. Review the accounts receivable with the credit manager to evaluate their
collectibility.
5. Compare a duplicate sales invoice with the sales journal for customer name and amount.
6. Obtain a written statement from a bank stating that the client has $15,671 on deposit
and liabilities of $500,000 on a demand note.
7. Add the sales journal entries to determine whether they were correctly totaled.
8. Obtain a letter from the client’s attorney addressed to the CPA firm stating that the
attorney is not aware of any existing lawsuits.
9. Extend the cost of inventory times the quantity on an inventory listing to test whether
it is accurate.
10. Obtain a letter from an insurance company to the CPA firm stating the amount of the
fire insurance coverage on buildings and equipment.
11. Examine an insurance policy stating the amount of the fire insurance coverage on
buildings and equipment.
12. Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of
gross margin relative to the preceding year.
13. Obtain information about internal control by requesting the client to fill out a questionnaire.
14. Trace the total in the cash disbursements journal to the general ledger.
15. Examine a piece of equipment to make sure that a major acquisition was actually
received and is in operation.
16. Examine corporate minutes to determine the authorization of the issue of bonds.
17. Obtain a letter from management stating that there are no unrecorded liabilities.
18. Review the total of repairs and maintenance for each month to determine whether
any month’s total was unusually large.
Classify each of the preceding items according to the eight types of audit evidence:
(1) physical examination, (2) confirmation, (3) inspection, (4) analytical procedures,
(5) inquiries of the client, (6) recalculation, (7) reperformance, and (8) observation
