Text PAQ 5.28 Bank reconciliations

Required

(a) Comment on the persuasiveness of the evidence in Ali’s files for Broad Ltd’s financial report audit.

(b) Explain how an auditor would obtain more persuasive evidence for the relevant assertions for the bank accounts at Broad Ltd.

You might it useful to move beyond just ASA 500 as you consider this question, especially part (b) … for example, check out ASA 505 and then AGS 1002 which provides specific guidance on a particular type of external confirmation – the bank confirmation. The point is to begin realising that there are quite a few ASAs that impose obligations and provide additional specific guidance for the evidence the auditor needs to gather … you will explore these in subsequent Modules, most especially in Module 3 & 4.

1. There is a hierarchy of evidence persuasiveness. The most persuasive is externally generated evidence sent directly to the auditor, then externally generated evidence held by the client, then the least persuasive evidence is internally generated evidence. None of the documents held in Ali’s files is in the most persuasive category because it is all held by the client. Therefore, the more persuasive evidence held by Ali is the externally generated evidence such as bank statements, correspondence from banks, and other bank initiated documents. The least persuasive evidence is Ali’s documents, including bank reconciliations and copies of letters sent to banks and other parties.
2. The auditor would obtain more persuasive evidence by obtaining documents directly from the bank. For example, the auditor could ask the bank to confirm in writing (via a bank representation letter) the balances of the client’s various accounts at specific dates, the interest rates and fees that apply to the client’s bank accounts and amounts payable for the period, the state of any disputed transactions etc. This evidence would be more persuasive because it has not passed through the hands of the client and therefore could not have been altered by the client.