During the course of an audit some of the following evidence is obtained by the auditor: 1. creditor's monthly statement from the entity's files; 2. management working papers in making accounting estimates; 3. letter from a customer stating that she will pay a balance owing; 4. bank statement confirmation sent directly to the auditor; 5. duplicate sales invoices filed in the entity's office; 6. bank statement from the entity's files; 7. material requisitions filed in the storeroom; 8. memo from the financial accountant authorising payment of an account for new equipment.

Requirement

(a) Classify the evidence by source into one of four categories: (1) directly from outsiders, (2) indirectly from outsiders, (3) internal but validated externally, and (4) entirely internal. (b) Comment on the reliability of the four sources of documentary evidence.

Question 2

You are the audit senior of Big Jacks, a hamburger chain that has expanded rapidly. Over the past few years, the audit partner of your firm has been a bit concerned that Big Jacks has been neglecting to implement adequate controls. In your partner's opinion, the main reason for this is the attitude of the founder, John Jacks. Over the life of the company, John Jacks has constantly shown very little regard for spending money to implement an adequate control system. His primary concern has always been to expand the business. John Jacks has always said 'Money spent on anything but expansion is a waste!' Every year substantial amounts of extra work need to be performed by your accounting firm because of the company's poor controls, and a very substantial management letter is produced usually without any response from John Jacks. The audit partner of your firm has had enough!

Requirement

The audit partner asks you to prepare a memo listing the advantages of a good internal control system and the requirements for a good control environment. The partner intends producing this letter at a pre-audit meeting he is having with John Jacks.