 Hello and welcome to the session in which we would look at a CPA exam simulation that deals with audit evidence. Audit evidence is a major topic on the CPA exam auditing and attestation suction. Why? Think about it. Do you want to have a CPA that's not competent in evaluating and analyzing audit evidence? I don't think so. That's why this topic is very important before sitting on the exam and here's what's going to happen on the exam day. You might get a question. I would say easy to medium question about audit evidence. If you get that question wrong, they may ask you another question about audit evidence. If also you get that question wrong, then now you might be heading toward a grade less than 75. They might give you additional questions in terms of audit evidence, but if you keep getting those questions wrong, it means you have a major weakness in this major topic, which is audit evidence. In this session, we're going to be looking at audit evidence in terms of whether the document, whether the evidence, whether the record, the record is internal or external, then we're going to evaluate the reliability of the record. For example, reliability means is it better? Is it not as good depending on the circumstances? Before I start, I would like to remind you that whether you are an accounting student or a CPA candidate, especially if you are a CPA candidate, you might be taking a CPA review course like Becker, Roger, Glyme, Wiley or any other CPA course. I don't replace those CPA courses, you can keep them. I can be a useful addition to your CPA course. I can add 10 to 15 points. How so? I can explain the material slower, more in depth, teach you the concept behind the theory rather than teaching you the mnemonics for the exam. So this is how I can add those points. Here's my challenge to you. Are you willing to take your chance? Basically invest in yourself $30 for a month to find out whether my system works or not. So the risk is $30, the reward is passing, helping you pass the exam. Now, if you don't like the system, you can cancel, you lost $30. If you like the system, you can keep and it will be a subscription until you actually pass or you can cancel anytime. Also for accounting students, I do have other courses. If you want to know if my system works so well, works well or not, check out my LinkedIn recommendation. Connect with me on LinkedIn and check out my LinkedIn recommendation. Please like this recording, share it, put it in playlist, connect with me on LinkedIn, on Instagram and Facebook. So let's take a look at this question. Okay, inspection of record and documents related to the auditor examination of the entity's accounting record and other information. That's fine. One issue that affect the reliability of auditory evidence is whether the document is internal or external. So first, when you are giving a document, you want to know whether this document is internally generated or coming from a third party or it could be internally generated that went through a third party route. So it's very important to understand this. So here's what's going to happen. First, we're going to classify each document. These are the documents, whether it's internal or external. That's important because whether it's internal or external, it determines the reliability, how much way we should give to this evidence. And it's reliability, how reliable it is, high, moderate or low. Okay, so this is what's going to happen, whether it's internal or external. First, you have to know whether it's internal or external. Now, before we start, before we start, you need to know this at least. Well, which evidence is more reliable? Is it internal evidence or external evidence? Obviously, external evidence. So always external evidence. If you have external evidence, it's better than internal evidence. Let's start to look at the first documentary evidence. Duplicate copies of sales invoices. Who generate the sales invoices? Well, the company generate the sales invoices. When they make a sale, they have a sales invoice and that's a duplicate copy. First, is it internal or external? Obviously, it's internal. How reliable is this document? Well, the reliability of internal document depends on the strength of the internal control. If the internal control of that company is strong, is excellent, then the evidence will be reliable. Why? Because if they have good internal control, it means this sales invoice is a reliable evidence. Now, if the internal control is not as good, is not as good, then it's not as reliable. So simply put, what's the reliability? High, high reliability if the internal control is excellent. Moderate to low, otherwise. So it could be, if they have really a lousy internal control, then I'm not going to rely on this. The reliability of a sales invoice is practically zero. I have to rely maybe on the cash receipts for that sale rather than the sales invoice. Purchase order, when the company make a purchase, they have a purchase order. They issue a purchase order. Is this internal or external? It is internal. What is the reliability of a purchase order? Well, I would say the same thing as a sales order. It's an internal document and it's a good document if they have a good internal control. Otherwise, it's not as good. Simply put, it's the same. Bank statement. Who issues the bank statement? Does the company issue the bank statement or the bank issue the bank statement? Well, obviously the bank statement is issued by the bank. It's an internal document and this is important. Once we know it's internal, well, now the reliability of that source document becomes high. As long as we control the whole process, receiving the bank document, making sure it's not a made up document. It's not a bank statement that was photoshopped by the company. It's high because it comes from an external party, but you don't only rely on the external party. You want to make sure you control this process that you are receiving this document from an external party. Now, remittance advices. First of all, do you know what remittance advice is? Well, it's a document that it's sent by a customer to a seller to indicate to inform the seller that the invoice has been paid. For example, if you have a cell phone, and I'm pretty sure all of you will have a cell phone listening to me, you would receive a bill. That bill will have a remittance advice. You're saying, okay, this is, okay, so this document is coming from the company, but you, the customer is receiving this document, then you're sending the document back to the company. So notice what happened. It is an internal document. However, it went through an external route. What's the external out? The customer. Then it becomes considered an external document. Here, it's high to moderate because the document has been circulated to an outside party. So it's high, but again, who knows? Maybe it was not real. It was not really sent to a real customer. You have to be careful. Generally, it's high. It could be moderate, depending again on how well you are controlling this process. Five, vendor's invoice. What is a vendor's invoice? When you buy something, the vendor will send you a bill. Say, you purchased this item from us. We want you to pay it. Well, that's an external document. Somebody else sent it to you. How about external document? How well are they? Well, it's high because they come from an outside party. Why? It's an outside party. Therefore, just like the bank statement, it's not only just because they comes from an outside party. Once again, you have to make sure that the invoice is not, is a real invoice. There are certain things you can confirm to make sure it's a real invoice. Again, this is beyond the scope of this recording, but especially if you are auditing for fraud, you want to make sure that this invoice has a number, the company exists. There's other things you can check to make sure that the invoice is a real invoice. Material requisition form. Is this an internal document or an external document? Well, when the company is manufacturing something, manufacturing tables, they might, they need wood, raw material. They will issue a material requisition form. It's an internal document. Well, if it's an internal document, guess what? It's high if the internal control is excellent. Moderate to low. Otherwise, overhead cost allocation. Well, of course, this is an internal document. And how good is that internal document? It's the same thing as the material requisition form. They go together hand in hand because when you are building the table, you have to keep track of your overhead to allocate to that table. So high if the internal control is excellent. Ship and documents. Who ships the items? The company ships the item. Therefore, the shipping document is internal. Same exact thing. Once you are done with that table, you are going to ship it. Well, if the internal control is high, I would rely on your shipping documents as a good evidence. Otherwise, I don't. Payroll checks. First of all, who issues the payroll checks? Well, the company issued the payroll checks. Therefore, it is internal. Okay. Now, what's going to happen is this. This document, although it's internal, it went through an outside party, not like the remittance advice because the remittance advice the customer is paying. It has more reliability. Here, it's still internal because you are dealing with a party that's inside the company. The payroll checks are issued to the employee. So high to moderate because the document has been circulated in quote to a party outside the entity. Really, the party is not outside the entity. The party nevertheless, it's still employees. Therefore, employees of the company, they can be, they can be biased to the company. They can be told to accept this paycheck, maybe to fudge the numbers. We don't know. It's still an internal document versus a remittance advice. It has a little bit more reliability because it's outside customer, outside customer. If you are inspecting a long term debt agreement, well, who issued a long term debt agreement? The lender, the bank. Okay. So that's an external document. Well, what happened to external document? Usually they have a high reliability because they come from an external party. Same thing though, even with a loan document, loan, loan agreement, you have to make sure that this is indeed a loan agreement. So there are other way to verify that this is not what we are dealing with here. What we are dealing here is simply put, is it internal? Is it external? And what's the reliability of that document? So the hierarchy of evidence is very important topic on the CPA exam. And that trips a lot of students on the exam day. What can I offer to you? How can I help you in this process? If you go to my website, farhatlectures.com, I do have evidence lessons, explanation, detailed explanation. And I will help you understand this topic inside out in conjunction with your CPA review course. And you will be good to go for the exam day. Don't shortchange yourself. And if not for anything, check out my website to find out how well is your university doing on the CPA exam? Good luck, study hard and stay safe.