Chapter 5
The measure of the QUALITY of audit evidence is referred to as ________.
Appropriateness
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
Which of the following statements are correct?
Accounting principle choices can impact some ratios. Material misstatement may not significantly affect some ratios. Financial ratios should not be evaluated in isolation
Whether amounts and other data relating to recorded transactions and events have been recorded appropriately is addressed by the ______ assertions.
accuracy
The current ratio can be distorted by __
old accounts receivable obsolete inventory
Misstatements in the entity's records are corrected with ___________ entries
adjusting
The primary concern of ______ is simply whether the relationship used to test the assertion makes sense.
plausibility
The quality of an expectation is referred to as the ___________ of the expectation
precision
Many factors, including changes in the business or industry, influence the ____________ of relationships among financial and nonfinancial data.
predictability
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
Specific acts performed by the auditor to gather evidence about whether specific assertions are being met are referred to as __________ ______________.
audit procedures
The audit procedures that will be conducted by the auditor are contained in the ____________ ______________ .
audit program
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
A statement by management that the ending balance of Notes Payable represents the total outstanding notes due at the balance sheet date is an example of the _________ assertion
completeness
Whether all transactions and events that occurred during the period have been recorded relates to the ____________ assertion.
completeness
Examination of supporting evidence, inquiries of independent persons and evaluating evidence obtained from other auditing procedures are all common ________ procedures.
corroborating
An auditor examines shipping documents to ensure that no prior period sales have been recorded in the current year to test the __________ assertion.
cutoff
The indication that an entity is too highly leveraged is suggested by a large ______ ratio.
debt to equity
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
Possible causes of significant differences are ______.
fraud economic conditions errors accounting changes
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
Audit documentation is the property of the ______.
independent auditors
The process of ___________ and ___________---____________ provides a trail from the financial statements to the individual audit documents that a reviewer can easily follow.
indexing and cross-referencing
In order to evaluate profitability ratios, each should be interpreted by comparison to _______ data.
industry
Counting cash on hand and examining inventory are examples of ___________ of tangible assets.
inspection
Duplicate copies of invoices and shipping remittances are examples of ______ documents.
internal
The auditor calculates inventory turnover to be 6.1 times per year. If the industry average is 7.9, this suggests ______.
inventory contains obsolete or slow-moving goods
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's assertions
The _____ precise the expectation, the ______ the likelihood that the difference is actually a misstatement.
more, greater
The ______ of the audit evidence refers to the form or type of information, which includes accounting records and other available information.
nature
The functions of audit documentation are to ______.
provide principal support that the audit was conducted in accordance with GAAS aid in the planning, performance and supervision of the audit provide the basis for the review of the quality of work
Modeling the association between certain elements of the balance sheet and related income statement accounts is typically done using ________ analysis.
reasonableness
The relationship of audit evidence to the assertion being tested is called the __________ of the evidence.
relevance
The ability to develop precise expectations is influenced by the __________ of the available data.
reliability
The source, nature, and individual circumstances under which it is obtained all influence the ______ of audit evidence.
reliability
In evaluating audit evidence, the auditor must ______.
remain objective understand the types of evidence available be unbiased
The auditor's independent execution of procedures or controls that were originally performed by company personnel is referred to as ____________
reperformance
The independent execution by the auditor of procedures or controls that were originally performed by company personnel is called ______.
reperformance
The return earned on the resources invested by both the stockholders and the creditors is indicated by the ______ ratio.
return on assets
In general, ______ analysis is the least precise method to form an expectation while ______ analysis is the most precise.
trend, reasonableness
The reliability of analytical procedures is a function of the ______.
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
Whether transaction and events are appropriately aggregated or disaggregated and clearly described in the financial statements is addressed by the ______ assertion.
presentation
The key mind-set behind effectively performing substantive analytical procedures is one of appropriate ___________ ___________ and obtaining a sufficient amount of appropriate audit evidence.
professional skepticism
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 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
Ensuring that disclosures related to transaction and events are relevant and understandable in the context of the requirements of the applicable financial reporting framework is addressed by the ______ assertion.
presentation
The _______ ratio is usually considered acceptable if it is 2 to 1 or better.
current ratio
This assertion relates to whether transactions and events have been recorded in the correct accounting period.
cutoff
Identify the sources that can be used to develop an expectation for an analytical procedure.
Budgets and forecasts Competitor information Industry publications
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: Auditing standards dictate how audit documentation should be organized.
FALSE
True or false: Auditors should refrain from using nonfinancial information in developing estimates of an entity's financial information.
FALSE
True or false: Inspecting tangible assets provides significant assurance for the rights and obligations assertion.
FALSE
This is an important audit procedure that is used extensively throughout the audit and is often complementary to performing other audit procedures
Inquiry
This is an important audit procedure that is used extensively throughout the audit and is often complementary to performing other audit procedures.
Inquiry
This is useful in helping auditors understand the entity's processes but is generally not considered very reliable.
Observation
Determining whether an explanation or error can explain the observed difference is called
Quantification
Substantive procedures
Used to detect material misstatements at the relevant assertion level.
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 assertion levels.
Using industry information as a basis of comparison can serve as a(n)_________ for assessing how well the entity's financial position and performance compare with others in the industry.
benchmark
Analytical procedures conducted to provide substantive evidence normally ______ be performed at aggregated levels.
cannot
Checks, invoices, contracts, ledgers, worksheets and spreadsheets are all part of auditing evidence referred to as_____________ _______________ .
accounting records
To effectively help the auditor determine if asset accounts contain material misstatements, _________ ratios may be used.
activity
Misstatements in the entity's records are corrected with ______ entries.
adjusting
Looking at a process or procedure being performed by others is referred to as ___________.
observation
The ______ assertion relates to whether all recorded transactions and events have happened and pertain to the entity.
occurrence
Because the entity's personnel might have incentives to record fictitious transactions, the __________ assertion is relevant for revenue transactions.
occurrence or validity
Footing, crossfooting, reconciling subsidiary ledgers and testing postings are all examples of ___________.
recalculation
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
Perhaps the most commonly used analytical procedure is ______.
comparison of current-year financial information with comparable prior periods
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
PCAOB standards require that audit documentation contain ______.
all documents that form the basis of the audit
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
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 ______.
still gather sufficient evidence on each of the 25 accounts
The reliability of inspection of records and documents depends primarily on ______.
whether the document is internal or external
Audit documentation is referred to as _________ ___________or the audit file.
working papers
A company generated total sales of $1,500,000 and has accounts receivables of $14,550. If 85% of sales are made on credit, the receivables turnover ratio is ______.
(1,500,000•85%)÷14,550=87.6
Identify the categories of financial ratios that are used by auditors as analytical procedures.
Coverage Profitability Short-term Liquidity Activity
True or false: The auditor is concerned with the completeness assertion because failure of this assertion always leads to an overstatement of income.
FALSE
True or false: The auditor is required to obtain corroborative evidence for planned analytical procedures.
FALSE
Which of the following statements are correct?
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 differences.
The accuracy assertion is based on ______.
GAAP
Which of these are generally low-reliability types of evidence because they require further corroboration by the auditor?
Inquiry Observation
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
The measure of the QUANTITY of audit evidence is referred to as ________.
Sufficiency
An example of the ______ assertion is that ordinary repairs to assets are charged to the repairs and maintenance expense account and not capitalized.
classification
Test of controls
Used to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the relevant assertion level.
Under current auditing standards, management assertions fall into categories of assertions about ______. stock performance and market valuations for the period under audit account balances and related disclosures at the period end the internal control in place to prevent errors and fraud classes of transactions and events and related disclosures for the period audited
account balances and related disclosures at the period end classes of transactions and events and related disclosures for the period audited
How effectively the entity's assets are managed is indicated by ______ ratios
activity
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 _______________
assertions
Whether transactions and events have been recorded in the proper accounts is the concern of the __________ assertion.
classification
For lower-risk, well controlled accounts, the assurance bucket may be filled entirely with tests of __________ and substantive analytical procedures.
controls
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
Documents originating within the entity but circulated to independent sources outside the entity and documents generated outside the entity are referred to as
external
Tests of controls ______.
may allow the auditor to gain a degree of assurance over thousands of transactions influence the scope of substantive testing
The reliability of evidence obtained through external confirmations may be affected by the ______.
nature of the information being confirmed form of the confirmation prior experience with the entity intended respondent
Significant fluctuations in the ______ ratio may indicate that selling, general and administrative expenses are misstated.
profit margin
The entity's success or failure for a given period is measured by ______ ratios
profitability
Inquiry may ______. provide new audit evidence be formal or informal provide corroborative audit evidence be considered sufficient evidence on its own in most cases
provide new audit evidence be formal or informal provide corroborative audit evidence
Checking the mathematical accuracy of documents or records is referred to as ___________
recalculation
When filling the "assurance bucket", existence or validity is typically more important for accounts _________ than for accounts __________
receivable payable
To properly present information on the financial statements a(n) ____________ entry that affects either the income statement or the balance sheet must be made.
reclassification
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
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
Whether a particular type of evidence can be depended upon to signal the true state of an assertion is referred to as the ________ of evidence.
reliability
A management statement that the entity is making payments and has control of a leased asset is an example of the ______ assertion.
rights and obligations
Assertions about ______________ and ____________ address whether the entity owns or controls the assets included on the financial statements, and that liabilities are debts of the entity.
rights and obligations
Analytical procedures can be used by auditors to accomplish ______ procedures.
risk assessment final analytical substantive analytical
An entity's ability to meet its current obligations can be evaluated using _______-______ ________ ratios
short-term liquidity
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 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
Coverage ratios provide information on the long-term _________ of the entity.
solvency