Audit - Chapter 4 & 5

Fill in the blank. The Sarbanes-Oxley Act and the PCAOB standards require that audit documentation be retained for ______ years from the date of completion of the engagement.

7

Select all that apply. Which of the following statements are correct? a) Industry averages are always the best way to analyze an entity's financial ratios. b) A ratio may be favorable because its components are unfavorable. c) Financial ratios should not be evaluated in isolation. d) Accounting principle choices can impact some ratios.

Accounting principle choices can impact some ratios. Financial ratios should not be evaluated in isolation. A ratio may be favorable because its components are unfavorable.

The first item that goes in an auditor's "assurance bucket" is ______. a) test of controls b) risk assessment procedures c) substantive analytical procedures d) test of details

b) risk assessment procedures

The reliability of inspection of records and documents depends primarily on ______. a) when the record or document was prepared b) whether the document is internal or external c) who prepared the document d) the dollar amount involved in the record

b) whether the document is internal or external

Select all that apply. In evaluating audit evidence, the auditor must ______. a) be thorough b) only consider evidence that is 100% reliable c) understand the types of information used as evidence d) be unbiased

be thorough understand the types of information used as evidence be unbiased

Select all that apply. Identify the sources that can be used to develop an expectation for an analytical procedure. a) investing data b) competitor information c) auditing standards d) industry publication e) budgets and forecasts

budgets and forecasts industry publication competitor information

The basic framework for the auditor's understanding of audit evidence and its use in supporting the auditor's opinion on the financial statements is (are) ______. a) management assertions regarding the financial statements b) generally accepted accounting principles c) auditing standards d) generally accepted auditing principles

c) auditing standards

When testing an entire account with a substantive analytical procedure, tolerable difference will usually be _____ the account's tolerable misstatement. a) less than b) greater than c) equal to

c) equal to

A management statement that the property, plant, and equipment shown on the balance sheet was owned and available for sale at the balance sheet date is an example of the ______ assertion. a) completeness b) valuation & obligation c) existence d) rights & obligations

c) existence

A management statement that the property, plant, and equipment shown on the balance sheet was owned and available for sale at the balance sheet date is an example of the ______ assertion. a) valuation & allocation b) completeness c) existence d) rights & obligations

c) existence

This is an important audit procedure that is used extensively throughout the audit and is often complementary to performing other audit procedures. a) observation b) recalculation c) inquiry d) confirmation

c) inquiry

All types of analysis are used for substantive analytical procedures, but ______ analysis is not commonly used for risk assessment or final analytical procedures. a) predictability b) ratio c) reasonableness d) trend

c) reasonableness

For lower-risk, well-controlled accounts, the assurance bucket may be filled entirely with tests of ______ and substantive analytical procedures.

controls

The primary concern of ______ is simply whether the relationship used to test the assertion makes sense. a) disaggregation b) predictability c) reliability d) plausibility

d) plausibility

Many factors, including changes in the business or industry, influence the ______ of relationships among financial and nonfinancial data. a) disaggregation c) plausibility c) reliability d) predictability

d) predictability

The independence of the source of the evidence, the effectiveness of internal controls, and the auditor's direct personal knowledge all affect the ______ of data for developing expectations. a) precision b) reasonableness c) aggregation d) reliability

d) reliability

Select all that apply. Audit documentation should ______. a) show that standards of fieldwork have been followed b) include a detailed breakdown of how the fees were set for the engagement c) demonstrate how the audit complied with appropriate standards d) enable a knowledgeable reviewer to determine who performed the work

demonstrate how the audit complied with appropriate standards enable a knowledgeable reviewer to determine who performed the work show that standards of fieldwork have been followed

Fill in the blank. The auditor's independent execution of procedures or controls that were originally performed by company personnel is referred to as ______.

reperformance

Select all that apply. In evaluating audit evidence, the auditor must ______. a) be thorough b) be unbiased c) only consider evidence that is 100% reliable d) understand the types of information used as evidence

thorough unbiased understand the types of information used as evidence

Fill in the blank. The second step in the analytical procedures decision process is to define a(n) ______ difference.

tolerable

Fill in the blank. First selecting a source document and then following it into the journal or ledger is referred to as ______.

tracing

Fill in the blank. The comparison of financial statement amounts between the current period and prior period can be done using absolute amounts, which is ______ analysis, or by converting the financial statement amounts to common-sized statements, which is ______ analysis.

trend ratio

Fill in the blank. Selecting an item for testing from the accounting journals or ledgers and then examining the underlying source document is referred to as ______.

vouching

Select all that apply. Which of the following statements are correct? a) During planning, the auditor determines whether planned procedures need to be revised due to preliminary analytical procedures. b) Unexpected differences may be addressed by reviewing the working papers for sufficient evidence. c) Differences are investigated in the same way for both planning and final analytical procedures. d) Entity personnel may be asked to explain unexpected differences.

During planning, the auditor determines whether planned procedures need to be revised due to preliminary analytical procedures. Unexpected differences may be addressed by reviewing the working papers for sufficient evidence. Entity personnel may be asked to explain unexpected difference

Matching. Risk Assessment Procedures Test of Controls Substantive Procedures

RAP - used to obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and relevant assertion levels ToC - used to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the relevant assertion level SP - used to detect material misstatements at the relevant assertion level

True or false: Both oral and visual information can be used as audit evidence.

True

This consists of evaluations of financial information through the examination of plausible relationships among both financial and nonfinancial data. a) analytical procedures b) inquiry of tangible assets c) recalculation d) reperformance

a) analytical procedures

Differences identified by substantive analytical procedures indicate a(n) ______ likelihood of misstatements. a) increased b) definite c) decreased

a) increased

Audit documentation is the property of the ______. a) independent auditors b) company management c) internal auditors d) audit committee e) board of directors

a) independent auditors

This is useful in helping auditors understand the entity's processes but is generally not considered very reliable. a) observation b) inquiry c) confirmation d) inspection

a) observation

Vouching provides evidence for the ______ assertion. a) occurrence b) completeness

a) occurrence

Footing, crossfooting, reconciling subsidiary ledgers, and testing postings are all examples of ______. a) recalculation b) reperformance c) analytical procedures d) confirmation

a) recalculation

The independent execution by the auditor of procedures or controls that were originally performed by company personnel is called ______. a) reperformance b) observation c) recalculation d) confirmation

a) reperformance

Assume an entity has 2,500 customers. If the auditor mails confirmation to 25 of the largest customers and only 20 respond the auditor must ______. a) still gather sufficient evidence on each of the 25 accounts b) base his or her evaluation on the 20 accounts that responded c) discard the sample and select a different set of 25 customers

a) still gather sufficient evidence on each of the 25 accounts

In general, ______ analysis is the least precise method to form an expectation, while _____ analysis is the most precise. a) trend ; reasonableness b) ratio ; reasonableness c) reasonableness ; trend d) ratio ; trend e) trend ; ratio

a) trend ; reasonableness

True or false: When doing ratio analysis, it is important to evaluate related financial ratios to avoid drawing an incorrect conclusion. a) true b) false

a) true

True or false: Although the auditor owns the audit documents, they cannot be shown to outside parties without the entity's consent, except under certain circumstances. a) true b) false

a) true

The reliability of inspection of records and documents depends primarily on ______. a) whether the document is internal or external b) the dollar amount involved in the record c) who prepared the document d) when the record or document was prepared

a) whether the document is internal or external

Select all that apply. Possible causes of significant differences are ______. a) accounting changes b) auditing principle changes c) errors d) fraud e) economic conditions

accounting changes economic conditions errors fraud

Select all that apply. The functions of audit documentation are to ______. a) aid in the planning, performance, and supervision of the audit b) provide principal support that the audit was conducted in accordance with GAAP c) provide justification for the fees charged for audit services rendered d) provide the basis for the review of the quality of work

aid in the planning, performance, and supervision of the audit provide the basis for the review of the quality of work

PCAOB standards require that audit documentation contain ______. a) only documents that the auditor feels are needed to support his or her conclusion b) only documents that are consistent with the final conclusion of the audit team c) all documents requested by the audit committee d) all documents that form the basis of the audit

all documents that form the basis of the audit

Select all that apply. The audit documentation needs to be organized so that ______ can find the audit evidence that supports each financial statement account. a) any member of the audit team b) the board of directors c) reviewers d) entity management

any member of the audit team reviewers

Fill in the blank. The measure of the quality of audit evidence is referred to as ______.

appropriateness

Select all that apply. Confirmations _____. a) provide reliable evidence for the existence assertion b) do not provide evidence about the rights and obligations assertion c) are used extensively on audits d) may provide evidence about the completeness assertion

are used extensively on audits provide reliable evidence for the existence assertion may provide evidence about the completeness assertion

Fill in the blank. The auditor can issue an unqualified/unmodified report when audit evidence supports management's ______.

assertions

Fill in the blank. The document that outlines the auditor's understanding of the entity and potential risks as well as the strategy to be followed by the auditor is called the ______ ______.

audit plan

Fill in the blank. Specific acts performed by the auditor to gather evidence about whether specific assertions are being met are referred to as ______ ______

audit procedures

Fill in the blank. The audit procedures that will be conducted by the auditor are contained in the ______ ______.

audit programs

Select all that apply. The reliability of analytical procedures is a function of the ______. a) availability and reliability of the data used in the calculations b) recalculation of analytical procedures and confirmation of tangible assets c) plausibility and predictability of the relationship being tested d) assertions made by management e) precision of the expectation and the rigor of the investigation

availability and reliability of the data used in the calculations plausibility and predictability of the relationship being tested precision of the expectation and the rigor of the investigation

True or False: The auditor is required to obtain corroborative evidence for planned analytical procedures. a) true b) false

b) false

True or false: Auditing standards dictate how audit documentation should be organized. a) true b) false

b) false

When an auditor performs audit work on one working paper and supporting information is obtained from another working paper, the auditor uses ______ to ensure that members of the audit team or firm can find relevant audit evidence. a) proper audit documentation headings b) indexing and cross referencing c) tick marks

b) indexing and cross referencing

Determining whether an explanation or error can explain the observed difference is called _____. a) evaluation b) quantification c) corroboration d) investigation

b) quantification

The independence of the source of the evidence, the effectiveness of internal controls, and the auditor's direct personal knowledge all affect the ______ of data for developing expectations. a) aggregation b) reliability c) reasonableness d) precision

b) reliability

Select all that apply. Audit documentation should ______. a) include a detailed breakdown of how the fees were set for the engagement b) demonstrate how the audit complied with appropriate standards c) show that standards of fieldwork have been followed d) enable a knowledgeable reviewer to determine who performed the work

demonstrate how the audit complied with appropriate standards show that standards of fieldwork have been followed enable a knowledgeable reviewer to determine who performed the work

Select all that apply. Audit documentation should ______. a) support the auditor's conclusions for each material financial statement assertion b) include an audit program for the engagement c) demonstrate the underlying accounting records agreed with the financial statements d) enable an ordinary person to understand the nature, timing, extent, results, evidence, and conclusions reached

demonstrate the underlying accounting records agreed with the financial statements include an audit program for the engagement support the auditor's conclusions for each material financial statement assertion.

Select all that apply. Audit documentation should ______. a) demonstrate the underlying accounting records agreed with the financial statements b) support the auditor's conclusions for each material financial statement assertion c) include an audit program for the engagement d) enable an ordinary person to understand the nature, timing, extent, results, evidence, and conclusions reached

demonstrate the underlying accounting records agreed with the financial statements support the auditor's conclusions for each material financial statement assertion include an audit program for the engagement

Fill in the blank. Two forms of electronic information that are used as audit evidence are ______ and ______.

documents data

Perhaps the most commonly used analytical procedure is ______. a) comparison of current-year financial information with industry averages b) relationships of financial data to nonfinancial data c) relationship among elements of the financial statements within the current period d) comparison of current-year financial information with budgets, projections, and forecasts e) comparison of current-year financial information with comparable prior periods

e) comparison of current-year financial information with comparable prior periods

Fill in the blank question. Information to which audit procedures have been applied that corroborates or contradicts assertions in the financial statements is audit ______.

evidence

Fill in the blank. information used by the auditor in arriving at the conclusions on which the audit opinion is based is called audit ______.

evidence

Fill in the blank. A management statement that the inventory shown on the balance sheet was available for sale at the balance sheet date is an example of the ______ assertion.

existence

Fill in the blank. Auditors usually use the term ______ to refer to unwritten questions asked of the entity's personnel or of a third party, and the term ______ to refer to written requests for a written response from a third party.

inquiry confirmation

Select all that apply. Inquiry ______. a) may be complementary to other audit procedures b) must be formal to be considered reliable c) is an important audit procedure d) is used extensively throughout the audit

is an important audit procedure may be complementary to other audit procedures is used extensively throughout the audit

Select all that apply. The heading of all audit documentation should include the ______. a) title of working paper b) identify of the auditor c) name of the audit firm d) entity's year-end date e) name of the entity

name of the entity title of working paper entity's year-end date

Fill in the blank. Looking at a process or procedure being performed by others is referred to as ______

observation

Select all that apply. Which of these are generally low-reliability types of evidence because they require further corroboration by the auditor? a) confirmation b) observation c) recalculation d) inquiry

observation inquiry

Fill in the blank. The quality of an expectation is referred to as the ______ of the expectation.

precision

Fill in the blank. Determining whether an explanation or error can explain the observed difference is called ______.

quantification

Checking the mathematical accuracy of documents or records is referred to as ______.

recalculation

The relationship of audit evidence to the assertion or to the objective of the control being tested is called the ______ of the evidence.

relevance

Fill in the blank. If the auditor relies on evidence that is unrelated to the assertion, an incorrect conclusion may be reached because the evidence used was not _____.

relevant

Select all that apply: Evidence is considered appropriate when it provides information that is ______. a) reliable b) relevant c) sufficient to draw a reasonable conclusion d) persuasive

relevant reliable

Fill in the blank. The ability to develop precise expectations is influenced by the ______ of the available data.

reliability

Fill in the blank. Audit documentation is referred to as ______ ______ or the audit file.

working papers