Chapter 5

True or false: The auditor is required to obtain corroborative evidence for planned analytical procedures.

false

true or false: inspecting tangible assets provides significant assurance for the rights and obligations assertion

false

the entity's success or failure for a given period is measure by _______ ratios

profitability

in general, ______ analysis is the least precise method to form an expectation while _______ analysis is the most precise

trend, reasonableness

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

substantive procedures

used to detect material misstatements at the relevant assertion level

the reliability of inspection of records and documents depends primarily on when the record or document was prepared the dollar amount involved in the record whether the document is internal or external who prepared the document

whether the document is internal or external

audit documentation is referred to as __________ ____________ or the audit file

working papers

the sarbanes-oxley act and the PCAOB standards required that audit documentation be retained for ____ years from the date of completion of the engagement

7

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

tests of controls

Used to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the relevant assertion level

Checks, invoices, contracts, ledgers, worksheets and spreadsheets are all part of auditing evidence referred to as _____________ ____________

accounting records

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. aggregation reliability precision reasonableness

reliability

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 ______________

confirmation

This consists of evaluations of financial information through the examination of plausible relationships among both financial and non-financial data analytical procedures reperformance reclalculation inquire of tangible assets

analytical procedures

under current auditing standards, management assertions fall into categories of assertions about _________ account balances and related disclosures at the period end stock performance and market valuations for the period under audit the internal control in place to prevent errors and fraud classes of transactions and events an related disclosures for the period audit

classes of transactions and events and related disclosures for the period audited account balances and related disclosures

Which of the following statements are correct? - Industry averages are always the best way to analyze an entity's financial ratios. - Financial ratios should not be evaluated in isolation. - Material misstatement may not significantly affect some ratios. - Accounting principle choices can impact some ratios.

financial ratios should not be evaluated in isolation material misstatement may not significantly affect some ratios accounting principle choices can impact some ratios

Differences identified by substantive analytical procedures indicate a(n) ______ likelihood of misstatements. increased definite decreased

increased

Audit documentation is the property of the ____________ independent auditors board of directors internal auditors company management audit committee

independent auditors

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

Looking at a process or procedure being performed by others is referred to as _________

observation

This is useful in helping auditors understand the entity's processes but is generally not considered very reliable confirmation inspection observation inquiry

observation

the quality of an expectation is referred to as the _________ of the expectation

precision

The functions of audit documentation are to -provide justification for the fees charged for audit services rendered - provide the basis for the review of the quality of work - provide principal support that the audit was conducted in accordance with GAAP - aid in the planning, performance and supervision of the audit - provide principal support that the audit was conducted in accordance with GAAS

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

Confirmations __________ - provide reliable evidence for the existence assertion - are used extensively on audits - do not provide evidence about the rights and obligations assertion - may provide evidence about the completeness assertion

provide reliable evidence for the existence assertion are used extensively on audits may provide evidence about the completeness assertions

The audit documentation needs to be organized so that _______ can find the audit evidence that supports each financial statement account - reviewers - the board of directors - any member of the audit team - entity management

reviewers, any member of the audit team

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 judgement to review accounting data to identify significant or unusual items to test is referred to as

scanning

an entity's ability to meet its current obligations can be evaluated using _________ - _____________ ___________ ratios

short-term liquidity

Counting cash on hand and examining inventory are examples of ___________ of tangible assets

inspection

how effectively the entity's assets are managed is indicated by ________ ratios

activity

to effectively help the auditor determine if asset accounts contain material misstatements, _______ ratios may be used

activity

the documentation 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

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

existance

Which of these processes are generally considered highly reliable because the auditor has direct knowledge about them? - inspection of tangible assets - analytical procedures - reperformance of tangible assets - recalculation of tangible assets - inspection of records and documents

inspection of tangible assets reperformance of tangible assets recalculation of tangible assets

Duplicate copies of invoices and shipping remittances are examples of _________ documents internal external

internal

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

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

important information on the ability of the entity to continue as a going concern are provided by ______ ratios

coverage

Which of the following statements are correct? - During planning the auditor determines whether planned procedures need to be revised due to preliminary analytical procedures. - Entity personnel may be asked to explain unexpected differences. - Differences are investigated in the same way for both planning and final analytical procedures. - Unexpected differences may be addressed by reviewing the working papers for sufficient evidence.

During planning the auditor determines whether planned procedures need to be revised due to preliminary analytical procedures. Entity personnel may be asked to explain unexpected differences. Unexpected differences may be addressed by reviewing the working papers for sufficient evidence.

PCAOB standards require that audit documentation contain - only documents that are consistent with the final conclusion of the audit team - only documents that the auditor feels are needed to support his or her conclusion - all documents that form the basis of the audit - all documents requested by the audit committee

all documents that form the basis of the audit

The measure of the quality of audit evidence is referred to as ________

appropriateness

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 programs

The basic framework for the auditor's understanding of audit evidence and its use in supporting the auditor's opinion on the financial statement is generally accepted accounting principles generally accepted auditing principles auditing standards management assertions regarding the financial statement

auditing standards

The reliability of analytical procedures is a function of the ____________ - precision of the expectation and the rigor of the investigation - assertions made by management - recalculation of analytical procedures and confirmation of tangible assets - plausibility and predictability of the relationship being tested - availability and reliability of the data used in the calculations

availability and reliability of the data used in the calculations plausibility and predictability of the relationship being tested precision of the expectations and the rigor of the investigations

Inquiry may ______ - provide a new audit evidence - provide corroborative audit evidence - be considered sufficient evidence on its own in most cases - be formal or informal

be formal or informal provide corroborative audit evidence provide a new audit evidence

Perhaps the most commonly used analytical procedure is ______. - relationship among elements of the financial statements within the current period - relationships of financial data to nonfinancial data - comparison of current-year financial information with budgets, projections and forecasts - comparison of current-year financial information with industry averages - comparison of current-year financial information with comparable prior periods

comparison of current-year financial information with comparable prior periods

For lower-risk, well controlled accounts, the assurance bucket may be filled entirely with tests of ___________ and substantive analytical procedures

controls

short-term liquidity ratios include the ______ ratio quick operating cash flow debt to equity current financing cash flow

current quick operating cash flow

Audit documentation should - include a detailed breakdown of how the fees were set for the engagement - demonstrate how the audit complied with appropriate standards - show that standards of fieldwork have been followed - enable a knowledgeable reviewer to determine who performed the work

demonstrate how the audit complied with appropriate standards show that standards of fieldwork have been followed enable a knowledgeable reviewer to determine who performed the work

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 completeness rights and obligations valuation and allocation

existence

true or false: auditing standards dictate how audit documentation should be organized

false

the process of _________ and ____________ - ___________ provides a trail from the financial statements to the individual audit documents that a reviewer can easily follow

indexing, cross-referencing

in order to evaluate profitability ratios, each should be interpreted by comparison to _______ data

industry

Tests of controls - may allow the auditor to gain a degree of assurance over thousands of transactions - are more costly to perform than tests of details - influence the scope of substantive testing

influence the scope of substantive testing may allow the auditor to gain a degree of assurance over thousands of transactions

This is an important audit procedure that is used extensively throughout the audit and is often complementary to performing other audit procedures recalculation inquiry observation confirmation

inquiry

the precision of the expectation _______________ - may lead to a cost benefit trade off due to an increase in testing - needs to be very precise if the assertion being tested requires a high level of detection risk - is a function of materiality and required detection risk - is a measure of potential effectiveness

is a measure of potential effectiveness is a function of materiality and required detection risk may lead to a cost benefit trade off due to an increase in testing

Evidence obtained from a source outside the entity is generally considered _______ evidence obtained solely from within the entity equally reliable to more reliable than less reliable

more reliable than

Because the entity's personnel might have incentives to record fictitious transactions, the ___________ assertion is relevant for revenue transactions

occurrence

The __________ assertion relates to whether all recorded transactions and events have happened and pertain to the entity authorization occurrence accuracy completeness

occurrence

The primary concern of ______ is simply whether the relationship used to test the assertion makes sense. reliability disaggregation plausibility predictability

plausibility

Many factors, including changes in the business or industry, influence the _________ of relationships among financial and nonfinancial data

predictability

All types of analysis are used for substantive analytical procedures, but ______ analysis is not commonly used for preliminary or final analytical procedures. predictability ratio trend reasonableness

reasonableness

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

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. precision aggregation reliability reasonableness

reliability

the ability to develop precise expectations is influenced by ___________ of the available data

reliability

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

Identify the categories of financial ratios that are used by auditors as analytical procedures. activity materiality solvency profitability coverage short-term liquidity earnings

short-term liquidity activity profitability coverage

coverage ratios provide information on the long-term _____ of the entity

solvency

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 discard the sample and select a different set of 25 customers base his or her evaluation on the 20 accounts that responded

still gather sufficient evidence on each of the 25 accounts

The measure if the quantity of audit evidence is referred to as ______________

sufficiency

Audit documentation should ______. - support the auditor's conclusions for each material financial statement assertion - enable an ordinary person to understand the nature, timing, extent, results, evidence and conclusions reached - 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 demonstrate the underlying accounting records agreed with the financial statements include an audit program for the engagement

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

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 __________

trend, ratio

True or false: audit evidence includes information developed by the auditor that permits him or her to reach conclusions through valid reasoning

true

In evaluating audit evidence, the auditor must _________ - remain objective - understand the types of evidence available - only consider evidence that is 100% reliable - be unbiased

understand the types of evidence available be unbiased remained objective