Auditing and Assurance Chapter 7
Below are 10 documents typically examined during an audit. Classify each document as either internal or external. Type of Document Documents 1. Canceled checks for payments of accounts payable. 2. Payroll time cards. 3. Duplicate sales invoices. 4. Vendors' invoices. 5. Bank statements. 6. Minutes of the board of directors' meetings. 7. Signed lease agreements. 8. Notes receivable. 9. Subsidiary accounts receivable records. 10. Remittance advices.
1. External 6. Internal 2. Internal 7. External 3. Internal 8. External 4. External 9. Internal 5. External 10. External
Below are 12 audit procedures. Classify each procedure according to the following types of audit evidence: (1) physical examination, (2) confirmation, (3) documentation, (4) observation, (5) inquiry of the client, (6) reperformance, and (7) analytical procedure. Type of Evidence Audit Procedures 1. Watch client employees count inventory to determine whether company procedures are being followed. 2. Count inventory items and record the amount in the audit files. 3. Trace postings from the sales journal to the general ledger accounts. 4. Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross margin relative to the preceding year. 5. Obtain information about the client's internal controls by asking questions of client personnel. 6. Trace column totals from the cash disbursements journal to the general ledger. 7. Examine a piece of equipment to make sure a recent purchase of equipment was actually received and is in operation. 8. Review the total of repairs and maintenance for each month to determine whether any month's total was unusually large. 9. Compare vendor names and amounts on purchase invoices with entries in the purchases journal. 10. Foot entries in the sales journal to determine whether they were correctly totaled by the client. 11. Make a surprise count of petty cash to verify that the amount of the petty cash fund is intact. 12. Obtain a written statement from the client's bank stating the client's year-end balance on deposit.
1. Observation 2. Physical examination 3. Reperformance 4. Analytical procedure 5. Inquiry of the client 6. Reperformance 7. Physical examination 8. Analytical procedure 9. Documentation 10. Reperformance 11. Physical examination 12. Confirmation
Match nine of the terms (a-k) with the definitions provided below (1-9): a. Foot b. Compute c. Scan d. Inquire e. Count f. Trace g. Reperform h. Read i. Examine j. Observe k. Compare ________ 1. A calculation done by the auditor independent of the client. ________ 2. Addition of a column of numbers to determine if the total is the same as the client's. ________ 3. A comparison of information in two different locations. ________ 4. A use of the senses to assess certain activities. ________ 5. Following details of transactions from original documents to journals. ________ 6. A less detailed examination of a document or record to determine if there is something unusual warranting further investigation. ________ 7. Obtaining information from the client in response to specific questions. ________ 8. A determination of assets on hand at a given time. ________ 9. An examination of written information to determine facts pertinent to the audit.
1. b 2. a 3. k 4. j 5. f 6. c 7. d 8. e 9. h
Match five of the terms (a-h) with the definitions provided below (1-5): a. Audit documentation b. Audit procedures c. Audit objectives d. Analytical procedures e. Budgets f. Reliability of evidence g. Sufficiency of evidence h. Persuasiveness of evidence ________ 1. Use of comparisons and relationships to assess the reasonableness of account balances. ________ 2. Detailed instructions for the collection of a type of audit evidence. ________ 3. The degree to which evidence can be considered believable or trustworthy. ________ 4. Contains all the information that the auditor considers necessary to conduct an adequate audit and to provide support for the audit report. ________ 5. This is determined by the amount of evidence obtained
1. d 2. b 3. f 4. a 5. g
"The use of comparisons and relationships to assess whether account balances or other data appear reasonable compared to the auditor's expectations" is a definition of: A) analytical procedures. B) tests of transactions. C) tests of balances. D) auditing
A
A benefit obtained from comparing the client's data with industry averages is that it provides a(n): A) benchmark to compare the company against industry averages. B) indication where errors exist in the statements. C) benchmark to be used in evaluating a client's budgets. D) comparison of "what is" with "what should be."
A
An important benefit of industry comparisons is as: A) an aid to understanding the client's business. B) an indicator of errors. C) an indicator of fraud. D) a least-cost indicator for audit procedures.
A
Analytical procedures must be used in the planning and completion phases of the audit. A) True B) False
A
Audit evidence obtained directly by the auditor will not be reliable if: A) the auditor lacks the competence to evaluate the evidence. B) it is provided by the client's attorney. C) the client denies its veracity. D) it is impossible for the auditor to obtain additional corroboratory evidence
A
Auditor judgment is the primary determinant in determining the amount of evidence gathered. A) True B) False
A
Confirmations are among the most expensive type of evidence to obtain. A) True B) False
A
Confirmations are ordinarily used to verify account balances, but may be used to verify transactions. A) True B) False
A
Cost is never an adequate justification for omitting a necessary procedure or not gathering an adequate sample size. A) True B) False
A
Evidence is usually more persuasive for balance sheet accounts when it is obtained: A) as close to the balance sheet date as possible. B) only from transactions occurring on the balance sheet date. C) from various times throughout the client's year. D) from the time period when transactions in that account were most numerous during the fiscal period
A
Given the audit procedures below, which one provides the most reliable evidence? A) Confirmations B) Recalculation C) Reperformance D) Observations
A
In performing your audit for a privately-held firm your inquiries have yielded that one of the company's owner's primary motivations is to pay the least amount of income tax that is possible. Based on this observation which audit objective for ending inventory would the auditor be most concerned about ascertaining? A) Completeness B) Accuracy C) Rights and obligations D) Existence
A
Inquiries of clients and reperformance normally have a low cost associated with them. A) True B) False
A
Objective evidence is more reliable, and hence more persuasive, than subjective evidence. A) True B) False
A
Ordinarily, audit documentation can be provided to someone else only with the express permission of the client. A) True B) False
A
Relevance of evidence can only be considered in terms of specific audit objectives. A) True B) False
A
The permanent files included as part of audit documentation do not normally include: A) a copy of the current and prior years' audit programs. B) copies of articles of incorporation, bylaws and contracts. C) information related to the understanding of internal control. D) results of analytical procedures from prior years.
A
The primary purpose of performing analytical procedures in the planning phase of an audit is to: A) help the auditor obtain an understanding of the client's industry and business. B) assess the going concern assumption. C) indicate possible misstatements. D) reduce detailed tests.
A
The relevance of audit evidence depends on the audit objective being tested. A) True B) False
A
The type of audit evidence known as inquiry requires the auditor to obtain oral information from the client in response to questions. A) True B) False
A
When the auditor uses tracing as an audit procedure for tests of transactions she is primarily concerned with which audit objective? A) Occurrence B) Completeness C) Cutoff D) Classification
A
Whenever practical and reasonable, the confirmation of accounts receivable is required of CPAs. A) True B) False
A
Which of the following forms of evidence would be least persuasive in forming the auditor's opinion about marketable securities and other investments held by the company? A) Responses to auditor's questions by the president and controller regarding the investments account. B) Correspondence with a stockbroker regarding the quantity of client's investments held in street name by the broker. C) Minutes of the board of directors authorizing the purchase of stock as an investment. D) The auditor's count of marketable securities.
A
Which of the following statements is true? A) A large sample of highly competent evidence is persuasive if it is relevant to the objective being tested. B) A large sample of evidence that is neither competent nor timely is not persuasive. C) A small sample of only one or two pieces of relevant, competent, and timely evidence lacks persuasiveness. D) The persuasiveness of evidence can be evaluated after considering its sufficiency.
A
Which of the following statements regarding the relevance of evidence is correct? A) To be relevant, evidence must pertain to the audit objective of the evidence. B) To be relevant, evidence must be persuasive. C) To be relevant, evidence must relate to multiple audit objectives. D) To be relevant, evidence must be derived from a system including effective internal controls.
A
A canceled check written by the client, made payable to a local supplier and drawn on the client's bank account is one type of internal document. A) True B) False
B
Accounts receivable confirmations must be controlled by the client from the time they are prepared until the time they are returned to the auditor. A) True B) False
B
An example of an external document that provides reliable information for the auditor is: A) employees' time reports. B) bank statements. C) purchase order for company purchases. D) carbon copies of checks.
B
Analytical procedures can be used to provide reliable substantive evidence for all balance-related audit objectives. A) True B) False
B
Appropriateness of evidence is a measure of the: A) quantity of evidence. B) quality of evidence. C) sufficiency of evidence. D) meaning of evidence
B
Audit documentation is the joint property of the auditor and the audit client. A) True B) False
B
Audit evidence has two primary qualities for the auditor; relevance and reliability. Given the choicesbelow which provides the auditor with the most reliable audit evidence? A) general ledger account balances B) confirmation of accounts receivable balance received from a customer C) internal memo explaining the issuance of a credit memo D) copy of month-end adjusting entries
B
Audit evidence to support an opinion about the fairness of a client's financial statements consists entirely of written information. A) True B) False
B
Auditors may decide to replace tests of details with analytical procedures when possible because the: A) analytical procedures are more reliable. B) analytical procedures are considerably less expensive. C) analytical procedures are more persuasive. D) tests of details are more difficult to interpret.
B
Calculating the gross margin for the current year under audit as a percent of sales and comparing it with previous years is what type of evidence? A) physical examination B) analytical procedures C) observation D) inquiry
B
Confirmations would almost always be used, assuming all the accounts below are material, for: A) individual transactions between organizations, such as sales transactions. B) bank balances and accounts receivable. C) fixed asset additions. D) payroll expenses.
B
Due professional care, the third general standard, is concerned with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documentation requires that audit documentation of the evidence gathered by the auditor meets which of the following criteria? A) Workpapers be indexed to the general ledger accounts and include both a permanent file and a general file. B) The content be sufficient to provide support for the auditor's opinion, including the auditor's representation as to compliance with auditing standards. C) Audit evidence is principally gathered to determine if the client's financial statements, as prepared by management, can be relied upon to make managerial decisions about the firm. D) Audit evidence as displayed in the workpapers is primarily performed to protect the auditing firm in the case of a lawsuit by investors.
B
For audit evidence to be compelling to the auditor it must be sufficient and appropriate. Which statement below is not correct regarding the appropriateness of audit evidence? A) The more effective the internal control system, the more assurance it provides the auditor about the reliability of financial reporting by the client. B) An auditor's opinion, to be economically useful and profitable to the auditing firm needs to be formed within a reasonable time and based on evidence obtained that assures profits for the auditing firm. C) Evidence obtained from independent sources outside the entity is generally more reliable than evidence secured solely within the entity. D) The independent auditor's direct personal knowledge, obtained through inquiry, observation and inspection, is generally more persuasive than information obtained indirectly.
B
Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an audit objective. A) True B) False
B
One advantage of using statistical techniques when performing analytical procedures is that they eliminate the need for auditor judgment. A) True B) False
B
The Auditing Standards Board has concluded that analytical procedures are so important that they are required during: A) planning and test of control phases. B) planning and completion phases. C) test of control and completion phases. D) planning, test of control, and completion phases.
B
The auditor is concerned that a client is failing to bill customers for shipments. An audit procedure that would gather relevant evidence would be to: A) select a sample of duplicate sales invoices and trace each to related shipping documents. B) trace a sample of shipping documents to related duplicate sales invoices. C) trace a sample of Sales Journal entries to the Accounts Receivable subsidiary ledger. D) compare the total of the Schedule of Accounts Receivable with the balance of the Accounts Receivable account in the general ledger.
B
To be considered reliable evidence, confirmations must be controlled by: A) a client employee responsible for accounts receivable. B) a financial statement auditor. C) a client's internal audit department. D) a client's controller or CFO.
B
What client information is needed by auditors in creating lead schedules? A) Interim statements prepared by the client for the company's 3rd quarter financial results. B) General ledger information, including unadjusted ending balances and beginning balances for accounts. C) A schedule of adjusting entries made by the client for all balance sheet accounts. D) Detailed transaction information that may explain the changes in balance sheet accounts for the current year under audit.
B
When analytical procedures reveal unusual fluctuations in an account balance, the auditor will probably perform fewer tests of details for that account and increase the tests of controls related to the account. A) True B) False
B
When the auditor used the audit procedure vouching she is primarily concerned with which of the following audit objectives when testing classes of transactions? A) Occurrence B) Completeness C) Authorization D) Classification
B
Which of the following is not a characteristic of the reliability of evidence? A) effectiveness of client internal controls B) education of auditor C) independence of information provider D) timeliness
B
Which of the following is the most objective type of evidence? A) A letter written by the client's attorney discussing the likely outcome of outstanding lawsuits. B) The physical count of securities and cash. C) Inquiries of the credit manager about the collectability of noncurrent accounts receivable. D) Observation of cobwebs on some inventory bins.
B
Which of the following statements is not a correct use of the terminology in relation to audit evidence? A) Evidence obtained from an independent source outside the client organization is more reliable than that obtained from within. B) Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly. C) Documents that originate outside the company are considered more reliable than those that originate within the client's organization. D) External evidence, such as communications from banks, is generally regarded as more reliable than answers obtained from inquiries of the client.
B
Which of the following statements is not correct? A) It is possible to vary the sample size from one unit to 100% of the items in the population. B) The decision of how many items to test should not be influenced by the increased costs of performing the additional tests. C) The decision of how many items to test must be made by the auditor for each audit procedure. D) The sample size for any given procedure is likely to vary from audit to audit.
B
You are auditing the company's purchasing process for goods and services. You are primarily concerned with the company not recording all purchase transactions. Which audit procedure below would be the most effective audit procedure in this case? A) Vouching from the accounts payable account to the vendor invoices. B) Tracing vendor invoices to recorded amounts in the accounts payable account. C) Confirmation accounts payable recorded amounts. D) Reconciling the accounts payable subsidiary ledger to the accounts payable account
B
An analytical procedure used to test the reasonableness of an account balance occurs when the auditor calculates the expected balance and compares it with the actual balance. The auditor's expected account balance may be determined by: A) using industry standards. B) using Dun and Bradstreet reports. C) relating it to another ccount that involves financial statement articulation. D) inquiry of the client.
C
An example of a document the auditor receives from the client, but which was prepared by someone outside the client's organization, is a: A) confirmation. B) sales invoice. C) vendor invoice. D) bank reconciliation.
C
Evidence is generally considered appropriate when: A) it has been obtained by random selection. B) there is enough of it to afford a reasonable basis for an opinion on financial statements. C) it has the qualities of being relevant, objective, and free from know n bias. D) it consists of written statements made by managers of the enterprise under audit.
C
Given the economic and time constraints in which auditors can collect evidence about management assertions about the financial statements, the auditor normally gathers evidence that is: A) irrefutable. B) conclusive. C) persuasive. D) completely convincing.
C
The auditor's results of evidence gathering procedures are contained in audit documentation for the audit. When preparing the requisite audit, documentation should be cognizant of: A) Documents are kept by the client for easy reference for their accounting staff. B) Audit documents should be considered as a substitute for the clients accounting records. C) Audit documents are designed to facilitate the review and supervision of the work performed by the audit team by a reviewing partner. D) Audit documents are the sole source of evidence that an auditor uses in forming an opinion about the client's financial statements.
C
The permanent audit file would usually include the following: A) client's working trial balance B) summary of the risk assessment procedures performed C) organizational chart of the company's employees D) summary of the auditors test of controls for the current years audit
C
The two characteristics of the appropriateness of evidence are: A) relevance and timeliness. B) relevance and accuracy. C) relevance and reliability. D) reliability and accuracy.
C
Two determinants of the persuasiveness of evidence are: A) competence and sufficiency. B) relevance and reliability. C) appropriateness and sufficiency. D) independence and effectiveness.
C
When auditors use documentation to support recorded transactions and amounts, the process is usually called: A) tracing. B) confirmations. C) vouching. D) reperformance.
C
When making decisions about evidence for a given audit, the auditor's goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified. In addition, the goal of audit efficiency is to gather and evaluate the information: A) no matter the cost involved in obtaining such evidence. B) even if cost is irrelevant to the auditor, because they bill the client for costs incurred. C) at the lowest possible total cost. D) at the cost suggested in the engagement letter.
C
When the auditor develops supporting evidence for amounts posted to account balances with documentary evidence, that process is called: A) inquiry. B) confirmation. C) vouching. D) physical examination.
C
Which of the following best describes one of the primary objectives of audit documentation? A) Defend against claims of a deficient audit. B) Provide a basis for reviewing the work of subordinates. C) Provide reasonable assurance that the audit was conducted in accordance with auditing standards. D) Provide additional support of recorded amounts to the client
C
Which of the following is not a correct combination of terms and related type of audit evidence? A) Inquire inquiries of client B) Count physical examination C) Recompute documentation D) Read documentation
C
Which of the following statements is most correct regarding the primary purpose of audit procedures? A) to detect all errors or fraudulent activities as well as illegal activities B) to comply with auditing standards promulgated by the PCAOB for publicly held clients C) to gather corroborative audit evidence about management's assertions regarding the client's financial statements D) to determine the amount of errors in the balance sheet accounts in order to adjust the accounts to actual
C
"Physical examination" is the inspection or count by the auditor of items such as: A) cash, inventory, and payroll timecards. B) cash, inventory, canceled checks, and sales documents. C) cash, inventory, canceled checks, and tangible fixed assets. D) cash, inventory, securities, notes receivable, and tangible fixed assets
D
Determine which of the following is most correct regarding the reliability of audit evidence. A) Information that is indirectly obtained from external sources is the most reliable audit evidence. B) Reliability of audit evidence is dependent upon the evidence being convincing. C) Reliability of evidence refers to the amount of evidence obtained. D) An effective internal control system provides more reliable audit evidence.
D
The auditor must gather sufficient and appropriate evidence during the course of the audit. Sufficient evidence must: A) be well documented and cross-referenced in the audit documents. B) be based on sources that are external to company. C) provide evidence that prove or disprove an audit objective/assertion. D) be persuasive enough to enable the auditor to issue an audit report.
D
Which of the following discoveries through the use of analytical procedures would most likely indicate a relatively high risk of financial failure? A) A decline in gross margin percentages. B) An increase in the balance in fixed assets. C) An increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at the same time accounts receivable turnover also decreased. D) A higher than normal ratio of long-term debt to net worth as well as a lower than average ratio of profits to total assets.
D
Which of the following is not one of the major types of analytical procedures? A) compare client with industry averages B) compare client with prior year C) compare client with budget D) compare client with SEC averages
D
Which of the following statements is not correct? A) Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively. B) For certain immaterial accounts, analytical procedures may be the only evidence needed. C) In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable. D) Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures.
D
Which of the following statements relating to the competence of evidential matter is always true? A) Evidence from outside an enterprise is always reliable. B) Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions. C) Oral representations made by management are not reliable evidence. D) Evidence must be both reliable and relevant to be considered appropriate.
D
Which one of the following is not one of the primary purposes of audit documentation prepared by the audit team? A) A basis for planning the audit. B) A record of the evidence accumulated and the results of the tests. C) A basis for review by supervisors and partners. D) A basis for determining work deficiencies by peer review teams.
D
