chapter 5 audit

Audit documentation should:

-Demonstrate how the audit complied with appropriate standards -Enable a knowledgeable reviewer to determine who performed the work - show that standards of fieldwork have been followed

heading of audit documentation

-name of the entity -entity's year-end date -title of the working paper

Functions of Audit Documentation

-provide the basis for the review of the quality of work -aid in the planning, performance and supervision of the audit - provide principal support that the audit was conducted in accordance with GAAS

Solvency

coverage ratios provide information on the long-term - of the entity

increased

differences identified by substantive analytical procedures indicate a(n) - likelihood of misstatements

activity

how effectively the entity's assets are managed is indicated by - ratios

a, b, d, e,

identify the categories of financial ratios that are used by auditors as analytical procedures. a. coverage b. activity c. materiality d. short-term liquidity e. profitability f. solvency g. earnings

a, d, e

identify the sources that can be used to develop an expectation for an analytical procedure a. competitor information b. investing data c. auditing standards d. budgets and forecasts e. industry publications

suspect account contains a material amount of bad debts (a good job means 30 days or less )

if an entity's trade terms are 2/10, net/30 and the auditor calculates days outstanding in accounts receivable as 41, this suggest

industry

in order to evaluate profitability ratios, each should be interpreted by comparison to - data

accounting records

include the records of initial entries and supporting records, such as checks and records of electronic fund transfers

highly reliable procedures; auditor has direft knowledge

inspection of tangible assets reperformance of tangible assets recalculation of tangible assets

adjusting

misstatements in the entity's records are corrected with - entries

tick marks

notations that are made by the auditor near, or next to, an item or amount on an audit document that are sued to document work performed are called - -

Audit Procedures

specific acts performed by the auditor to gather evidence about whether specific assertions are being met are referred to as

a and c

test of controls a. may allow the auditor to gain a degree of assurance over thousands of transactions b. are more costly to perform than test of details c. influence the scope of substantive testing

nature

the - of the audit evidence refers to the from or type of information, which includes accounting records and other available information

more, greater

the - precise the expectation, the - the likelihood that the difference is actually a misstatement

tolerable misstatement

the amount of difference that can be accepted will generally always be lower than

audit program

the audit procedures that will be conducted by the auditor are contained in the

old accounts receivable or obsolete inventory

the current ratio can be distorted by

Audit Plan

the document that outlines the auditor's understanding of the enity and potential risks as well as the strategy to be followed by the auditor is called the - -

profitability

the entity's success or failure for a given period is measured by - ratios

precision

the quality of an expectation is referred to as the - of the expectation

whether a document is internal or external

the reliability of inspection of records and documents depends primarily on

tolerable

the second step in the analytical procedures decision process is to define a - difference

Fieldwork

the working papers document the auditor's compliance with auditing standards and particularly compliance with the standards of -

activity ratios

to effective help the auditor determine if accounts contain material misstatements, - ratios may be used

Reclassification

to properly present information on the financial statements a(n) - entry that affects either the income statement or the balance sheet must be made

true

true ir false: audit evidence includes information developed by the auditor thag permits him or her to reach conclusions through valid reasoning

true

true or false: although the auditor owns the audit documents, they cannot be shown to outside parties without the entity's consent, except under certain circumstances

substantive procedures

used to detect material misstatements (in an account balance or disclosure component of the financial statements) at the relevant assertion level. Include test of details and substantive analytical procedures

Tests of controls

used to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the relevant assertion level

management's assertions

when audit evidence supports - -, the auditor can issue an unqualified report

a, b, c

which of the following statements are correct? a. accounting principle choices can impact some ratios b. material misstatement may not significantly affect some ratios c. financial ratios should not be evaluated in isolation d. industry averages are always the best way to analyze an entity's financial ratios

b, c, d

which of the following statements are correct? a. differences are investigated in the same way for both planning and final analytical procedures b. during planning the auditor determines whether planned procedures need to be revised due to preliminary analytical procedures c. unexpected differences may be addressed reviewing the working papers for sufficient evidence d. entity personnel may be asked to explain unexpected differences

Management

who is responsible for the fair presentation of financial statements

b, c, d

working papers document the - a. fee structure for the audit b. scope of the audit was adequate c. correspondence of the financial statements with GAAP d. basis for the audit report decision

Short term liquidity ratios

Current Ratio Quick Ratio Operating Cash Flow Ratio

87.6 [$1,500,000 x 85% = $1,275,000/$14,550 = 87.6]

A company generated total sales of $1,500,000 and has accounts receivables of $14,550. If 85% of sales are made on credit, the receivables turnover ratio is

A

An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n) a.) Lead schedule. b.) Working trial balance. c.) Audit control account. d.) Supporting schedule.

b, c, d

Audit documentation should - a. enable an ordinary person to understand the nature, timing, extent, results, evidence and conclusions reached b. include an audit program for the engagement c. support the auditors conclusions for each material financial statement assertion d. demonstrate the underlying accounting records agreed with the financial statments

D

Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence? a.) Bank statements obtained from the entity. b.) Prenumbered entity sales invoices. c.) Vendors' invoices included in the entity's files. d.) Computations made by the auditor.

coverage

Important information on the ability of the entity to continue as a going concern are provided by _________ ratios.

controls, details

In regards to applying the audit testing hierarchy, starting with test of - is generally more effective and efficient than starting tests of -

current

The - ratio is usually considered acceptable if it is 2 - 1 or better

C

The assurance bucket is filled with all of the following types of evidence except a.) Tests of details. b.) Substantive analytical procedures. c.) The audit report. d.) Test of controls.

A

The current file of the auditor's working papers should generally include a.) A copy of the financial statements. b.) A flowchart of the accounting system. c.) Organization charts. d.) Copies of bond and note indentures.

B

The permanent file section of the working papers that is kept for each audit client most likely contains a.) Review notes pertaining to questions and comments regarding the audit work performed. b.) Narrative descriptions of the entity's accounting system and control procedures. c.) Correspondence with the entity's legal counsel concerning pending litigation. d.) A schedule of time spent on the engagement by each individual auditor.

false

True or false: The auditor is required to obtain corroborative evidence for planned analytical procedures

D

The substantive analytical procedure known as trend analysis is best described by a.) Development of a model to form an expectation using financial data, nonfinancial data, or both to test account balances or changes in account balances between accounting periods. b.) The comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data. c.) The comparison of common-size financial statements over time. d.) The examination of changes in an account over time.

True

True or False: Although the auditor owns the audit documents, they cannot be shown to outside parties without the entity's consent, except under certain circumstances

Risk Assessment Procedures

Used to obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatements at the financial statement and relevant assertion level

C

Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? a.) Observing the entity's distribution of payroll checks. b.) Confirming a sample of recorded receivables by direct communication with the debtors. c.) Comparing a sample of shipping documents to related sales invoices. d.) Reviewing standard bank confirmations for indications of cash manipulations.

B

Which of the following statements concerning audit evidence is correct? a.) A entity's general ledger may be sufficient audit evidence to support the financial statements. b.) The measure of the reliability of audit evidence lies in the auditor's judgment. c.) The difficulty and expense of obtaining audit evidence concerning an account balance are a valid basis for omitting the test. d.) To be appropriate, audit evidence should be either persuasive or relevant but need not be both.

4.17 days

a company generated total sales of $1,500,000 and has accounts receivables of $14,550. If 85% of sales are made on credit, the days outstanding in accounts receivable is

Short term liquidity

an entity's ability to meet its current obligations can be evaluated using - - - ratios

independent auditors

audit documentation is the property of the -

Working Papers

audito documentation is referred to as - - or the audit file