Audit Chapter 5

Following are several statements regarding accounting records or audit documentation. Which of the statements is correct?

A. Accounting records belong to the auditee.

Which of the following elements ultimately determines the amount of audit work that is necessary in the circumstances to afford a reasonable basis for an opinion?

A. Auditor judgment.

Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?

A. Compare a sample of shipping documents to related sales invoices.

Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the:

A. Difficulty and expense involved in testing a particular item.

An example of an analytical procedure is the comparison of

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

To test for unsupported entries in the ledger, the direction of audit testing should start from the

A. Ledger entries.

In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events, and specifically, which assertion?

A. Occurrence.

Vouching is used primarily to test which of the following assertions about classes of transaction?

A. Occurrence.

Footing is an example of

A. Recalculation.

An example of audit evidence with a medium level of reliability is

A. Scanning.

Which of the following is the least persuasive documentation in support of an auditor's opinion?

A. Schedules of details of physical inventory counts conducted by the entity.

Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except:

A. Tracing transactions through the system to determine whether procedures are being applied as prescribed.

The current audit file usually includes

A. Working trial balance.

Which of the following presumptions does not relate to the appropriateness of audit evidence?

B. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.

Which of the following are ordinarily designed to detect possible material monetary errors in the financial statements?

B. Analytical procedures.

Audit documentation prepared on audits of public entities is the property of the

B. Auditor.

Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying?

B. Completeness.

Tracing is used primarily to test which of the following assertions about classes of transactions?

B. Completeness.

Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for transactions within the purchasing process are you most concerned with?

B. Completeness.

Which of the following types of documentary evidence should the auditor consider to be the most reliable?

B. Confirmation of an account payable balance mailed by and returned directly to the auditor.

The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents'

B. Content be sufficient to provide support for the auditor's report, including the auditor's representation as to compliance with auditing standards.

The permanent (continuing) file of an auditor's working papers most likely would include copies of the

B. Debt agreements.

Which assertions may be tested for the "account balances" category of management assertions?

B. Existence, rights and obligations, completeness, valuation and allocation.

The auditor generally gives most emphasis to ratio and trend analysis in the examination of the

B. Income Statement.

The permanent audit file usually includes

B. Organizational chart.

The auditor notices significant fluctuations in key elements of the company's financial statements. If management is unable to provide an acceptable explanation, the auditor should

B. Perform additional audit procedures to investigate the matter further.

An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by

B. Relative effectiveness and efficiency of the tests.

Analytical procedures may be classified as being primarily which of the following?

B. Substantive procedures.

You are concerned with unrecorded transactions in the purchasing cycle. Which audit procedure are you most likely to use when auditing purchases?

B. Tracing vendor invoices to accounting records.

A company sells a particular product only in the last month of its fiscal year. The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made. The agents' sales were $10 million. Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year. The auditor would expect the year-end balance in the accrued commissions payable account to be

C. $588,000.

Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that

C. Additional tests of details are required.

Which set of assertions is tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity's balance sheet?

C. Assertions about presentation and disclosure.

Which of the following types of audit evidence is the most persuasive?

C. Bank statements obtained from the auditee.

All of the following are typically in the current file except:

C. Chart of accounts.

Which of the following is not a typical analytical procedure?

C. Comparison of recorded amounts of major disbursements with appropriate invoices.

Of the following, which is the least persuasive type of audit evidence?

C. Copies of company sales invoices inspected by the auditor.

Audit documents that record the procedures used by the auditor to gather evidence should be

C. Designed in an orderly fashion to facilitate the review of audit work by the senior, manager, and partner on the engagement.

Which assertions may be tested for the "transactions and events" category of management assertions?

C. Occurrence, completeness, authorization, accuracy, cutoff and classification.

In determining whether transactions have been recorded, the direction of the audit testing should start from the

C. Original source documents.

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures?

C. Relationships involving income statement accounts.

Of the following, the most reliable type of evidence typically is:

C. Reperformance.

Analytical procedures are

C. Required for planning and overall review of the financial statements.

You are auditing a manufacturing company that has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about?

C. Rights and obligations.

You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying?

C. Rights and obligations.

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?

C. Square footage of selling space.

The audit working papers belong to

C. The audit firm.

Which of the following best describes the primary purpose of audit procedures?

C. To gather corroborative evidence about management's assertions.

A confirmation is used to

C. Verify a representation from a third party.

Which of the following statements concerning audit evidence is correct?

D. A company's accounting data cannot be considered sufficient audit evidence to support the financial statements.

All audit documentation should have a heading, which includes

D. All of these.

Which of the following presumptions is correct about the reliability of audit evidence?

D. An effective internal control system provides more reliable audit evidence.

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of

D. Analytical procedures.

Analytical procedures used in planning an audit should focus on identifying

D. Areas that may represent specific risks relevant to the audit.

Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that

D. Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement.

Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must

D. Be persuasive enough to enable the auditor to form an opinion.

As a result of analytical procedures conducted during the planning phase, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should

D. Consider the possibility of an error in the financial statements.

Procedures specifically outlined in an audit program are designed primarily to

D. Gather evidence about management's assertions.

Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance?

D. Lead schedules.

In designing written audit programs, an auditor should plan specific audit procedures to test

D. Management assertions.

Audit documentation

D. May be in paper, electronic, or some other form.

Which assertions may be tested for the "presentation and disclosure" category of management assertions?

D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.

An auditor's analytical procedures performed during the overall review stage indicated that the entity's accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following explanations most likely would satisfy the auditor?

D. The entity opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?

D. Total debt divided by total assets.

T/F Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements.

False

T/F Management assertions fall into four main categories.

False

T/F The classification assertion refers to transactions and events being recorded in the correct accounting period.

False

T/F The sufficiency of evidence refers to the quality of audit evidence.

False

In creating lead schedules for an audit engagement, what financial information is needed to begin?

General ledger information, such as account numbers, prior-year account balances, and current year unadjusted information.

Which statement concerning audit evidence is not valid?

The auditor performs tests to collect convincing evidence that the financial statements are not misstated

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

The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements

T/F Audit procedures are designed to test management assertions.

True

T/F The auditor gathers audit evidence to test management's assertions.

True

T/F The auditor must use his or her professional judgment to determine the amount of audit evidence to be gathered.

True

T/F The completeness assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded.

True

T/F The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period.

True

T/F The relevance of audit evidence or specific audit procedures depends on the assertion being tested.

True