Wiley Practitioner's Guide to GAAS 2020. Joanne M. Flood
Ultimately, you should consider that you are making a conclusion about the effectiveness of internal control as a whole. When you evaluate activity-level controls, you should consider the effectiveness of the entire information-processing stream, not individual control procedures in isolation.
Examples of Evidential Matter That May Support the Specific Assertions Embodied in Financial Statements
Another approach is a source list of procedures or evidential matter to be used as a resource in developing audit programs. Exhibit 12.3 indicates what this approach might look like for some common financial statement components. Usually such source lists present either evidential matter or procedures but, to avoid repetition, not both. For example, if the evidential matter is minutes of board meetings, the procedure is to read the minutes. Or if the procedure is to inspect a broker’s advice, the evidential matter is the broker’s advice.
Another approach is to use standardized audit programs developed for common components of financial statements. This approach is not illustrated here. Many auditors prefer source lists to packaged programs because of a concern that standardized programs promote routine application and do not encourage exercise of judgment.
Exhibit 12.3 Source List of Procedures or Evidential Matter
| Elements of financial statements | Existence or occurrence | Completeness | Rights and obligations | Valuation or allocation | Presentation and disclosure |
| Cash | Bank confirmations | Bank reconciliations | Bank confirmations | Foreign currency exchange rates from newspapers, and so on | Confirmation of restrictions on bank balances |
| Cash counts | Interbank transfer schedules | Contractual agreements relating to escrow funds, compensating balances, sinking funds, and so on | |||
| Certificates of deposit and savings account books | Subsequent cutoff bank statements Review of controls over cash receipts and disbursements | ||||
| Marketable securities | Security counts | Analyses of general ledger account activity | Certificate of ownership | Broker’s advices and documents supporting purchases of securities | Representation and other information regarding management’s intention to retain securities |
| Security confirmations | Confirmations of security positions with brokers and dealers | Security confirmations | Market value quotations | Minutes of board or committee meetings | |
| Custodian’s reports | Custodian’s reports | Appraised values of infrequently traded securities | Contractual terms of debt securities and preferred stocks | ||
| Review of subsequent transactions | Foreign currency exchange rates from newspapers, and so on | Confirmation of securities pledged under loan agreements, and so on | |||
| Review of controls over security of investments and transactions | |||||
| Receivables | Confirmation of account balances | Tests of year-end sales and shipping cutoff procedures | Confirmation of account balances | Aging of open balances | Confirmation of terms with debtors |
| Underlying customer orders and agreements, invoices, and shipping documents | Reconciliation of trial balances and general control accounts | Subsequent collections | Credit experience and terms | Sales agreement and contract terms | |
| Subsequent collections | Analytical relationship of balances to recent sales volume | Sales records | Credit reports on customers | Terms of notes receivable and collateral held | |
| Customer correspondence | Analyses of general ledger account activity | Customer correspondence | Correspondence on collection follow-up | Confirmation of receivables sold with recourse, discounted, pledged, and so on | |
| Sales records | Review of controls over billings and cash receipts | Promissory notes | History of sales returns and allowances Industry experience and trends | ||
| Subsequent collections, credits, and write-offs | |||||
| Discussion with credit and collection personnel |
|