Chapter 5 audit

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.

Risk assessment procedures

In most instances, auditors rely on evidence that is _______ rather than _____ in forming an opinion on a set of financial statements

persuasive, convincing

The functions of audit documentation are to ______.

aid in the planning, performance and supervision of the audit provide the basis for the review of the quality of work provide principal support that the audit was conducted in accordance with GAAS

____________ assertion relates to whether all transactions have been properly approved.

authorization

Whether all transactions and events that occurred during the period have been recorded relates to the

completeness assertion

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 assertion

Tests of controls ______.

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

The reliability of evidence obtained through external confirmations may be affected by the ______.

intended respondent form of the confirmation nature of the information being confirmed prior experience with the entity

If the observed difference is ______ the tolerable difference, the auditor accepts the account.

less than

Footing, crossfooting, reconciling subsidiary ledgers and testing postings are all examples of

recalculation

The source, nature, and individual circumstances under which it is obtained all influence the ______ of audit evidence.

reliability

This consists of evaluations of financial information through the examination of plausible relationships among both financial and non-financial data.

Analytical Procedures

A financial statement component ______.

can be an account or a business process

A management statement that the entity is making payments and has control of a leased asset is an example of the ______ assertion.

rights and obligations

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

There is a(n) ______ relationship between the sufficiency and appropriateness of audit evidence

inverse

The ______ assertion relates to whether all recorded transactions and events have happened and pertain to the entity.

occurrence

Confirmations ______.

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

Explanations for significant differences observed for substantive analytical procedures must be followed up and resolved through ______.

quantification corroboration evaluation

Checking the mathematical accuracy of documents or records is referred to as

recalculation

Used to detect material misstatements at the relevant assertion level.

Substantive Procedures

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

Test of controls

When a substantive analytical procedure is used as the principal substantive procedure for a significant financial statement assertion, the auditor should document ______.

any additional auditing procedures performed in response to significant differences identified results of the comparison of the expectation to the recorded amounts the expectation and how it was developed

An example of the ______ assertion is that ordinary repairs to assets are charged to the repairs and maintenance expense account and not capitalized.

classification

Management stating that all major restrictions on the entity resulting from debt covenants are disclosed in the footnotes and expressed clearly to users of the financial statements is an example of the ______ assertion.

classification

Perhaps the most commonly used analytical procedure is ______.

comparison of current-year financial information with comparable prior periods

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

On most audit engagements, ______ makes up the bulk of the evidence gathered by the auditor.

inspection of records or documents

When audit evidence supports _______ _________the auditor can issue an unqualified report

management assertion

When management states that inventory is carried at lower of cost or market on the balance sheet a(n) ______ assertion is being made.

valuation

The accuracy assertion is based on ______.

GAAP

Identify the sources that can be used to develop an expectation for an analytical procedure.

Budgets and forecasts Industry publications Competitor information

Who is responsible for the fair presentation of the financial statements?

Management

Which of these processes are generally considered highly reliable because the auditor has direct knowledge about them?

Recalculation of tangible assets Reperformance of tangible assets Inspection of tangible assets

This is useful in helping auditors understand the entity's processes but is generally not considered very reliable.

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

In evaluating audit evidence, the auditor must ______.

be unbiased understand the types of evidence available remain objective

Whether transactions and events have been recorded in the proper accounts is the concern of the

calssification

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

observation

Put the items in order of how an auditor fills an "assurance bucket."

1. Risk of assessment procedure 2. test of controls 3. substantive analytical procedures 4. test of details

Auditing standards use the word ______ to reflect that transactions and events have been recorded correctly and properly authorized.

accuracy

whether amounts and other data relating to recorded transactions and events have been recorded appropriately is addressed by the ______ assertions.

accuracy

Whether assets, liabilities and equity interests included in the financial statements are at appropriate amounts and any resulting adjustments are appropriately recorded are assertions about _________ _______ ________

accuracy, valuation, allocation

Which of these are generally low-reliability types of evidence because they require further corroboration by the auditor?

Observation Inquiry

Which of the following types of evidence may be gathered during the application of risk assessment procedures, tests of controls or substantive procedures?

Observation Inquiry Scanning Confirmation

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

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

occurrence

Vouching provides evidence for the ______ assertion.

occurrence

In general, ______ analysis is the least precise method to form an expectation while ______ analysis is the most precise.

trend, reasonableness

Possible causes of significant differences are ______.

accounting changes errors economic conditions fraud

Failure to meet the _______ assertion results in an understatement in the related account, while failure to meet the ________ assertion results in an overstatement in the account.

completeness, occurrence

A statement by management that the ending balance of Notes Payable represents the total outstanding notes due at the balance sheet date is an example of the _____ assertion

completeness

The working papers document the ______.

correspondence of the financial statements with GAAP scope of the audit was adequate basis for the audit report decision

An auditor examines shipping documents to ensure that no prior period sales have been recorded in the current year to test the

cutoff

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

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

occurrence

This is an important audit procedure that is used extensively throughout the audit and is often complementary to performing other audit procedures.

inquiry

Evidence obtained from an independent source from outside the entity is generally viewed as ______ reliable when compared to evidence obtained solely within the entity. less

more

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

Whether transaction and events are appropriately aggregated or disaggregated and clearly described in the financial statements is addressed by the _______ assertions

presentation

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

reasonableness

The relationship of audit evidence to the assertion being tested is called the

relevance of the evidence

Whether a particular type of evidence can be depended upon to signal the true state of an assertion is referred to as the

reliability of evidence

The independent execution by the auditor of procedures or controls that were originally performed by company personnel is called ______.

reperformance

Assertions about _______ and _______ and address whether the entity owns or controls the assets included on the financial statements, and that liabilities are debts of the entity.

right and obligation

Analytical procedures can be used by auditors to accomplish ______ procedures.

substantive analytical risk assessment final analytical

For lower-risk, well controlled accounts, the assurance bucket may be filled entirely with

tests of details and substantive analytical procedures.

The second step in the analytical procedures decision process is to define a _________________ difference.

tolerable