ACTG 307 - Auditing - Audit Evidence (Ch. 7)
To be considered reliable evidence, confirmations must be controlled by...
...a financial statement auditor
An important benefit of industry comparisons is as....
...an aid to understand the client's business
Evidence is usually more persuasive for balance sheet accounts when it is obtained...
...as close to the balance sheet date as possible
Traditionally, confirmations are used to verify...
...bank balances and accounts receivable
The evidence-gathering technique of inquiry...
...cannot be regarded as conclusive ...requires the gathering of corroborative evidence. ...does not provide evidence from an independent source.
The primary purpose of performing analytical procedures in the planning phase of an audit is to...
...help the auditor obtain an understand of the client's industry and business
A benefit obtained from comparing the client's data with industry averages is that it provides a(n)...
...indication of the likelihood of financial problems
Evidence is generally considered appropriate when...
...it has the qualities of being relevant, objective, and free from known bias
Given the economic constraints in which auditors collect evidence, the auditor normally gathers evidence that is...
...persuasuive
Auditors will replace tests of details with analytical procedures when possible because the...
...tests of details are more expensive.
Analytical Procedures definition
"Evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data involving comparisons of recorded amounts to expectations developed by the auditor
Permanent files included as part of audit documentation include (3)
*Copies of articles of incorporation, bylaws and contracts *Information related to the understanding of internal control *Results of analytical procedures from prior years
What are the primary purposes of audit documentation (3)
A basis for planning the audit A record of the evidence accumulated and the results of the tests A basis for review by supervisors and partners.
Which of the following discoveries through the use of analytical procedures would indicate a relatively high risk of financial failure? *A decline in gross margin percentages. *An increase in the balance in fixed assets. *An increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at the same time accounts receivable turnover also decreased. *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.
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.
Trace inventory purchases from the acquisitions journal to supporting invoices.
An example of vouching.
Calculating the gross margin as a percent of sales and comparing it with previous periods is what type of evidence?
Analytical procedures
Order of confirmations in order of reliability from highest to lowest.
Blank form positive confirmations. Positive confirmations with information included. Negative confirmations.
Major types of analytical procedures (3)
Compare client with industry averages Compare client with prior year Compare client with budget
What form of evidence is most reliable? *General ledger account balances *Confirmation of accounts receivable balance received from a customer. *Internal memo explaining the issuance of a credit memo *Copy of month-end adjusting entries
Confirmation of accounts receivable balance received from a customer.
A specific type of evidence is rarely sufficient by itself to provide reliable evidence to satisfy any audit objective.
Correct
Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively.
Correct
Analytical procedures may be reliable even if tests of internal controls indicate control weaknesses
Correct
Audit documentation is the primary frame of reference used by supervisory personnel to evaluate the sufficiency of evidence
Correct
Both physical examination and mechanical accuracy are likely to be highly reliable if the internal control is effective.
Correct
Correct combination of terms and related type of audit evidence? Compare - documentation
Correct
Correct combination of terms and related type of audit evidence? Count - physical examination
Correct
Correct combination of terms and related type of audit evidence? Foot - reperformance
Correct
Correct combination of terms and related type of audit evidence? Inquire - inquiries of client
Correct
Correct combination of terms and related type of audit evidence? Red - documentation
Correct
Correct combination of terms and related type of audit evidence? Vouch - documentation
Correct
For certain immaterial accounts, analytical procedures may be the only evidence needed.
Correct
In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable.
Correct
The auditor may deny requests by the client to review audit evidence
Correct
The only time anyone has a legal right to examine audit documentation is when the documentation is subpoenaed by the court as legal evidence
Correct
What is NOT a characteristic of the reliability of evidence? *Effectiveness of client internal controls *Education of auditor *Independence of information provider *Timeliness *Qualification of individual providing information *Auditor's direct knowledge *Degree of subjectivity *Degree of objectivity
Education of auditor. Degree of subjectivity.
Analytical tests emphasize a comparison of client internal controls to GAAP
False
Confirmations are expensive and so are often not used.
False
Confirmations are required for several balance sheet accounts but no income statement accounts
False
Confirmations are sometimes not reliable and so auditors use them only as necessary
False
Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly.
False
Internal documents are documents that are generated within the company and used to communicate with external parties.
False
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 compare the total of the Schedule of Accounts Receivable with the balance of the Accounts Receivable account to the general ledger.
False
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 select a sample of duplicate sales invoices and trace each to related shipping documents
False
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 Sales Journal entries to the Accounts Receivable subsidiary ledger.
False
The auditor need not consider the independence of an information source when obtaining evidence.
False
The decision of how many items to test should not be influenced by the increased costs of performing the additional tests
False
The persuasiveness of evidence can be evaluated after considering its competence and its sufficiency.
False
Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures.
Incorrect
Audit documentation is acquired to defend against claims that the auditor performed the deficient audit
Incorrect
Regarding the costs involved in obtaining evidence: Physical examination is usually the least expensive type of audit evidence.
Incorrect
The effectiveness of the client's internal control has little effect on the reliability of most types of evidence.
Incorrect
Audit evidence supporting the financial statements consists of the underlying accounting data and all corroborating information available to the auditor. Which of the following is an example of corroborating information? *Minutes of meetings. *General and subsidiary ledgers. *Accounting manuals. *Worksheets supporting cost allocations.
Minutes of meetings
Correct combination of terms and related type of audit evidence? Recompute - documentation
Not correct
Correct combination of terms and related type of audit evidence? Trace - analytical procedures
Not correct
SOX requires auditors of public companies to maintain audit documentation for what period of time
Not less than 7 years
What is the overall objective of audit documentation?
Provide reasonable assurance that the audit was conducted in accordance with standards.
Auditors must make decisions regarding what evidence to gather and how much to accumulate. Relating to evidence, regarding sample size and timing of audit procedures, what decision must be made by the auditor?
Sample size and Timing of audit procedures
What items affect the sufficiency of evidence when choosing a sample?
Selecting items with a high likelihood of misstatement
Audit documentation should provide support for
The audit report
A large sample of evidence that is neither competent nor timely is not persuasive
True
A large sample of highly competent evidence is not persuasive unless it is relevant to the objective being tested.
True
A small sample of only one or two pieces of relevant, competent, and timely evidence lacks persuasiveness
True
Analytical procedures are required on all audits
True
Analytical procedures can be used as substantive tests
True
Confirmations may inconvenience those asked to supply them, but they are widely used.
True
Documentation includes examining client records such as general ledgers and journals.
True
Documents that originate outside the company are considered more reliable than those that originate within the client's organization
True
Evidence obtained directly by the auditor is ordinarily more reliable than evidence obtained from other sources.
True
Evidence obtained from an independent source outside the client organization is more reliable than the obtained from within.
True
External documents are considered more reliable than internal documents.
True
External documents are documents that are generated outside of the company and are used to communicate the results of a transaction.
True
External evidence such as communications from banks, is generally regarded as more reliable than answers obtained from inquiries of the client.
True
For certain accounts with small balances, analytical procedures alone may be sufficient evidence
True
It is possible to vary the sample size from one unit to 100% of the items in the population.
True
Persuasiveness of evidence is partially determined by the reliability of evidence.
True
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.
True
The decision of how many items to test must be made by the auditor for each audit procedure
True
The quantity of evidence obtained determines its sufficiency
True
The sample size for any given procedure is likely to vary from audit to audit.
True
Purpose of analytical procedures (3)
Understand the client's industry Assess the client's ability to continue as a going concern Reduce detailed audit test
Vouching
When auditors use documents to support recorded transactions
2 determinants of the persuasiveness of evidence
appropriateness and sufficiency.
When making decisions about evidence for a given audit, the auditor's goal is to obtain sufficient amount of timely, reliable evidence that is relevant to the information being verified, and to do so...
at the lowest possible total cost
Example of an external document is: *employees' time reports *bank statements *purchase order for company purchases *carbon copies of checks
bank statements
Procedures specifically outlined in an audit program are primarily designed to...
gather evidence
Audit documentation should possess certain characteristics. Audit documentation should be
indexed and cross-referenced
Is a confirmation of accounts payable required or optional?
optional
To be relevant, evidence must...
pertain to the audit objective of the evidence
Analytical procedures must be used during what phases of the audit
planning and completion
The Auditing Standards Board (ASB) has concluded that analytical procedures are so important that are required during....
planning and completion phases
When may audit procedures be performed?
prior to the fiscal year-end of the client and subsequent to the fiscal year-end of the client
Appropriateness of evidence is a measure of the...
quality of evidence
Is a confirmation of accounts receivable required or optional?
required
Which would be least persuasive in forming the auditor's opinion? *responses to auditor's questions by the president and controller regarding the investments account *correspondence with a stockbroker regarding the quantity of client's investments held in street name by the broker *minutes of the board of directors authorizing the purchase of stock as an investment *the auditor's count of marketable securities
responses to auditor's questions by the president and controller regarding the investments account
The auditor should investigate further if
significant differences are not expected but do exist and if significant differences are expected but do not exist
Relevance can be considered only in the terms of
specific audit objectives
Audit evidence obtained directly by the auditor will not be reliable if...
the auditor lacks the qualifications to evaluate the evidence.
physical examination
the inspection or count by the auditor of items such as cash, inventory, securities, notes receivable, and tangible fixed assets
Which of the following is the most objective type of evidence? *a letter written by the client's attorney discussing the likely outcome of outstanding lawsuits *the physical count of securities and cash *inquiries of the credit manager about the collectibility of noncurrent accounts receivable *observation of cobwebs on some inventory bins
the physical count of securities and cash
Example of a document the auditor receives from the client, but which is prepared by someone outside the client's organization, is a(n): *confirmation *sales invoice *vendor invoice *bank reconciliation
vendor invoice