Chapter 7 Test Bank
Which of the following is a correct statement regarding confirmations?
Auditors consider alternative EVIDENCE available when determining if confirmations should be used.
Two determinants of the persuasiveness of evidence are
appropriateness and sufficiency.
a comparison of information in two different locations
compare
a use of the senses to assess certain activities
observe
Make a surprise count of petty cash to verify that the amount of the petty cash fund is intact.
physical examination
The reliability of evidence refers to the degree to which evidence is considered believable or trustworthy. There are six factors that affect the reliability of audit evidence. One factor is the independence of the provider; i.e., evidence obtained from a source outside the client company is more reliable than that obtained within. Identify and discuss any two of the remaining five factors.
1. Effectiveness of client's internal control. When a client's internal controls are effective, evidence obtained from the client is more reliable than when controls are not effective. 2. Auditor's direct knowledge. Evidence obtained directly by the auditor is more reliable than information obtained indirectly.
Discuss three of the following characteristics of relevant evidence. 1. Independence of provider 2. Effectiveness of client's internal controls 3. Auditor's direct knowledge 4. Qualification of individuals providing the information 5. Degree of objectivity 6. Timeliness
1. Independence of provider — Evidence obtained from a source outside the entity is more reliable and persuasive than that obtained from within. 2. Effectiveness of client's internal controls — When a client's internal controls are effective, evidence obtained is more reliable than when the controls are not effective. 3. Degree of objectivity — Objective evidence is more reliable than evidence that requires considerable judgment to determine whether it is correct.
Factors that determine the auditor's willingness to accept a document as reliable evidence include
A) whether it is internal or external. B) whether it was created and processed under conditions of effective internal control. C) whether it is an original document or a photocopy. (all of the above)
Indicate whether confirmation of accounts receivable and accounts payable, provided they each are significant accounts, is required or optional.
Accounts Receivable REQUIRED Accounts Payable OPTIONAL
For audit evidence to be compelling to the auditor it must be sufficient and appropriate. Which statement below is not correct regarding the appropriateness of audit evidence?
An auditor's OPINION, to be economically useful and profitable to the auditing firm needs to be formed within a reasonable time and based on evidence obtained that assures profits for the auditing firm.
An example of an external document that provides reliable information for the auditor is a(n)
BANK statement
Audit evidence has two primary qualities for the auditor; relevance and reliability. Given the choices below, which provides the auditor with the most reliable audit evidence?
CONFIRMATION of accounts receivable balance received from a customer
Which of the following statements is not correct?
COST is an adequate justification for not gathering an adequate sample size.
Which of the following statements is not a correct statement regarding audit evidence?
Documentary evidence is more reliable when it is received by the AUDITOR indirectly rather than directly.
Which of the following is not a characteristic of the reliability of evidence?
EDUCATION of auditor
Which of the following statements relating to the competence of evidential matter is always true?
Evidence must be BOTH reliable and relevant to be considered appropriate.
Which of the following statements is true?
Evidence obtained directly by the auditor may not be reliable if the auditor lacks the QUALIFICATIONS to evaluate the evidence.
Determine which of the following is the most correct statement regarding the reliability of audit evidence.
If internal controls are EFFECTIVE, evidence obtained is more reliable than when the controls are not effective.
Which of the following statements is correct regarding the costs involved in obtaining evidence?
Physical examination is usually the least expensive type of audit evidence NO Cost of obtaining evidence may be a factor in deciding whether to obtain that evidence YES
When can audit procedures be performed?
Prior to the fiscal year-end of the client YES Subsequent to the fiscal year-end of the client YES
the auditor lacks the competence to evaluate the evidence.
QUALITY of evidence
Auditors must make decisions regarding what evidence to gather and how much to accumulate. Which of the following is a decision that must be made by auditors related to evidence?
Sample size YES Timing of audit procedures YES
Which items affect the sufficiency of evidence when choosing a sample?
Selecting items with a high likelihood of misstatement YES The randomness of the items selected NO
Audit procedures can result in significant, unexpected differences. The auditor should investigate further if
Significant differences are not expected but do exist YES Significant differences are expected but do not exist YES
Analytical procedures must be used during which phase(s) of the audit?
Test of Controls YES Planning YES Completion YES
Which of the following is a correct statement regarding audit evidence?
The auditor must obtain a SUFFICIENT amount of relevant and reliable evidence to form an opinion on the fairness of the financial statements.
Which of the following is an accurate statement regarding audit evidence?
The auditor uses evidence to determine whether the statements are FAIRLY presented.
Which of the following statements regarding the relevance of evidence is correct?
To be relevant, evidence must PERTAIN to the audit objective of the evidence.
An example of a document the auditor receives from the client, but which was prepared by someone outside the client's organization is a
VENDOR invoice
Which of the following discoveries through the use of analytical procedures would most likely indicate a relatively high risk of financial failure?
a HIGHER than normal ratio of long-term debt to net worth as well as a lower than average ratio of profits to total assets
compute
a calculation done by the auditor independent of the client
compare
a comparison of information in two different locations
count
a determination of assets on hand at a given time. This term is associated only with the type of evidence defined as physical examination.
examine
a reasonably detailed study of a specific document or record to determine specific facts about it
When practical and reasonable, U.S. auditing standards require the confirmation of
accounts receivable
foot
addition of a column of numbers to determine whether the total is the same as the client's
The evaluations of financial information through analysis of plausible relationships among financial and nonfinancial data is the definition of
analyical procedures
Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross margin relative to the preceding year.
analytical procedure
Review the total of repairs and maintenance for each month to determine whether any month's total was unusually large.
analytical procedure
Calculating the gross margin for the current audit year as a percent of sales and comparing it with previous years is what type of evidence?
analytical procedures
When the auditor scans the sales journal looking for large and unusual transactions, he or she is gathering what type of evidence?
analytical procedures
use of comparisons and relationships to assess the reasonableness of account balances
analytical procedures
Auditors may decide to replace tests of details with analytical procedures when possible because the
analytical procedures are considerably less EXPENSIVE.
Evidence is usually more persuasive for balance sheet accounts when it is obtained
as CLOSE to the balance sheet date as possible.
An ________ is the detailed instruction that explains the audit evidence to be obtained during the audit.
audit PROCEDURE
Examine the cash receipts journal in the accounting system and compare the amounts received to the corresponding amounts invoiced in the revenue accounting system and to the bank statement evidencing the deposit. This is an example of which of the following?
audit PROCEDURE
________ often incorporate sample size, items to select, and timing into the procedure.
audit PROCEDURES
contains all the information that the auditor considers necessary to conduct an adequate audit and to provide support for the audit report
audit documentation
When making audit evidence decisions,
audit engagement SOFTWARE can assist the auditor in making evidence decisions.
detailed instructions for the collection of a type of audit evidence
audit procedures
The ________ always includes a list of the ________, and it usually includes sample sizes, items to select, and the timing of the tests.
audit program; audit procedures
The auditor must gather sufficient and appropriate evidence during the course of the audit. Sufficient evidence must
be PERSUASIVE enough to enable the auditor to issue an audit report.
"Physical examination" is the inspection or count by the auditor of items such as
cash, inventory, SECURITIES, notes receivable, and tangible fixed assets.
When the auditor uses tracing as an audit procedure for tests of transactions, he or she is primarily concerned with which audit objective?
completeness
a calculation done by the auditor independent of the client
compute
Obtain a written statement from the client's bank stating the client's year-end balance on deposit.
confirmation
________, generally, provide the most reliable evidence.
confirmations
a determination of assets on hand at a given time
count
Compare vendor names and amounts on purchase invoices with entries in the purchases journal.
documentation
bank statements
external
canceled checks for payments of accounts payable
external
notes receivable
external
signed lease agreements
external
vendors' invoices
external
addition of a column of numbers to determine if the total is the same as the client's
foot
The primary purpose of audit procedures is to
gather corroborative audit EVIDENCE about management's assertions regarding the client's financial statements.
obtaining information from the client in response to specific questions
inquire
Obtain information about the client's internal controls by asking questions of client personnel.
inquiry of the client
________ is the auditor's examination of the client's documents and records to substantiate that the information is included in the financial statements.
inspection
duplicate sales invoices
internal
minutes of the board of directors' meetings
internal
payroll time cards
internal
Physical examination
is a DIRECT means of verifying that an asset really exists.
Evidence is generally considered appropriate when
it is RELEVANT to the audit objective being tested.
scan
less detailed examination of a document or record to determine whether there is something unusual warranting further investigation
Watch client employees count inventory to determine whether company procedures are being followed.
observation
When the auditor uses the audit procedure vouching, he or she is primarily concerned with which of the following audit objectives when testing classes of transactions?
occurrence
Given the economic and time constraints in which auditors can collect evidence regarding management assertions about the financial statements, the auditor normally gathers evidence that is
persuasive
Count inventory items and record the amount in the audit files.
physical examination
Examine a piece of equipment to make sure a recent purchase of equipment was actually received and is in operation.
physical examination
an examination of written information to determine facts pertinent to the audit
read
Which of the following is not a correct combination of terms and related type of audit evidence?
read — documentation
The two characteristics of the appropriateness of evidence are
relevance and reliability.
the degree to which evidence can be considered believable or trustworthy
reliability of evidence
Foot entries in the sales journal to determine whether they were correctly totaled by the client.
reperformance
Trace column totals from the cash disbursements journal to the general ledger.
reperformance
Trace postings from the sales journal to the general ledger accounts.
reperformance
Which of the following forms of evidence would be least persuasive in forming the auditor's opinion about marketable securities and other investments held by the company?
responses to auditor's questions by the PRESIDENT and controller regarding the investments account
a less detailed examination of a document or record to determine if there is something unusual warranting further investigation
scan
this is determined by the amount of evidence obtained
sufficiency of evidence
Which of the following is the most objective type of evidence?
the PHYSICAL count of securities and cash
Audit evidence obtained directly by the auditor will not be reliable if
the auditor lacks the COMPETENCE to evaluate the evidence.
To be considered reliable evidence, confirmations must be controlled by
the external auditor
vouch
the use of documents to verify recorded transactions or amounts
following details of transactions from original documents to journals
trace
The auditor is concerned that a client is failing to bill customers for shipments. An audit procedure that would gather relevant evidence would be to
trace a sample of shipping documents to related duplicate sales invoices.
You are auditing the company's purchasing process for goods and services. You are primarily concerned with the company not recording all purchase transactions. Which audit procedure below would be the most effective audit procedure in this case?
tracing vendor INVOICES to recorded amounts in the accounts payable account
When auditors use documentation to support recorded transactions and amounts, the process is usually called
vouching
When the auditor uses supporting evidence for amounts posted to account balances with documentary evidence, that process is called
vouching
Which of the following is not one of the four decisions about what evidence to gather and how much of it to accumulate in the development of an audit program?
which accounts must AGREE to the general ledger
