Chapter 5

reperformance

independent execution of procedures or controls by auditor performed as part of entity's internal control

seven types of audit procedures for gathering audit evidence

inspection, observation, inquiry, confirmation, recalculation, reperformance, and analytical procedures

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

lead schedule.

observation

looking at a process or procedure being performed by others

Which of the following types of audit evidence is the most persuasive? - Prenumbered client purchase order forms - Client work sheets supporting cost allocations - Bank statements obtained from the client - Representation letter

Bank statements obtained from the client

inspection

examination of accounting records and source documents (i.e., vouching and tracing)

Which of the following is not required documentation in an audit in accordance with generally accepted auditing standards? - A written engagement letter formalizing the level of service to be rendered - A flowchart depicting the segregation of duties and authorization of transactions - A written audit program describing the necessary procedures to be performed - Written representations from management

A flowchart depicting the segregation of duties and authorization of transactions

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

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

Which of the following presumptions is correct about the reliability of audit evidence? - Information obtained indirectly from outside sources is the most reliable audit evidence. - To be reliable, audit evidence should be convincing rather than persuasive. - Reliability of audit evidence refers to the amount of corroborative evidence obtained. - An effective internal control structure provides more assurance about the reliability of audit evidence.

An effective internal control structure provides more assurance about the reliability of audit evidence.

According to the third standard of fieldwork, which of the following terms identifies a requirement for audit evidence? - Appropriate - Adequate - Reasonable - Disconfirming

Appropriate

The permanent (continuing) file of an auditor's working papers most likely would include copies of the - Lead schedules - Attorney's letters - Bank statements - Debt agreements

Debt agreements

Analytical procedures used in planning an audit should focus on - Reducing the scope of tests of controls and substantive tests - Providing assurance that potential material misstatements will be identified - Enhancing the auditor's understanding of the client's business - Assessing the adequacy of the available audit evidence

Enhancing the auditor's understanding of the client's business

In creating lead schedules for an audit engagement, a CPA often uses automated workpaper software. What client information is needed to begin this process? - Interim financial information such as third quarter sales, net income, and inventory and receivables balances - Specialized journal information such as the invoice and purchase order numbers of the last few sales and purchases of the year - General ledger information such as account numbers, prior-year account balances, and current-year unadjusted information - Adjusting entry information such as deferrals and accruals, and reclassification journal entries

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

Which of the following procedures would provide the most reliable audit evidence? - Inquiries of the client's internal audit staff held in private - Inspection of prenumbered client purchase orders filed in the Vouchers Payable Department - Analytical procedures performed by the auditor on the entity's trial balance - Inspection of bank statements obtained directly from the client's financial institution

Inspection of bank statements obtained directly from the client's financial institution

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

a copy of the financial statements.

confirmation

a direct written response to the auditor from a third party

Which of the following would not be considered an analytical procedure? - Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked - Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics - Computing accounts receivable turnover by dividing credit sales by the average net receivables - Developing the expected current year sales based on the sales trend of the prior five years

Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics

An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for - Cash flow increases and decreases - Audit objectives and assertions - Reclassifications and adjustments - Reconciliations and tick marks

Reclassifications and adjustments

Which of the following non-financial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit? - Turnover of personnel in the Accounting Department - Objectivity of audit committee members - Square footage of selling space - Management's plans to repurchase stock

Square footage of selling space

The best primary audit evidence regarding year-end bank balances is documented in the - Standard bank confirmations - Interbank transfer schedule - Bank reconciliations - Bank deposit lead schedule

Standard bank confirmations

Which of the following factors would least likely affect the quantity and content of an auditor's working papers? - The condition of the client's records - The assessed risk of material misstatement - The nature of the auditor's report - The content of the representation letter

The content of the representation letter

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses? - The current year's accounts receivable with the prior year's accounts receivable - The current year's payroll expense with the prior year's payroll expense - The budgeted current year's sales with the prior year's sales - The budgeted current year's warranty expense with the current year's contingent liabilities

The current year's payroll expense with the prior year's payroll expense

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

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

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that - Obsolete inventory has not yet been reduced to fair market value. - There was an improper cutoff of sales at the end of the year. - An unusually large receivable was written off near the end of the year. - The aging of accounts receivable was improperly performed in both years.

There was an improper cutoff of sales at the end of the year.

An auditor's analytical procedures most likely would be facilitated if the entity - Segregates obsolete inventory before the physical inventory count - Uses a standard cost system that produces variance reports - Corrects material weaknesses in internal control before the beginning of the audit - Develops its data from sources solely within the entity

Uses a standard cost system that produces variance reports

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

accounting records to the supporting documents.

analytical procedures

analysis of plausible relationships (i.e., trend, ratio, and reasonableness analysis)

the analysis of plausible relationships (trends, ratio, and reasonableness) is referred to as

analytical procedures

The primary objective of final analytical procedures is to: - obtain evidence from details tested to corroborate particular assertions. - assist the auditor in assessing the validity of the conclusions reached on the audit. - satisfy doubts when questions arise about an entity's ability to continue in existence. - identify areas that represent specific risks relevant to the audit.

assist the auditor in assessing the validity of the conclusions reached on the audit.

A set of audit procedures prepared to test assertions for a component of the financial statements is referred to as an

audit program

inquiry

audit work conducted to understand entity and its environment including internal control

recalculation

checking the mathematical accuracy of information (i.e., manually or technology)

Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? - comparing a sample of shipping documents to related sales invoices - reviewing standard bank confirmations for indications of cash manipulations - confirming a sample of recorded receivables by direct communication with the debtors - observing the entity's distribution of payroll checks

comparing a sample of shipping documents to related sales invoices

Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence? - computations made by the auditor - vendors' invoices included in the entity's files - bank statements obtained from the entity - prenumbered entity sales invoices

computations made by the auditor

an external _________________ represents audit evidence obtained as a direct written response to the auditor from a third party, either in paper form or by electronic or other medium

confirmation

The permanent file section of the working papers that is kept for each audit client most likely contains: - review notes pertaining to questions and comments regarding the audit work performed. - a schedule of time spent on the engagement by each individual auditor. - narrative descriptions of the entity's accounting system and control procedures. - correspondence with the entity's legal counsel concerning pending litigation.

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

Which of the following types of audit evidence is the least reliable? - prenumbered purchase order forms prepared by the entity - correspondence from the entity's attorney about litigation - test counts of inventory performed by the auditor - bank statements obtained from the entity

prenumbered purchase order forms prepared by the entity

_________________ may include checking the mathematical accuracy of information

recalculation

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

refundable income taxes.

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

the audit report.

The substantive analytical procedure known as trend analysis is best described by: - development of a model to form an expectation using financial data, nonfinancial data, or both to test account balances or changes in account balances between accounting periods. - the comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data. - the examination of changes in an account over time. - the calculation of days sales outstanding and comparing the value to the industry average.

the examination of changes in an account over time.

the direction of testing accounting records from the journals back to the source documents is known as

vouching