Auditing Chapter 5

g) Vouching

Establishing the validity of a transaction by examining supporting documents.

a) Inspection of records

Examining a document or record.

f) Tracing

Following a transaction from a source document to recorded entries.

6) Absent any other changes, an increase in the risk of material misstatement results in an increase in audit risk. incorrect/correct

correct

8) Both inherent risk and control risk exist independently of the audit of financial statements. incorrect/correct

correct

5. Reviewers are concerned if immaterial passed misstatements have a ______ material effect.

cumulative

o) The examination of large data sets to uncover hidden patterns, unknown correlations and other useful information is referred to as _________.

data analytics

Analytical procedures are most likely to detect: Weaknesses of a material nature in internal control. Unusual transactions. Noncompliance with prescribed control activities. Improper separation of accounting and other financial duties.

Unusual transactions.

Which of the following is not a management assertion? Existence. Verification. Rights. Valuation.

Verification.

m) The auditors develop __________ to recommend to management to correct the effects of errors or fraud in the client's accounting records.

adjusting entries

e) The audit approach of evaluating financial statement information by a study of relationships among financial and nonfinancial data is __________.

analytical procedures

Differences of opinion between members of the audit staff about auditing matters should: be documented along with the manner in which they were resolved. be described in the auditors' report. be included in a note to the financial statements. never be documented in the working papers because to do could lead to legal liability problems.

be documented along with the manner in which they were resolved.

n) The purpose of an analysis of an account is to illustrate __________ in the account for the period under audit.

changes

The auditors' working papers will generally be least likely to include documentation showing how the: unusual matters were resolved. engagement had been planned. client's schedules were prepared. client's internal control structure had been considered.

client's schedules were prepared.

iii. Analytical procedures at the end of the audit help confirm the ______ reached.

conclusions

The major reason auditors gather evidence is to: form an opinion on the financial statements. evaluate management. assess control risk. detect fraud.

form an opinion on the financial statements.

k) Separate __________ are used to combine similar general ledger accounts into the total that appears on the working trial balance.

lead schedules

e) The primary source of evidence about pending litigation is the attorney ______.

letter

b) The amount of evidence that is considered sufficient varies __________ with the reliability of the evidence.

inversely

v. Part of performing analytical procedures involves considering ________.

ratios

When an audit is made in accordance with generally accepted auditing standards, the independent auditors must: perform analytical procedures. observe the taking of physical inventory on the balance sheet date. perform tests of controls. use statistical sampling.

perform analytical procedures.

d) Presentation and disclosure

Assets are properly classified.

f) Valuation

Assets are recorded at proper amounts.

c) External confirmation

Obtaining a written response about a particular item from a third party.

Concerning retention of working papers, the Sarbanes-Oxley Act: Has no provisions. Requires permanent retention. Requires retention for at least 7 years. Requires retention for a period of 4 or less years.

Requires retention for at least 7 years.

j) Confirm accounts receivable.

Tests of details of account balances, transactions, or disclosures

c) Existence and occurrence

There is such an asset.

Representations or evidence from outside parties

Third Party Representations

Which of the following is not a primary purpose of audit working papers? To coordinate the examination. To assist in preparation of the audit report. To decrease the need for substantive procedures. To provide evidence of the audit work performed.

To decrease the need for substantive procedures.

As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter? To increase the efficiency of the audit by eliminating the need for other audit procedures. To remind the client's management of its primary responsibility for the financial statements. To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement. To provide evidence in those areas dependent upon management's future intentions.

To increase the efficiency of the audit by eliminating the need for other audit procedures.

7) Adjusting journal entries. Permanent/Current

CF

8) An analysis of miscellaneous expenses. Permanent/Current

CF

Computations made independently to prove arithmetical accuracy of client records

Computations

f) A __________ is a type of documentary evidence transmitted directly to the auditors by a third party (e.g., a customer or a vender).

confirmation reply

Methods and records to process, summarize, and report the company's transactions

Accounting Information Systems

Which of the following is not an assertion relating to classes of transactions? Accuracy. Adequacy. Cutoff. Classification.

Adequacy.

The internal control flowchart is an example of: A supporting schedule. An administrative working paper. A lead schedule. A corroborative working paper.

An administrative working paper.

d) Reperformance

An independent execution of procedures or controls that were originally performed by the client.

In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the: Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements. Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements. Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist.

Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements.

6) An adjusted trial balance. Permanent/Current

CF

4) Detection risk does not exist when no audit is performed. incorrect/correct

Correct

Variety of records in support of the company's business and accounting information system

Documentary Evidence

The inspection of a vendor's invoice by the auditors is: Direct evidence about occurrence of a transaction. Physical evidence about occurrence of a transaction. Documentary evidence about occurrence of a transaction. Part of the client's accounting system.

Documentary evidence about occurrence of a transaction.

5) Rather than restrict detection risk through the performance of more substantive procedures, auditors assess it. incorrect/correct

Incorrect

Applying substantive tests to the details of asset and liability accounts as of an interim date, rather than as of the balance sheet date: Eliminates the use of certain statistical sampling methods that would otherwise be available. Presumes that the auditor will perform the tests as of the balance sheet date. Should be especially considered when there are rapidly changing economic conditions. Potentially increases the risk that errors which exist at the balance sheet date will not be detected.

Potentially increases the risk that errors which exist at the balance sheet date will not be detected.

c) ______ may be involved in some testing of calculations.

Specialists

e) Rights and obligations

The company legally owns the assets.

To increase the efficiency of the audit by eliminating the need for other audit procedures. Related party transactions generally are illegal acts. The substance of related party transactions may differ from their form. All related party transactions must be eliminated as a step in preparing consolidated financial statements. Related party transactions are a form of management fraud.

The substance of related party transactions may differ from their form.

b) Cutoff

Transactions are recorded in the correct accounting period.

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts? Trend analysis. A detailed test of balance analysis. Ratio analysis. Risk analysis.

Ratio analysis.

2) A confirmation of financial institution deposits. Permanent/Current

CF

9) An analysis of owners' equity accounts. Permanent/Current

PF

2. Managers and partners typically review at the _____ of the engagement timeline.

end

Performing analytical procedures may help an auditor to: Achieve audit objectives related to a particular assertion. Develop an effective system of quality control. Meet PCAOB requirements that analytical procedures be performed relating to every major account. Increase the level of detection risk.

Achieve audit objectives related to a particular assertion.

h) Calculate the ratio of bad debt expense to credit sales.

Analytical procedures

The date on which no information may be deleted from audit documentation is the Client's year-end. Documentation completion date. Last date of significant fieldwork. All of these are incorrect in that no information may ever be deleted from audit documentation.

Documentation completion date.

Which of the following is not a financial statement assertion made by management? Existence of recorded assets and liabilities. Completeness of recorded assets and liabilities. Valuation of assets and liabilities. Effectiveness of internal control.

Effectiveness of internal control.

Assertions that have a meaningful bearing on whether an account balance, transaction class, or disclosure is fairly stated are referred to as: Appropriate assertions. Sufficient assertions. Relevant assertions. Reliable assertions.

Relevant assertions.

g) Prepare a flowchart of internal control over sales.

Risk assessment procedures (other than analytical procedures)

i) Determine whether disbursements are properly approved.

Tests of controls

g) In relying upon the work of a specialist, the auditors must ascertain the __________ and reputation of the specialist.

professional qualifications

3. Concurring partners are often concerned with _____ control standard compliance.

quality

ii. Analytical procedures can also be used as ______ procedures in testing.

substantive

1. Working papers are reviewed at ______ supervisory level(s) of a CPA firm.

every

1) The risk of material misstatement is composed of the three components of audit risk. incorrect/correct

incorrect

7) Audit risk refers to the possibility that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially or immaterially misstated. incorrect/correct

incorrect

l) Working papers of audit interest over an extended period of time should be filed in the __________.

permanent file

i) Without regard to the effect of controls, __________ have a reasonable possibility of containing a misstatement that could cause the financial statements to be materially misstated.

relevant assertions

d) Tests of controls and __________ are referred to as "further audit procedures."

substantive procedures

j) The __________ is a schedule listing the balances of accounts in the client's general ledger.

working trial balance

A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably: Remain silent on the matter since it is an internal matter of the auditing firm. Note that the assistant auditor is completely dissociated from responsibility for the auditors' opinion. Document the additional work required because all disagreements of this type will require expanded substantive procedures. Document the assistant auditor's position and how the difference of opinion was resolved.

Document the assistant auditor's position and how the difference of opinion was resolved.

Which of the following is correct relating to the use of data analytics in financial statement auditing? The approach is not considered acceptable. Its use by the auditors should be properly documented a note to the financial statements. It is required on audits of all public companies. It may result in the audit of an entire population rather than a sample from that population.

It may result in the audit of an entire population rather than a sample from that population.

Which of the following is not a factor that affects the independent auditors' judgment as to the quantity, type, and content of working papers? The nature of the audit report. The timing and the number of personnel to be assigned to the engagement. The need for supervision of the engagement. The nature of the financial statements, schedules, or other information upon which the auditors are reporting.

The timing and the number of personnel to be assigned to the engagement.

h) A letter signed by officers of the client company at the auditors' request which sets forth certain assertions about the company's financial position and operations is known as a __________.

representation letter

Which of the following business characteristics is not indicative of high inherent risk? Operating results that are highly sensitive to economic factors. Large likely misstatements detected in prior audits. Substantial turnover of management. A large amount of assets.

A large amount of assets.

An auditor should expect that fair value is the price that would be received to sell an asset in an orderly transaction between the market participants at the: Acquisition date of the asset. Audit report date. Expected replacement date of the asset. Measurement date (ordinarily the date of the financial statements).

Measurement date (ordinarily the date of the financial statements).

During an audit, the working papers are primarily considered to be: A client-owned record of conclusions reached by the auditors who performed the engagement. Evidence supporting financial statements. Support for the auditors' representations as to compliance with generally accepted auditing standards. A record to be used as a basis for the following year's engagement.

Support for the auditors' representations as to compliance with generally accepted auditing standards.

A primary purpose of the audit working papers is to: Aid the auditors by providing a list of required procedures. Provide a point of reference for future audit engagements. Support the underlying concepts included in the preparation of the basic financial statements. Support the auditors' opinion.

Support the auditors' opinion.

e) Recalculation

Testing the mathematical accuracy of documents or records.

A schedule listing account balances for the current and previous years, and columns for adjusting and reclassifying entries proposed by the auditors to arrive at the final mount that will appear in the financial statement, is referred to as a: Working trial balance. Lead schedule. Summarizing schedule. Supporting schedule.

Working trial balance.

The permanent file of the auditors' working papers generally should include: names and addresses of all audit staff personnel on the engagement. a copy of the corporate charter. a copy of key customer confirmations. time and expense reports.

a copy of the corporate charter.

a) Representation letters are dated as of the date of the ________.

audit report

Which of the following eliminates voluminous details from the auditors' working trial balance by classifying and summarizing similar or related items? Supporting schedules. Control accounts. Account analyses. Lead schedules.

Lead schedules.

c) The risk of material misstatement is composed of two risks that the auditor assesses, those risks are inherent risk and __________ risk.

control

b) Inventory can be observed as it is ______ by client personnel.

counted

d) Analytical procedures are the primary way to test data _______.

interrelationships

a) Completeness

All assets have been recorded.

Comparison between the relationships among financial or nonfinancial data

Data Interrelationships

The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable? 5%. 12.5%. 42.7%. 60%.

12.5%.

k) Compare current financial information with comparable prior periods.

Analytical procedures

In developing an expectation for analytical procedures, the auditors are least likely to consider: Financial information for comparable prior periods. Relationships between financial information and relevant nonfinancial data. Anticipated costs of audit completion. Relationships among elements of financial information within a period.

Anticipated costs of audit completion.

Which of the following is not a function of audit working papers? Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles. Assist audit team members responsible for supervision in reviewing the work. Assist auditors in planning future engagements. Assist peer reviewers and inspectors in performing their roles.

Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles.

Even though the quantity, type, and content of working papers will vary, the working papers generally would include: Copies of those client records examined by the auditor during the course of the engagement. An evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit. Auditor's comments concerning the efficiency and competence of client management personnel. Auditing procedures followed and the testing performed in obtaining audit evidence.

Auditing procedures followed and the testing performed in obtaining audit evidence

Written documentation and representation from clients

Client Representations

Which of the following is not considered to be an analytical procedure? Comparisons of financial statement amounts with source documents. Comparisons of financial statement amounts with nonfinancial data. Comparisons of financial statement amounts with budgeted amounts. Comparisons of financial statement amounts with comparable prior year amounts.

Comparisons of financial statement amounts with source documents.

Which of the following is not a primary approach to auditing an accounting estimate? Review and test management's process for developing the estimate. Review subsequent transactions. Confirm the amounts. Develop an independent estimate.

Confirm the amounts.

Analytical procedures performed near the end of the audit to assist the auditor in forming an overall conclusion on the financial statements are aimed primarily at: Gathering evidence concerning account balances that have not changed from the prior year. Retesting internal control procedures. Considering unusual or unexpected account balances that were not previously identified. Performing a test of transactions to corroborate management's financial statement assertions.

Considering unusual or unexpected account balances that were not previously identified.

Of the following, which is the least reliable type of audit evidence? Confirmations mailed by outsiders to the auditors. Correspondence between the auditors and suppliers. Copies of sales invoices inspected by the auditors. Canceled checks returned in the year-end bank statement directly to the client.

Copies of sales invoices inspected by the auditors.

3)Less control risk means an increase in the risk of material misstatement. incorrect/correct

Incorrect

Which of the following procedures is not customarily used by the auditors in determining the existence of related parties? Review prior years' work papers for the names of known related parties. Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions. Evaluate the company's procedures for identifying and properly accounting for related-party transactions. Inquire of appropriate management personnel as to the names of all related parties and whether there were any transactions with these parties during the period.

Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions.

A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount, is referred to as a: Supporting schedule. Lead schedule. Corroborating schedule. Reconciling schedule.

Lead schedule.

The cost of analytical procedures in terms of time needed to perform, when compared to other tests, is ordinarily considered: Low. High. Identical. Indeterminate.

Low

Which of the following best describes the reason that auditors are concerned with the detection of related party transactions? The financial statements must often be adjusted for the effects of material related party transactions. Material related party transactions must be disclosed in the notes to the financial statements. The substance of related party transactions will differ from their form. In a related party transaction one party has the ability to exercise significant influence over the other party.

Material related party transactions must be disclosed in the notes to the financial statements.

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

Narrative descriptions of the client's accounting procedures and controls.

Which of the following is not ordinarily considered a limitation in applying data analytics in auditing? Differences between client information systems may make each application different and requiring of separate analysis. Obtaining computers with the needed storage capacity to perform procedures. Determining which data is potentially useful. Disparate databases may make analysis difficult.

Obtaining computers with the needed storage capacity to perform procedures.

The components of the risk of misstatement are: Inherent Risk Control Risk Detection Risk A. Yes Yes Yes B. Yes Yes No C. Yes No No D No Yes Yes

Option B

1) A lease agreement. Permanent/Current

PF

10) A chart of accounts. Permanent/Current

PF

3) Articles of incorporation. Permanent/Current

PF

4) An analysis of long-term debt. Permanent/Current

PF

5) A pension agreement. Permanent/Current

PF

In what section of the audit working papers would a long-term lease agreement be filed? Current working paper file. Permanent working paper file. Lead schedule file. Corroborating documents file.

Permanent working paper file.

Tangible asset from examination

Physical Evidence

b) Inspection of tangible assets

Physically examining an asset.

Which of the following is not a function of working papers? Provide support for the auditors' report. Provide support for the accounting records. Aid partners in planning and conducting future audits. Document staff compliance with generally accepted auditing standards.

Provide support for the accounting records.

Which of the following is not a financial statement assertion relating to account balances? Completeness. Existence. Rights and obligations. Recorded value and discounts.

Recorded value and discounts.

Audit working papers should include: content that is sufficient to provide support for the auditors' report, including the auditors' representation as to compliance with auditing standards. details on client ownership of individual working papers. a number of permanent files each year and a general file that summarizes the permanent files.. all authorization details for overtime worked.

content that is sufficient to provide support for the auditors' report, including the auditors' representation as to compliance with auditing standards.

2) Inherent risk is the possibility of material misstatement before considering the client's internal control. incorrect/correct

correct

Although there are sometimes exceptions, ordinarily the most reliable audit evidence is: documentary in form rather than an oral representation. generated internally through a system of effective controls rather than through a computerized system of controls. a facsimile of original documents, rather than photocopy. from nonindependent sources within the client company rather than independent sources outside the client company.

documentary in form rather than an oral representation.

iv. Often, analytical procedures are considered the most ____ procedures for a strong understanding of the client and its business.

efficient

A principal purpose of a representation letter from management is to: confirm management's approval of the work performed by the auditors. substitute for other evidence-gathering audit procedures. remind management of its primary responsibility for the financial statements. serve as an introduction to company personnel and authorize the auditors to examine the records.

remind management of its primary responsibility for the financial statements.

i. Auditing standards ______ analytical procedures at the planning and concluding stages of the audit.

require

a) The term __________ relates to the quantity of evidence that the auditors should obtain.

sufficient

Audit procedures performed to obtain an understanding of the client and its environment, including its internal control, and to assess the risk of material misstatement are referred to as: tests of controls. substantive procedures. analytical procedures. tests of details of balances.

tests of controls.

Analytical procedures are: tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data. analytical tests of financial information made by a computer. diagnostic tests of financial information that may not be classified as audit evidence. statistical tests of financial information designed to identify areas requiring intensive investigation.

tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data.

Evidence is generally considered sufficient when: it has the qualities of being relevant, objective, and free from bias. it is reliable. there is enough of it to afford a reasonable basis for an opinion on the financial statements. it has been obtained by random selection.

there is enough of it to afford a reasonable basis for an opinion on the financial statements.

4. Reviewers are concerned that the ________ all tie together.

working papers