Ch. 5

Classify each document as internal or external evidence and as to its reliability (high, moderate, or low). 1. Duplicate copies of sales invoices. 2. Purchase orders. 3. Bank statements. 4. Remittance advices. 5. Vendors' invoices. 6. Materials requisition forms. 7. Overhead cost allocation sheets. 8. Shipping documents. 9. Payroll checks. 10. Long-term debt agreements.

1. Internal, High if internal control is excellent, moderate to low otherwise. 2. Internal, High if internal control is excellent, moderate to low otherwise. 3. External, High because it comes from an external party. 4. External, High to moderate because the document has been circulated to a party outside the entity. 5. External, High because it comes from an external party. 6. Internal, High if internal control is excellent, moderate to low otherwise. 7. Internal, High if internal control is excellent, moderate to low otherwise. 8. Internal, High if internal control is excellent, moderate to low otherwise. 9. Internal, High to moderate because the document has been circulated to a party outside the entity. 10. External, High because it comes from an external party.

The following selected information pertains to L&H's sales and accounts receivable: Consolidated revenue increased 184 percent from the 1997 fiscal year to the 1998 fiscal year. Revenue in South Korea, which has a reputation as a difficult market for foreign companies to enter, increased from $97,000 in the first quarter of 1999 to approximately $59 million in the first quarter of 2000. In the second quarter of 2000, sales grew by 104 percent but accounts receivable grew by 128 percent. Average days outstanding increased from 138 days in 1998 to 160 days for the six-month period ended June 30, 2000. 1a. Based on the above information which assertion for sales would the auditor be most concerned with 2b. Based on the above information which assertion for accounts receivable would the auditor be most concerned with 1c. Which of the following would be the best audit evidence to verify the assertion of sales? a. The auditors could have interviewed personnel at Lernout & Hauspie to inquire as to the validity of the sales. b. The auditors could have reviewed a listing of invoices to ensure that the total amount invoiced matched the revenues recorded. c. The auditors could have examined documentation for sales transactions, particularly searching for valid sales orders and evidence that the products sold were shipped. d. The auditors could have examined the revenue amounts for other customers in the same industry and compared to Lernout & Hauspie's recorded revenues.

1a. existence or occurrence 2b. existence or occurrence 1c. c. The auditors could have examined documentation for sales transactions, particularly searching for valid sales orders and evidence that the products sold were shipped.

Which of the following items would be the least persuasive type of audit evidence? a. A letter of representation signed by the client's president and chief executive officer. b. A schedule comparing an estimate of interest expense, prepared by the auditor, to the amount reported on the client's trial balance. c. A confirmation of bank balances as of year-end received by the auditor directly from the bank. d. A copy of a bank statement provided to the auditor by the client.

a. A letter of representation signed by the client's president and chief executive officer.

For each of the following specific audit procedures, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. a. Sending a written request to the entity's customers requesting that they report the amount owed to the entity. b. 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. c. Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account. d. Discussing the adequacy of the allowance for doubtful accounts with the credit manager. e. Comparing the current-year gross profit percentage with the gross profit percentage for the last four years. f. Examining a new plastic extrusion machine to ensure that this major acquisition was received. g. Watching the entity's warehouse personnel count the raw materials inventory. h. Performing test counts of the warehouse personnel's count of the raw material. i. Obtaining a letter from the entity's attorney indicating that there were no lawsuits in progress against the entity. j. Tracing the prices used by the entity's billing program for pricing sales invoices to the entity's approved price list. k. Reviewing the general ledger for unusual adjusting entries.

a. Assertions about account balances, Existence b. Assertions about classes of transactions and events, Cutoff c. Assertions about account balances, Completeness d. Assertions about account balances, Accuracy, valuation, and allocation e. Assertions about account balances, Accuracy, valuation, and allocations f. Assertions about account balances, Existence g. Assertions about account balances, Completeness/Existence h. Assertions about account balances, Completeness/Existence i. Assertions about account balances, Accuracy, valuation, and allocation/Completeness j. Assertions about classes of transactions and events, Accuracy k. Assertions about account balances, Accuracy, valuation, and allocation

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

a. Prenumbered purchase order forms prepared by the entity.

The assurance bucket is filled with all of the following types of evidence except: a. the audit report. b. tests of details. c. test of controls. d. substantive analytical procedures.

a. the audit report.

Which of the following items would be the most persuasive type of audit evidence? a. A letter of representation signed by the client's president and chief executive officer. b. A schedule comparing an estimate of interest expense, prepared by the auditor, to the amount reported on the client's trial balance. c. A confirmation of bank balances as of year-end received by the auditor directly from the bank. d. A copy of a bank statement provided to the auditor by the client.

b. A schedule comparing an estimate of interest expense, prepared by the auditor, to the amount reported on the client's trial balance.

Which of the following presumptions is least likely to relate to the reliability of audit evidence? a. The more effective internal control, the more assurance it provides about the accounting data and financial statements. b. An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost. c. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity d. The independent auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.

b. An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost.

Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? a. Reviewing standard bank confirmations for indications of cash manipulations. b. Comparing a sample of shipping documents to related sales invoices. c. Observing the entity's distribution of payroll checks. d. Confirming a sample of recorded receivables by direct communication with the debtors.

b. Comparing a sample of shipping documents to related sales invoices.

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

b. a copy of the financial statements.

An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n): a. working trial balance. b. lead schedule. c. audit control account. d. supporting schedule.

b. lead schedule.

Auditors will apply tests of details to accomplish which of the following? a. Compliance with generally accepted accounting principles. b. Evaluating the operating effectiveness of management's policies and procedures. c. Detecting material misstatements affecting the financial statements. d. Determining whether or not the accounting system is reliable.

c. Detecting material misstatements affecting the financial statements.

L&H's auditor did not confirm accounts receivable from customers in South Korea. However, The Wall Street Journal contacted 18 of L&H's South Korean customers and learned the following: Three out of 18 customers listed by L&H stated that they were not L&H customers. Three others indicated that their purchases from L&H were smaller than those reported by L&H. Which of the following would be the best audit evidence to verify the assertion of accounts receivable? a. The auditors could have examined the accounts receivable percentage of other companies in the same industry and compared to Lernout & Hauspie's recorded amounts. b. The auditors could have reviewed the accounts receivable accounts to determine if they are consistent with the sales for each customer. c. The auditor could confirm a sample of accounts receivable with customers, perhaps asking the customers to fill in the dollar amount that they owe as of the balance sheet date. d. The auditors could have interviewed personnel at Lernout & Hauspie to inquire as to the validity of the accounts receivable.

c. The auditor could confirm a sample of accounts receivable with customers, perhaps asking the customers to fill in the dollar amount that they owe as of the balance sheet date.

Which of the following statements concerning audit evidence is correct? a. The difficulty and expense of obtaining audit evidence concerning an account balance are a valid basis for omitting the test. b. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. c. The measure of the reliability of audit evidence lies in the auditor's judgment. d. An entity's general ledger may be sufficient audit evidence to support the financial statements.

c. The measure of the reliability of audit evidence lies in the auditor's judgment.

Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence? a. Vendors' invoices included in the entity's files. b. Prenumbered entity sales invoices. c. Bank statements obtained from the entity. d. Computations made by the auditor.

d. Computations made by the auditor.

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

d. accounting records to the supporting documents.

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

d. narrative descriptions of the entity's accounting system and control procedures.

An auditor would be least likely to use confirmations in connection with the examination of: a. inventory held in a third-party warehouse. b. stockholders' equity. c. long-term debt. d. refundable income taxes.

d. refundable income taxes.