Audit Chapter 5

The auditor selected a sample of invoices and agreed the vendor to the approved vendor list, as had been required by the client's internal control procedures.

Reperformance.

Which of the following is most consistent with an increase in the ratio of debt to equity?

Repurchase of a portion of the company's outstanding common stock.

Concerning retention of working papers, the Sarbanes-Oxley Act:

Requires retention for at least 7 years.

Failure to detect material dollar errors in the financial statements is a risk which the auditors primarily mitigate by:

Performing substantive procedures.

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice

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

Analytical procedures are required at the risk assessment stage and as:

Procedures near the end of the audit.

Which of the following is not a function of working papers?

Provide support for the accounting records.

In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are

Reasonable in the circumstances.

The auditing firm's computer assisted audit specialist obtained an electronic billing file from the company and checked the accuracy of the summarized billings file.

Recalculation.

An independent auditor finds that the Simmer Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding indicates the existence of:

Related party transactions.

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

Relevant assertions.

Which of the following is not a primary purpose of audit working papers?

To support the financial statements.

A vendor's invoice is an example of documentary evidence created by a third party and held by the client.

True

Adjusting journal entries are ordinarily recorded by the client, while reclassifying journal entries need not be recorded.

True

In performing analytical procedures, the auditors may use dollar amounts, physical quantities, or percentages.

True

When the risk of material misstatement for an account is high, the auditors may perform additional substantive procedures to restrict detection risk to a lower level.

True

An auditor is performing an analytical procedure that involves developing common-size financial statements. This technique is referred to as:

Vertical analysis.

A CPA wishes to use a representation letter as a substitute for performing other audit procedures. Doing so:

Violates professional standards.

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.

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?

12.5%.

To be effective, analytical procedures performed near the end of the audit should be performed by

A manager or partner who has a comprehensive knowledge of the client's business and industry.

In auditing an asset valued at fair value, which of the following potentially provides the auditor with the strongest evidence?

A price for a similar asset obtained from an active market.

Financial statement assertions are established for classes of transactions:

Account Balances - Yes; Disclosures - Yes

Audit documentation should be sufficient to allow which individual to understand the audit work performed, the evidence obtained, and the significant conclusions?

An experienced auditor.

The auditor scanned the repairs and maintenance account for unusually large amounts.

Analytical Procedures.

Which of the following is true about analytical procedures?

Analytical procedures are used in risk assessment, as a substantive procedure for specific accounts, and near the completion of the audit of the audited financial statements.

An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed?

Analytical procedures.

Although the quantity, type, and content of working papers will vary with the circumstances, the working papers generally would include the:

Auditing procedures followed and the testing performed in obtaining audit evidence.

Which of the following is most likely to be considered an analytical procedure?

Comparing inventory balances to recent sales activities.

Which of the following is not a typical analytical procedure?

Comparison of recorded amounts of major disbursements with appropriate invoices.

Which of the following is not considered to be an analytical procedure?

Comparisons of financial statement amounts with source documents.

When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations:

Complement, but do not replace, substantive procedures designed to support the assertion.

An auditor is performing an analytical procedure that involves comparing a client's ratios with other companies in the same industry. This technique is referred to as:

Cross-sectional analysis.

The date of the management representation letter should coincide with the:

Date of the auditor's report.

During financial statement audits, auditors seek to restrict which type of risk?

Detection risk.

The inspection of a vendor's invoice by the auditors is:

Documentary evidence about occurrence of a transaction.

The date on which no information may be deleted from audit documentation is the

Documentation completion date.

An example of an analytical procedure is the comparison of:

Financial information with similar information regarding the industry in which the entity operates.

The auditors should propose an adjusting journal entry for all material related-party transactions.

False

The most reliable form of documentary evidence generally is considered to be documents created by the client.

False

The primary purpose of a letter of representations is to obtain additional evidence about specific accounts.

False

The professional standards consider calculating depreciation expense a "routine" transaction.

False

The use of lead schedules is designed to increase the detail of the working trial balance.

False

Working papers of continuing audit interest usually are filed with the administrative working papers.

False

An auditor is performing an analytical procedure that involves comparing a client's account balances over time. This technique is referred to as:

Horizontal analysis.

The auditor sent a letter to the company's outside attorney accompanied by management's request for information concerning pending or threatened litigation, claims, and assessments.

Inquiry.

The auditor obtained a copy of the company's accounting manual and read the section on inventory to prepare for the physical inventory observation.

Inspection of records or documents.

During the physical inventory count, the auditor requested that certain containers of inventory items be opened to ensure they were not empty.

Inspection of tangible assets.

Which of the following groups are not considered a specialist by AICPA Professional Standards?

Internal auditors.

Confirmation would be most effective in addressing the existence assertion for the:

Inventory held on consignment.

The auditors use analytical procedures during the course of an audit. The most important phase of performing these procedures is the:

Investigation of significant variations and unusual relationships.

Which of the following best describes the problem with the use of published industry averages for analytical procedures?

Lack of comparability.

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:

Lead schedule.

Which of the following expressions is least likely to be included in a client's representation letter?

Management acknowledges responsibility for illegal actions committed by employees.

Which of the following best describes the reason that auditors are concerned with the detection of related party transactions?

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

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:

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

The permanent file section of the working papers that is kept for each audit client most likely contains:

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

During a site visit to a branch warehouse, the auditor noted unauthorized personnel have access to the inventory.

Observation.

Which of the following is a basic approach often used by auditors to evaluate the reasonableness of accounting estimates?

Reviewing subsequent events or transactions.

Further audit procedures include:

Risk assessment procedures - No; Test of controls - Yes

Assertions with high inherent risk are least likely to involve:

Routine transactions.

During an audit engagement pertinent data are prepared and included in the audit working papers. The working papers primarily are considered to be:

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

Which of the following is generally true about the sufficiency of audit evidence?

The amount of evidence that is sufficient varies directly with the acceptable risk of material misstatement.

Which of the following statements relating to audit evidence is the most accurate statement?

The auditor must obtain sufficient appropriate audit evidence.

Which of the following statements is generally correct about audit evidence?

The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.

Which of the following ultimately determines the specific audit procedures necessary to provide independent auditors with a reasonable basis for the expression of an opinion?

The auditors' judgment.

The auditors must obtain written client representations that normally should be signed by:

The chief executive officer and the chief financial officer.

In general, which of the following statements is correct with respect to ownership, possession, or access to working papers prepared by a CPA firm in connection with an audit?

The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation.