Audit Chapter 5

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period.

1

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account.

1, 7

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning Examining a new plastic extrusion machine to ensure that this major acquisition was received.

2

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning Watching the entity's warehouse personnel count the raw materials inventory

3

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Discussing the adequacy of the allowance for doubtful accounts with the credit manager.

4

Explain why in most instances audit evidence is persuasive rather than convincing.

- Auditor must complete verification within a certain time period at a reasonable cost. As a result, a sampling process (when the auditor randomly selects a set of transactions that consists of account balances or group of transactions) is used because it is less time consuming and through this process is how audit findings are derived. - Collected evidence by an auditor from verification of accounts does not always have absolute reliability. With different types of evidence having different types of reliability, even highly reliable sources of evidence can be prone to have weaknesses. Absolute assurance is rarely achieved simply because of the nature of audit evidence.

Why are indexing and cross-referencing important to the documentation of audit working papers?

- To explain the audit was performed complying the audit standards and with prudence - To provide a reference to the document based on which assertions were tested and the basis of deriving a conclusion - To ensure that the financial statements are agreed with the underlying records

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning Obtaining a letter from the entity's attorney indicating that there were no lawsuits in progress against the entity.

5

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Sending a written request to the entity's customers requesting that they report the amount owed to the entity

5

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning Performing test counts of the warehouse personnel's count of the raw material

7

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning Tracing the prices used by the entity's billing program for pricing sales invoices to the entity's approved price list.

7

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Comparing the current-year gross profit percentage with the gross profit percentage for the last four years.

8

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning Reviewing the general ledger for unusual adjusting entries

9

Which of the following types of audit evidence is the least reliable? a. Prenumbered purchase order forms prepared by the entity. b. Bank statements obtained from the entity. c. Test counts of inventory performed by the auditor. d. Correspondence from the entity's attorney about litigation.

A

Evidence comes in various types and has different degrees of reliability. Following are some statements that compare various types of evidence. a. A bank confirmation versus observation of the segregation of duties between cash receipts and recording payment in the accounts receivable subsidiary ledger For each situation, indicate whether the first or second type of evidence is more reliable. Provide a rationale for your choice.

A bank confirmation type of evidence is considered to be more reliable than the second type of evidence. An auditor considers evidence as more reliable when it is collected from an outside independent source than from sources within the entity. Therefore, the confirmation collected from the bank as an independent source is considered to be more reliable than verification of receipts and payment transactions recorded in the accounts receivable subsidiary ledger within the entity.

Evidence comes in various types and has different degrees of reliability. Following are some statements that compare various types of evidence. c. A bank statement included in the entity's records versus shipping documents. For each situation, indicate whether the first or second type of evidence is more reliable. Provide a rationale for your choice.

A bank statement included in the client's records is more reliable than the second type of evidence. The bank statement is an external document which is obtained from an outside source; whereas the shipping documents are the internal documents prepared by the internal employees of the company. Internal documents are not displayed to the outside users, and thus the possibilities of misstatements in the financial statements are high. Therefore, the auditor is likely to collect evidence from the external source, which is the bank, as the documents obtained externally are reviewed by the third party. Hence, the bank statement being an external document possesses high reliability.

Identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account

Account balances: Completeness

Identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Performing test counts of the warehouse personnel's count of the raw material.

Account balances: Completeness/Existence

Identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Watching the entity's warehouse personnel count the raw materials inventory.

Account balances: Completeness/existence

Identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Examining a new plastic extrusion machine to ensure that this major acquisition was received

Account balances: Existence

Identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Sending a written request to the entity's customers requesting that they report the amount owed to the entity

Account balances: Existence

Identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Comparing the current-year gross profit percentage with the gross profit percentage for the last four years.

Account balances: Valuation and allocation

Identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Discussing the adequacy of the allowance for doubtful accounts with the credit manager.

Account balances: Valuation and allocation

Identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Reviewing the general ledger for unusual adjusting entries.

Account balances: Valuation and allocation

Identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Obtaining a letter from the entity's attorney indicating that there were no lawsuits in progress against the entity.

Account balances: Valuation and allocation/completeness

Evidence comes in various types and has different degrees of reliability. Following are some statements that compare various types of evidence. b. An auditor's recalculation of depreciation versus examination of raw material requisitions. For each situation, indicate whether the first or second type of evidence is more reliable. Provide a rationale for your choice.

An auditor's recalculation of depreciation is considered to be more reliable. Recalculation is the verification of accuracy of the calculation of account balance. The auditor recalculates the amount of the account balance to check its mathematical accuracy. Therefore, the evidence collected from recalculation is considered as highly reliable by the auditor.

Discuss the relative reliability of the different types of audit procedures.

Audit procedures that are of higher reliability (inspection of tangible assets, re-performance, re-calculation) means that the auditor has direct knowledge of them. Audit procedures that are of middle reliability (inspection of records and documents, confirmation, analytical procedures, scanning) depends on whether a document is internal or external, and the 4 procedures affect the reliability of confirmation. Audit procedures that are of lower reliability (observation, inquiry) requires further confirmation by the auditor.

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. Computations made by the auditor. c. Prenumbered entity sales invoices. d. Vendors' invoices included in the entity's files.

B

Which of the following statements concerning audit evidence is correct? a. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. 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. An entity's general ledger may be sufficient audit evidence to support the financial statements

B

In testing the existence assertion for an asset, an auditor ordinarily works from the a. Financial statements to the potentially unrecorded items. b. Potentially unrecorded items to the financial statements. . c. Accounting records to the supporting documents. d. Supporting documents to the accounting records

C

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

C

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. A schedule of time spent on the engagement by each individual auditor. c. Correspondence with the entity's legal counsel concerning pending litigation. d. Narrative descriptions of the entity's accounting system and control procedures.

D

Evidence comes in various types and has different degrees of reliability. Following are some statements that compare various types of evidence. d. Physical inspection of common stock certificates held for investment versus physical examination of inventory components for a personal compute For each situation, indicate whether the first or second type of evidence is more reliable. Provide a rationale for your choice.

Physical inspection of common stock certificates held for investment is considered more reliable. When the auditor personally collects the evidence, it is considered as more reliable than when it is collected from references or secondary sources. In the above case, the auditor would physically examine and collect the reliable evidence. If the auditor lacks technical skills to investigate the inventory components for a computer, then he may need an assistant to help him in the audit. Thus, the audit evidence collected may not be reliable. however, the inspection of the common stock certificates does not require any technical skills. The common inspection of the common stock certificates does not require any technical skills. The common stock certificates are the documentary evidence for the auditor, and he only needs to examine the certificates. Therefore, the physical inspection of common stock certificates is more reliable.

Consider the "assurance bucket" analogy. Why are some of the buckets larger than others for particular assertions or accounts?

Some of the buckets are larger than others for particular assertions or accounts because certain assurance will be more important or present bigger risks for some accounts than for others. For an organization with lower risk, the bucket for tests of controls and substantive audit procedures would be larger and the bucket for tests of controls would be lower because the auditor expects less possibility of fraud and error. The opposite can be said for high risk organizations. The difference in account balances account for the subjective matters that might require certain buckets to be larger than others for those particular accounts (the assertions being tested and the importance of such assurances).

Why does the "audit testing hierarchy" begin with tests of controls and substantive analytical procedures?

The audit testing of hierarchy is the approach of the auditors to obtain evidence. An auditor has to acquire sufficient and appropriate audit evidence to perform the audit assignment. The audit testing hierarchy starts with test of controls and substantive analytical procedures because it is more effective and efficient than starting with the test details. In terms of being more efficient, it is less costly to perform compared to test of details. This test provides assurance on multiple transactions (over thousands to millions). These procedures provide evidence related to more than one assurance, balance, or class of transactions. As for being more effective, an auditor's ability is enhanced when controls are so effective that less need to be performed to get the job done. Auditors can then redirect their attention to more higher risk areas with more detail.

Identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period.

Transactions and Events: Cutoff

Identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Tracing the prices used by the entity's billing program for pricing sales invoices to the entity's approved price list.

Transactions and events: Accuracy

Why is it necessary to obtain corroborating evidence for inquiry and for observation?

While observation provides evidence about the performance of a process or procedure- it is limited by the time at which it takes place and the nature of personnel acting differently when not being observed. Inquiry, on the other hand, helps the audit understand the entity and its environment by consisting of finding information of knowledgeable persons both inside and outside of the entity. However, evidence collected from inquiry and observation is considered to be less reliable evidence. Thus, an auditor needs corroborative evidence such as written documents or data from financial records to come to an appropriate conclusion.