An auditor is concerned that sales are being made and shipped but are never billed or recorded. The auditor believes that employees may be stealing company assets in this way. Which of the following is correct?I. The auditor should select a sample of bills of lading and verify that sales invoices do exist.II. Shipments on consignment would not explain the missing sales invoices.

AUD evidence gathering focuses on obtaining sufficient, appropriate evidence (SAE) to support audit opinions, prioritized by reliability (external > internal, documentary > oral, direct > indirect). Auditors test transaction cycles (Revenue, Expenditure, Payroll, etc.) by evaluating internal controls (tests of controls) and performing substantive procedures to verify assertions like completeness, existence, and accuracy.  Audit Evidence Gathering Fundamentals (SAE) Sufficient (Quantity): Based on risk assessment and materiality. Appropriate (Quality): Relevance and... Show more

AUD evidence gathering focuses on obtaining sufficient, appropriate evidence (SAE) to support audit opinions, prioritized by reliability (external > internal, documentary > oral, direct > indirect). Auditors test transaction cycles (Revenue, Expenditure, Payroll, etc.) by evaluating internal controls (tests of controls) and performing substantive procedures to verify assertions like completeness, existence, and accuracy. 

Audit Evidence Gathering Fundamentals (SAE)
Sufficient (Quantity): Based on risk assessment and materiality.
Appropriate (Quality): Relevance and reliability.
Procedures: Inspection, observation, inquiry, confirmation, recalculation, reperformance, and analytical procedures. 

Key Transaction Cycles & Assertions
Revenue Cycle (Sales & Cash Receipts): Often tested for existence (sales actually occurred) and occurrence. Key documents include customer purchase orders, shipping documents (bill of lading), and sales invoices.
Expenditure Cycle (Purchases & Cash Disbursements): Often tested for completeness (all expenses recorded). Key procedures include reviewing purchasing, receiving, and cash disbursement controls.
Payroll Cycle: Focuses on authorization, timekeeping, and processing.
Cash Cycle: Includes bank reconciliations and testing for kiting (overstating cash). 

Evidence Gathering Techniques by Cycle
Testing Cutoff: Examining transactions immediately before/after year-end to ensure proper period recording.
Existence vs. Completeness: Vouching (from journal to source documents) tests existence; tracing (from source documents to journal) tests completeness.
Segregation of Duties: Ensuring different personnel handle authorization, custody, and recording (e.g., shipping department should be separate from billing). 

Evidence Reliability Hierarchy
Highest: External evidence (confirmations).
Medium: Internal evidence with strong controls.
Lowest: Internal evidence with weak controls; oral evidence. 

Show less