Exhibit 7.3 is a depiction of the sources of evidence. The auditor gathers:

● Knowledge about the client

● Information about internal controls

● Accounting process information-tests of account balances and accounting processes

● Outside information, including market information

Required

a. Exhibit 7.3 shows each of these four items with an arrow going to cumulative audit evidence. However, each component may have an effect on other components. Explain how the components interact, e.g., how information about internal control affects client acceptance, tests of account balances, and the need for outside information.

b. Is the ultimate audit decision based on the tests of accounting records, or is it a cumulative judgment from all of the sources of information? Or would it be proper to argue that all of the other components lead directly or indirectly to evidence on the account balances and the financial statements?

c. Explain how information about the client, i.e., client acceptance/ continuance information and previous year's audit work might be considered evidence for this year's audit.

d. Does the auditor have to document how previous audit work and client acceptance/continuation information affects the current year audit? Explain your rationale and how your answer affects current year audit documentation.

Exhibit 7.3

Transcribed Image Text:

Knowledge of the Client Outside Information Gathered through: • Work of the audit team using market data • Independent analyses by specialists Gathered through: • Previous audit work • Client risk analysis • Client acceptance analysis CUMULATIVE AUDIT EVIDENCE Accounting Systems Quality of Internal Control Gathered through: • Direct tests of account balances and transactions Gathered through: • Evaluation of the design of internal controls • Analytical analysis • Evaluation of the operation of controls