Chapter 5
Many factors, including changes in the business or industry, influence the _____ of relationships among financial and nonfinancial data.
predictability
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 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
Whether amounts and other data relating to recorded transactions and events have been recorded appropriately is addressed by the ______ assertions.
Accuracy
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.
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.
Match the appropriate category of audit procedure with the purpose that it serves. Instructions
Risk assessment procedures- used to obtain an understanding of the entity Test of Controls- Used to tet the operating effectiveness Substantive procedures- used to detetct material misstatements
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 observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.
According to the text, each of the following is a main purpose for performing audit procedures except:
To develop recommendations for the control system.
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: In most cases, the entity must give consent to show the audit documents.
True or false: Audit evidence includes information developed by the auditor that permits him or her to reach conclusions through valid reasoning.
True: This is part of other information which also includes data available to the auditor such as confirmations, meeting minutes and industry analysts' reports.
One of the main objectives of performing analytical review 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.
Checks, invoices, contracts, ledgers, worksheets and spreadsheets are all part of auditing evidence referred to as _____ _____.
accounting records
Documents originating within the entity but circulated to independent sources outside the entity and documents generated outside the entity are referred to as _____ documents.
external
Identify the sources that can be used to develop an expectation for an analytical procedure.
-Budgets and forecasts -Industry publications -Competitor information
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.
Which of these are generally low-reliability types of evidence because they require further corroboration by the auditor?
-Inquiry -Observation
Under current auditing standards, management assertions fall into categories of assertions about ______.
-account balances and related disclosures at the period end -classes of transactions and events and related disclosures for the period audited
The functions of audit documentation are to ______.
-aid in the planning, performance and supervision of the audit -provide principal support that the audit was conducted in accordance with GAAS -provide the basis for the review of the quality of work
The reliability of analytical procedures is a function of the ______.
-availability and reliability of the data used in the calculations -precision of the expectation and the rigor of the investigation -plausibility and predictability of the relationship being tested
Inquiry may ______.
-be formal or informal -provide new audit evidence -provide corroborative audit evidence
Audit documentation should ______.
-demonstrate the underlying accounting records agreed with the financial statements -include an audit program for the engagement -support the auditor's conclusions for each material financial statement assertion
Audit documentation should ______.
-enable a knowledgeable reviewer to determine who performed the work -show that standards of fieldwork have been followed -demonstrate how the audit complied with appropriate standards
The precision of the expectation ______.
-may lead to a cost-benefit trade-off due to an increase in testing -is a measure of potential effectiveness -is a function of materiality and required detection risk
The heading of all audit documentation should include the ______.
-name of the entity -entity's year-end date -title of the working paper
Analytical procedures can be used by auditors to accomplish ______ procedures.
-risk assessment -final analytical -substantive analytical
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
Whether all transactions and events that occurred during the period have been recorded relates to the _____ assertion.
Completeness
Which of the following primary assertions is satisfied when an auditor observes the entity's physical count of inventory? Multiple Choice
Existence.
True or false: Auditing standards base the need for substantive procedures for significant account balances on the assessed risk of material misstatement.
False: Auditing standards require testing regardless of the assessed risk of material misstatement.
True or false: Inspecting tangible assets provides significant assurance for the rights and obligations assertion.
False: Inspection provides little or no assurance as to rights and obligation.
True or false: Auditing standards dictate how audit documentation should be organized.
False: Standards do not dictate, but the documentation needs to be organized so that any member of the audit team and reviewers can find supporting evidence.
True or false: The auditor is concerned with the completeness assertion because failure of this assertion always leads to an overstatement of income.
False: The completeness assertion is related to the understatement of accounts and both revenues and expenses can be affected.
The accuracy assertion is based on ______.
GAAP
This is an important audit procedure that is used extensively throughout the audit and is often complementary to performing other audit procedures.
Inquiry
Counting cash on hand and examining inventory are examples of _____ of tangible assets.
Inspection
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.
Who is responsible for the fair presentation of the financial statements?
Management
This is useful in helping auditors understand the entity's processes but is generally not considered very reliable.
Observation
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.
The ______ assertion relates to whether all recorded transactions and events have happened and pertain to the entity.
Occurence
PCAOB standards require that audit documentation contain ______.
all documents that form the basis of the audit
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
The measure of the quality of audit evidence is referred to as _____.
appropriateness
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
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
Perhaps the most commonly used analytical procedure is ______.
comparison of current-year financial information with comparable prior periods
Audit evidence obtained by the auditor as a direct written response to the auditor from a third party in paper form or by electronic or other medium is called a(n) _____.
confirmation
For lower-risk, well controlled accounts, the assurance bucket may be filled entirely with tests of _____ and substantive analytical procedures.
controls
In regards to applying the audit testing hierarchy, starting with tests of _____ is generally more effective and efficient than starting with tests of _____.
controls, details
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
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
Possible causes of significant differences are ______.
fraud economic conditions accounting changes errors
Differences identified by substantive analytical procedures indicate a(n) ______ likelihood of misstatements.
increased
Audit documentation is the property of the ______.
independent auditors
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
Duplicate copies of invoices and shipping remittances are examples of ______ documents.
internal
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 assertion
Evidence obtained from a source outside the entity is generally considered ______ evidence obtained solely from within the entity.
more reliable than
In general, ______ analysis is the least precise method to form an expectation while ______ analysis is the most precise.
trend, reasonableness
Looking at a process or procedure being performed by others is referred to as _____.
observation
Because the entity's personnel might have incentives to record fictitious transactions, the _____ assertion is relevant for revenue transactions.
occurrence /validity
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
Determining whether an explanation or error can explain the observed difference is called _____.
quantification
All types of analysis are used for substantive analytical procedures, but ______ analysis is not commonly used for preliminary or final analytical procedures.
reasonableness
Modeling the association between certain elements of the balance sheet and related income statement accounts is typically done using ______ analysis.
reasonableness
Checking the mathematical accuracy of documents or records is referred to as _____.
recalculation
Footing, crossfooting, reconciling subsidiary ledgers and testing postings are all examples of _____.
recalculation
When filling the "assurance bucket", existence or validity is typically more important for accounts _____ than for accounts _____.
receivable, payable
The ability to develop precise expectations is influenced by the _____ of the available data.
reliability
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
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
The Sarbanes-Oxley Act and the PCAOB standards require that audit documentation be retained for _____ years from the date of completion of the engagement.
seven
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 measure of the quantity of audit evidence is referred to as _____.
sufficiency
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 second step in the analytical procedures decision process is to define a _____ difference.
tolerable
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
The comparison of financial statement amounts between the current period and prior period can be done using absolute amounts which is _____ analysis or by converting the financial statement amounts to common-sized statements which is _____ analysis
trend, ratio
In evaluating audit evidence, the auditor must ______.
-understand the types of evidence available -remain objective -be unbiased
