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Auditing And Assurance Services A Systematic Approach

Auditing and Assurance Services A Systematic Approach

Part III: Understanding Audit Concepts and Tools
Chapter 7
Audit Evidence: A Framework
Learning Objectives:
By studying this chapter, students should be able to:
1. Identify the basic sources of audit evidence, including for review engagements.
2. Describe the assertions contained in financial statements and notes thereto.
3. Discuss what is meant by the sufficiency and reliability of evidence.
4. Explain directional testing and its importance to achieving audit efficiency.
5. Identify basic audit and review procedures and the assertion(s) involved in each
test.
6. Explain the nature and purposes of audit programs.
7. Describe the purposes and contents of good audit documentation for audits and
reviews.
8. Understand issues surrounding auditing management’s estimates.
9. Apply the decision analysis and ethical decision-making frameworks to situations

involving audit evidence.
Teaching Suggestions
Auditing is a process of objectively gathering and evaluating evidence pertaining to
assertions. In planning an audit, three basic questions need to be answered: What
procedures should be performed? How much evidence is needed? When should the
procedures be performed? Audit programs, no matter what their size, whether
standardised or customised, are designed to provide assurance on management’s
Copyright © 2012 Cengage Learning Australia Pty Limited

Assurance and Auditing: A business risk approach 3e
Instructor’s Manual Chapter 7: Audit Evidence: A Framework 375
assertions on financial statements and notes or other measures of business performance.

The specific audit procedures used must address the risk of potential misstatement. This
chapter develops the financial assertions that are contained in financial statements and
relates the gathering of evidence to the specific assertions tested. Different types of
evidence are identified along with characteristics that affect the persuasiveness of audit
evidence. The auditor’s process of gathering and assessing the evidence must be
documented explaining the evidence gathered, the auditor’s reasoning process, and the
conclusions reached.
The following points need to be emphasised when discussing audit evidence:
(1) Different audit objectives are served by different forms of evidence; some forms of
evidence serve more than one objective. Give several examples of audit objectives and
explain how they may be met with one or more of these evidence types.
(2) Some types of evidence are inherently stronger than others. Go through the reliability
of evidence from various sources. Explain how the quality of the client’s internal control
system affects the reliability of internal evidence.
(3) The Auditing Standards require that ‘sufficient and competent evidence’ be obtained,
but does not specify what constitutes such evidence. The components of competence
(validity – relating to evidence quality, and relevance – relating to audit objects) should
be fully discussed. Explain the role of professional judgement in the evidence-gathering
process. Explain what is meant by directional testing.
Develop a few tests of transactions examples and go over them. Students should easily
grasp the material dealing with sources of audit evidence, but the importance of
effectively using analytical procedures should be emphasised. Explain how analytical
procedures are increasingly being used by the profession both for audit planning purposes
and as a source of evidence regarding specific account balances. Explain the nature and
purposes of audit programs.
Start the discussion of audit documentation by emphasising that audit documents are the
only evidence the auditor has that s/he complied with Auditing Standards. Explain the
role of audit documentation in litigation both from the perspective of the plaintiff and the
defence legal counsel. Distinguish between current files and permanent files; provide

examples of the contents of each. Explain the uniqueness of procedures for testing
management’s estimates.
Illustrate what typical audit documentation looks like; explain its components and
critique its ‘quality’. Note that a good documentation ‘stands alone’ and explain this
concept. Note that audit documents are currently prepared by computer in most public
accounting firms and, as a quality control, are subject to engagement quality control
partner review.
One pedagogical approach to this material would be to follow the lecture/discussion with
an application exercise (which could be done in class). Divide the class into ‘audit teams’
and require each to identify management’s assertions and an evidence-gathering strategy
for several account balances. Reconvene the class and compare the various ‘audit
programs’. The complexity of the assignment depends upon the number and nature of the
accounts used and the background data and assumptions provided (e.g., quality of client’s
control system, integrity of management, new vs continuing client, etc.). Besides being
able to point out that valid alternatives exist for evidence gathering, this exercise
facilitates further discussion of audit effectiveness and efficiency.

Suggested Homework Problems
Learning Multiple Choice Discussion and

Review Questions Cases
Objectives Questions Research Questions
LO 1 7-1, 7-2, 7-5, 7-29 7-42
Pp 253 7-6, 7-8, 7-13, 7-15
LO 2 7-3, 7-4 7-6 7-26, 7-27, 7-32, 7-33, 7-41, 7-43

Pp 254-255 7-35, 7-36
LO 3 7-2, 7-5, 7-6, 7-1, 7-2 7-29, 7-30, 7-31, 7-34
Pp 256-262 7-8, 7-12, 7-13,
7-15, 7-16, 7-22,
7-24
LO 4 7-9, 7-10, 7-17 7-4 7-31, 7-32
Pp 262
LO 5 7-11, 7-12, 7-14, 7- 7-2, 7-3, 7-26, 7-27, 7-28, 7-29, 7-40, 7-41,
Pp 262-268 15, 7-16 7-5, 7-6, 7-8 7-30, 7-33, 7-34, 7-35, 7-42
7-36
LO 6 7-18, 7-19
Pp 268-269
LO 7 7-7, 7-20, 7-21, 7-5, 7-9 7-29, 7-30, 7-37, 7-38
Pp 269-273 7-23
LO 8 7-25 7-39
Pp 273-274
LO 9 7-44, 7-45
Chapter 3

Chapter Outline
I. OVERVIEW OF THE AUDIT MODEL
A. Auditors spend most of their time obtaining and evaluating evidence
concerning the assertions management makes through the financial report.
The evidence-gathering process is the core of an audit. The auditor considers
the risk associated with an account balance or other measures of business
performance, the types of evidence available, and the reliability of alternative
sources of evidence to develop an audit approach. Management makes
assertions about a number of different things: earnings and financial
conditions, the organisation’s internal controls and its operations, compliance
with governmental regulations, and other measures of business performance
such as on-time arrival information for an airline. Auditors may be called on
to perform audits of these assertions. This chapter develops a framework for
approaching the detailed evidence-gathering process that is common across all
audits. Evidence is first gathered on the factors that may affect an account
balance misstatement and the risk that an account balance may be misstated.
After assessing all those risks, the auditor must directly test the account
balances that have a residual risk of potential misstatement. In doing these
direct tests of account balances and transactions, the auditor is guided by the
third standard of fieldwork, which states:
1. Sufficient, competent audit evidence is to be obtained through audit
procedures performed to afford a reasonable basis for an opinion
regarding the financial report under audit.
B. Thus, the auditor must obtain an appropriate amount of reliable evidence
concerning the truth and fairness of the financial report and their conformity
with Accounting Standards.
II. ASSERTION MODEL FOR FINANCIAL REPORT AUDITS

A. In performing these direct tests, the auditor is guided by the overall
framework of assertions that are embodied in financial reports and individual
accounts. Fortunately, these assertions lead to the development of direct and
efficient procedures to gather evidence. These procedures are referred to as an
audit program. If financial reports are true and fair in accordance with
Accounting Standards, then the individual account balances must exist, be
complete, reflect a right or obligation, be properly valued, and be adequately

presented. There are different sets of assertions for transactions, account

balances, and disclosures.
III. GATHERING SUFFICIENT, APPROPRIATE EVIDENCE

A. When considering the best approach to gather audit evidence, the auditor
needs to consider factors affecting the reliability of the financial data:
management integrity, client economic risk, quality of the client’s information
system, client’s control structure, and current market conditions and
competitor actions. Management’s integrity and competence affect both the
design and operation of the client’s information system. The client’s business,
by its nature, carries distinct risks that require management and/or auditor
judgement, because the economic consequences of these factors are not
regularly captured by transactions-oriented computer systems. Finally,
competitors may be introducing new products that will affect the marketability
of inventory on hand. The auditor cannot prepare an audit program to directly
test the integrity of a company’s financial report without considering all the
risk factors affecting those accounts.
B. Current auditing standards for the annual audit of an organisation’s financial

report require that some direct/substantive tests of material account balances
and transactions always be performed. However, there are two major changes
affecting the nature of overall evidence gathering. First, auditors have become
better at identifying various types of risk and assessing the risk that a
misstatement may exist in an account balance. Second, as accounting systems
increasingly become more computerised and paperless, there is a trend toward
placing more emphasis on systems audits (i.e., understanding and gaining
assurance about the reliability of a company’s computerised processing
system). During each audit, the auditor must determine the degree of evidence
needed to justify an audit opinion consistent with the audit risk model.
C. Sufficiency
1. The amount of evidence must be convincing. This is a matter of
experienced audit judgement. Statistical sampling can help
determine how much evidence is enough based on the quantification
of audit judgements about materiality, audit risk, and sampling risk.

D. Reliability of Audit Evidence

1. Reliability means that it is relevant to the audit objectives. The
Auditing and Assurance Standards Board (AUASB) has established
the presumptions about the reliability of audit evidence. Independent
third-party evidence obtained from knowledgeable individuals with
adequate time and motivation to respond to audit inquiries is
preferable to internally generated information. Evidence obtained
directly by the auditor is preferable to that obtained indirectly.
Evidence from well-controlled information systems is preferable to
that from poorly controlled systems. But some evidence better
addresses specific assertions, and there will always be a trade-off in
each audit.
E. Internal Documentation
1. Internal documentation ranges from legal agreements to business
documents to accounting documents to planning and control
documents. The reliability of internal documentation can vary.
F. External Documentation
1. External documentation is generally considered to be highly reliable,
particularly when the auditor receives it directly. If auditors have
reason to suspect the validity of external documentation obtained
from the client, they should confirm the validity of the evidence.
2. Paper vs Electronic Documentation
i. A major challenge for auditors is to determine which electronic
data has the same degree of reliability as paper-based
documents. Fortunately, computer systems can be designed to
provide safeguards similar to those that surround paper-based
documents.
G. Nature of Audit Testing

1. Direct tests of account balances are designed by determining the
most efficient manner to substantiate the assertions embodied in the
account. Auditors look primarily at two basic types of evidence: the
underlying accounting data, and corroborating information that
validates this data. Auditors have traditionally focused most audit

procedures on the direct tests of account balances (particularly the

asset and liability accounts) because:
i. There are usually fewer items in the ending balance than are
contained in the transactions that have taken place during the
year.
ii. Reliable evidence, which can be gathered efficiently, usually
exists for ending balance items more so than it does for
transactions.
iii. There is a preference to focus on changes in the account
balances during the year.
H. Audit Procedures
1. Overview of Audit Procedures
i. Audit procedures vary according to the risks associated with
the client and the methods used to record transactions. The
auditor’s task is to determine which procedures provide a
sufficient level of evidence to achieve the desired levels of
audit risk with the least amount of audit cost. Each of these
procedures has strengths and weaknesses that should be
considered on each audit engagement.
2. Directional Testing
i. Directional testing involves testing transactions or balances
primarily for either over- or understatement, but not for both at
the same time. Directional testing leads to audit efficiency
because:
• Misstatements of some accounts are more likely to
occur in one direction than the other.
• Directional testing of an account balance provides
evidence on a complementary set of accounts.
• Some assertions are directional by nature.
3. Commonly Used Audit Procedures for Direct Tests of Account
Balances and Transactions
i. A wide variety of audit procedures are used to perform direct
tests of account balances
• Observation
Observation is the physical process of observing
activities or physical assets to reach an audit

conclusion. It is most often used to gain an

understanding of a client’s processing system, including
a ‘walkthrough’ of process. It also includes the physical
shipment and receipt of goods and separation of duties.
• Physical Examination
Physical examination is useful in verifying the
existence of tangible assets and in identifying potential
obsolescence or signs of wear and tear.
• Inquiries of Client Personnel
Inquiry is used extensively to gain an understanding of
the accounting system, management’s plans, litigation
against the organisation, accounting changes,
management’s assessments, etc. Inquiry is a strong
source of evidence, but it is not persuasive by itself and
needs to be corroborated.
• Confirmations With Outside Parties
Confirmation consists of sending a letter to an outside
party to confirm or corroborate an assertion represented
in the financial report. Although confirmations can be a
strong source of evidence, auditors should not place
undue reliance on them. Auditors must make sure the
client does not intercept the outgoing confirmation
letter or the response from the outside party. Therefore,
auditors should mail the confirmations directly with the
post office and have self-addressed and stamped return
envelopes addressed to the auditor’s office, not the
client’s location.
• Examination of Documents
Much of the audit process depends on examining
documents – either in paper or electronic form.
Documentation is useful for evaluating all of the
assertions. Historically, such documentation has existed
on paper and has often constituted much of the audit
evidence reviewed on most audit engagements.
Whether the documentation is paper-based or
electronic, the auditor must establish the authenticity of
the documentation in order to rely upon it.

Teaching Note: Explain that ACL software can be used to extract documentation
from computer records for subsequent processing and then be used to perform some
of that processing.
• Recomputation or Recalculation of Data

Auditors often find it useful to recalculate a number of
client computations; recalculations include footing,
crossfooting, tests of extensions, and recomputing
estimated accounts or allowances.
• Reprocessing of Transactions
Reprocessing involves selecting a sample from a
population of source documents, such as bills of lading,
and reprocessing them to be sure they have been
properly recorded.
• Vouching of Transactions
Vouching takes a sample of already recorded
transactions and traces them back to their original
source. Vouching helps to establish that all recorded
transactions are valid.
•Analytical Procedures
Analytical procedures are defined as studies of
plausible relationships among both financial and non-
financial data and involve the comparison of recorded
amounts or ratios to expectations developed by the
auditor.
4. Application to Assertions
i. The text provides a series of examples of procedures that
auditors can use to gather evidence to address specific
assertions.
5. Fixed Assets
i. Physical examination addresses the existence assertion for
many assets, including fixed assets.
6. Contingencies (Pending Litigation)
i. Management is the primary source of information concerning
the existence of pending litigation, the probability of an
unfavourable outcome, and the potential amount of damages.

Corroboration of this information is obtained from the client’s

legal counsel.
7. Timing of Procedures
i. The auditor must determine when to perform audit procedures
– as of or after the balance sheet date, or at an interim date.
With strong internal controls, the risk of misstatements
occurring between the interim date and year-end is decreased.
8. Extent of Procedures
i. The auditor must decide how much evidence is needed. The
extent of testing is affected by the following and by the
individual risk preferences of the auditor:
• The auditor’s assessment of the risk that the account
balance may contain a misstatement
• The amount of misstatement that would be considered
material
• The quality of the company’s internal controls, and
• The persuasiveness of alternative forms of evidence.
IV. AUDIT PROGRAMS AND DOCUMENTING AUDIT EVIDENCE

A. Audit Program Development
1. Audit procedures are designed to gather evidence regarding
management’s assertions. An audit program specifies the procedures
that should be followed in gathering, documenting, and evaluating
audit evidence. Audit programs help address issues such as how
many transactions need to be examined, or what population should
be sampled to determine the validity of a particular account balance.
It is important to note that an auditor will select the best combination
of procedures used to test assertions for each client – the auditor has
a wide choice of procedures that might be used to address any
particular account balance.
B. Documenting Audit Evidence

2. It is extremely important in litigation defence that the audit process
of gathering evidence, evaluating the evidence, and reasoning to a
conclusion in support of the auditor’s opinion on the financial report
be carefully planned and documented. The documented audit work

should be able to be evaluated independently of the individuals who

performed the audit. Audit documentation serves as the primary
evidence in support of audit conclusions.
3. Revisions and Retention of Audit Documentation
i. Audit documentation should be completed and assembled
within 60 days following the audit report release date. After
that date, the auditor must retain the audit documentation for at
least seven years.
4. Audit Planning Documentation
i. The planning process lays the foundation for the audit and
should be carefully documented. Interviews with key
executives should be summarised in a memo to the file.
Analytical procedures should be documented in spreadsheets or
similar documents with a clear identification of accounts that
are to receive special attention. Materiality assessments and the
overall audit approach should be summarised.
5. The Audit Program
i. An audit program specifies the actual procedures to be
performed in gathering the required audit evidence about the
assertions embodied in the client’s financial statements. It is
the single most important piece of documentation in an audit
engagement. Many audit firms have developed standardised
audit programs that can be modified to correspond to unique
features of an individual client.
6. Copies of Documents
i. Some documents reviewed by the auditor are deemed
important enough that a copy will be included in the audit
documentation. These include both internal and external
evidence.
7. Auditor-Generated Memos
i. Auditors piece evidence together and reach an opinion as to
whether or not a particular account balance might be misstated.
Auditors need to document the reasoning process and support
the conclusions they reach on particular account balances.
8. Characteristics of Good Audit Documentation
Well-developed audit documentation contains:
i. A heading

ii. Initials or electronic signature of the auditor performing the test

and date it was performed
iii. Initials or electronic signature of person(s) reviewing the
documentation and date
iv. Description of tests performed and findings
v. An assessment of whether the tests indicate the possibility of a
material misstatement
vi. Tickmarks/legend indicating the nature of the work performed
vii. Index to identify the location of papers
viii. Cross-reference to related documentation, when applicable.
V. AUDITING ACCOUNT BALANCES AFFECTED BY MANAGEMENT’S

ESTIMATES
There are many balances that are based on appraisals and/or management estimates
and assumptions. Earnings management often involves manipulating these estimates
and assumptions to achieve desired earnings goals. Auditors must take special care in
evaluating the reasonableness of these estimates.
A. Evidence Used in Auditing Management’s Estimates
1. There is usually hard evidence that can be gathered in evaluating
estimates. Auditors should find out and evaluate the processes used
by management in making its estimates. The results of those
processes can be tested. Economy-based estimates need to be
independently evaluated. Asset impairment is based on either
appraisals or estimates of future cash flows. If appraisals are done by
professional valuers, the auditor should determine the qualifications
and reputation of the valuers. Estimates of future cash flows need to
be analysed for the reasonableness of the assumptions.

Solutions for Chapter 7

Audit Evidence: A Framework
Multiple Choice Questions Online
7-1 (LO 3) The auditor wishes to gather evidence to test the assertion that the client’s
capitalisation of leased equipment assets is properly valued. Which of the
following sources of evidence will the auditor find to be the most persuasive
(most reliable and relevant)?
a. Direct observation of the leased equipment.
b. Examination of the lease contract and recomputation of capitalised amount
and current amortisation.
c. Confirmation of the current purchase price for similar equipment with
vendors.
d. Confirmation of the original cost of the equipment with the lessor.
*7-2 (LO 3, 5) Which of the following is the least persuasive documentation in support of an
auditor’s opinion?
a. Schedules of details of physical inventory counts conducted by the client.
b. Notation of inferences drawn from ratios and trends.
c. Notation of valuers’ conclusions in the auditor’s documentation.
d. Lists of confirmations and the nature of responses received from the client’s
customers.
7-3 (LO 5)An auditor determines that management integrity is high, the risk of account
misstatements is low, and the client’s internal controls are effective. Which of the
following conclusions can be reached regarding the need to perform direct tests of
account balances?
a. Direct tests should be limited to material account balances, and the extent of
testing should be sufficient to corroborate the auditor’s assessment of low
risk.
b. Direct tests of account balances are not needed.
c. Direct tests of account balances are necessary if audit risk was set at a low
level but are not necessary if audit risk was set at a high level.
d. Direct tests should be performed on all account balances to independently
verify the correctness of the financial report.

7-4 (LO 4) A test of inventory for overstatement provides corresponding evidence on:
Cost of Goods Sold Revenue Accounts Payable
a. Overstatement Overstatement Understatement
b. Understatement Overstatement Overstatement
c. Understatement Understatement Understatement
d. Overstatement Overstatement Overstatement.
7-5 (LO 5) Observation is considered a reliable audit procedure but one that is limited in its
usefulness. Which of the following is not correct regarding a limitation of the use
of observation as an audit technique?
a. Individuals may act differently when being observed than they do otherwise.
b. It is rarely sufficient to satisfy any assertion other than existence.
c. It is rarely sufficient to satisfy any assertion other than valuation.
d. It is difficult to generalise from one observation as to the correctness of
processing throughout the period under audit.
*7-6 Confirmation is most likely to be a relevant form of evidence with regard to

(LO 2, 5)
assertions about accounts receivable when the auditor has concern about the
receivables’
a. Valuation
b. Classification
c. Existence
d. Completeness.
7-7 (LO 7) Regarding the auditor’s reasoning process about an account balance, the
auditor should:
a. Simply state a conclusion because anything else would lead to second-guessing
by another auditor or a lawyer.
b. Identify all of the elements of the reasoning process and document them in a
memo.
c. Assure that audit documentation, by itself, is sufficient to support the auditor’s
opinion without an explicit description of the reasoning process; that is, the
evidence can stand on its own.
d. Be limited to analysis made by the partner in charge of the engagement.
7-8 (LO 5) An auditor observes inventory held by the client and notes that some of the
inventory appears to be very old but still in reasonable condition for sale. Which
of the following conclusions is justified by the audit procedure?
I. The older inventory is obsolete.
II. The inventory is owned by the company.

III. Inventory may need to be reduced to current market value.

a. I only
b. II only
c. I and III only
d. III only.
7-9 (LO 7) Which of the following statements is not true concerning the auditor’s
documentation?
a. The auditor should document the reasoning process and conclusions reached
for significant account balances even if audit tests show no exceptions.
b. Documentation review is facilitated if a standard documentation format is
utilised.
c. Audit documents should cross-reference other documents if the other
documents contain work that affects the auditor’s overall assessment of an
account balance contained in the documentation.
d. The client should not prepare documentation schedules for the auditor even if
the auditor independently tests them.
*
All problems marked with an asterisk are adapted from the Uniform CPA
Examination.
Multiple Choice Answers:
7-1. b. (LO 3, pp 256-262)

7-2. a. (LO 3, pp 256-262; LO 5, pp 262-268)
7-3. a. (LO 5, pp 262-268)
7-4. b. (See solution 7-10 for related discussion) (LO 4, pp 262)
7-5. c. (LO 5, pp 262-268)
7-6. c. (LO 2, 254-255; LO 5, pp 262-268)
7-7. c. (LO 7, pp 269-273)
7-8. d.(LO 5, pp 262-268)
7-9. d. (LO 7, pp 269-273)
Review Questions:
7-1. (LO 1, p 253) Audit evidence is all the information used by auditors in arriving at the
conclusions on which the audit opinion is based. The basic sources of evidence are

knowledge of the business and industry, analytical procedures, tests of controls, and
substantive/direct tests of account balances and transactions.
7-2. (LO 1, p 253; LO 3, pp 256-262) The auditor must decide how much evidence is
needed (extent), what kind of evidence is needed (nature), and when to gather the
evidence (timing).
7-3. (LO 2, pp 254-255) The assertions form the framework for gathering sufficient,
competent audit evidence as required by the professional standards. The assertions tie
into generally accepted accounting principles in that those assertions are also
embodied in Accounting Standards. The five main assertions are defined as:
Existence/occurrence. The assets, liabilities, and equity interests exist and all
transactions reflected in the financial report actually occurred.
Completeness. All assets, liabilities, equity interests, and transactions that should
have been recorded have been recorded, i.e., nothing is left out of the financial
report.
Rights/obligations. The entity holds or controls the legal ownership to assets, and
liabilities are legally owed by the entity.
Valuation/allocation. Assets, liabilities, and equity interests are included in the

financial statements at appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded.
Presentation/disclosure. Assets, liabilities, and equity interests are appropriately

classified on the financial statements, and are adequately described in the notes to
the financial statements.
7-4. (LO 2, pp 254-255) Valuation is usually one of the most important assertions to
address in most audits. The intent of this question is to have the students think about
the detail required by Accounting Standards in forming specific assertions to be tested
with individual accounts. The basic components of the valuation assertion for
investments in marketable securities are these:
• The securities are initially recorded at cost and are thereafter valued at market.
• Cost includes all costs, including brokerage fees, to purchase the securities.
• Market is:
o Defined as aggregate market value determined either by classes of
securities or treating all securities as one class.

o Measured by year-end market prices, assuming a liquid market such

that sales of the securities would not have a major impact on market
value.
• All gains/losses due to sales during the current period are properly reflected in
the accounts.
• Carrying values of marketable securities sold are removed.
• All adjustments required for the unrealised adjustments to market value are
properly recognised.
7-5 (LO 1, pp 253; LO 3, pp 256-262) The basic characteristics that distinguish the
reliability of audit evidence are:
More reliable information
• Directly observable evidence
• Evidence derived from well controlled information system
• Evidence from independent outside sources
• Documented evidence
• Original documents.
Less reliable information

• Indirectly observable evidence
• Evidence derived from a poorly controlled system or easily overridden
information system
• Evidence from within the client’s organisation
• Verbal evidence
• Photocopies or facsimiles.
7-6. (LO 1, pp 253; LO 3, pp 256-262) Audit risk and reliability of audit evidence are
related. If audit risk is low rather than high, it implies that the auditor has to gather
more evidence of the same quality, more reliable evidence, or some combination of
each. For example, if audit risk has been established at a minimal amount because the
auditor is concerned with overstatement of sales and accounts receivable, the auditor
may seek more persuasive evidence such as subsequent payment of a receivable, direct
contact with the customer by the auditor, or verification of invoices by direct reference
to shipping documents (as opposed to only a confirmation of the account balance sent
to a customer address at a post office box number). The auditor would be seeking
more reliable evidence. In other situations, the auditor would control audit risk by
taking larger sample sizes that statistically control the risk of making an incorrect
inference as a result of the audit tests.
7-7. (LO 7, pp 269-273) An audit adjustment is a correction of a misstatement of the

financial report that was or should have been proposed by the auditor, whether or
not recorded by management, which could, either individually or when

aggregated with other misstatements, have a material effect on the company’s

financial report.
Auditing Standards require that auditors document audit adjustments, both

proposed and recorded, so that there is a record of important issues that the
auditor considered and was concerned about during the conduct of the audit. In
fact, auditors are required to discuss audit adjustments with the audit committee,
so documentation helps establish a record of complying with the requirements
regarding audit committee communications.
If an audit is reviewed upon inspection by ASIC, documentation regarding

proposed adjustments, especially those that management refused to book (i.e.,
reflect in the adjusted financial report), would shed light on the areas that were the
most contentious and judgemental in terms of financial reporting and disclosure.
By evaluating adjustments in a given year, and especially in a pattern over time,
ASIC could get a sense of how aggressive management is in its financial
reporting choices and how the auditor responds to management.
7-8. (LO 1, pp 253; LO 3, pp 256-262) All things being equal, external documentary
evidence is considered more reliable than internally generated evidence. However, it is
seldom that ‘all things are equal’. External documentary evidence is generally more
reliable when provided by independent, knowledgeable external parties.
Examples of external documentation are original vendor invoices that are in the
client’s possession and confirmations sent directly to the auditors by third parties.
Internal documentary evidence can be very reliable when it is developed within a
strong internal control environment. Examples of internal documentation are sales
invoices, receiving reports, payroll records, and purchase orders.
7-9. (LO 4, pp 262) Directional testing is the design of audit tests to search primarily for
either over-or understatements for particular accounts. It takes advantage of the
double-entry bookkeeping system. The auditor is normally concerned with
overstatement of assets or revenues and understatement of liabilities or expenses
because there are greater risks associated with misstatements in those particular
directions.
Directional testing can lead to audit efficiency because audit tests of an account in one
direction provide evidence on other related accounts. An example is auditing accounts
receivable for an overstatement, which also provides indirect evidence on the potential
overstatement of sales. Efficiency comes from planning the audit to consider the
relationships among a number of different accounts.

7-10. (LO 4, pp 262) The efficiency of directional testing comes from the double entry
method of bookkeeping. If an asset increases, it must come from the recognition of
revenue, the decrease of another asset, a misclassification of an expense item as an
asset, or an increase in a liability. Thus, testing an asset for overstatement can provide
information on potential understatement of another asset or expense or overstatement
of revenue or a liability.
Accounts receivable example. Testing for overstatements provides evidence on

overstatement of sales and understatement of expenses. If Accounts Receivable is
overstated because of fictitious sales, sales are also overstated. If receivables are
overstated because of an inadequate allowance for doubtful accounts at year-end,
when the allowance for bad debt is increased the corresponding debit belongs to Bad
Debt Expense, thus providing evidence on potential understatement of the related
expense account.
Inventory example. Tests of overstatement of inventory provide indirect evidence

regarding overstatement of revenues or liabilities and direct evidence regarding
understatement of expenses. If inventory is misstated, the corresponding entry is to
Cost of Goods Sold. If inventory is overstated because of recording the receipt of
inventory before title passes, accounts payable will also be overstated. If ending
inventory is overstated because inventory was sold but the entry to record the cost of
goods sold was not made, Cost of Goods Sold is understated. The evidence on revenue
is more indirect. If the tests indicate that cost of goods sold represents only 55% of
sales this year, but it had previously been over 60% (let’s say for the last five years)
and there is no major change in product mix or production technology, the tests may
indicate potential fictitious sales. The auditor’s evidence is based on an analytical
reasoning process.
7-11. (LO 5, pp 262-268) Observation is best suited for testing the existence assertion (e.g.
the existence of inventory and the adequacy of the client’s physical inventory count
procedures can be observed). It may be indirectly useful in helping test some valuation
assertions. For example, the auditor can observe the quality of inventory and make
reasonable inferences about the value of inventory.
Observation is strong evidence when physical existence is important. However, it is

weak because observation can lead to misleading inferences. For example, observing
that an object exists does not warrant the inference that it is owned by the company.
Similarly, observing an item in good shape does not mean that it is properly valued
because it could still be technologically obsolete or be assigned the wrong unit cost.
7-12. (LO 3, pp 256-262; LO 5, pp 262-268) Inquiries of management are subject to

management bias and seldom can be used without corroborating evidence. The

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for fear to make an enemy. But, on the other hand, it was
complained that he was bitter and harsh, that his zeal burned with
too hot a flame. It is so difficult, in evil times, to escape this charge!
for the faithful preacher most of all. It was his merit, like Luther, Knox
and Latimer, and John Baptist, to speak tart truth, when that was
peremptory and when there were few to say it. But his sympathy for
goodness was not less energetic. One fault he had, he
overestimated his friends,—I may well say it,—and sometimes vexed
them with the importunity of his good opinion, whilst they knew better
the ebb which follows unfounded praise. He was capable, it must be
said, of the most unmeasured eulogies on those he esteemed,
especially if he had any jealousy that they did not stand with the
Boston public as highly as they ought. His commanding merit as a
reformer is this, that he insisted beyond all men in pulpits—I cannot
think of one rival—that the essence of Christianity is its practical
morals; it is there for use, or it is nothing; and if you combine it with
sharp trading, or with ordinary city ambitions to gloze over municipal
corruptions, or private intemperance, or successful fraud, or immoral
politics, or unjust wars, or the cheating of Indians, or the robbery of
frontier nations, or leaving your principles at home to follow on the
high seas or in Europe a supple complaisance to tyrants,—it is a
hypocrisy, and the truth is not in you; and no love of religious music
or of dreams of Swedenborg, or praise of John Wesley, or of Jeremy
Taylor, can save you from the Satan which you are.
His ministry fell on a political crisis also; on the years when
Southern slavery broke over its old banks, made new and vast
pretensions, and wrung from the weakness or treachery of Northern
people fatal concessions in the Fugitive Slave Bill and the repeal of
the Missouri Compromise. Two days, bitter in the memory of Boston,
the days of the rendition of Sims and of Burns, made the occasion of
his most remarkable discourses. He kept nothing back. In terrible
earnest he denounced the public crime, and meted out to every
official, high and low, his due portion.[159] By the incessant power of
his statement, he made and held a party. It was his great service to
freedom. He took away the reproach of silent consent that would
otherwise have lain against the indignant minority, by uttering in the
hour and place wherein these outrages were done, the stern protest.
But whilst I praise this frank speaker, I have no wish to accuse the
silence of others. There are men of good powers who have so much
sympathy that they must be silent when they are not in sympathy. If
you don’t agree with them, they know they only injure the truth by
speaking. Their faculties will not play them true, and they do not wish
to squeak and gibber, and so they shut their mouths. I can readily
forgive this, only not the other, the false tongue which makes the
worse appear the better cause. There were, of course, multitudes to
censure and defame this truth-speaker. But the brave know the
brave. Fops, whether in hotels or churches, will utter the fop’s
opinion, and faintly hope for the salvation of his soul; but his manly
enemies, who despised the fops, honored him; and it is well known
that his great hospitable heart was the sanctuary to which every soul
conscious of an earnest opinion came for sympathy—alike the brave
slave-holder and the brave slave-rescuer. These met in the house of
this honest man—for every sound heart loves a responsible person,
one who does not in generous company say generous things, and in
mean company base things, but says one thing, now cheerfully, now
indignantly, but always because he must, and because he sees that,
whether he speak or refrain from speech, this is said over him; and
history, nature and all souls testify to the same.
Ah, my brave brother! it seems as if, in a frivolous age, our loss
were immense, and your place cannot be supplied. But you will
already be consoled in the transfer of your genius, knowing well that
the nature of the world will affirm to all men, in all times, that which
for twenty-five years you valiantly spoke; that the winds of Italy
murmur the same truth over your grave; the winds of America over
these bereaved streets; that the sea which bore your mourners
home affirms it, the stars in their courses, and the inspirations of
youth; whilst the polished and pleasant traitors to human rights, with
perverted learning and disgraced graces, rot and are forgotten with
their double tongue saying all that is sordid for the corruption of man.
The sudden and singular eminence of Mr. Parker, the importance
of his name and influence, are the verdict of his country to his
virtues. We have few such men to lose; amiable and blameless at
home, feared abroad as the standard-bearer of liberty, taking all the
duties he could grasp, and more, refusing to spare himself, he has
gone down in early glory to his grave, to be a living and enlarging
power, wherever learning, wit, honest valor and independence are
honored.[160]
XIII
AMERICAN CIVILIZATION
To the mizzen, the main, and the fore

Up with it once more!—
The old tri-color,
The ribbon of power,
The white, blue and red which the nations adore!
It was down at half-mast
For a grief—that is past!
To the emblem of glory no sorrow can last!
AMERICAN CIVILIZATION
Use, labor of each for all, is the health and virtue of all beings. Ich
dien, I serve, is a truly royal motto. And it is the mark of nobleness to
volunteer the lowest service, the greatest spirit only attaining to
humility. Nay, God is God because he is the servant of all. Well, now
here comes this conspiracy of slavery,—they call it an institution, I
call it a destitution,—this stealing of men and setting them to work,
stealing their labor, and the thief sitting idle himself; and for two or
three ages it has lasted, and has yielded a certain quantity of rice,
cotton and sugar. And, standing on this doleful experience, these
people have endeavored to reverse the natural sentiments of
mankind, and to pronounce labor disgraceful, and the well-being of a
man to consist in eating the fruit of other men’s labor. Labor: a man
coins himself into his labor; turns his day, his strength, his thought,
his affection into some product which remains as the visible sign of
his power; and to protect that, to secure that to him, to secure his
past self to his future self, is the object of all government. There is no
interest in any country so imperative as that of labor; it covers all,
and constitutions and governments exist for that,—to protect and
insure it to the laborer. All honest men are daily striving to earn their
bread by their industry. And who is this who tosses his empty head
at this blessing in disguise, the constitution of human nature, and
calls labor vile, and insults the faithful workman at his daily toil? I see
for such madness no hellebore,—for such calamity no solution but
servile war and the Africanization of the country that permits it.
At this moment in America the aspects of political society absorb
attention. In every house, from Canada to the Gulf, the children ask
the serious father,—“What is the news of the war to-day, and when
will there be better times?” The boys have no new clothes, no gifts,
no journeys; the girls must go without new bonnets; boys and girls
find their education, this year, less liberal and complete.[161] All the
little hopes that heretofore made the year pleasant are deferred. The
state of the country fills us with anxiety and stern duties. We have
attempted to hold together two states of civilization: a higher state,
where labor and the tenure of land and the right of suffrage are
democratical; and a lower state, in which the old military tenure of
prisoners or slaves, and of power and land in a few hands, makes an
oligarchy: we have attempted to hold these two states of society
under one law. But the rude and early state of society does not work
well with the later, nay, works badly, and has poisoned politics, public
morals and social intercourse in the Republic, now for many years.
The times put this question, Why cannot the best civilization be
extended over the whole country, since the disorder of the less-
civilized portion menaces the existence of the country? Is this
secular progress we have described, this evolution of man to the
highest powers, only to give him sensibility, and not to bring duties
with it? Is he not to make his knowledge practical? to stand and to
withstand? Is not civilization heroic also? Is it not for action? has it
not a will? “There are periods,” said Niebuhr, “when something much
better than happiness and security of life is attainable.” We live in a
new and exceptionable age. America is another word for
Opportunity. Our whole history appears like a last effort of the Divine
Providence in behalf of the human race; and a literal, slavish
following of precedents, as by a justice of the peace, is not for those
who at this hour lead the destinies of this people. The evil you
contend with has taken alarming proportions, and you still content
yourself with parrying the blows it aims, but, as if enchanted, abstain
from striking at the cause.[162]
If the American people hesitate, it is not for want of warning or
advices. The telegraph has been swift enough to announce our
disasters. The journals have not suppressed the extent of the
calamity. Neither was there any want of argument or of experience. If
the war brought any surprise to the North, it was not the fault of
sentinels on the watch-tower, who had furnished full details of the
designs, the muster and the means of the enemy. Neither was
anything concealed of the theory or practice of slavery. To what
purpose make more big books of these statistics? There are already
mountains of facts, if any one wants them. But people do not want
them. They bring their opinion into the world. If they have a
comatose tendency in the brain, they are pro-slavery while they live;
if of a nervous sanguineous temperament, they are abolitionists.
Then interests were never persuaded. Can you convince the shoe
interest, or the iron interest, or the cotton interest, by reading
passages from Milton or Montesquieu? You wish to satisfy people
that slavery is bad economy. Why, the Edinburgh Review pounded
on that string, and made out its case, forty years ago. A democratic
statesman said to me, long since, that, if he owned the state of
Kentucky, he would manumit all the slaves, and be a gainer by the
transaction. Is this new? No, everybody knows it. As a general
economy it is admitted. But there is no one owner of the state, but a
good many small owners. One man owns land and slaves; another
owns slaves only. Here is a woman who has no other property,—like
a lady in Charleston I knew of, who owned fifteen sweeps and rode
in her carriage. It is clearly a vast inconvenience to each of these to
make any change, and they are fretful and talkative, and all their
friends are; and those less interested are inert, and, from want of
thought, averse to innovation. It is like free trade, certainly the
interest of nations, but by no means the interest of certain towns and
districts, which tariff feeds fat; and the eager interest of the few
overpowers the apathetic general conviction of the many. Banknotes
rob the public, but are such a daily convenience that we silence our
scruples and make believe they are gold. So imposts are the cheap
and right taxation; but, by the dislike of people to pay out a direct tax,
governments are forced to render life costly by making them pay
twice as much, hidden in the price of tea and sugar.
In this national crisis, it is not argument that we want, but that rare
courage which dares commit itself to a principle, believing that
Nature is its ally, and will create the instruments it requires, and more
than make good any petty and injurious profit which it may disturb.
There never was such a combination as this of ours, and the rules to
meet it are not set down in any history. We want men of original
perception and original action, who can open their eyes wider than to
a nationality, namely, to considerations of benefit to the human race,
can act in the interest of civilization. Government must not be a
parish clerk, a justice of the peace. It has, of necessity, in any crisis
of the state, the absolute powers of a dictator. The existing
administration is entitled to the utmost candor. It is to be thanked for
its angelic virtue, compared with any executive experiences with
which we have been familiar. But the times will not allow us to
indulge in compliment. I wish I saw in the people that inspiration
which, if government would not obey the same, would leave the
government behind and create on the moment the means and
executors it wanted. Better the war should more dangerously
threaten us,—should threaten fracture in what is still whole, and
punish us with burned capitals and slaughtered regiments, and so
exasperate the people to energy, exasperate our nationality. There
are Scriptures written invisibly on men’s hearts, whose letters do not
come out until they are enraged. They can be read by war-fires, and
by eyes in the last peril.
We cannot but remember that there have been days in American
history, when, if the free states had done their duty, slavery had been
blocked by an immovable barrier, and our recent calamities forever
precluded. The free states yielded, and every compromise was
surrender and invited new demands. Here again is a new occasion
which heaven offers to sense and virtue. It looks as if we held the
fate of the fairest possession of mankind in our hands, to be saved
by our firmness or to be lost by hesitation.
The one power that has legs long enough and strong enough to
wade across the Potomac offers itself at this hour; the one strong
enough to bring all the civility up to the height of that which is best,
prays now at the door of Congress for leave to move. Emancipation
is the demand of civilization. That is a principle; everything else is an
intrigue. This is a progressive policy, puts the whole people in
healthy, productive, amiable position, puts every man in the South in
just and natural relations with every man in the North, laborer with
laborer.
I shall not attempt to unfold the details of the project of
emancipation. It has been stated with great ability by several of its
leading advocates. I will only advert to some leading points of the
argument, at the risk of repeating the reasons of others. The war is
welcome to the Southerner; a chivalrous sport to him, like hunting,
and suits his semi-civilized condition. On the climbing scale of
progress, he is just up to war, and has never appeared to such
advantage as in the last twelvemonth. It does not suit us. We are
advanced some ages on the war-state,—to trade, art and general
cultivation. His laborer works for him at home, so that he loses no
labor by the war. All our soldiers are laborers; so that the South, with
its inferior numbers, is almost on a footing in effective war-population
with the North. Again, as long as we fight without any affirmative step
taken by the government, any word intimating forfeiture in the rebel
states of their old privileges under the law, they and we fight on the
same side, for slavery. Again, if we conquer the enemy,—what then?
We shall still have to keep him under, and it will cost as much to hold
him down as it did to get him down. Then comes the summer, and
the fever will drive the soldiers home; next winter we must begin at
the beginning, and conquer him over again. What use then to take a
fort, or a privateer, or get possession of an inlet, or to capture a
regiment of rebels?
But one weapon we hold which is sure. Congress can, by edict, as
a part of the military defence which it is the duty of Congress to
provide, abolish slavery, and pay for such slaves as we ought to pay
for. Then the slaves near our armies will come to us; those in the
interior will know in a week what their rights are, and will, where
opportunity offers, prepare to take them. Instantly, the armies that
now confront you must run home to protect their estates, and must
stay there, and your enemies will disappear.
There can be no safety until this step is taken. We fancy that the
endless debate, emphasized by the crime and by the cannons of this
war, has brought the free states to some conviction that it can never
go well with us whilst this mischief of slavery remains in our politics,
and that by concert or by might we must put an end to it. But we
have too much experience of the futility of an easy reliance on the
momentary good dispositions of the public. There does exist,
perhaps, a popular will that the Union shall not be broken,—that our
trade, and therefore our laws, must have the whole breadth of the
continent, and from Canada to the Gulf. But since this is the rooted
belief and will of the people, so much the more are they in danger,
when impatient of defeats, or impatient of taxes, to go with a rush for
some peace; and what kind of peace shall at that moment be easiest
attained, they will make concessions for it,—will give up the slaves,
and the whole torment of the past half-century will come back to be
endured anew.
Neither do I doubt, if such a composition should take place, that
the Southerners will come back quietly and politely, leaving their
haughty dictation. It will be an era of good feelings. There will be a
lull after so loud a storm; and, no doubt, there will be discreet men
from that section who will earnestly strive to inaugurate more
moderate and fair administration of the government, and the North
will for a time have its full share and more, in place and counsel. But
this will not last;—not for want of sincere good will in sensible
Southerners, but because Slavery will again speak through them its
harsh necessity. It cannot live but by injustice, and it will be unjust
and violent to the end of the world.[163]
The power of Emancipation is this, that it alters the atomic social
constitution of the Southern people. Now, their interest is in keeping
out white labor; then, when they must pay wages, their interest will
be to let it in, to get the best labor, and, if they fear their blacks, to
invite Irish, German and American laborers. Thus, whilst Slavery
makes and keeps disunion, Emancipation removes the whole
objection to union. Emancipation at one stroke elevates the poor-
white of the South, and identifies his interest with that of the Northern
laborer.
Now, in the name of all that is simple and generous, why should
not this great right be done? Why should not America be capable of
a second stroke for the well-being of the human race, as eighty or
ninety years ago she was for the first,—of an affirmative step in the
interests of human civility, urged on her, too, not by any romance of
sentiment, but by her own extreme perils? It is very certain that the
statesman who shall break through the cobwebs of doubt, fear and
petty cavil that lie in the way, will be greeted by the unanimous
thanks of mankind. Men reconcile themselves very fast to a bold and
good measure when once it is taken, though they condemned it in
advance. A week before the two captive commissioners were
surrendered to England, every one thought it could not be done: it
would divide the North. It was done, and in two days all agreed it
was the right action.[164] And this action, which costs so little (the
parties injured by it being such a handful that they can very easily be
indemnified), rids the world, at one stroke, of this degrading
nuisance, the cause of war and ruin to nations. This measure at
once puts all parties right. This is borrowing, as I said, the
omnipotence of a principle. What is so foolish as the terror lest the
blacks should be made furious by freedom and wages? It is denying
these that is the outrage, and makes the danger from the blacks. But
justice satisfies everybody,—white man, red man, yellow man and
black man. All like wages, and the appetite grows by feeding.
But this measure, to be effectual, must come speedily. The
weapon is slipping out of our hands. “Time,” say the Indian
Scriptures, “drinketh up the essence of every great and noble action
which ought to be performed, and which is delayed in the
execution.”[165]
I hope it is not a fatal objection to this policy that it is simple and
beneficent thoroughly, which is the tribute of a moral action. An
unprecedented material prosperity has not tended to make us Stoics
or Christians. But the laws by which the universe is organized
reappear at every point, and will rule it. The end of all political
struggle is to establish morality as the basis of all legislation. It is not
free institutions, it is not a republic, it is not a democracy, that is the
end,—no, but only the means. Morality is the object of government.
[166] We want a state of things in which crime shall not pay. This is
the consolation on which we rest in the darkness of the future and
the afflictions of to-day, that the government of the world is moral,
and does forever destroy what is not. It is the maxim of natural
philosophers that the natural forces wear out in time all obstacles,
and take place: and it is the maxim of history that victory always falls
at last where it ought to fall; or, there is perpetual march and
progress to ideas. But in either case, no link of the chain can drop
out. Nature works through her appointed elements; and ideas must
work through the brains and the arms of good and brave men, or
they are no better than dreams.
Since the above pages were written, President Lincoln has

proposed to Congress that the government shall coöperate with any
state that shall enact a gradual abolishment of slavery. In the recent
series of national successes, this message is the best. It marks the
happiest day in the political year. The American Executive ranges
itself for the first time on the side of freedom. If Congress has been
backward, the President has advanced. This state-paper is the more
interesting that it appears to be the President’s individual act, done
under a strong sense of duty. He speaks his own thought in his own
style. All thanks and honor to the Head of the State! The message
has been received throughout the country with praise, and, we doubt
not, with more pleasure than has been spoken. If Congress accords
with the President, it is not yet too late to begin the emancipation; but
we think it will always be too late to make it gradual. All experience
agrees that it should be immediate.[167] More and better than the
President has spoken shall, perhaps, the effect of this message be,
—but, we are sure, not more or better than he hoped in his heart,
when, thoughtful of all the complexities of his position, he penned
these cautious words.
XIV
THE EMANCIPATION PROCLAMATION
AN ADDRESS DELIVERED IN BOSTON IN

SEPTEMBER, 1862
To-day unbind the captive,

So only are ye unbound;
Lift up a people from the dust,
Trump of their rescue, sound!
Pay ransom to the owner

And fill the bag to the brim.
Who is the owner? The slave is owner,
And ever was. Pay him.
O North! give him beauty for rags,

And honor, O South! for his shame;
Nevada! coin thy golden crags
With freedom’s image and name.
Up! and the dusky race

That sat in darkness long,—
Be swift their feet as antelopes,
And as behemoth strong.
Come, East and West and North,

By races, as snow-flakes,
And carry my purpose forth,
Which neither halts nor shakes.
My will fulfilled shall be,

For in daylight or in dark,
My thunderbolt has eyes to see
His way home to the mark.
THE EMANCIPATION PROCLAMATION

In so many arid forms which states encrust themselves with, once
in a century, if so often, a poetic act and record occur. These are the
jets of thought into affairs, when, roused by danger or inspired by
genius, the political leaders of the day break the else insurmountable
routine of class and local legislation, and take a step forward in the
direction of catholic and universal interests. Every step in the history
of political liberty is a sally of the human mind into the untried Future,
and has the interest of genius, and is fruitful in heroic anecdotes.
Liberty is a slow fruit. It comes, like religion, for short periods, and in
rare conditions, as if awaiting a culture of the race which shall make
it organic and permanent. Such moments of expansion in modern
history were the Confession of Augsburg, the plantation of America,
the English Commonwealth of 1648, the Declaration of American
Independence in 1776, the British emancipation of slaves in the
West Indies, the passage of the Reform Bill, the repeal of the Corn-
Laws, the Magnetic Ocean Telegraph, though yet imperfect, the
passage of the Homestead Bill in the last Congress, and now,
eminently, President Lincoln’s Proclamation on the twenty-second of
September. These are acts of great scope, working on a long future
and on permanent interests, and honoring alike those who initiate
and those who receive them. These measures provoke no noisy joy,
but are received into a sympathy so deep as to apprise us that
mankind are greater and better than we know.[168] At such times it
appears as if a new public were created to greet the new event. It is
as when an orator, having ended the compliments and pleasantries
with which he conciliated attention, and having run over the
superficial fitness and commodities of the measure he urges,
suddenly, lending himself to some happy inspiration, announces with
vibrating voice the grand human principles involved;—the bravos
and wits who greeted him loudly thus far are surprised and
overawed; a new audience is found in the heart of the assembly,—
an audience hitherto passive and unconcerned, now at last so
searched and kindled that they come forward, every one a
representative of mankind, standing for all nationalities.
The extreme moderation with which the President advanced to his
design,—his long-avowed expectant policy, as if he chose to be
strictly the executive of the best public sentiment of the country,
waiting only till it should be unmistakably pronounced,—so fair a
mind that none ever listened so patiently to such extreme varieties of
opinion,—so reticent that his decision has taken all parties by
surprise, whilst yet it is just the sequel of his prior acts,—the firm
tone in which he announces it, without inflation or surplusage,—all
these have bespoken such favor to the act that, great as the
popularity of the President has been, we are beginning to think that
we have underestimated the capacity and virtue which the Divine
Providence has made an instrument of benefit so vast. He has been
permitted to do more for America than any other American man. He
is well entitled to the most indulgent construction. Forget all that we
thought shortcomings, every mistake, every delay. In the extreme
embarrassments of his part, call these endurance, wisdom,
magnanimity; illuminated, as they now are, by this dazzling success.
When we consider the immense opposition that has been
neutralized or converted by the progress of the war (for it is not long
since the President anticipated the resignation of a large number of
officers in the army, and the secession of three states, on the
promulgation of this policy),—when we see how the great stake
which foreign nations hold in our affairs has recently brought every
European power as a client into this court, and it became every day
more apparent what gigantic and what remote interests were to be
affected by the decision of the President,—one can hardly say the
deliberation was too long. Against all timorous counsels he had the
courage to seize the moment; and such was his position, and such
the felicity attending the action, that he has replaced government in
the good graces of mankind. “Better is virtue in the sovereign than
plenty in the season,” say the Chinese. ’Tis wonderful what power is,
and how ill it is used, and how its ill use makes life mean, and the
sunshine dark. Life in America had lost much of its attraction in the
later years. The virtues of a good magistrate undo a world of
mischief, and, because Nature works with rectitude, seem vastly
more potent than the acts of bad governors, which are ever
tempered by the good nature in the people, and the incessant
resistance which fraud and violence encounter. The acts of good
governors work a geometrical ratio, as one midsummer day seems
to repair the damage of a year of war.
A day which most of us dared not hope to see, an event worth the
dreadful war, worth its costs and uncertainties, seems now to be
close before us. October, November, December will have passed
over beating hearts and plotting brains: then the hour will strike, and
all men of African descent who have faculty enough to find their way
to our lines are assured of the protection of American law.
It is by no means necessary that this measure should be suddenly
marked by any signal results on the negroes or on the rebel masters.
The force of the act is that it commits the country to this justice,—
that it compels the innumerable officers, civil, military, naval, of the
Republic to range themselves on the line of this equity. It draws the
fashion to this side. It is not a measure that admits of being taken
back. Done, it cannot be undone by a new administration. For
slavery overpowers the disgust of the moral sentiment only through
immemorial usage. It cannot be introduced as an improvement of the
nineteenth century. This act makes that the lives of our heroes have
not been sacrificed in vain. It makes a victory of our defeats. Our
hurts are healed; the health of the nation is repaired. With a victory
like this, we can stand many disasters. It does not promise the
redemption of the black race; that lies not with us: but it relieves it of
our opposition. The President by this act has paroled all the slaves in
America; they will no more fight against us: and it relieves our race
once for all of its crime and false position. The first condition of
success is secured in putting ourselves right. We have recovered
ourselves from our false position, and planted ourselves on a law of
Nature:—
“If that fail,
The pillared firmament is rottenness,
And earth’s base built on stubble.”[169]
The government has assured itself of the best constituency in the

world: every spark of intellect, every virtuous feeling, every religious
heart, every man of honor, every poet, every philosopher, the
generosity of the cities, the health of the country, the strong arms of
the mechanic, the endurance of farmers, the passionate conscience
of women, the sympathy of distant nations,—all rally to its support.
Of course, we are assuming the firmness of the policy thus
declared. It must not be a paper proclamation. We confide that Mr.
Lincoln is in earnest, and as he has been slow in making up his
mind, has resisted the importunacy of parties and of events to the
latest moment, he will be as absolute in his adhesion. Not only will
he repeat and follow up his stroke, but the nation will add its
irresistible strength. If the ruler has duties, so has the citizen. In
times like these, when the nation is imperilled, what man can,
without shame, receive good news from day to day without giving
good news of himself? What right has any one to read in the journals
tidings of victories, if he has not bought them by his own valor,
treasure, personal sacrifice, or by service as good in his own
department? With this blot removed from our national honor, this
heavy load lifted off the national heart, we shall not fear
henceforward to show our faces among mankind. We shall cease to
be hypocrites and pretenders, but what we have styled our free
institutions will be such.[170]
In the light of this event the public distress begins to be removed.
What if the brokers’ quotations show our stocks discredited, and the
gold dollar costs one hundred and twenty-seven cents? These tables
are fallacious. Every acre in the free states gained substantial value
on the twenty-second of September. The cause of disunion and war
has been reached and begun to be removed. Every man’s house-lot
and garden are relieved of the malaria which the purest winds and
strongest sunshine could not penetrate and purge. The territory of
the Union shines to-day with a lustre which every European emigrant
can discern from far; a sign of inmost security and permanence. Is it
feared that taxes will check immigration? That depends on what the
taxes are spent for. If they go to fill up this yawning Dismal Swamp,
which engulfed armies and populations, and created plague, and
neutralized hitherto all the vast capabilities of this continent,—then
this taxation, which makes the land wholesome and habitable, and
will draw all men unto it, is the best investment in which property-
holder ever lodged his earnings.
Whilst we have pointed out the opportuneness of the
Proclamation, it remains to be said that the President had no choice.
He might look wistfully for what variety of courses lay open to him;
every line but one was closed up with fire. This one, too, bristled with
danger, but through it was the sole safety. The measure he has
adopted was imperative. It is wonderful to see the unseasonable
senility of what is called the Peace Party, through all its masks,
blinding their eyes to the main feature of the war, namely, its
inevitableness. The war existed long before the cannonade of
Sumter, and could not be postponed. It might have begun otherwise
or elsewhere, but war was in the minds and bones of the
combatants, it was written on the iron leaf, and you might as easily
dodge gravitation. If we had consented to a peaceable secession of
the rebels, the divided sentiment of the border states made
peaceable secession impossible, the insatiable temper of the South
made it impossible, and the slaves on the border, wherever the
border might be, were an incessant fuel to rekindle the fire. Give the
Confederacy New Orleans, Charleston, and Richmond, and they
would have demanded St. Louis and Baltimore. Give them these,
and they would have insisted on Washington. Give them
Washington, and they would have assumed the army and navy, and,
through these, Philadelphia, New York, and Boston. It looks as if the
battle-field would have been at least as large in that event as it is
now. The war was formidable, but could not be avoided. The war
was and is an immense mischief, but brought with it the immense
benefit of drawing a line and rallying the free states to fix it
impassably,—preventing the whole force of Southern connection and
influence throughout the North from distracting every city with
endless confusion, detaching that force and reducing it to handfuls,
and, in the progress of hostilities, disinfecting us of our habitual
proclivity, through the affection of trade and the traditions of the
Democratic party, to follow Southern leading.[171]
These necessities which have dictated the conduct of the federal
government are overlooked especially by our foreign critics. The
popular statement of the opponents of the war abroad is the
impossibility of our success. “If you could add,” say they, “to your
strength the whole army of England, of France and of Austria, you
could not coerce eight millions of people to come under this
government against their will.” This is an odd thing for an
Englishman, a Frenchman or an Austrian to say, who remembers
Europe of the last seventy years,—the condition of Italy, until 1859,
—of Poland, since 1793,—of France, of French Algiers,—of British
Ireland, and British India. But granting the truth, rightly read, of the
historical aphorism, that “the people always conquer,” it is to be
noted that, in the Southern States, the tenure of land and the local
laws, with slavery, give the social system not a democratic but an
aristocratic complexion; and those states have shown every year a
more hostile and aggressive temper, until the instinct of self-
preservation forced us into the war. And the aim of the war on our
part is indicated by the aim of the President’s Proclamation, namely,
to break up the false combination of Southern society, to destroy the
piratic feature in it which makes it our enemy only as it is the enemy
of the human race, and so allow its reconstruction on a just and
healthful basis. Then new affinities will act, the old repulsion will
cease, and, the cause of war being removed, Nature and trade may
be trusted to establish a lasting peace.
We think we cannot overstate the wisdom and benefit of this act of
the government. The malignant cry of the Secession press within the
free states, and the recent action of the Confederate Congress, are
decisive as to its efficiency and correctness of aim. Not less so is the
silent joy which has greeted it in all generous hearts, and the new
hope it has breathed into the world. It was well to delay the steamers
at the wharves until this edict could be put on board. It will be an
insurance to the ship as it goes plunging through the sea with glad
tidings to all people. Happy are the young, who find the pestilence
cleansed out of the earth, leaving open to them an honest career.
Happy the old, who see Nature purified before they depart. Do not let
the dying die: hold them back to this world, until you have charged
their ear and heart with this message to other spiritual societies,
announcing the melioration of our planet:—
“Incertainties now crown themselves assured,

And Peace proclaims olives of endless age.”[172]
Meantime that ill-fated, much-injured race which the Proclamation

respects will lose somewhat of the dejection sculptured for ages in
their bronzed countenance, uttered in the wailing of their plaintive
music,—a race naturally benevolent, docile, industrious, and whose
very miseries sprang from their great talent for usefulness, which, in
a more moral age, will not only defend their independence, but will
give them a rank among nations.[173]

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Auditing and Assurance Services A Systematic Approach

Auditing And Assurance Services A Systematic Approach

Auditing and Assurance Services A Systematic Approach

By studying this chapter, students should be able to:

2. Describe the assertions contained in financial statements and notes thereto.

3. Discuss what is meant by the sufficiency and reliability of evidence.

4. Explain directional testing and its importance to achieving audit efficiency.

6. Explain the nature and purposes of audit programs.

8. Understand issues surrounding auditing management’s estimates.

9. Apply the decision analysis and ethical decision-making frameworks to situations

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assertions on financial statements and notes or other measures of business performance.

The following points need to be emphasised when discussing audit evidence:

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Copyright © 2012 Cengage Learning Australia Pty Limited

Suggested Homework Problems

Learning Multiple Choice Discussion and

LO 2 7-3, 7-4 7-6 7-26, 7-27, 7-32, 7-33, 7-41, 7-43

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II. ASSERTION MODEL FOR FINANCIAL REPORT AUDITS

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presented. There are different sets of assertions for transactions, account

III. GATHERING SUFFICIENT, APPROPRIATE EVIDENCE

B. Current auditing standards for the annual audit of an organisation’s financial

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D. Reliability of Audit Evidence

G. Nature of Audit Testing

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procedures on the direct tests of account balances (particularly the

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conclusion. It is most often used to gain an

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• Recomputation or Recalculation of Data

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Corroboration of this information is obtained from the client’s

IV. AUDIT PROGRAMS AND DOCUMENTING AUDIT EVIDENCE

B. Documenting Audit Evidence

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should be able to be evaluated independently of the individuals who

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ii. Initials or electronic signature of the auditor performing the test

V. AUDITING ACCOUNT BALANCES AFFECTED BY MANAGEMENT’S

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Solutions for Chapter 7

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*7-6 Confirmation is most likely to be a relevant form of evidence with regard to

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III. Inventory may need to be reduced to current market value.

Multiple Choice Answers:

7-1. b. (LO 3, pp 256-262)

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Valuation/allocation. Assets, liabilities, and equity interests are included in the

Presentation/disclosure. Assets, liabilities, and equity interests are appropriately

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o Measured by year-end market prices, assuming a liquid market such

Less reliable information

7-7. (LO 7, pp 269-273) An audit adjustment is a correction of a misstatement of the