 Hello and welcome to the session in which we would look at a CPA exam simulation that deals with evidence. Evidence is a major and an important topic on the CPA exam, auditing and attestation section. You want to make sure you are comfortable with all sorts of evidence before setting on the exam because you could be given those questions in a multiple choice to select the appropriate type of evidence or you could be given this information in a form of a simulation. So you want to make sure it's something you want to be very comfortable with. Evidence, assertions, internal control, the cycles, IT, those are major components of the auditing and attestation exam. Now if you are a CPA candidate or an accounting student but especially if you are a CPA candidate, I strongly suggest you check out my website farhatlectures.com. Now I understand you might be using Becker, Roger, Gleim, Wiley or some other CPA course. That's great. You do need that course. What I can do is I can be a useful addition to that CPA course. I can add 10 to 15 points to your CPA exam by explaining the material a little bit more in depth and slower than your typical CPA review course. And here's my offer to you. Are you willing to take your chance? Are you willing to try my system for $30 to find out you might be able to pass your CPA exam? I might be able to help you cross that 75%. That's the offer. Your risk is $30 limited. Your gain is unlimited. Passing the exam. Are you willing to take that chance? If you like my system, you keep it. And it's $29.99 a month. If not, you can cancel and that's your risk. That's the only thing you are risking. If not for anything, check out my website to find out how well is your university perform on the CPA exam. Simply put on average, what is the score at your university? I have it. The overall score as well the score per section. I also have resources for other accounting, finance, tax and other courses. Please connect with me on LinkedIn. If you haven't done so and check out my LinkedIn recommendation. My recommendations are people who use my system and it very well on the CPA exam. Please like this recording, share it. If it's helping you, it's going to help other people as well. Connect with me on Instagram and Facebook. So let's take a look at this problem in which we are giving scenarios and you are being asked to select the type of the audit that we are discussing here. For each of the following audit procedure indicate the type of the audit procedure it represents. So again, we have many type of audit procedures and many type of evidence. So you want to know what are we doing here? You want to understand the different type of evidence. This is extremely, you know, I said this before at the beginning, but I cannot emphasize this enough. So in this session, I'm going to go over these very briefly. But if you want a detailed explanation, please go to forehead lectures where I have several recording about evidence. What is evidence? How do we collect evidence that the different type of evidence? What evidence serve which assertion so on and so forth. Looking at a sending written requests to the entity's customer requesting that they report the amount to the amount owed to the entity. Okay. What type of evidence is that when we send a confirmation to someone else to a third party? Well, I hope you know this. And if not, don't set for the exam yet. That's a confirmation. So that's the evidence is a confirmation. Generally speaking, this is a strong form of evidence. Well, as long as it's controlled, controlled means you send it out and you receive it. I still remember when I was in practice, I would mail those request myself. I would mail them out. For example, I'll put the client name, the account number and tell them how much does this report the amount owed to the entity. And I will put also a returned envelope and with my name on it. So when the client gets that confirmation, they will send it back to me. I would receive it myself. So as long as it's controlled, this is a strong type of evidence because it's a third party evidence. For example, you can confirm a counter-receivable, you can confirm with the legal counsel of the client, you can confirm bank balances. There's many form of confirmation, but that's a strong, strong form of evidence. B, examining large sales invoices for a period of two days before and after year end to determine if sales are recorded in the prior period. Here you are, you are looking at, you are examining, you are looking at something. What do you think? When you examine something, you're examining large, you're looking, you're basically examining. That's what we're saying. You're looking at them. I would say this is a form of inspection, inspection of record or document. That's what you are doing. You are inspecting the record and the document. But here you have to be very careful when you are inspecting the records and the document. You want to make sure that those documents and records are authentic because these are provided by the client. Just want to make sure they are authentic. That's the first thing. If they are not authentic, it doesn't matter how hard you're going to examine them, then you are looking at them for a period of two days or more. This is basically a form of inspection. This is what you are doing. You do inspect a lot of documents. Sometimes that inspection could be done on a computer. You're looking at the computer rather than a physical invoice. But the point is, when you examine something, it's a form of inspection, inspection. C, agreeing the total of the account receivable sub ledger to the account receivable general ledger account. Here what you are doing is you are adding up all the sub ledgers, all the sub ledgers. For example, you add up all the client's account, all their customers. They have five customers. You add them up. It's a million dollars. Then you look at their general ledger and make sure it's a million dollars. This is what you are doing now. First of all, are you doing any form of inspection? Yes, you are. When you are looking at the record, you are inspecting the record. Is this the only thing that you are doing? The answer is not. You are also agreeing. You want to make sure you add them up and you are agreeing them. You are performing some form of computation, re-performance. It's not only that you are inspecting the record. You are also re-performing. The truth is, in the real world, if you are using QuickBooks or some sort of a software, and where I used to work, we had a lot of QuickBooks, QuickBooks will obviously match all the sub ledgers to the general ledgers. Otherwise, this type of process is done automatically. Nevertheless, you still want to do it just to make sure everything is good. Everything makes sense. So you're inspecting it. Make sure it's there and you are agreeing. You are re-performing that step. But again, in the real world, this step is done automatically or computerized. Discussing the adequacy of the allowance for doubtful account with the credit managers. Just look at what we are seeing here. We are discussing. What does it mean discussing? It means you are talking. You are asking the managers about the doubtful account. Can you tell me a little bit more? Why is it a little bit more than last year? Why is it less than last year? Why is it $500,000? Why is it $300,000? That's all you are doing. You are discussing and asking them questions about the economic situation overall in the industry. That's all what you are doing to determine the allowance. What type of evidence is that? That's basically inquiries. You are inquiring. You are inquiring with the customer. First, inquiry, it depends on the management integrity because you are listening to the manager. How much do you trust that manager or management overall? If you do trust the manager, then you have a strong evidence. It's a strong, but you always have to back it up because obviously the manager is biased. They are going to tell you what you want to hear. You always need to corroborate this evidence. Although it might be strong, but it's not going to persuade you. You need more evidence to back up what they are saying. The form of evidence is inquiry. You want to make sure you understand the difference between all these. Comparing the current year gross profit percentage with the gross profit percentage of the last four years. Hopefully you know what this is. You are looking at ratios from year to year. We call this analytical procedures. On my website, if you don't know what analytical procedure is, I go into the details about analytical procedures. We do analytical procedures at the beginning of the audit. When we are learning about the client initially, we do it through the audit and we can do it at the end of the audit. So analytical procedure is an important step that you have to be familiar with. And by the way, inquiries, usually inquiries, it's done when you are learning about the customer, learning about their internal control, learning about their business. It doesn't mean it's not done during the collection of the evidence, but it's more done during the initial stage. F, examining, examining a new plastic extrusion machine to ensure that this major acquisition was received. Now you're examining something, right? You're examining. Oh, examining. It means I am doing some inspection. Yes, you are. But look what you are inspecting. You're inspecting the existence of a new machine. So this is inspection of a tangible asset. Tengeable means it's a physical asset that you have. It's a tangible asset. So that's a form of inspection. And that's very important for the existence. It does exist. It is there. So it's important, but it's only to verify existence. Now you could also look at other things, look at the sales receipt, you see how much they pay for it, so on and so forth. But the inspection itself will make sure it's there. Now you want to make sure you match the, for example, if the machine has a specific VIN number, not VIN number, an account number, you want to make sure that you see that account number, it should be the same thing at the purchase invoice. It should be. So when you make sure that what you are seeing in your hand, the paper in your hand, matches what you are looking at physically. G, watching the entities, warehouse personnel count, the raw material inventory, all what you are doing is standing there and watching. Now you are better off if they don't see you. I did this several times. I did this several times in the real world. So when you are watching, what are you doing? Okay, are you inspecting? No, not really. You're not inspecting anything. Are you observing? Yes, that's exactly what watching is. You're doing observation. Again, observation is good if they don't see you, if they don't know you are there, because people will act differently when they see you. And usually also observation is done when you are learning about the client, about the client process and procedures. So it's a good, it's a good type of evidence. If they don't see you, they don't see what's going on. It means that people who are being watched, they don't see you. You are watching them because they would act differently, especially if they know that you are the auditor. Obviously, you don't want them to know that. H, performing, performing test count of the warehouse personnel count of raw material. Now you are doing actual, actual counting. You are performing test count. So obviously the, maybe this, this was, this was done by the client themselves. Now you are performing a test count again. What does that mean? It means you are doing a re-performance. You are re-counting. You are doing the work again. Basically, basically you are checking on their work. That's all what you are doing. When you re-perform, you check on their work, you check on their work. I, obtaining a letter from the entity's attorney. Okay, the entity's attorney is a third party, indicating there are no lawsuit and progress against the entity. When you obtain something from a third party, it's like, it's like obtaining the, the balance from the bank, from a third party. This is a confirmation. You need to know, there's a lot to know about confirmation. So if you're not familiar with positive confirmation, negative confirmation, you really want to make sure you understand confirmation inside out. So this is a form of confirmation. Okay. And it's, again, it's a strong evidence as long as the process is controlled and as long as that third party respond to you and as long as that third party pay attention to what you are asking them. So there's more than just, it's good evidence. There's other qualification for that. But generally speaking, it's a good evidence because it's not coming from the client. That's why we consider it a strong evidence. Again, more about confirmation and evidence you could learn on my website, forehead lectures. Tracing the prices used by the entity's billing program for pricing sales and voices to the entity's approved list. Here, what you are doing is once you are tracing, you are looking at things, you are inspecting and you are reperforming. Now again, the computer system might be doing this, but you also want to double check. You just want to double check. Okay. So you want to double check. So you want to tracing the prices used by the entity billing program to four, so notice pricing sales and voices to the entity's approval list. Make sure they confirm. You are double checking. You are reperforming this step. Reviewing. Again, reviewing. What does, just also reviewing real quick, the general ledger for unusual adjustment and entries. Now you might be saying reviewing is a form of inspection. You're not really, you know, you're not inspecting. You're just basically reviewing and what are you reviewing for, for unusual transactions? So let me give you an example of reviewing the general ledger for unusual adjusting entries. Let's assume at the end of the year you had a large sale or a large expense. So you're looking for something that's unusual. You're not looking for anything in particular. You're looking for something that should not be there. Or if it should be there, it does not make any sense. You want more explanation for this. We call this step scanning. You're just looking for unusual, just like looking over. Basically scanning is looking over the transaction, making sure everything make sense for unusual entries. For example, if you see that they are reducing their expenses, you want to know this is unusual. Why are your expenses being reduced? Or there's a large revenue transaction. This looks Arab whack. Why is this large transaction in there? Or anything that does not make any sense. Basically you are reviewing real quick the general ledger. It's a form of scanning. Inspection, it's like more like you are really looking at it in the tail. Reviewing is basically scanning. Scanning is just overview. Let's look at it overview. So when you say, you know, what's the difference between inspection and scanning? Scanning is going a little bit faster. Okay, that's the difference between the two. So basically, at the end of this recording, I'm going to ask you again to like it, share it, check out my website. And again, I don't replace your CPA course. You can keep it. If it's working for you, that's great. If you need that extra supplement, that vitamin, to help you understand the material better, whether it's for Becker, Roger, Glyme or YV, I will be there to help you with that step. And that step alone, this is mostly what students are missing. That extra knowledge, because the CPA exam really tests you about basic knowledge. But you have to know that basic knowledge very strongly. So you have to have strong knowledge in that basic knowledge. If you are weak in your basic knowledge, any question will trip you. You will not misunderstand it or you will misinterpret it. But if you have a strong knowledge about the topic, you could eliminate, as I show you in my multiple choice sections, immediately, most of the time, you could eliminate two choices by having a basic knowledge, only basic knowledge about the topic, and a little bit of tweak, and you'll be able to get to the right answer. Good luck. Study hard and stay safe.