Ch. 5 Audit Evidence and Documentation

Tracing:

Following a transaction from a source document to recorded entries.

Seeking and treating as more persuasive information that is consistent with one's beliefs.

Confirmation bias

As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter?

To increase the efficiency of the audit by eliminating the need for other audit procedures. Explanation A client letter of representations may never be used as a substitute for other appropriate auditing procedures.

Further audit procedures include: Risk assessment procedures/ Tests of controls A) Yes Yes B) Yes No C) No Yes D) No No

Option A

A __________ is a type of documentary evidence transmitted directly to the auditors by a third party (e.g., a customer or a vender)

confirmation reply

Which of the following business characteristics is not indicative of high inherent risk?

A large amount of assets. Explanation A large amount of assets by itself is not indicative of high inherent risk. Operating results highly sensitive to economic factors, large past misstatements, and turnover of management all represent characteristics that may indicate high inherent risk.

Reperformance:

An independent execution of procedures or controls that were originally performed by the client.

Auditors consider financial statement assertions to identify appropriate audit procedures. For items a through f, match each assertion with the statement that most closely approximates its meaning. Each statement may be used only once. Presentation

Assets are properly classified.

Auditors consider financial statement assertions to identify appropriate audit procedures. For items a through f, match each assertion with the statement that most closely approximates its meaning. Each statement may be used only once. Valuation

Assets are recorded at proper amounts.

Information used by the auditor that corroborates or contradicts the assertions in the financial statements.

Audit evidence

In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the:

Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements. Explanation The work of a specialist is only referred to in circumstances in which those findings do not support the representations made by management in the financial statements, thus causing the auditors to modify their report.

Which of the following is not considered to be an analytical procedure?

Comparisons of financial statement amounts with source documents.

The risk that a material misstatement that could occur will not be prevented or detected on a timely basis.

Control risk

Inspection of records:

Examining a document or record.

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Less control risk means an increase in the risk of material misstatement.

Incorrect A decrease in control risk, absent other changes, results in a decrease in the risk of material misstatement.

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Rather than restrict detection risk through the performance of more substantive procedures, auditors assess it.

Incorrect This is backwards. Auditors restrict detection risk through the performance of more substantive procedures. Auditors assess inherent risk and control risk.

External confirmation:

Obtaining a written response about a particular item from a third party.

In what section of the audit working papers would a long-term lease agreement be filed?

Permanent working paper file. Explanation Relatively unchanging data, such as a long-term lease agreement, is placed in the permanent working paper file.

Inspection of tangible assets:

Physically examining an asset.

Which of the following is not a function of working papers?

Provide support for the accounting records.

Which of the following is not a basic procedure used in an audit?

Substantive tests of detailed evidence

Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable conclusions as to whether the client's financial statements follow generally accepted accounting principles. Match each audit procedure with its type. Determine whether disbursements are properly approved

Tests of controls

Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable conclusions as to whether the client's financial statements follow generally accepted accounting principles. Match each audit procedure with its type. Confirm accounts receivable.

Tests of details of account balances, transactions, or disclosures

Which of the following statements best describes why auditors investigate related party transactions?

The substance of related party transactions may differ from their form. Explanation According to the definition of "related parties," one party may be able to influence the other to the extent that the two parties do not pursue their own separate interests in conducting transactions. Thus, a risk exists that the substance of related party transactions may differ from their form.

Analytical procedures are most likely to detect:

Unusual transactions. Explanation Analytical procedures are effective in isolating unusual transactions because such transactions may represent a change in a relationship being investigated. Analytical procedures are not typically considered to be tests of internal control, although in certain circumstances they might reveal errors caused by weaknesses in the internal control.

Test of controls and ________ are referred to as further audit procedures

substantive procedures

The term _________ relates to the quantity of evidence that the auditors should obtain

sufficient

Of the following, which is the least reliable type of audit evidence?

Copies of sales invoices inspected by the auditors. Explanation Copies of sales invoices represent internally generated evidence, which is considered least reliable. Confirmations mailed by outsiders and correspondence between the auditor and suppliers represent more reliable externally generated evidence. Canceled checks, although internally generated, are considered reliable because they bear the endorsement of the payee and a perforation or stamp indicating payment by the bank.

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Both inherent risk and control risk exist independently of the audit of financial statements.

Correct

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Detection risk does not exist when no audit is performed.

Correct

Which of the following is not a financial statement assertion made by management?

Effectiveness of internal control. Explanation The effectiveness of internal control is not a financial statement assertion made by management.

The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 50%, and there is a 40% risk that material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable?

12.5% Explanation audit risk = 5% inherent risk = 100% control risk =100% Audit risk = Inherent risk * control risk * detection risk 5 % =100%*40%* detection risk 5% =40% * Detection risk Detection risk = 5%/40% Detection risk =12.5%

Reply to the following questions relating to analytical procedures. Performing analytical procedures may help an auditor to:

Achieve audit objectives related to a particular assertion.

Auditors consider financial statement assertions to identify appropriate audit procedures. For items a through f, match each assertion with the statement that most closely approximates its meaning. Each statement may be used only once. Completeness

All assets have been recorded

Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable conclusions as to whether the client's financial statements follow generally accepted accounting principles. Match each audit procedure with its type. Calculate the ratio of bad debt expense to credit sales.

Analytical procedures

Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable conclusions as to whether the client's financial statements follow generally accepted accounting principles. Match each audit procedure with its type. Compare current financial information with comparable prior periods.

Analytical procedures

Starting with an initial belief and then insufficiently adjusting that belief when contrary information is encountered.

Anchoring bias

Reply to the following questions relating to analytical procedures. In developing an expectation for analytical procedures, the auditors are least likely to consider:

Anticipated costs of audit completion.

Overvaluing information that quickly comes to mind.

Availability bias

Which of the following is not a primary approach to auditing an accounting estimate?

Confirm the amounts. Explanation Auditors use three basic approaches for auditing accounting estimates—reviewing management's process, reviewing subsequent transactions, and developing an independent estimate. Confirmation is not a basic approach for auditing most accounting estimates.

Seeking and treating as more persuasive information that is consistent with one's initial beliefs describes which cognitive bias?

Confirmation bias. Explanation A confirmation bias involves seeking and treating as more persuasive information that is consistent with one's initial beliefs.

Reply to the following questions relating to analytical procedures. Analytical procedures performed near the end of the audit to assist the auditor in forming an overall conclusion on the financial statements are aimed primarily at:

Considering unusual or unexpected account balances that were not previously identified.

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Absent any other changes, an increase in the risk of material misstatement results in an increase in audit risk.

Correct

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Inherent risk is the possibility of material misstatement before considering the client's internal control.

Correct

During financial statement audits, auditors seek to restrict which type of risk?

Detection risk.

A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably:

Document the assistant auditor's position and how the difference of opinion was resolved. Explanation When a difference of opinion cannot be resolved, the working papers should be expanded to document the various positions and to describe how the difference of opinion was resolved.

Vouching:

Establishing the validity of a transaction by examining supporting documents.

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Audit risk refers to the possibility that the auditors may express an inappropriate opinion on financial statements that are materially or immaterially misstated.

Incorrect The error is the "or immaterially." Audit risk deals with material misstatements.

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. The risk of material misstatement is composed of the three components of audit risk.

Incorrect The risk of material misstatements is composed of inherent risk and control risk.

Reply to the following questions relating to analytical procedures. The cost of analytical procedures in terms of time needed to perform, when compared to other tests, is ordinarily considered:

Low

A financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially or immaterially misstated.

No term applies

A financial statement assertion that is probable of misstatement given the nature of the further audit procedures performed.

No term applies

All information prepared within the audited organization.

No term applies

An attitude that includes a subjective mind and a detailed assessment of audit evidence.

No term applies

Every assumption relating to a significant financial statement assertion.

No term applies

Information used by the auditor that corroborates the assertions in the financial statements.

No term applies

Overestimating one's abilities.

No term applies

The risk that the auditors' procedures will lead them to conclude that a misstatement does not exist when in fact it does exist.

No term applies

The components of the risk of misstatement are: Inherent Risk : Control Risk : Detection Risk A. Yes : Yes : Yes B. Yes : Yes : No C. Yes : No : No D. No : Yes : Yes

Option B

An attitude that includes a questioning mind, and a critical assessment of audit evidence.

Professional skepticism

Reply to the following questions relating to analytical procedures. What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts?

Ratio analysis.

A financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated.

Relevant assertion

Assertions that have a meaningful bearing on whether an account balance, transaction class, or disclosure is fairly stated are referred to as:

Relevant assertions.

Which of the following is not an assertion relating to classes of transactions?

Reliability

Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable conclusions as to whether the client's financial statements follow generally accepted accounting principles. Match each audit procedure with its type. Prepare a flowchart of internal control over sales.

Risk assessment procedures (other than analytical procedures)

As related to an accounting estimate, an assumption for which a reasonable variation would materially affect the measurement of that accounting estimate.

Significant assumption

A primary purpose of the audit working papers is to:

Support the auditors' opinion. Explanation A primary purpose of audit working papers is to provide documented evidence that the auditors had a firm basis for their report.

Recalculation:

Testing the mathematical accuracy of documents or records.

Auditors consider financial statement assertions to identify appropriate audit procedures. For items a through f, match each assertion with the statement that most closely approximates its meaning. Each statement may be used only once. Rights and obligations

The company legally owns the assets

Auditors consider financial statement assertions to identify appropriate audit procedures. For items a through f, match each assertion with the statement that most closely approximates its meaning. Each statement may be used only once. Existence and occurrence

There is such an asset.

Auditors consider financial statement assertions to identify appropriate audit procedures. For items a through f, match each assertion with the statement that most closely approximates its meaning. Each statement may be used only once. Cutoff

Transactions are recorded in the correct accounting period.

Which of the following is not a financial statement assertion relating to account balances?

Valuation and allocation

The auditors develop __________ to recommend to management to correct the effects of errors or fraud in the client's accounting records.

adjusting entries

The risk of material misstatement is composed of two risks that the auditor assesses, those risk are inherent risk and ______________ risk

control

The amount of evidence that is considered sufficient varies ______________ with the reliability of the evidence

inversely

Working papers of audit interest over an extended period of time should be filed in the ______________

permanent file

The ________________ is a schedule listing the balances of accounts in the client's general ledger

working trail balance