External Confirmations: Banks, Custodians, and Warehouses

Answer A. Direct confirmation from an independent third party combined with auditor observation of the physical inventory provides highly reliable, external evidence addressing the existence assertion for material off‑site inventory. Reconciling observed items (including serial or lot numbers) to the client's inventory listing directly tests whether the recorded inventory actually existed at year‑end; internal count sheets or analytical procedures are less persuasive when existence is the primary concern.

Why not B: Tempting because documentation and book reconciliation exist, but those are client‑ or third‑party‑prepared and not independent verification of physical existence. For a material off‑site balance, external confirmation and/or auditor observation are needed for sufficient appropriate evidence.

Why not C: Analytical procedures may indicate whether a balance is plausible in aggregate, but they do not provide direct evidence that specific inventory items physically existed at the third‑party warehouse at year‑end and therefore cannot substitute for confirmation or observation when existence is in question.

Why not D: Testing at the company's own warehouse is convenient, but custody, controls, and risks differ at the third‑party location. Extrapolating on‑site results does not directly verify off‑site inventory existence and therefore would not provide sufficiently appropriate evidence for the third‑party holdings.

Answer D. Inspecting the signed loan agreement provides original documentary evidence of the loan's terms, while confirming with the lender gives independent external evidence about the loan's existence and the year-end balance. For a significant, late-year borrowing recorded from an internal summary, these combined procedures are the most reliable way to obtain sufficient appropriate audit evidence.

Why not A: Analytical comparisons to prior year are too indirect for a new, material borrowing late in the year and cannot by themselves establish the loan's terms or confirm the year-end balance.

Why not B: Inquiry and representation letters come from management and lack external independence; they may supplement other evidence but are not the best primary evidence for a significant new loan that affects the year-end balance.

Why not C: Recalculation tests the mathematical accuracy of management's computations, but it relies on the internally prepared summary and does not independently verify the loan's existence, terms, or year-end liability; it is useful as a follow-up after confirming the loan.

Answer D. A bank confirmation is external evidence obtained directly from a third party and is generally more reliable than client‑provided documentation. Because the account is material and the auditor currently only has a client screenshot, obtaining a confirmation from Metro Bank is the primary next step to verify the existence and year‑end balance.

Why not A: Subsequent cash receipts may provide some corroboration for cut‑off or processing, but they do not directly verify the December 31 bank balance for a newly opened, material account. This comparison could miss outstanding items or errors that a direct bank confirmation would reveal.

Why not B: Inspecting the client's reconciliation checks internal calculations and the client's presentation of reconciling items, but it still relies on client‑prepared records. It does not provide independent third‑party verification of the bank balance, so it is not the best primary step when external evidence is available.

Why not C: Inquiry of management is quick and may identify issues, but it is among the least reliable forms of evidence. Management inquiry can supplement other procedures but should not be the primary step when independent external confirmation is appropriate for a material account.

Answer C. This is the best answer because the auditor has only client-generated evidence plus inquiry, which is generally less reliable than evidence obtained directly from an independent external source. For material inventory held by a third party, direct confirmation from the warehouse is a common and appropriate way to strengthen evidence about existence and custody (rights). Without that kind of external support, the evidence may be insufficiently appropriate.

Why not A: This is tempting because agreement between two client records can feel like corroboration. However, matching internal records to other internal records does not provide strong independent evidence, especially for material inventory held off-site. The auditor still needs external confirmation or other procedures directed at the third-party custodian.

Why not B: This is tempting because candidates often over-credit management explanations and detailed internal records. But responsibility for records does not make the evidence highly reliable; both the listing and the inquiry come from the client. The issue is whether the auditor has obtained sufficiently persuasive evidence from an appropriate, independent source.

Why not D: This distractor is attractive if the candidate mixes up assertions. Contacting the warehouse is especially relevant to existence and rights/custody for inventory held by others, not mainly valuation. Failing to obtain external evidence on material off-site inventory means the planned procedures likely need to be expanded, not left unchanged.

Answer A. Documents obtained directly from an independent external source (the bank) are more reliable and directly address concerns about possible alteration. Receiving original bank statements and canceled checks from the bank increases both the appropriateness and sufficiency of evidence for the year‑end cash balance. Other procedures may provide corroboration but are less direct in verifying authenticity of client‑provided copies.

Why not B: This choice is tempting because recomputation and tracing are standard substantive procedures to test the reconciliation. It fails here because those procedures still rely on management‑provided photocopies and do not eliminate the auditor's concern about possible alteration or provide independent confirmation of authenticity.

Why not C: This is attractive because subsequent transactions can corroborate balances and cutoff, but it provides indirect evidence and may not cover all year‑end items or prove that the year‑end statements themselves are authentic. It is less conclusive than obtaining originals directly from the bank.

Why not D: A management representation is easy to obtain and might seem to address the issue, which makes it tempting. However, such representations are internal and lack independence, so they do not provide the objective assurance needed when the authenticity of client‑provided documents is in question.