Audit 344 - Topic 8

Which of the following areas would ordinarily be expected to require the most time when performing an audit of a continuing client? Accounts receivable. Common stock. Retained earnings. Salaries expense.

Accounts receivable.

Which of the following factors does the auditor not need to evaluate before relying on the internal audit function? The internal auditor's objectivity The internal auditor's competence The internal auditor's approach to auditing All of the above are factors the external auditor should evaluate before relying on the internal audit function.

All of the above are factors the external auditor should evaluate before relying on the internal audit function.

Which of the following factors does the auditor need to evaluate before relying on the internal audit function? The internal auditor's objectivity The internal auditor's competence The internal auditor's approach to auditing All of the above are factors the external auditor should evaluate before relying on the internal audit function.

All of the above are factors the external auditor should evaluate before relying on the internal audit function. Each of these are factors the external auditor should evaluate when deciding whether or not to rely on the internal audit function.

Which of the following should be included in the written representations from management? Litigation Related party transactions Subsequent events All of the above.

All of the above.

The auditor performed a reasonableness test to make sure the client's cost of goods sold and revenue aligned

Analytical Procedures

Which of the following statements concerning analytical procedures is correct? Analytical procedures may be omitted entirely for some financial statemtn audits. Analytical procedures used during risk assessment of the audit should not use nonfinancial information. Analytical procedures usually are effective and efficient for tests of controls. Analytical procedures alone may provide the appropriate level of assurance for some assertions.

Analytical procedures alone may provide the appropriate level of assurance for some assertions. Option "a" is incorrect because the performance of analytical procedures is required during the planning and overall review stages of audits. Option "b" is incorrect because analytical procedures used during the risk assessment of the audit may use nonfinancial information (e.g., number of employees, square footage of selling space). Option "c" is incorrect because analytical procedures are not used to test controls. Option "d" is correct because analytical procedures may in certain circumstances provide the appropriate level of assurance for some assertions.

Which of the following statements is generally correct about the reliability of audit evidence? a. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements. b. Appropriate audit evidence refers to the amount of evidence obtained. c. Information obtained indirectly from independent outside sources is more persuasive than the auditor's direct personal knowledge obtained through observation and inspection. d. Appropriate audit evidence relates only to the audit evidence obtained from outside the entity.

Answer: a. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements. Reason: Option "a" is correct because the professional standards state that the more effective an internal control, the more assurance it provides about the reliability of the accounting data and financial statements. Option "b" is incorrect because sufficiency, not appropriateness, of audit evidence refers to the amount of corroborative evidence obtained. Option "c" is incorrect because information obtained indirectly will not in general be as persuasive as the auditor's direct personal knowledge. Option "d" is incorrect because appropriateness refers to the relevance and reliability of evidence, not whether it is obtained from outside the entity.

Of the following, which is the least persuasive type of audit evidence? a. Documents mailed by outsiders to the auditor. b. Correspondence between auditor and vendors. c. Copies of sales invoices inspected by the auditor. d. Computations made by the auditor.

C. Copies of sales invoices inspected by the auditor. Reason: Option "c" is correct because copies of sales invoices represent internally generated evidence, which is considered less reliable than externally generated evidence received directly by the auditor. Option "a" is incorrect because externally generated documents received directly by the auditor are considered more reliable evidence than internally generated evidence. Option "b" incorrect because information obtained directly by the auditor from a third party source is considered more reliable than internally generated evidence. Option "d" is incorrect because computations made by the auditor represent direct personal knowledge, which is considered more persuasive than internally generated evidence.

True or false: High-quality evidence must be relevant, but it does not always have to be reliable.

False

True or false: The management representation letter should be dated the same as the balance sheet date.

False

When the external auditor relies upon the work of the internal auditor the external auditor will also rely on the internal auditor to develop the appropriate materiality of identified misstatements for the specific area of testing.

False

High quality evidence must be relevant, but it does not always have to be reliable.

False Reason: High quality evidence must be both relevant and reliable.

The management representation letter is generally signed by the client's board of directors.

False Reason: The management representation letter is typically signed by the CEO and CFO or equivalent positions.

The management representation letter should be dated the same as the balance sheet date.

False Reason: The management representation letter should be dated as of the audit report date.

True or false: Auditors do not have the option of testing account balances directly or testing transactions that make up the account balance.

False This statement is false. Auditors can design tests that relate to the account balance as a whole or can design tests that relate to specific transactions making up the account balance.

True or false: If an auditor hires a valuation specialist to assist her in valuing a client asset, she can take the specialist's work as her own without doing any additional work.

False The auditor must evaluate the specialist's competence, capabilities, and objectivity in order to rely on his or her work. They also must obtain an understanding of the work and seek to assess the appropriateness of the work.

Tests of controls provide which type of audit evidence? Indirect Direct Substantive None of the above

Indirect Tests of controls provide indirect evidence to the auditor regarding the fair presentation of the financial statements.

The following procedure is an example of which type of audit procedure? "Interviewing an employee regarding the process employed on a specific type of transaction to obtain an understanding of the client's internal controls over the recording of that transaction." -Inspection of Tangible Assets -Inspection of Records and Documents -Observation -Inquiry

Inquiry

the auditor talked with the lead accounts receivable cleark to gain an understanding of the cash receipts process

Inquiry

the auditor selects a sample of PP&E items and physically examines them

Inspection

Which of the following is NOT a factor to consider when evaluating the reliability of audit evidence? Is the evidence a document/file or is it verbal evidence. Is the evidence received from management or staff. Is the evidence received directly or indirectly by the auditor. Is the evidence from an internal or external client source.

Is the evidence received from management or staff.

Which party typically signs the management representation letter? Management The auditor The internal auditors The board of directors

Management The management representation letter is typically signed by the CEO and CFO or equivalent positions.

Which of the following relates to the amount or quantity of evidence the auditor obtains in the course of the financial statement audit? Nature of the evidence Appropriateness of the evidence Timing of the evidence None of the above

None of the Above Reason: The amount or quantity of the evidence is referred to as the extent of audit evidence or as the sufficiency of evidence.

What 3 documents should be obtained prior to paying a bill? Sales receipt, remittance advice, and invoice Purchase order, Remittance advice, and Invoice Sales receipt, Receiving report, and Control listing Sales receipt, Remittance advice, and Control listing Purchase order, Receiving report, and Control listing Purchase order, Receiving report, and Invoice

Purchase order, Receiving report, and Invoice

The auditor selects a sample of invoices and checks the mathematical accuracy of the invoices

Recalculation

The auditor independently puts together the bank reconciliation and compares to the client's bank reconciliation

Reperformance

The audotor reviewed the PP&E accounts looking for transactions that appeared out of place

Scanning

Which of the following tasks is the auditor allowed to rely on the internal audit function for? Testing specific controls for reliability Assessing inerent risk Determining whether a misstatement is material to the financial statements Assessing the sufficiency of evidence The auditor is allowed to rely on the internal audit function for each of the above tasks.

Testing specific controls for reliability The auditor maintains responsibility for tasks with higher levels of judgment required.

Which of the following is not one of the categories that audit procedures performed to obtain audit evidence during the course of the audit can be categorized into? Tests of materiality Substantive procedures Risk assessment procedures Tests of controls

Tests of materiality

True or false: Although it is ultimately signed by the client's management, the management representation letter is often written by the external auditor.

True

True or false: If an auditor hires a valuation specialist to assist him in valuing a client's asset, he cannot take the specialist's work as his own without doing any additional work.

True

True or false: If the auditor fails to obtain a management representation letter, he can not issue an unqualified audit opinion without modifications, even if he obtains adequate evidence through other sources.

True

Even when auditors complete a high quality audit in accordance with GAAS, they are not 100% confident that the financial statements are free of material misstatements.

True Reason: Auditing standards require reasonable assurance, but not absolute assurance, that the financial statements are free of material misstatement. Therefore, the auditor would not genarally be 100% confident that the financial statements are free of material misstatements when he or she has completed the audit.

Tests of controls provide indirect audit evidence.

True Reason: Tests of controls provide indirect evidence to the auditor regarding the fair presentation of the financial statements.

If an auditor hires a valuation specialist to assist him in valuing a client's asset, he can not take the specialist's work as his own without doing any additional work.

True Reason: The auditor must evaluate the specialist's competence, capabilities, and objectivity in order to rely on his or her work.They also must obtain obtain an understanding of the work and seek to assess the appropriateness of the work.

If the auditor fails to obtain a management representation letter, she can not issue an unqualified audit opinion without modifications, even if she obtains adequate evidence through other sources. TrueFalse

True Reason: The auditor must obtain a written representation from management, or it is a scope limitation potentially resulting in disclaimer of the audit opinion or withdrawal from the engagement.The auditor may choose to issue a qualified opinion depending on the circumstances, but an unqualified opinion with no modifications is not appropriate.

Although it is ultimately signed by the client's management, the management representation letter is often written by the external auditor.

True Reason: The management representation letter is typically drafted by the auditor. It is then reviewed and signed by the client's management.

Vouching involves obtaining a sample from the accounting records (e.g., subsidiary ledger) and working towards source documents whereas tracing involves obtaining a sample from source docuemnts and working towards the accounting records.

True Reason: Vouching involves obtaining a sample of recorded sales transactions and working toward the source documents to substantiate the existence or occurrence assertion. Tracing involves obtaining a sample of transactions from source documents and following them to the financial statements to substantiate the completeness assertion.

Even though they are written and signed by management, written representations (i.e., management representation letters) are not adequate audit evidence in and of themselves. TrueFalse

True Reason: Written representations are not adequate evidence in and of themselves. Professional skepticism requires that the auditor corroborate evidence obtained from management.

True or false: Risk assessment procedures performed when deciding whether to audit the client and during the planning phase of the audit are included in the required evidence auditors must obtain when performing an audit.

True Risk assessment procedures pertaining to client acceptance and continuance or planning the audit are part of the auditor's evidence. Other sources of evidence include previous years' audits and audit procedures performed during the course of the audit.

True or false: Auditors have the option of testing account balances directly or testing transactions that make up the account balance.

True This statement is true. Auditors can design tests that relate to the account balance as a whole or can design tests that relate to specific transactions making up the account balance.

True or false: If an auditor fails to obtain a written representation (management representation letter) from management on an audit engagement it is a scope limitation.

True This statement is true. The auditor must obtain a written representation from management or it is a scope limitation resulting in disclaimer of the audit opinion or withdrawal from the engagement.

If the independent auditors decide that the work performed by the internal auditor may have a bearing on their own procedures, they should consider the internal auditor's a. Competence and objectivity. b. Efficiency and experience. c. Independence and review skills. d. Training and supervisory skills.

a. Competence and objectivity. Reason: Option "a" is correct because the AICPA's Professional Standards require independent auditors to consider internal auditor's competence, objectivity, and work performance. Option "b" is incorrect because while these attributes may be considered by the independent auditors, they are less complete than the correct answer. Option "c" is incorrect because while these attributes may be considered by the independent auditors, they are less complete than the correct answer. Option "d" is incorrect because while these attributes may be considered by the independent auditors, they are less complete than the correct answer.

The auditor witnesses the physical inventory count done by the clients personnel

observation

Which of the following factors would least influence an auditor's consideration of the reliability of data for purposes of analytical procedures? a. Whether the data were processed in a computerized system or in a manual accounting system. b. Whether sources within the entity were independent of those who are responsible for the amount being audited. c. Whether the data were subjected to audit testing in the current or prior year. d. Whether the data were obtained from independent sources outside the entity or from sources within the entity.

a. Whether the data were processed in a computerized system or in a manual accounting system. Reason: Option "a" is correct because whether the data were processed in a computerized system or in a manual accounting system will not in and of itself influence reliability--either type of system may provide reliable (or unreliable) information. Option "b" is incorrect because whether sources within the entity were independent of those who are responsible for the amount being audited does influence the auditor's consideration of the reliability of data for purposes of achieving audit objectives. Option "c" is incorrect because whether the data were subjected to such audit testing is a factor which influences the auditor's consideration of the reliability of data for purposes of achieving audit objectives. Option "d" is incorrect because whether the data were obtained from independent sources is a factor which influences the auditor's consideration of the reliability of data for purposes of achieving audit objectives.

When auditing related-party transactions, an auditor places primary emphasis on a. Confirming the existence of the related parties. b. Evaluating the disclosure of the related-party transactions. c. Verifying the valuation of the related-party transactions. d. Ascertaining the rights and obligations of the related parties.

b. Evaluating the disclosure of the related-party transactions. Reason: Option "b" is correct because the auditor should view related-party transactions within the framework of existing pronouncements, placing primary emphasis on the adequacy of disclosure. Option "a" is incorrect because while auditors attempt to determine the existence of related parties, this is not the primary emphasis. Option "c" is incorrect because verifying the valuation of related-party transactions will often not be possible. Option "d" is incorrect because ascertaining rights and obligations is only part of the total responsibility.

Which of the following documents are examples of audit evidence generated by the client? a. Customer purchase orders and bank statements. b. Shipping documents and receiving reports. c. Vendor invoices and packing slips. d. Bills of lading and accounts receivable confirmations.

b. Shipping documents and receiving reports. Reason: Option "b" is correct because shipping documents and receiving reports are client-generated. Option "a" is incorrect because customer purchase orders are generated by customers and bank statements by banks. Option "c" is incorrect because vendor invoices and packing slips, at least from the perspective of the client, are generated by vendors. Option "d" is incorrect because bills of lading are ordinarily generated by common carriers and accounts receivable confirmations by auditors.

When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces these items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that a. Recorded obligations were paid. b. Incurred obligations were recorded in the correct period. c. Recorded obligations were valid. d. Cash disbursements were recorded as incurred obligations. FEEDBACK

c. Recorded obligations were valid. Reason: Option "c" is correct because the existence of support for the recorded transactions will help the auditor to determine that the recorded obligations are valid. Option "a" is incorrect because the items in the vouchers payable register recorded during the last month may or may not have been paid when an auditor is performing the audit. Option "b" is incorrect because the auditor is testing in the wrong direction to accomplish this objective. In order to support this assertion, the auditor would test from the source documents to the journal entries. Option "d" is incorrect because to test whether cash disbursements are properly recorded an auditor would need to use the cash disbursements journal.

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue? a. The auditor should perform analytical procedures at an interim date and discuss any changes in the level of sales with senior management. b. The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period. c. The auditor should perform tests of controls at an interim date to obtain audit evidence about the operational effectiveness of internal controls over sales. d. The auditor should review period-end compensation to determine if bonuses were paid to meet earnings goals.

b. The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period. Reason: Option "b" is correct because examining transactions occurring during the last month will reveal whether they have been recorded in the proper period. Option "a" is incorrect because, since most sales occur during the final month, interim period testing will not address the last month sales very well. The interim period has different characteristics (at a minimum, lower sales) than sales in the last month. Option "c" is incorrect because, since most sales occur during the final month, interim period testing will not address the last month sales very well. The interim period has different characteristics (at a minimum, lower sales) than sales in the last month. Option "d" is incorrect as examining period-end compensation will not as directly address final month sales.

In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the a. Client's policies that limit the internal auditor's access to management salary data. b. Evidence supporting a further reduction in the assessed level of control risk. c. Internal auditor's compliance with professional internal auditing standards. d. Results of ratio analysis that may identify unusual transactions and events.

c. Internal auditor's compliance with professional internal auditing standards. Reason: Option "c" is correct because internal auditor compliance with professional internal auditing standards will reflect positively on evaluation of the competence of the internal auditor. Option "a" is incorrect because limitations placed by management upon the internal auditor address internal auditor independence more directly than they address competence. Option "b" is incorrect because, while evidence supporting a further reduction in the assessed level of control risk (i.e., tests of controls) may relate to the competence of internal auditors, it is more likely that it will relate to other controls within the system. Option "d" is incorrect because such results of ratio analysis will not ordinarily provide significant information on the competence of the client's internal auditor.

As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the client's treasurer had signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? a. The confirmation request was signed by the treasurer. b. Sending the request was meaningless because the account was closed before the year-end. c. The request was mailed by the assistant treasurer. d. The CPA did not sign the confirmation request before it was mailed.

c. The request was mailed by the assistant treasurer. Reason: Option "c" is correct because allowing the client to mail the confirmation directly violated the requirement that the confirmations remain under the auditor's control. The auditor is unable to ascertain whether the confirmation reached the proper party. Option "a" is incorrect because the treasurer (or an appropriate client representative) must sign the confirmation request, thereby authorizing the bank to respond directly to the CPA. Option "b" is incorrect because additional information may be gathered with respect to the closed account including information of indebtedness to the bank, etc. Option "d" is incorrect because independent auditors do not sign bank confirmations.

Which of the following statements concerning analytical procedures is correct? a. Analytical procedures may be omitted entirely for some financial statement audits. b. Analytical procedures used during risk assessment of the audit should not use nonfinancial information. c. Analytical procedures usually are effective and efficient for tests of controls. d. Analytical procedures alone may provide the appropriate level of assurance for some assertions.

d. Analytical procedures alone may provide the appropriate level of assurance for some assertions. Reason: Option "d" is correct because analytical procedures may in certain circumstances provide the appropriate level of assurance for some assertions. Option "a" is incorrect because the performance of analytical procedures is required during the planning and overall review stages of audits. Option "b" is incorrect because analytical procedures used during the risk assessment of the audit may use nonfinancial information (e.g., number of employees, square footage of selling space). Option "c" is incorrect because analytical procedures are not used to test controls.

An auditor is testing sales transactions. One step is to trace a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. What would the auditor intend to establish by this step? a. Sales invoices represent bona fide sales. b. All sales have been recorded. c. All sales invoices have been properly posted to customer accounts. d. Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices.

d. Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices. Reason: Option "d" is correct because the auditor would appropriately conclude that entries in the accounts receivable subsidiary ledger are properly supported by sales invoices. Option "a" is incorrect because the auditor would trace sales invoices to supporting bills of lading in order to conclude that sales invoices represent bona fide sales. Option "b" is incorrect because the auditor would trace bills of lading to entries in the subsidiary ledger in order to conclude that all sales have been properly recorded. Option "c" is incorrect because the auditor will trace sales invoices to the subsidiary ledger in order to conclude that sales invoices have been properly posted to customer accounts.

An auditor will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are a. Owned by the client. b. Not obsolete. c. Physically present at the time of the preparation of the final inventory schedule. d. Included in the final inventory schedule.

d. Included in the final inventory schedule. Option "a" is incorrect because tracing the test count data to the final inventory schedule provides no evidence that the client owns the inventory. Reason: Option "d" is correct because tracing the test counts from the observation of physical inventory to the final inventory schedule determines that items observed by the auditor are included in the final inventory schedule. Option "b" is incorrect because tracing the test count data to the final inventory schedule provides no evidence of the obsolescence of the inventory. Option "c" is incorrect because, while the inventory was present for the auditor's observation and test count, it may have been shipped prior to the auditor's tracing the test count data to the final inventory schedule.