Auditing The Art and Science of Assurance Engagements Canadian Twelfth Edition Canadian 12th Edition Arens Solutions Manual

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Chapter 8: Audit Evidence
Chapter 8
Audit Evidence
Opening Vignette: Sometimes the most important evidence is not found in the accounting
records
1. Other factors include the extent of competition in the market, the ability of the company to cut
costs while maintaining operations, and the potential existence of other sources of capital, for
example, from existing business partners. The auditors could find out about competition by
conducting an internet search (or consulting business databases). Ability to cut costs or obtain
capital from other sources would be discussed with management.
2. Knowledge of the economy helps the auditor to develop expectations with respect to the
financial statements of the audit client, which also helps the auditor in the risk assessment
process. Specific industry knowledge helps the auditor to develop a targeted audit strategy and
audit plan that addresses risks that are not only specific to the client, but also to the industry.
Concept Check Answers

C8-1 There are well-defined procedures for the use of legal evidence. Auditors also have a well-
defined process, linked to risk assessment, that is used in the evidence gathering process. Also,
for both legal and audit purposes, evidence is used to support decisions.
C8-2
1. Which risks, by assertion, could result in a RMM. This helps to target the evidence
collection process.
2. Which audit procedure to use. Audit procedures are geared to particular audit objectives,
considering costs and the nature of the client's systems.
3. What sample size to use. Sample size can be calculated statistically or using the
professional judgment of the auditor, linked to the required assurance.
4. Which particular items to select. The auditor would describe the method used and the
relevance of the selection process (e.g., high dollar items).
5. When to perform the procedures. The nature of the test will affect timing (e.g. close to
the year end, throughout the year, availability of data).
C8-3
Inspection: Physically examine fixed assets and record their serial numbers.
Observation: Watch employees punch a time clock when they arrive at work.
Inquiry: Ask shipping clerk about procedures followed when receiving goods.
External confirmation: Send a confirmation to the bank asking about bank balances and
contingent liabilities
Recalculation: Calculate the goods and services taxes (or harmonized sales taxes) on an invoice.
Copyright  2013 Pearson Canada Inc. 1

Instructor’s Solutions Manual for Arens et al., Auditing, Canadian 12th Edition
Reperformance: Trace the general ledger posting from the sales journal to the sales general
ledger account.
Analytical procedures: Calculate gross margin for each of the last five years.
C8-4 CAATs enable the auditor to recalculate or reperform for a whole group of transactions
cost-effectively (although they can also be used for a sample).
C8-5 Internal documentation has never left the organization, while external documentation, even
though it may have been prepared by the client organization, has left and been returned (such as
a cheque that has been cleared by the bank) or originated from an outside party (such as an
accounts payable statement from a supplier).
C8-6 High quality internal controls may mean that there is less likelihood of error in the clients'
records, while poor quality internal controls could mean the opposite. This will also affect the
type of evidence to be collected—with poor quality internal controls, the auditor will select
substantive tests rather than tests of internal controls.
C8-7 The types of evidence that should be collected are (i) compare the underlying accounting
records to the general ledger accounts with reconciliation to the financial statements and (ii)
review material adjustments or journal entries and their supporting documentation that are part of
the financial statement preparation process.
C8-8 Analytical procedures are a tool to understand the client's business, to assess the entity's
ability to continue as a going concern, and to indicate the presence of possible misstatements in
the financial statements. These results help the auditor to target field work, possibly reducing
tests of detail.
C8-9 Audit software increases the scope of analytical review that can be conducted, as well as
reducing its costs.
Audit Challenge 8-1
1. Since most organizations require information systems to deliver services, it is very likely that
a problem with delivering services could be linked to a problem with information systems. The
auditor would need to look at the process for developing and implementing information systems,
to determine whether the same problems are present in the accounting systems, which is very
likely. If the same group of employees or outside contractors is responsible for developing both
accounting systems and operational systems, then the auditor would likely increase risks
associated with errors in the information systems.

2. Best practices need to be in place for the implementation of high quality information systems.
Students could talk about many such practices. Several important practices include independent
authorization of program changes, independent testing of program changes, and careful
reconciliation of data from the old systems to the newer ones when there are system conversions.
3. If information systems quality is poor, this has a pervasive effect on internal control,
depending upon the reliance on information technology by the organization. The auditors would
likely decide that they could not rely upon internal controls if there were numerous errors in the
information systems and the organization used such systems extensively.
Review Questions
8-1 Generally, it may be said that evidence is used to reach conclusions, however, different
evidence is used by auditors than in a medical test, and it is used in different ways.
Basis of Medical Test Audit of Financial

Comparison Statements
Use of evidence Determine presence or absence of certain Determine if statements
characteristics based upon specific quantitative are fairly presented
criteria
Nature of evidence Presence or absence of particles or percentages Various types of audit
of material in physical or other tests evidence
Party or parties Laboratory technician Auditor
evaluating evidence
Certainty of Some tests have “false positives” or “false High level of assurance
conclusions from negatives,” depending upon the level of
evidence accuracy of the instrumentation or matter used
in the tests
Nature of Likelihood of presence or absence of certain Issue one of several
conclusions states of illness alternative types of
auditor’s reports
Typical A false negative could result in medical Users of financial
consequences of treatment not being provided when it should statements make
incorrect be; a false positive could result in potentially incorrect decisions,
conclusions from invasive treatment being provided when it is potentially loss of funds
evidence not needed; errors could result in deterioration and lawsuit against the
of health or even death auditors
8-2 The four major audit evidence decisions that must be made on every audit are:
1. Which risks could results in a risk of material misstatement at the assertion level,
requiring a greater level of evidence collection for that assertion.
2. The audit procedures to use.
3. The sample size to select for a given procedure.
4. The particular items to select from the population.
5. The appropriate time to perform the procedure.

8-3 Audit procedures are the detailed instructions for the collection of a particular type of
audit evidence that is to be obtained. Since they are the instructions to be followed in
accumulating evidence they must be worded carefully to make sure the instructions are clear.
8-4 An audit program section for accounts receivable is a list of audit procedures that will be
used to audit accounts receivable for a given client. The audit procedures, sample size, items to
select, and timing should be included in the audit program.
8-5 There are two primary reasons why the auditor can only be persuaded rather than
convinced that the financial statements are correct:
1. The cost of accumulating evidence. It would be extremely costly for the auditor to be
completely convinced.
2. Evidence is normally not sufficiently reliable to enable the auditor to be completely
convinced. For example, confirmations from customers may come back with incorrect
information that is the fault of the customer rather than the auditor.
8-6 The three determinants of the persuasiveness of evidence are sufficiency,

appropriateness, and timeliness. Sufficiency is related to sample size and items to select (i.e. is
enough evidence collected). Appropriateness is related to audit procedures (i.e. were the correct
audit procedures performed properly). Timeliness is related to timing of the test (i.e. was the date
collected on a timely basis pertaining to the correct fiscal period).
8-7 Following are six characteristics that determine appropriateness and an example of each.
Factor Determining Example of Appropriate Evidence

Appropriateness
Relevance Examination of share quotations to determine current
value of marketable securities.
Auditor’s direct knowledge Physical examination of inventory by auditor
Independence of provider External confirmation of a bank balance
Effectiveness of client’s internal Duplicate sales invoices for a large, well-run company
controls
Qualifications of provider External confirmation from a lawyer dealing with the
client’s affairs
Objectivity of evidence Count of cash on hand by auditor
8-8
Types of Audit Evidence Examples
1. Inspection  count petty cash on hand
 count inventory on hand
2. Observation  observe the taking of inventory
 observe access restrictions to cash
3. Inquiries of the client  inquire of management whether there is obsolete inventory
 inquire of management regarding the collectability of large
accounts receivable balances

4. External  confirm accounts receivable balance of a sample of client’s
confirmation customers
 confirm client’s cash balance with bank
5. Recalculation  recompute invoice total by multiplying item price times
quantity sold
 foot the sales journal for a one-month period and compare
all totals to the general ledger
6. Reperformance  match receiving reports to sales invoices
 account for a sequence of documents to make sure that none
are missing
7. Analytical procedures  evaluate reasonableness of receivables by calculating and
comparing ratios
 review general ledger for reasonableness
8-9 The four characteristics of the definition of an external confirmation are:

1. Receipt
2. Written or oral response
3. From independent third party
4. Requested by the auditor
A confirmation is prepared specifically for the auditor and comes from an external source.
External documentation is in the hands of the client at the time of the audit but was in the hands
of someone outside the client’s organization at one time; it may have been prepared by the client,
sent outside, and returned to the client or prepared outside the company and sent to the client.
8-10 Internal documentation has been prepared and used within the client’s organization
without its ever having gone to an outside party, such as a customer or vendor. Examples:
 cheque request form
 receiving report
 payroll time card
 adjusting journal entry
External documentation either originated with an outside party or was an internal document that
went to an outside party and is now either in the hands of the client or readily accessible.
Examples:
 vendor’s invoice
 cancelled note
 cancelled cheque
 validated deposit slip
8-11 Analytical procedures (comparisons and relationships) are useful in indicating individual
account balances that may appear to be correct when viewed separately but which may appear to
be questionable when viewed in the context of the other financial statement accounts.

For example, inventory may appear to be correctly stated on the basis of evidence
collected but may appear to be questionable in the context of sales and cost of goods sold. If
inventory has increased significantly from the previous year and sales and cost of sales have
declined significantly in the same period, obsolescence and/or valuation of inventory may be a
problem.
They are also useful in reviewing accounts or transactions for reasonableness to
corroborate tentative conclusions reached on the basis of other evidence.
8-12 The decrease of the current ratio indicates a liquidity problem for Harper Ltd. since the
ratio has dropped to a level close to the requirements of the bond indenture. Special care should
be exercised by the auditor to determine that the 2.05:1 ratio is proper since management would
be motivated to hide any lower ratio. The auditor should expand procedures to test all current
assets for proper cut-off and possible overstatement and to test all current liabilities for proper
cut-off and possible understatement.
8-13 Attention-directing analytical procedures occur when significant, unexpected differences

between the current year’s unaudited financial data and other data used in comparisons are
found. If the unusual difference is large, the auditor must determine the reason for it, and satisfy
him or herself that the cause is a valid economic event and not an error, fraud or other
irregularity.
When an analytical procedure reveals no unusual fluctuations, the implication is
minimized. In that case, the analytical procedure constitutes substantive evidence in support of
the fair statement of the related account balances, and it is possible to perform fewer detailed
substantive tests in connection with those accounts. Frequently, the same analytical procedures
can be utilized for more than one purpose: for attention direction (i.e., targeting of audit tests) or
used to reduce tests of details of balances. This depends on the outcome of the tests. Simple
procedures such as comparing the current-year account balance to the prior-year account balance
is more attention directing (and provides less assurance) than more complex analytical
procedures; i.e., those that rely on regression analysis. More sophisticated analytical procedures
help the auditor examine relationships between many information variables simultaneously. The
nature of these tests may provide greater assurance than simple procedures.
8-14 Gail Gordon could improve the quality of her analytical tests by:
 Making internal comparisons to ratios of previous years.
 In cases where the client has more than one branch in different industries, computing the
ratios for each branch and comparing these to the industry ratios.
 See if there is data available from industry associations that might be helpful.
8-15 The investigation of differences discovered through analytical procedures is affected by:
 The materiality of the amount. A potential material assessment will require extensive
investigation, whereas an immaterial difference may be dismissed.
 The auditor’s knowledge of the client’s business. The auditor may know of events that
caused the change in ratio.
 The results of other auditing procedures. Other information obtained during the audit may
substantiate the results of the analytical procedures.

 The purpose of the analytical procedure. The objective of the tests will also affect the
auditor’s response to his or her findings.
 The level of aggregation of data. If the auditor uses disaggregated data, he or she may be able
to isolate specific segments, locations, or time periods that require further investigation.
8-16 Such financial statements display all items as a percentage of a chosen common base,
such as sales. This allows for comparison between companies (since the percentage can be more
readily compared rather than the dollar amounts) or for the same company over different time
periods. This can reveal trends in the way that certain accounts or expenses are being used or are
changing over the period of time that is being analyzed.
Discussion Questions and Problems
8-17
a. Type of Evidence that is More b. Factor Affecting Appropriateness
Reliable
1. Confirmation with business organizations Qualifications of provider
2. Physically examine 8-cm steel plates Qualifications of provider (in this case
the auditor)
3. Examine documents when several Effectiveness of internal control
competent people are checking each
other’s work
4. Examine inventory of parts for the Degree of objectivity
number of units on hand
5. Confirm a bank balance Degree of objectivity
6. Confirm a bank balance Independence of provider
7. Physically count the client’s inventory Auditor’s direct knowledge
8. Physically count the inventory Independence of provider and auditor’s
direct knowledge
8-18
a. 1. Commission expense could be overstated during the current year or could have been
understated during each of the past several years. Or, sales may have been understated during the
current year or could have been overstated in each of the past several years.
2. Obsolete or unsalable inventory may be present and may require markdown to the lower
of cost or market.
3. Especially when combined with 2 above, there is a high likelihood that obsolete or
unsalable inventory may be present. Inventory appears to be maintained at a higher level than is
necessary for the company.
4. Collection of accounts receivable appears to be a problem. Additional provision for
doubtful accounts may be necessary.
5. Especially when combined with 4 above, the allowance for doubtful accounts may be
understated.
6. Amortization expenses may be understated for the year.

b. 1. Make an estimate computation of total commission expense by multiplying the

standard commission rate times commission sales for each of the last two years. Compare the
resulting amount to the commission expense for that year. For whichever year appears to be out
of line, select a sample of individual sales and recompute the commission, comparing it to the
commission recorded.
2. and 3. If data is available, analytical review can be conducted by product to identify slow
moving items. These items could then be observed at the inventory count, the quality of the
products examined and valuation discussed with the client. More items should be selected to test
count at the year end and particular attention should be paid to the whole inventory area to
attempt to identify slow-moving items (looking for dust or other signs of age).
4. and 5. Select a sample of the larger and older accounts receivable and have the client
prepare a schedule of subsequent payments and credits for each of these accounts. For the larger
accounts that show no substantial subsequent payments, examine credit reports and recent
financial statements to determine the ability to pay. Discuss each account for which substantial
subsequent payment has not been received with the credit manager and determine the need for
additional allowance for doubtful accounts.
6. Discuss the reason for the reduced amortization expense with the client personnel
responsible for the capital assets accounts. If they indicate that the change resulted from a
preponderance of fully depreciated assets, test the detail records to determine that the explanation
is reasonable. If no satisfactory explanation is given, expand the tests of amortization until
satisfied that the provision is reasonable for the year.
c. The financial position seems to be worsening, as inventories and accounts receivable

increase. The company seems to be trying to hide this, possibly with inventory manipulation,
understatement of the allowance for uncollectible accounts, and understatement of amortization
expense.
8-19 a. & b.
Ratio number 1.
Need for investigation Yes
Reason for Investigation: Current ratio has decreased from previous year end and is significantly
lower than the industry average. This could indicate a shortage of working capital required for
competition in this industry.
Nature of Investigation: Obtain explanation for the decrease in current ratio and investigate the
effect of the company’s ability to operate, obtain needed financing, and meet the requirements of
its debt agreements.
Ratio number 2.
Reason for Investigation: An 11-2/3% increase in the amount of time required to collect
receivables provides less cash with which to pay bills. This change could represent a change in
the collection policy which could have a significant effect on the company in the future. It may

also indicate that a larger allowance for uncollectible accounts may be needed if accounts
receivable are less collectible than in the prior year.
Nature of Investigation: Determine the cause of the change in the time to collect and evaluate the
long-term effect on the company’s ability to collect receivables and pay its bills. The difference
between the company’s and the industry’s days to collect could indicate a more strict credit
policy for the company. The investigation of this possibility could indicate that the company is
forfeiting a large number of sales and lead to a recommendation for a more lenient credit policy.
Ratio number 3.
Reason for Investigation: The difference in the company’s days to sell and the industry is
significant. This could indicate that the company is operating with too low an inventory level
causing stock-outs and customer dissatisfaction. In the long term, this could have a significant
adverse effect on the company.
Nature of Investigation: Investigate the reasons for the difference in the days to sell between the
company and the industry. Determine the effect on the company in terms of customer
dissatisfaction and lost customers due to stockouts or long waits for delivery.
Ratio number 4.
Need for investigation No, very little change from one year to the next
Reason for Investigation: N/A
Nature of Investigation: N/A
Ratio number 5.
Need for investigation No, very little change from one year to the next and consistent with
industry figures
Reason for Investigation: N/A
Nature of Investigation: N/A
Ratio number 6.
industry figures
Reason for Investigation N/A
Nature of Investigation N/A
Ratio number 7.
industry figures
Ratio number 8.
Reason for Investigation: The company appears to have raised prices during the past year to
achieve the gross margin of the industry. However, it appears that the industry’s gross margin
has been reduced from either increased cost of goods that could not be passed on to customers in
price increases or reduction in selling prices from competition, decreased demand for product, or
overproduction. The result of these changes could be significant to the company’s ability to
produce a profit on its operations.
Nature of Investigation: Determine the reason for the change in the industry’s gross margin
percent and the effect this might have on the company.
Ratio number 9.
Need for investigation No, very little change from one year to the next
c. Mahogany Products operations differ significantly from the industry. Mahogany has
operated in the past with higher turnover of inventory and receivables by selling at a lower gross
margin and lower operating earnings. However, the company has changed significantly during
the past year. The days to convert inventory to cash have increased 7% (11 days), while the
current ratio has decreased by 15%. The company was able to increase its gross margin percent
during the year when the industry was experiencing a significant decline in gross margin.
8-20 a. Select a sample of sales from the sales journal and vouch (trace to) the sales invoice
and then to the shipping document. Any credit sales not shipped (i.e. absence of shipping
document) is likely an inappropriate/nonexistent sale.
Trace cash sale invoices to cash receipts journal or bank deposit. Any sale recorded as a
cash sale but not paid for would likely be a non-existent sale.
b. Select a sample of shipping documents and trace to sales invoice and then to sales journal, to
find sales shipped but not recorded in the sales journal.
Trace cash deposits for the last week before the year end to the sales journal to find
potential unrecorded sales.
8-21 Examples of audit evidence the auditor can use to support each of the functions are:
a. Inspect invoice from vendor, direct external confirmation with vendor
b. Inspect the physical inventory, direct internal confirmation with custodian
c. Direct external confirmation with customer, inspect cash receipts journal and bank
deposits for subsequent payments
d. Inspect title documents for ownership of asset, inspect invoice from vendor
e. Direct external confirmation with vendor, inspect client’s copy of vendor’s statement
f. Inspect the physical inventory for quality, inspect sales invoice of subsequent sale of
goods showing marked down sale price
g. Petty cash count (inspection), direct internal confirmation with custodian
8-22 a. Confirmations are normally more reliable evidence than inquiries of the client
because of the independence of the outside party confirming the information.
b. Confirmation of bank balances is considered highly reliable whereas confirmation
of a department store charge account is often not considered reliable. Banks are
accustomed to confirmations from auditors and normally maintain excellent
accounting records, whereas most customers of department stores have neither

characteristic.
c. If an auditor is not qualified to distinguish between valuable inventory (e.g.,
diamonds) and worthless inventory (e.g., glass), the physical examination of
inventory would not be considered to be reliable evidence.
d. Recalculation tests are highly reliable because the auditor is able to gain 100%
assurance of the accuracy, but the tests only verify whether the recorded amounts
are accurately totaled. These tests do not uncover omissions or fictitious amounts.
e. Relatively reliable documentation examples include: vendor statements, bank
statements, and signed lease agreements. Relatively unreliable documentation
examples may be: copies of customer invoices, internal memoranda and other
communications, and a listing of fixed asset additions.
The difference between reliable and unreliable documentation examples
above is whether they originate from outside or inside the client's organization.
External information is considered more reliable than internal documentation.
f.
1. External confirmation of accounts receivable - Corporation accustomed to
confirmations compared to a member of the general public.
2. Examination of the corporate minutes - Experienced partner compared to a
new assistant.
3. Physical observation of inventory - Auditor knowledgeable in the client's
inventory compared to one who is not.
4. Lawyer’s letter - General counsel compared to a lawyer involved only
with patents.
g. Analytical procedures can provide evidence of the likelihood of misstatements in

the financial statements, but they are rarely sufficient by themselves to conclude
that the statements are misstated. Other supporting evidence is needed to
determine whether apparent misstatements are actually material.
8-23
Audit Procedure a. Type of Audit b. General Audit
Evidence Objective
1. Using audit software, extend unit Recalculation and Completeness and
prices times quantity on the inventory Reperformance allocation
list, foot the list, and compare the total
to the general ledger.
2. Trace selected quantities from the Inspection Existence and
inventory list to the physical inventory allocation
to make sure the items exist and the
quantities are the same.
3. Question operating personnel about Inquiry of the client Valuation
the possibility of obsolete or slow-
moving inventory.

4. Select a sample of quantities of Inspection Completeness and

inventory in the factory warehouse, allocation
and trace each item to the inventory
count sheets to determine if it has
been included and if the quantity and
description are correct.
5. Compare the quantities on hand and Analytical Allocaion
unit prices on this year’s inventory procedures
count sheets with those in the
preceding year as a test for large
differences.
6. Examine sales invoices and contracts Inspection Rights and
with customers to determine if any obligations
goods are out on consignment.
Examine vendors’ invoices and
contracts with vendors to determine if
any goods on the inventory listing are
owned by vendors.
7. Send letters directly to third parties External Existence,
who hold the client’s inventory and confirmation completeness, and
request they respond directly to us. allocation
8-24
a. The use of analytical procedures in an audit provides two general advantages to a public
accountant:
 a broad view is obtained of the data under audit
 attention is focused on exceptions or variations in the data
A broad view of the data under audit is needed by the public accountant to draw conclusions
about the data as a whole — such conclusions cannot be drawn by merely looking at individual
transactions. The application of analytical procedures to obtain this broad view requires a
discerning analysis of the data, which results in overall conclusions upon which the public
accountant’s audit satisfaction rests. The public accountant is thus able to satisfy him or herself
as to the reasonableness, validity, and consistency of the data in view of the surrounding
circumstances.
The focusing of the auditor’s attention on exceptions or variations in the data results in a
more efficient and economical audit because there is a reduction in the amount of detailed testing
that would be required in the absence of overall checks, to uncover these exceptions or
variations. Furthermore, manipulations of accounts may be revealed because the double-entry
bookkeeping system extends the effects of manipulations to additional accounts, which will then
bear a changed relationship to other accounts.
In addition, managerial problems and trouble spots will be highlighted for the auditor and
may lead to the opportunity for the auditor to be of additional service to his or her client.
b. The ratios that a public accountant may compute during an audit as overall checks on
balance sheet accounts and related income accounts may include the following:

 accruals of individual expenses to related total expenses

 accounts payable to purchases (days of purchases outstanding)
 long-term debt and interest expense thereon
 return on equity (relationship of net income to ownership equity)
 return on investments (relationship of investment income to investments).
c. (1) The possible reasons for a decrease in the rate of inventory turnover include:
 decline in sales
 increase in inventory quantities, intentional or unintentional
 incorrect computation of inventory because of errors in pricing,
 extensions, or taking of physical inventory
 inclusion in inventory of slow-moving or obsolete items
 erroneous cut-off of purchases
 erroneous cut-off of sales under the perpetual inventory
 unrecorded purchases
 change in inventory valuation method
(2) The possible reasons for an increase in the number of days’ sales in receivables
include:
 change in credit terms
 decreasing sales
 change in the sales mix of products with different sales terms
 change in mix of customers
 improper sales cut-off
 unrecorded sales
 lapping (discussed further in Chapter 12)
 slower collections caused by tighter economic conditions or lowering of the quality of the
receivables

Professional Judgment Problem
8-25 a.
Type of Possible Evidence at Provincial Collected from? Level of

Evidence Auditor’s Office Objectivity
of Evidence
Inspection Examine state of repair of equipment N/A, collected High
used for scanning student answers by auditor
Observation Observe data entry process (recording Data entry staff Medium
of grades by student) for access
controls
Inquiries of the Inquire about the process of School Medium
client administering tests and recording administrative
grades staff, test centre
staff
External Confirm with schools the number of Individual school High
confirmation students that wrote tests at the school, administrators
and the nature of information
collected
Recalculation Test calculate the school averages for Test centre Medium
a sample of schools
Reperformance Match school results to the data Individual school High
reported by the test centre administrators
and Test centre
Analytical Compare school averages and look for Test Centre Low
procedures schools with excessively high or low
grades; compare current year to prior
year grades for all schools
Refer to Table 8-4. High quality evidence is evidence that is completed by the auditor, or is
obtained from an external party. Where the auditor obtains information from a test centre or
school, but can corroborate this information, then it is of medium quality.

b.
Transaction-related Possible Audit Procedure
Audit Objective
Occurrence Compare the number of students enrolled in a school to the
number of students tested (tested number should be less than
enrolled)
Completeness Obtain a list of all of the schools in the jurisdiction and compare
the total to the number of schools tested (should be equal).
Accuracy Recalculate the average grades by school for a sample of schools.
Classification Determine which schools are public schools versus high schools
and whether statistics have been recorded in the correct grouping.
Cutoff n/a
Case
8-26 The following are deficiencies in the sufficiency and appropriateness of the evidence in
the audit of accounts payable for Grande Stores:
McClure Advertising Credits – An insufficient number of external confirmations (four) were

sent. The use of alternative procedures is probably acceptable. However, one credit was
confirmed by telephone, rather than by written confirmation. Although the differences found
were immaterial, the auditors should have determined the reason for the differences, and any
errors should have been projected to the population.
Twenty additional credits were selected for testing. Whether this is a sufficient number is a
matter of judgment, and depends on several factors. With a fairly small sample, it is critical that
the items selected for testing adequately represent the population. The testing relied on internal
documentation, which is insufficient to support the credits. The placing of the ad is insufficient
evidence without supporting evidence from the vendor supporting the reduction in accounts
payable.
Springbrook Credits – These credits were confirmed by telephone, and were not supported by a
written confirmation. The staff auditor was suspicious of the client’s unwillingness to allow
written confirmation of the amounts, as well as the client’s changing explanation of the nature of
the credits, but did not perform additional testing to resolve any doubts about the validity of the
credits.
Ridolfi Credits – The auditor obtained an oral confirmation that these credits were not valid.
The client indicated that the auditor's information was incorrect, but would not allow the auditor
to obtain written confirmation for these credits. In addition, the credit memos had been altered,
which should have further indicated to the auditor that the credits were not valid.
Accounts Payable Accrual – The auditors sent 50 accounts payable confirmations. Whether this
is a sufficient number of confirmations is a matter of auditor judgment. However, the adequacy
of the confirmations as evidence is significantly undermined by the knowledge that the client

told suppliers how to respond. As a result, the auditor should have verified the confirmed
balances using alternative procedures. There is no discussion of the performance of alternative
procedures for nonresponses, or the resolution of the six responses that were not reconciled to
Grande’s records.
The auditors agreed to an adjustment of $260,000 when their cutoff tests indicated a
potential liability of $500,000. It would be appropriate for the auditors to agree to a lower
amount only if additional testing supported a lower accrued liability.
Ongoing Small Business Case: Banking at CondoCleaners.com
8-27
a. External documentation will be bank statements, statements from the credit card service
provider, and cheques that have been cleared. Supplier invoices will also be external. Internal
documents will be expense reports.
b. Inspection: Compare deposit amounts to the bank statement.

Observation: N/A
Inquiries of the client: Ask about the process for preparing expense reports.
External confirmation: Send a confirmation to the bank about the bank account balances.
Recalculation: Recalculate the bank reconciliations.
Reperformance: Match supporting documents to the amounts paid on expense cheques and trace
the cheque amount to the appropriate journal.
Analytical procedures: Perform a vertical analysis month-by-month for the accounts to consider
reasonableness.

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Title: Trouble
Author: George O. Smith
Illustrator: Swenson
Release date: June 9, 2022 [eBook #68272]
Language: English
Original publication: United States: Street & Smith Publications,

Incorporated, 1946
Credits: Greg Weeks, Mary Meehan and the Online Distributed

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*** START OF THE PROJECT GUTENBERG EBOOK TROUBLE ***

Trouble
By GEORGE O. SMITH
[Transcriber's Note: This etext was produced from

Astounding Science-Fiction, July 1946.
Extensive research did not uncover any evidence that
the U.S. copyright on this publication was renewed.]
Tom Lionel, Consulting Engineer, awoke with a shake of his head. At
once, he was out of bed. He consulted first the calendar and then the
clock. The thought struck him funny. He hadn't been drinking, but the
idea of looking at a calendar upon awakening might be construed as
an admission that he didn't know what time of what day it was.
Or mayhap what month.
"Ding it," he grunted. "I've been away again."
He dressed by stages. At the trousers department, Tom wandered out
into the living room and stood over a chessboard, studying the set-up.
The opponent had moved the queen to the rook's fourth, menacing
his bishop. Tom smiled and moved his knight to his knight's sixth and
checked the opponent's king on the rook's first, and the queen
simultaneously. He slid the drawer below the table open and removed
a little standing sign that said, in red, block letters:
CHECK!
"Let him try that one, will he?" laughed Tom. The move was basic; in
checking the king and menacing the queen simultaneously, Tom had
—or would upon the next move—collect himself his opponent's queen
with no great loss.
At the shirt and necktie stage, Tom Lionel stood teetering on his heels
before the bookcase on the right of the fireplace. He took from the
case a slim volume and read the title with considerable distaste:
"Theory of Monomolecular Films in Fission-Reaction"
By A. G. Rodan, Ph.D., M.M., LL.D.
"Yipe!" exploded Tom as he opened the book and glanced at the
price: $9.50. With ease he prorated the price against the thickness of
the volume and came to the estimate that the book had cost
approximately nineteen dollars per inch excluding covers. He riffled
through the pages and paused here and there to read, but the pages
themselves were a good average of four lines of text to the rest of the
page full of nuclear equations.
Tom Lionel snorted. He ran down through one of the arguments and
followed it to conclusion.
"Why can't he get something worth reading?" he yawned, putting the
book back in its place. "Darned impractical stuff." As usual with a man
who spends much time in his own company, Tom Lionel talked aloud
to himself—and occasionally was known to answer himself back.
"The whole trouble with the entire tribe of physicists per se is the fact
that once, someone told one of them that he was a theorist, an
idealist, and a dealer in the abstract. Now the bunch of them are
afraid to do anything practical because they're afraid if they do,
people won't know they're physicists. Physicists are a sort of
necessary, end-product evil."
During the breakfast section of Tom's morning duties, Tom read the
latest copy of the "Proceedings of the I.R.E." with some relish. A
paper on the "Crystallographic Generation of Microwaves" complete
with plainly manipulated differential calculus and engineering data
occupied most of his time. The rest of the time through coffee he was
making marks on the tablecloth with the egg-laden end of his fork and
trying to fit the crystallographic generation of microwaves into a
problem that made the article most timely; the solution for which he
had been seeking for a week.
The mail arrived. Three household bills were filed in the desk to await
the first of the month. Two advertisements were filed into the
wastebasket. One thick letter addressed to Thomas Lionel, Ph.D.,
M.M., was taken carefully between thumb and forefinger and
deposited in a letter file.
Tom then inspected the other letter file and found two letters
addressed to Tom Lionel, Consulting Engineer, which he opened and
read. One was from a concern in Cedar Rapids that wanted some
information on a method of induction heating glued joints selectively
without waiting for the normal drying time. The other was a letter from
a medium-sized town in Illinois pertaining to some difficulty they were
having with police-radio coverage of that area.
Both letters meant money, and Tom Lionel set the first aside while he
started to work on the second. From the engineering data supplied by
the local engineer, Tom decided that a change in antenna height and
a conversion from quarter-wave current fed to a one and one quarter-
wave current fed antenna would give the desired coverage. He
concluded his letter with four pages of calc, seven diagrams, and as a
last measure dropped a photograph of a similar installation in the
envelope.
He gloated. That would net him a pretty penny. The guy who hung
that antenna on top of the water tank thought he was smart, getting
all that height. But the roof was metal, and therefore the radiation
angle took off from the rooftop as a basis rather than the true ground
a hundred feet below.
The tank top was greater than three wave lengths in diameter, and
conical to boot. Tom grinned at the maze of mathematics that solved
it—and as far as he was concerned it was solved, for Tom Lionel was
a top-flight engineer.
He checked on his calendar. Metal for the sonic job was not due for a
week yet; a minute casting was still being held up for the foundry's
pleasure; and the life-test of the bearing-jewel for the Watson
Instrument Corporation was still on. Good jewel that. No sign of
freeze-up or wear-out after twenty-seven million cycles.
"Theory of Monomolecular Films be hanged," he snorted. "He's the
kind of a guy that would try to analyze the brew that MacBeth's three
witches were cooking up. And don't ask why!"
What he objected to most was the other's unconcern at spending
money. Nine bucks and fifty cents for a book of the most questionable
theory—and nine fifty that the other didn't really earn. It was getting
worse. The other was really beginning to obtrude. He hadn't minded,
particularly, except for the mental anguish. He'd become reconciled to
it by sheer rationalization. Way, way down deep in his heart he knew
that he'd have enjoyed being a physicist himself. But physicists were
not particularly practical, and money was made with practical things.
He knew, and recognized, that his retreat from being a physicist
himself had given him a dislike for the breed, especially when he
knew that solution of a problem was theirs, but reduction to practice
was his. He was continuously being forced to take some physicist's
wild-haired scheme and making it cook meat, open cans, or dig post
holes. The physicist had all the fun of standing on the threshold and
delving into phenomena that abounded just over the line. And then
instead of working on the suggestion that the physicist had located in
the wilderness, the physicist just tossed it over his shoulder into
Lionel's lap and went on digging.
Obviously it must be fun to dig in the unknown, but why in the name
of sense—
"Theory of Monomolecular Films in Fission-Reaction," scowled Tom
Lionel. "A hypothesis on a theory for an idea, based upon a practical
impossibility, and directed at a problem solvable only by concentrated
masses. He should be working in a negative universe where
nonmatter repels nonmatter disproportionately to the nonmass and
inversely disproportional to the not-square of the not-distance
between. Holy Entropy."
Tom Lionel went out of the house, mentally tinkering with the glue-
joint heating problem. That shouldn't be hard, he thought, high-
frequency heating was no trick, though the furniture company
probably had no one in the place that knew what high frequency
really meant.
He'd take a chair, rip it apart at the joints, and start tinkering with the
big radio-frequency heater in the lab. Another fat consulting fee—
eminently practical and satisfying—from the simple engineering of a
means to accelerate the drying of glue by electronics.
Eminently practi—hell!
Lionel stared. The door closed slowly behind him as he walked ever
so slowly across the floor of the lab. There was his radio-frequency
heater, all right. But it was not in its usual place. It was across the
room nuzzling up against another piece of equipment—the latter new,
shining, and absolutely alien to the lab.
Tom went over to the set-up and inspected it with critical derision.
The alien piece of equipment had been a standard model of mass
spectrograph. Its sleek sides were gaping open, and the high-
frequency heater was permanently wired—piped—into the very heart
of the spectrograph. Peering into the maze of one-inch copper tubing
that led from the output of the high-frequency heater to the insides of
the spectrograph, Lionel saw at once what the reason was.
The spectrograph had been overhauled by the physicist. It now
contained a pair of "D" chambers.
Operating on the cyclotron principle, the spectrograph was using the
output of the high-frequency heater to energize the D chambers.
Lionel nodded. The frequency was about right; could be adjusted to
the proper value without any trouble at all. He felt an infinitesimally
short twitch of admiration for the idea before he started to roar in
anguish.
His first impulse was to rip the gadget apart so that he could go to
work on something practical. But the engineer's admiration for the
idea stopped him.
But this was getting thick.
It had been getting thicker for a long time. It was getting intolerable.
He didn't mind too much having volumes of utterly cock-eyed theory
about the place, but when the physicist starts to appropriate
equipment for his screwball ideas, it was time to call a halt.
Lionel left the laboratory, returned to his house, and called a
psychiatrist.
An hour later he was in Dr. Hamilton's office.
"Why are you here?" asked Hamilton pleasantly.
"I want to get rid of a physicist."
"Tell him to go away."
"Can't. Impossible."
"Nothing is impossible."
"Look, doctor, have you ever tried to light a safety match on a wet bar
of soap?"
"Suppose you tell me about it, then."
Tom Lionel was more than talkative for a half hour.

"A clear-cut case of split-personality. A most remarkable cleavage."
Lionel muttered something.
"What did you say?"
"I'd rather not repeat it," said Tom.
"Please—it may have a bearing on your case."
"I was merely thinking of an hypothetical case. Says the doctor to his
associate: 'Doctor, look at this magnificent tumor,' and his buddy
answers: 'Lovely, but you should see my case of angina; it's positively
beautiful.'"
"Oh?"
"So I'm a most remarkable case, huh?"
"You are. There seems to be a deep-seated liking for one another
that has been barred psychologically by certain factors in your youth.
You play chess. You respect one another's property—"
"That's what you say. The other bird just screwed up my dielectric
heater to fiddle up a cyclotronic spectrograph."
"Might try putting it to work," observed Hamilton.
"Oh, I will. After all, he can't get ahead of me."
"Then why the outcry?"
"Because who knows what he'll do next."
"He's appropriated things before?"
"Only to the extent of buying books."
"What manner of books?"
"The last one he purchased was entitled 'The Theory of
Monomolecular Films in Fission-Reaction.'"
"Mind explaining that? It sounds like Greek to me."
Lionel smiled tolerantly. "If you have a flat table and a pile of kid's toy
blocks, you can either build a structure or lay 'em on the table in a
single layer. Since molecules are often called the building-blocks of
the universe, the analogy is quite clear. The blocks in a single layer
form a monomolecular layer. Fission reaction is a self-sustaining
nuclear reaction."
"Sounds quite erudite."
"In the first place, no one with any sense would try to make use of it.
It is the type of volume that a physicist would write in the hope that he
will get letters pro and con on the subject which will be useful in
forming a later theory."
"Then it is not a complete waste of time."
"Any time I lay out nine bucks for a half-inch of paper—"
"Expensive, isn't it?" asked the doctor.
"Sure. Those things are not best sellers, usually. The publisher puts it
out in the name of science and must at least get his printing cost out
of the very limited edition."
"I see. And you want to get rid of this physicist?"
"Who wouldn't? After all, I had this body first. He's an interloper."
"Seems that way."
"It is—and it's annoying."
"We may be able to do something about it," said the psychiatrist.
"Permit me to think about this for a few days. We'll have another
consultation in a week. We may require another one before I make a
decision. But it seems to me that you are both intelligent, useful
citizens. Neither of you is irresponsible or dangerous. You have
enough money to afford schizophrenia for a while. Especially if the
personality B dreams up things that personality A makes practical,
financially advantageous use of. Ergo you need fear nothing for a few
weeks."
"Ugh. Means I'll have to go out and buy another high-frequency
heater. O.K., doctor. I'll lay low."
Thomas Lionel, Ph.D., M.M., awoke with a shake of his head. At

once, he was out of bed. He consulted first the calendar and then the
clock. The thought struck him funny. He hadn't been drinking, but the
idea of looking at a calendar upon awakening might be construed as
an admission that he didn't know what time of what day it was.
Or mayhap what month.
"I've been away again," he grunted.
He dressed by stages. At the trousers department, Thomas
wandered out into the living room and stood over the chessboard,
studying the set-up.
He removed the little sign that said:
CHECK!
and dropped it into the drawer again. He moved his king aside with a
contemplative smile. His queen was gone on the next move, he knew.
So he had lost a major piece. So that other bird thought that losing a
major piece was bad, huh? Well, winning battles does not count—it is
a matter of who wins the last one.
He found the volume on the theory of monomolecular films and
started to read with relish. Over coffee, at breakfast, Thomas made
notations on the margin of the book with a pencil; checked some of
the equations and though he found them balanced properly, the
author was amiss in not considering the lattice-effect in his
presumptions. No monomolecular film could follow that type of
reaction simply because—well, it could follow it, but since the thing
was to take place in a monomolecular film, the fission-reaction and
the radiation byproducts that cause the self-sustaining nature could
only be effective in a plane of molecular thickness. That meant a
.999999% loss, since the radiation went off spherically. Fission-
reaction might take place, but it would be most ineffective. Besides,
the equations should have taken that into account.
He stopped by the desk and wrote for a half hour, filling seventeen
pages full of text and mathematics, explaining the error in the author's
presumption.
He sealed it up and mailed it with some relish. No doubt that letter
would start a fight.
He found his letter in the letter file and read it. It was a request to
indulge in some basic research at a fancy figure, but Thomas was not
particularly interested. He was thinking of another particular line of
endeavor. He dropped the letter into the wastebasket.
He went into the lab and took a look at his cyclotronic spectrograph.
There was a letter hung on the front. Thomas opened it and read:
Dear Isaac Newton:
I don't particularly mind your laying out thirty-five hundred bucks for a
mass spectrograph.
Appropriating my high-frequency generator didn't bother me too
much.
Nor did your unsymmetrical wiring and haywire peregrinations in and
about the two of them annoy (too acutely) my sense of mechanical
and electrical precision.
But the idea of your using the ##&&%!! spectrograph only once—just
for pre-change calibration—makes me madder than mad!
Sincerely,
Tom Lionel,
Consulting Engineer
Thomas grinned boyishly and picked up the notebook on top of the
high-frequency heater. It was Tom's, and the physicist riffled through it
to the last-used pages. He found considerable in the way of notes
and sketches on the cyclotronic spectrograph. Cut in size by about
one quarter, the thing would be not only a research instrument of
value, but would be of a price low enough to make it available to
schools, small laboratories, and perhaps production-lines—if Tom
Lionel could find a use for a mass spectrograph on a production line.
Thomas grinned again. If it were possible, Tom would certainly have it
included on some production line, somewhere.
He looked the spectrograph over and decided that it was a fine piece
of apparatus. So it wasn't the shining piece of commercial panel and
gleaming meters. The high-frequency plumbing in it had the touch of
a one-thumbed plumber's apprentice after ten days' drinking and the
D plates were soldered together with a heavy hand. But it did work—
and that's all he cared. The knobs and dials he had added were
sticking out at all angles, but they functioned.
And the line-voltage ripple present in the high-frequency generator
made a particular mess out of the spectrograph separation. But
electronic heaters do not normally come luxuriously equipped with
rectifiers and filters so that the generator tubes were served with pure
direct current—the circuit was self-rectified which would give a
raucous signal if used as a radio transmitter. That generated a ripple-
varied signal for the D plates and it screwed up the dispersion. The
omission of refinement satisfied Thomas. So it wasn't perfect. It would
be by the time Tom Lionel got through with it.
And for the time being, Thomas would leave it alone. No use trying to
make it work until Tom made an engineering model out of the
physicist's experiment.
Smiling to himself, Thomas went to work in the laboratory. He ignored
Tom's experiments and started a few of his own accord.
Some hours later, the doorbell rang and Thomas went to the door to
find a letter, addressed to Thomas Lionel, Ph.D. It was from an Arthur
Hamilton, M.D.
"Hm-m-m," said Thomas. "Is there something the matter with me?"
He slit the envelope and removed a bill for consultation.
"Consultation? Consultation? What in the name of all that's unholy is
he consulting a doctor about? Or is the doctor consulting—no, the bill
is rendered in the wrong direction. I know my consulting engineer."
The physicist put on his hat and headed forth. It was not much later
that he was sitting again in the same chair, facing Hamilton.
"You're back."
"Nope," smiled Thomas. "I'm here, not back."
"But you were here last week."
"That was another fellow. Look, Hamilton, I think I require your
assistance. I have an engineer that is no end of bother."
"Want to get rid of him, huh?" answered Hamilton. The suppressed
smile fought valiantly and won, and the doctor's face beamed and
then he broke into laughter. "What am I, anyway? Man, I can't take
money from both sides. That's ... that's ... barratry, or something."
"I'm the same man."
"Nope. You are not."
"Well, by and large, I thought it might be of interest to you to hear
both sides. It might be that I am a useful citizen in spite of what the
engineer says."
"The engineer's opinion is that no physicist is worth an unprintable."
"The physicist's opinion is that all engineers are frustrated physicists."
"Might challenge him to a fight."
"Have. But chess isn't too satisfying. I want blood."
"It's your blood."
"That's the annoying part of it all. He seems entirely a different
fellow."
"The cleavage is perfect. You would think him a separate entity."
Hamilton paused, "But neither of you refer to the other by name. That
indicates a psychological block that may be important evidence."
"O.K., what do we do?"
"I must discover the reason for the split personality."
"I can give you that reason. The engineer was forced into being a
practical man because money lies in that direction. Upon getting out
of college, there was a heavy debt. It was paid off by hard work—a
habit formed and never broken. Bad habits, you know, are hard to
break."
"Interesting."
"Well, the desire to delve into the physicist's realm stayed with the
engineer, but people who had heavy purses were not interested in
new ways to measure the ether-drift or the effect of cosmic radiation
on the physical properties of carbon. Money wants more perfect
pencil sharpeners, ways of automatically shelling peas, and efficient
methods of de-gassing oil. All these things are merely applications in
practice of phenomena that some physicist has uncovered and
revealed and put on record so that some engineer can use the effect
to serve his ends.
"At any rate, the desire to be a physicist is strong, strong enough to
cause schizophrenia. I, Dr. Hamilton, am a living, breathing, talking
example that an engineer is but a frustrated physicist. He is the
troubled one—I am the stable personality. I am happy, well-adjusted,
and healthy."
"I see. Yet he has his point. You, like other physicists, are not
interested in making money. How, then, do you propose to live?"
"A physicist—or an engineer—can always make out well. The bank
account at the last sitting was something like ninety-four thousand,
six hundred seventeen dollars and thirty-four cents."
"That's quite a lot of money."
"The engineer considers it a business backlog," said Thomas.
"Equipment is costly. Ergo—see?"
"I see. Seems you laid out a large sum of money for a mass
spectrograph."
"I did."
"And what did he do?"
"He made notes on it and is going to peddle it as a commercial
product. He'll probably make fifty thousand dollars out of it."
"I suggested that," admitted the psychiatrist.
"That's all right. I don't mind. It sort of tickles me, basically. I do things
constantly that make him roar with anguish. And then his only rebuttal
is to take it and make something practical out of it."
"I see."
"That, you understand, is the game that has been going on for some
time between all physicists and engineers."
"If you'd leave one another alone, you'd all be better off," said
Hamilton. "From what I've heard, the trouble lies in the fact that
physicists are not too interested in the practical details, whilst the
engineer resents the physicist's insistance upon getting that last point
zero two percent of performance."
"Are you willing to give me my answer?"
"What answer?"
"How do I get rid of the engineer? One of us has got to go, and being
the stable, happy one, I feel that all in all I am the best adjusted and
therefore the most likely to succeed. After all, I am the ideal
personality according to the other one. He'd like to be me. That's why
he is, from time to time."
"Sort of a figment of your own imagination."
"That's me."
"Then I wonder—Yet, I did accept his case, not yours."

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Concept Check Answers

Copyright  2013 Pearson Canada Inc. 1

Audit Challenge 8-1

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Basis of Medical Test Audit of Financial

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8-6 The three determinants of the persuasiveness of evidence are sufficiency,

Factor Determining Example of Appropriate Evidence

accounts receivable balances

8-9 The four characteristics of the definition of an external confirmation are:

Copyright  2013 Pearson Canada Inc. 5

8-13 Attention-directing analytical procedures occur when significant, unexpected differences

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Discussion Questions and Problems

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b. 1. Make an estimate computation of total commission expense by multiplying the

c. The financial position seems to be worsening, as inventories and accounts receivable

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g. Analytical procedures can provide evidence of the likelihood of misstatements in

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4. Select a sample of quantities of Inspection Completeness and

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 accruals of individual expenses to related total expenses

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Professional Judgment Problem

Type of Possible Evidence at Provincial Collected from? Level of

Copyright  2013 Pearson Canada Inc. 14

McClure Advertising Credits – An insufficient number of external confirmations (four) were

Copyright  2013 Pearson Canada Inc. 15

Ongoing Small Business Case: Banking at CondoCleaners.com

b. Inspection: Compare deposit amounts to the bank statement.

Copyright  2013 Pearson Canada Inc. 16

Author: George O. Smith

Release date: June 9, 2022 [eBook #68272]

Original publication: United States: Street & Smith Publications,

Credits: Greg Weeks, Mary Meehan and the Online Distributed

*** START OF THE PROJECT GUTENBERG EBOOK TROUBLE ***

[Transcriber's Note: This etext was produced from

Tom Lionel was more than talkative for a half hour.

Thomas Lionel, Ph.D., M.M., awoke with a shake of his head. At

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* START OF THE PROJECT GUTENBERG EBOOK TROUBLE *