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Another approach is a source list of procedures or evidential matter to be used as a resource in developing audit programs. Exhibit 12.3 indicates what this approach might look like for some common financial statement components. Usually such source lists present either evidential matter or procedures but, to avoid repetition, not both. For example, if the evidential matter is minutes of board meetings, the procedure is to read the minutes. Or if the procedure is to inspect a broker’s advice, the evidential matter is the broker’s advice.

Another approach is to use standardized audit programs developed for common components of financial statements. This approach is not illustrated here. Many auditors prefer source lists to packaged programs because of a concern that standardized programs promote routine application and do not encourage exercise of judgment.

Exhibit 12.3 Source List of Procedures or Evidential Matter

Elements of financial statements	Existence or occurrence	Completeness	Rights and obligations	Valuation or allocation	Presentation and disclosure
Cash	Bank confirmations	Bank reconciliations	Bank confirmations	Foreign currency exchange rates from newspapers, and so on	Confirmation of restrictions on bank balances
	Cash counts	Interbank transfer schedules			Contractual agreements relating to escrow funds, compensating balances, sinking funds, and so on
	Certificates of deposit and savings account books	Subsequent cutoff bank statements Review of controls over cash receipts and disbursements
Marketable securities	Security counts	Analyses of general ledger account activity	Certificate of ownership	Broker’s advices and documents supporting purchases of securities	Representation and other information regarding management’s intention to retain securities
	Security confirmations	Confirmations of security positions with brokers and dealers	Security confirmations	Market value quotations	Minutes of board or committee meetings
	Custodian’s reports	Custodian’s reports		Appraised values of infrequently traded securities	Contractual terms of debt securities and preferred stocks
		Review of subsequent transactions		Foreign currency exchange rates from newspapers, and so on	Confirmation of securities pledged under loan agreements, and so on
		Review of controls over security of investments and transactions
Receivables	Confirmation of account balances	Tests of year-end sales and shipping cutoff procedures	Confirmation of account balances	Aging of open balances	Confirmation of terms with debtors
	Underlying customer orders and agreements, invoices, and shipping documents	Reconciliation of trial balances and general control accounts	Subsequent collections	Credit experience and terms	Sales agreement and contract terms
	Subsequent collections	Analytical relationship of balances to recent sales volume	Sales records	Credit reports on customers	Terms of notes receivable and collateral held
	Customer correspondence	Analyses of general ledger account activity	Customer correspondence	Correspondence on collection follow-up	Confirmation of receivables sold with recourse, discounted, pledged, and so on
	Sales records	Review of controls over billings and cash receipts	Promissory notes	History of sales returns and allowances Industry experience and trends
				Subsequent collections, credits, and write-offs
				Discussion with credit and collection personnel
				Review of controls over credit extension and collection
				Foreign currency exchange rates from newspapers, and so on
Inventory	Physical counts	Tests of year-end shipping and receiving cutoff procedures	Physical counts and confirmations	Purchasing and manufacturing cost records	Confirmation of inventories pledged under loan agreements, and so on
	Confirmation of inventories not on hand	Reconciliations of physical counts with perpetual records and general ledger balances	Paid vendors’ invoices	Vendors’ invoices
	Perpetual inventory records	Analytical relationship of balances to recent purchasing, production, and sales activity	Consignment agreements	Review of labor rates
	Underlying purchasing records, including purchase orders, vendors’ invoices, and receiving reports	Analyses of general ledger account activity	Purchase agreements and contracts	Analyses of purchasing and manufacturing standard cost variances
	Underlying production records	Review of controls over accounting for receiving, production, and shipping activities	Physical observations and confirmations	Open purchase commitments
	Subsequent sales and delivery reports	Review of controls over inventory records		Current market value quotations and replacement cost information
				Plant tour for possible excess and obsolescence
				Discussion with production and sales personnel
				Inventory turnover schedules
				Industry experience and trends
				Analytical relationship of balances to anticipated sales volume
Prepaid assets and deferred charges	Invoices, contracts, agreements, and other documents supporting additions to balances	Analyses of general ledger account activity	Documents supporting additions to balances	Documents supporting additions to balances	Terms of insurance policies, tax bills, and so on (current vs. noncurrent)
		Review of controls over accounts payable and cash disbursements		Recalculation of amortization
		Review of subsequent transactions		Recomputation of ending account balances
				Analytical relationship of balances to estimated future utilization of assets
				Discussion of realizability of deferred charges with appropriate personnel
				Industry experience and trends
Fixed assets	Physical observations	Plant tour	Documents supporting confirmations	Documents supporting acquisitions	Minutes, representations, and other information regarding management’s intention to abandon or dispose of fixed assets
	Documents supporting acquisitions, including authorizations in minutes, construction contracts, purchase orders, invoices, work orders, and so on	Analyses of general ledger activity	Lease agreements	Lease agreement terms	Confirmation of fixed assets pledged under loan agreements, and so on
	Confirmation of equipment maintained at outside locations	Reconciliation of account activity to subsidiary property records Analytical relationship of fixed asset dispositions to replacements Confirmation of construction contracts payable Vouching of repair and maintenance expense accounts Review of controls over accounts payable and cash disbursements Review of controls over construction work in progress		Appraisal reports, replacement cost quotations, and so on Recalculation of depreciation and amortization Analytical relationship of current year’s depreciation and amortization to fixed asset costs Industry experience and trends	Terms of lease agreements
Intangible assets	Documents supporting acquisitions, Including authorizations in minutes, purchase agreements, contracts, and so on	Review of controls over accounts payable and cash disbursements	Documents supporting acquisitions	Documents supporting acquisitions	Terms of contracts and purchase agreement
				Appraisal reports	Minutes of board or committee meetings
				Recalculation of amortization
				Representations and other information regarding use and realizability of assets
				Industry experience and trends
				Verification of foreign currency exchange rates
Accounts payable	Confirmation of selected accounts	Circularization of vendors	Confirmation of selected balances	Foreign currency exchange rates from newspapers, and so on	Confirmation of terms with creditors
	Supporting documents, including purchase orders, invoices, receiving reports, check requests, and so on	Tests of year-end purchasing and receiving cutoff procedures	Purchase contracts and vendor statements		Purchase agreement and contract terms
	Vendor statements	Reconciliation of trial balances and general ledger control accounts
		Review of subsequent payments
		Review of unmatched vendor invoices and receiving reports
		Review of controls over purchasing, receiving, and cash disbursements
Accrued taxes and other expenses	Tax bills, invoices, and other documents supporting charges for services	Analysis of general ledger account activity	Tax bills, invoices, and other documents supporting charges for services	Documents relating to items accrued	Terms of tax bills, and so on
	Subsequent payments	Comparison of account balances between years	Subsequent payments	Recalculation of amortization	Internal Revenue Service agents’ reports
	Industry experience	Review of controls over recording of cash disbursements		Recomputation of ending account balance Discussion of estimated future costs with entity personnel
Debt	Confirmation with lenders	Bank confirmations	Notes and loan agreements	Current interest rate quotations	Confirmation of terms with lenders
	Note and loan agreements	Representations from management	Lease agreements	Foreign currency exchange rates from newspapers, and so on	Terms of note and loan agreements
	Lease agreements	Reference in minutes to commitments, obligations, acquisitions, and so on			Terms of lease
	Authorization in minutes of board meetings	Correspondence from legal counsel			Current bank prime rate schedules
Revenue	Documents in support of selected revenue transactions, including customer orders, contracts, shipping documents, and sales invoices	Tests of year-end sales and shipping cutoff procedures	Not applicable	Discussions with engineers regarding percentage of completion of long-term projects	Terms of documents supporting revenue transactions, including long-term contracts
	Review of controls over shipping and billing activities	Review of subsequent transactions		Recalculations of percentage of completion computations
	Documents in support of selected expense transactions, including purchase orders, contracts, check requests, and so on	Review of controls over shipping and billing activities		History of sales returns and allowances
	Review of controls over recording long-term contract activity		Industry experience and trends	Subsequent credit memos
NOTE: Revenue recognition continues to pose significant audit risk to auditors. Therefore, auditors should be aware that the AICPA’s Audit and Accounting Guide, Auditing Revenue in Certain Industries, available through an online subscription, summarizes key accounting guidance regarding identifying circumstances and transactions that may signal improper revenue recognition, and provides guidance on auditing revenue transactions in selected industries not covered by existing AICPA Audit and Accounting Guides. The SEC has issued Staff Accounting Bulletin 104, Revenue Recognition, which summarized certain of the SEC staff’s views in applying GAAP to revenue recognition in financial statements. These two publications may be useful to auditors in evaluating revenue recognition issues. In addition, the Wiley publication Revenue Recognition has detailed and clear implementation guidance for the new revenue recognition standard.
Expense	Documents in support of selected expense transactions, including purchase orders, contracts, check requests, and so on	Test of year-end purchasing cutoff procedures	Not applicable	Recomputation of depreciation and amortization	Terms of documents supporting selected expense transactions, including large and unusual purchases
	Confirmation of large and unusual purchases with suppliers	Review of subsequent transactions		Recomputation of amortization of prepaid and accrued expense and deferred charges
	Review of controls over accounts payable and cash disbursements	Comparison of account balances between years		Analytical relationship of balances to total revenue
		Review of controls over accounts payable and cash disbursements