Audit Chapter 5
Following are several statements regarding accounting records or audit documentation. Which of the statements is correct?
Accounting records belong to the auditee
Confirmations would normally be most likely used as a type of audit evidence in connection with which of the following?
Accounts receivable
Which of the following presumptions is least likely to relate to the reliability of audit evidence?
An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost
Which of the following presumptions does not relate to the appropriateness of audit evidence?
An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.
Which of the following presumptions is correct regarding the reliability of audit evidence?
An effective internal control system provides increased assurance with regard to the reliability of audit evidence
Which of the following presumptions is correct about the reliability of audit evidence?
An effective internal control system provides more reliable audit evidence than a system with ineffective controls
An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of:
Analytical procedures
An example of an audit procedure that results in evidence with a medium level of reliability is:
Analytical procedures
Analytical procedures used in planning an audit should focus on identifying:
Areas that may represent specific risks relevant to the audit
Of the following, which is the least reliable type of audit evidence?
Asking the controller about an end of period adjustment
Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that:
Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement
Which of the following is true regarding audit evidence?
Audit evidence is gathered to determine whether each relevant financial statement assertion is being supported
Audit documentation prepared on audits of public entities is the property of the:
Auditor
Which of the following elements ultimately determines the amount of audit work that is necessary in the circumstances to afford a reasonable basis for an opinion?
Auditor judgment
A not-for-profit organization published a monthly magazine that had 15,000 subscribers on January 1, 2013. The number of subscribers increased steadily throughout the year and on December 31, 2013, there were 16,200 subscribers. The annual magazine subscription cost was $10 on January 1, 2013 and was increased to $12 for new members on April 1, 2013. Subscriptions are paid in full at the beginning of the member term. An auditor should expect that the revenue from subscriptions for the year ended December 31, 2013, would be approximately:
$163,800
A company sells a particular product only in the last month of its fiscal year. The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made. The agents' sales were $10 million. Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year. The auditor would expect the year-end balance in the accrued commissions payable account to be:
$588,000
Which of the following statements concerning audit evidence is correct?
A company's accounting data cannot be considered sufficient audit evidence to support the financial statements
Which of the following types of audit evidence is the most persuasive?
Bank statements obtained from the auditee
All of the following are typically in the current file except:
Chart of accounts
Which of the following items is generally not included as part of audit documentation?
Client review notation
Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?
Compare a sample of shipping documents to related sales invoices
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
Which of the following is not a typical analytical procedure?
Comparison of recorded amounts of major disbursements with appropriate invoices
Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying?
Completeness
Discussions with the owner-manager of an entity under audit reveal to the auditor that the company is more concerned with minimizing its income tax payments than maximizing income. Based on this information, which management assertion will the auditor be most concerned about verifying with regard to sales revenue?
Completeness
Tracing is used primarily to test which of the following assertions about classes of transactions?
Completeness
Your audit client is under intense pressure to meet an earnings target. Which assertion related to classes of transactions are you most concerned with for transactions within the purchasing process?
Completeness
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
Which of the following types of documentary evidence should the auditor consider to be the most reliable?
Confirmation of an account payable balance mailed by and returned directly to the auditor
As a result of analytical procedures conducted during the planning phase, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should:
Consider the possibility of an error in the financial statements
Audit documents that record the procedures used by the auditor to gather evidence should be:
Designed in an orderly fashion to facilitate the review of audit work by the senior, manager, and partner on the engagement
Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the:
Difficulty and expense involved in testing a particular item
Which of the following would be least likely to be comparable between similar corporations in the same industry or line of business?
Earnings per share
In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events, and specifically, which assertion?
Existence
Which of the following primary assertions is satisfied when an auditor observes the entity's physical count of inventory?
Existence
Which assertions may be tested for the "account balances, and related disclosures" category of management assertions?
Existence, rights and obligations, completeness, accuracy, valuation and allocation, classification, and presentation
Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements.
False
Management assertions fall into four main categories.
False
The classification assertion refers to transactions and events being recorded in the correct accounting period.
False
The sufficiency of evidence refers to the quality of audit evidence.
False
An example of an analytical procedure is the comparison of:
Financial information with similar information regarding the industry in which the entity operates
In creating lead schedules for an audit engagement, what financial information is needed to begin?
General ledger information, such as account numbers, prior-year account balances, and current-year unadjusted information
The auditor generally finds more predictability in the ratio and trend analysis in the examination of the:
Income Statement
Which of the following is true relating to audit work paper documentation?
It serves as the basis of review for audit supervisors to determine if sufficient. appropriate evidence has been gathered
Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance?
Lead schedules
To test for unsupported entries in the ledger, the direction of audit testing should start from the:
Ledger entries
In designing written audit programs, an auditor should plan specific audit procedures to test:
Management assertions
Audit documentation:
May be in paper, electronic, or some other medium
According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a low level of reliability is:
Observation
Vouching is used primarily to test which of the following assertions about classes of transaction?
Occurrence
Which assertions may be tested for the "transactions and events, and related disclosures" category of management assertions?
Occurrence, completeness, accuracy, cutoff, classification, and presentation
The permanent (continuing) file of an auditor's working papers most likely would include copies of the
Organizational chart
The permanent audit file usually includes:
Organizational chart
In determining whether transactions have been recorded, the direction of the audit testing should start from the:
Original source documents
The auditor notices significant fluctuations in key elements of the company's financial statements. If management is unable to provide an acceptable explanation, the auditor should:
Perform additional audit procedures to investigate the matter further
Audit evidence can come in different forms with different degrees of reliability. Which of the following is the least reliable type of evidence?
Pre-numbered sales invoices
According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a high level of reliability is:
Recalculation
Footing is an example of:
Recalculation
Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures?
Relationships involving income statement accounts
Of the following, the most reliable type of evidence typically is:
Reperformance
You are auditing a manufacturing company that has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about?
Rights and obligations
You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying?
Rights and obligations
Which of the following is the least persuasive documentation in support of an auditor's opinion?
Schedules of details of physical inventory counts conducted by the entity
Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?
Square footage of selling space
Analytical procedures may be classified as being primarily which of the following?
Substantive procedures
Audit documentation is the principal record of the audit and provides the principal support for the representations in the auditor's report. Because of this, audit documentation should do all of the following except for:
Support the audit firm's human resource department in employee retention decisions
The audit working papers belong to:
The audit firm
Which of the following statements is correct with regard to the quality or appropriateness of evidential matter?
The auditor's direct personal knowledge, obtained through reperformance and recalculation, is more persuasive than information obtained indirectly from independent outside sources
An auditor's analytical procedures performed during the overall review stage indicated that the entity's accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following explanations most likely would satisfy the auditor?
The entity opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet
Which of the following statements concerning audit evidence is correct?
The measure of the reliability of audit evidence lies in the auditor's judgment
Which of the following statements is generally correct about the appropriateness of audit evidence?
The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements
According to the text, each of the following is a main purpose for performing audit procedures except:
To develop recommendations for the control system
Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?
Total debt divided by stockholders' equity
Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except:
Tracing transactions through the system to determine whether procedures are being applied as prescribed
You are concerned with unrecorded transactions in the purchasing cycle. Which audit procedure are you most likely to use when auditing purchases?
Tracing vendor invoices to accounting records
Audit procedures are designed to test management assertions.
True
The auditor gathers audit evidence to test management's assertions.
True
The auditor must use his or her professional judgment to determine the amount of audit evidence to be gathered.
True
The completeness assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded.
True
The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period.
True
The relevance of audit evidence or specific audit procedures depends on the assertion being tested.
True
One of the main objectives of performing analytical procedures during the planning phase of the audit is to identify:
Unusual changes that may signal possible account misstatements
Which of the following audit procedures would most likely be used to test the mathematical accuracy of a five-hundred page inventory listing?
Use computer assisted audit techniques to foot, or sum, the entire listing
Which of the following best describes audit data analytics?
Use of data visualization to identify patterns and anomalies
A confirmation is used to:
Verify a representation using information from a third party
The current audit file usually includes:
Working trial balance
The current file of the auditor's working papers should generally include:
a copy of the financial statements
Audit documentation provides the principal support for which of the following?
a. demonstrate how the audit complied with auditing and related professional practice standards b. support the basis for the auditor's conclusions concerning every material financial statement assertion c. demonstrate that the underlying accounting records agreed or reconciled with the financial statements d. all of the above d. all of the above
All audit documentation should have a heading, which includes:
a. name of the company under audit b. title of the working paper c. company's year-end date d. all of these d
In testing the existence assertion for an asset, an auditor ordinarily works from the:
accounting records to the supporting documents
Analytical procedures performed during the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that:
additional tests of details are required
The primary objective of final analytical procedures is to:
assist the auditor in assessing the validity of the conclusions reached on the audit
An audit document that reflects the major components of an amount reported in the financial statements is referred to as a:
lead schedule
The permanent file section of the working papers that is kept for each audit client most likely contains:
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
An auditor would be least likely to use confirmations in connection with the examination of:
refundable income taxes
The assurance bucket is filled with all of the following types of evidence except:
the audit report
The substantive analytical procedure known as trend analysis is best described by:
the examination of changes in an account over time
