BUS165A CHAPTER 5

Which of the following statements are correct?

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

Under current auditing standards, management assertions fall into categories of assertions about ______.

-classes of transactions and events and related disclosures for the period audited -account balances and related disclosures at the period end

Possible causes of significant differences are ______.

-errors -economic conditions -accounting changes -Fraud

Which of these processes are generally considered highly reliable because the auditor has direct knowledge about them?

-inspection of tangible assets -Reperformance of tangible assets -Recalculation of tangible assets

The precision of the expectation ______.

-may lead to a cost-benefit trade-off due to an increase in testing -is a function of materiality and required detection risk -is a measure of potential effectiveness

The heading of all audit documentation should include the ______.

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

The reliability of evidence obtained through external confirmations may be affected by the _____

-nature of the information being confirmed -prior experience with the entity -form of the confirmation -intended respondent

The reliability of analytical procedures is a function of the ______.

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

Inquiry may __

-provide new audit evidence -be formal or informal -provide corroborative audit evidence

the functions of audit documentation are to ______.

-provide principal support that the audit was conducted in accordance with GAAS -provide the basis for the review of the quality of work -aid in the planning, performance and supervision of the audit

Confirmations ______.

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

Audit documentation should ______.

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

Audit documentation should __

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

Put the items in order of how an auditor fills an "assurance bucket."

1- risk assessment procedures 2-test of controls 3- substantive analytical procedures 4-test of detail

The primary concern of ______ is simply whether the relationship used to test the assertion makes sense.

Plausibility

Many factors, including changes in the business or industry, influence ____the of relationships among financial and nonfinancial data.

Predictability

The amount of difference that can be accepted will generally always be lower than ____ _____

Tolerable misstatement

Comparing current year financial statements with budgeted amounts is usually performed using ______ analysis.

Trend

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 and ratio

In general, ______ analysis is the least precise method to form an expectation while ______ analysis is the most precise.

Trend, reasonableness

Checks, invoices, contracts, ledgers, worksheets and spreadsheets are all part of auditing evidence referred to as __________ ___________.

accounting records

PCAOB standards require that audit documentation contain ______.

all documents that form the basis of the audit

Expressed or implied representations by management regarding the recognition, measurement, presentation and disclosure of information in the financial statements and related disclosures are referred to as ___

assestions

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

Specific acts performed by the auditor to gather evidence about whether specific assertions are being met are referred to as _____________ __________.

audit procedures

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) ______.

auditing standards

Analytical procedures conducted to provide substantive evidence normally ______ be performed at aggregated levels.

cannot

Perhaps the most commonly used analytical procedure is ______.

comparison of current-year financial information with comparable prior periods

Audit evidence obtained by the auditor as a direct written response to the auditor from a third party in paper form or by electronic or other medium is called a(n) ___

confirmation

Audit evidence obtained by the auditor as a direct written response to the auditor from a third party in paper form or by electronic or other medium is called a(n) _______

confirmation

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

controls

This assertion relates to whether transactions and events have been recorded in the correct accounting period.

cutoff

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

True or false: Auditing standards base the need for substantive procedures for significant account balances on the assessed risk of material misstatement.

false

True or false: Inspecting tangible assets provides significant assurance for the rights and obligations assertion.

false

Audit documentation is the property of the ______.

independent auditors

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

Counting cash on hand and examining inventory are examples of _________ of tangible assets

inspections

Duplicate copies of invoices and shipping remittances are examples of ______ documents.

internal

The _____ precise the expectation, the ______ the likelihood that the difference is actually a misstatement.

more, greater

The quality of an expectation is referred to as the of the expectation

precision

Footing, crossfooting, reconciling subsidiary ledgers and testing postings are all examples of ________

recalculation

The ability to develop precise expectations is influenced by the of the available data.

reliability

The independent execution by the auditor of procedures or controls that were originally performed by company personnel is called ___

reperformance

Coverage ratios provide information on the long-term ____of the entity

solvency

Assume an entity has 2,500 customer. If the audit mails confirmation to 25 of the largest customers and only 20 respond the auditor must ______

still gather sufficient evidence on each of the 25 accounts

Tests of Control

used to test the operating effectiveness of controls in preventing, or detesting and correcting, material misstatements at the relevant assertions level

Audit documentation is referred to as ____ _____ or the audit file

working papers

Documents originating within the entity but circulated to independent sources outside the entity and documents generated outside the entity are referred to as___ documents.

external

The measure of the quality of audit evidence is referred to as _________.

Appropriateness

The more detailed the level at which an expectation is formed, the ______ the precision.

Greater

How effectively the entity's assets are managed is indicated by ______ ratios.

activity

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.

existence

Who is responsible for the fair presentation of the financial statements?

management

An entity's ability to meet its current obligations can be evaluated using _______ - _______ _______ ratios.

short-term liquidity

True or false: Audit evidence includes information developed by the auditor that permits him or her to reach conclusions through valid reasoning.

true

Substantive procedures

used to detect material misstatements at the relevant assertions level

This consists of evaluations of financial information through the examination of plausible relationships among both financial and non-financial data.

Analytical procedures

Because the entity's personnel might have incentives to record fictitious transactions, the ___assertion is relevant for revenue transactions

occurrence or validity

The ______ assertion relates to whether all recorded transactions and events have happened and pertain to the entity.

occurrences

Modeling the association between certain elements of the balance sheet and related income statement accounts is typically done using____ analysis.

reasonableness

Because the entity's personnel might have incentives to record fictitious transactions, the________ assertions is relevant for revenue transaction

occurrence

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

Audit programs

In regards to applying the audit testing hierarchy, starting with tests of _______ is generally more effective and efficient than starting with tests of _______>

Control, details

Examination of supporting evidence, inquiries of independent persons and evaluating evidence obtained from other auditing procedures are all common _______ procedures.

Corroborating

True or false: The auditor is concerned with the completeness assertion because failure of this assertion always leads to an overstatement of income.

False

The ______ of the audit evidence refers to the form or type of information, which includes accounting records and other available information.

Nature

Looking at a process or procedure being performed by others is referred to as ___.

Observation

This is useful in helping auditors understand the entity's processes but is generally not considered very reliable.

Observation

Searching for large and unusual items in the accounting records and reviewing transactions for errors are examples of _________

Scanning

The auditor's exercise of professional judgment to review accounting data to identify significant or unusual items to test is referred to as

Scanning

Risk Assessment Procedures

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 assestion level

The reliability of inspection of records and documents depends primarily on ______.

Whether the document is internal or external

The accuracy assertion is based on ______.

GAAP

Short-term liquidity ratios include the ______ ratio.

-operating cash flow -current -quick

whether amounts and other data relating to recorded transactions and events have been recorded appropriately is addressed by the ______ assertions.

Accuracy

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.

True

In evaluating audit evidence, the auditor must ______.

-understand the types of evidence available -be unbiased -remain objective

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

To effectively help the auditor determine if accounts contain material misstatements, ______ ratios may be used.

Activity

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) ______.

Auditing standards

Whether all transactions and events that occurred during the period have been recorded relates to the____ assertion

Completeness

If an entity overstates sales, the ______ ratio will likely be higher than in prior years.

Gross profit percentage

Many factors, including changes in the business or industry, influence the ______ of relationships among financial and nonfinancial data

Predictability

Determining whether an explanation or error can explain the observed difference is called _______

Professional skepticism

The _______ ratio is usually considered acceptable if it is 2 to 1 or better.

current

An auditor examines shipping documents to ensure that no prior period sales have been recorded in the current year to test the _________ assertions.

cutoff

True or false: The auditor is required to obtain corroborative evidence for planned analytical procedures.

false

The more detailed the level at which an expectation is formed, the ______ the precision.

greater

If an entity overstates sales, the ______ ratio will likely be higher than in prior years.

gross profit percentage

Differences identified by substantive analytical procedures indicate a(n) ______ likelihood of misstatements

increased

In order to evaluate profitability ratios, each should be interpreted by comparison to ___

industry

Counting cash on hand and examining inventory are examples of _____ of tangible assets.

inspection

There is a(n) ______ relationship between the sufficiency and appropriateness of audit evidence

inverse

when audit evidence supports __________ __________, the auditor can issue an unqualified report.

management assertions

The ______ assertion relates to whether all recorded transactions and events have happened and pertain to the entity.

occurrence

The entity's success or failure for a given period is measured by______ ratios.

profitability

All types of analysis are used for substantive analytical procedures, but ______ analysis is not commonly used for preliminary or final analytical procedures.

reasonableness

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

recalculation

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

recalculation

Assume an entity has 2,500 customer. If the audit mails confirmation to 25 of the largest customers and only 20 respond the auditor must ______.

still gather sufficient evidence on each of the 25 accounts

The measure of the quantity of audit evidence is referred to as ___________.

sufficiency

Notations that are made by the auditor near, or next to, an item or amount on an audit document that are used to document work performed are called

tick marks

The second step in the analytical procedures decision process is to define a ________ difference.

tolerable

Analytical procedures can be used by auditors to accomplish ______ procedures.

-Final analytical -Substantive analytical -Risk assessment

Tests of controls ___

-may allow the auditor to gain a degree of assurance over thousands of transactions -influence the scope of substantive testing

The current ratio can be distorted by __

-old accounts receivable -obsolete inventory

The independent execution by the auditor of procedures or controls that were originally performed by company personnel is called ___

whether the document is internal or external

Which of the following statements are correct?

-Accounting principle choices can impact some ratios. -Financial ratios should not be evaluated in isolation. -Material misstatement may not significantly affect some ratios.

The audit documentation needs to be organized so that ______ can find the audit evidence that supports each financial statement account.

-Any member of the audit team -Reviewers

Explanations for significant differences observed for substantive analytical procedures must be followed up and resolved through ____

-Corroboration -Quantification -Evaluation

Identify the categories of financial ratios that are used by auditors as analytical procedures.

-Coverage -Activity -Short-term Liquidity -Profitability

Which of the following statements are correct?

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

Identify the sources that can be used to develop an expectation for an analytical procedure.

-Industry publications -Budgets and forecasts -Competitor information

Important information on the ability of the entity to continue as a going concern are provided by ______ ratios.

Coverage

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.

Existence

In order to evaluate profitability ratios, each should be interpreted by comparison to _____ data.

Industry

This is an important audit procedure that is used extensively throughout the audit and is often complementary to performing other audit procedures.

Inquiry

Evidence obtained from a source outside the entity is generally considered ______ evidence obtained solely from within the entity.

More reliable than

Footing, crossfooting, reconciling subsidiary ledgers and testing postings are all examples of ___

Recalculation

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.

Reliability

The auditor's independent execution of procedures or controls that were originally performed by company personnel is referred to as ___

Reperformance