Principles of Auditing Chapter 5
Checks, invoices, contracts, ledgers, worksheets and spreadsheets are all part of auditing evidence referred to as ____________ ______________.
accounting records
How effectively the entity's assets are managed is indicated by _________ ratios.
activity
In most instances, auditors rely on evidence that is __________ rather than _____________ in forming an opinion on a set of financial statements.
persuasive; convincing
The quality of an expectation is referred to as the __________ of the expectation.
precision
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 program
The ____________ 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 ___________ assertion.
completeness
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
An auditor examines shipping documents to ensure that no prior period sales have been recorded in the current year to test the ____________ assertion.
cutoff
The PCAOB requires the auditor to identify all significant findings or issues in a(n) ___________ ____________ memorandum.
engagement completion
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
When audit evidence supports _______________ ______________, the auditor can issue an unqualified report.
management's assertions
A company generated total sales of $1,500,000 and has accounts receivables of $14,550. If 85% of sales are made on credit, the days outstanding in accounts receivable is ______. o 4.17 days o 3.54 days o 5.56 days o 3.20 days
o 4.17 days $1,500,000 x 85% = $1,275,000 / $14,550 = 87.6 receivables turnover. 365/87.6 = 4.17 days
Whether transaction and events are appropriately aggregated or disaggregated and clearly described in the financial statements is addressed by the ___________ assertion.
presentation
Evidence is considered appropriate when it provides information that is both _______________ and __________________.
relevant and reliable
Whether a particular type of evidence can be depended upon to signal the true state of an assertion is referred to as the ___________ of evidence.
reliability
Account listings represent a schedule of items remaining in the ending balance of an account and are often called ______________ _______________working papers.
trial balance
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
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
Whether assets, liabilities and equity interests have been recorded in the proper accounts is the concern of the ___________ assertion.
classification
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
The working papers document the auditor's compliance with auditing standards and particularly compliance with the standards of ______________.
fieldwork
A company generated total sales of $1,500,000 and has inventory of $134,680. If cost of goods sold is 47% of sales, the inventory turnover ratio is ______. o 5.23 o 1.69 o 1.91 o 5.90
o 5.23 $1,500,000 x 47% = $705,000 / $134,680 = 5.23
This assertion relates to whether transactions and events have been recorded in the correct accounting period. o Existence o Accuracy o Authorization o Cutoff
o Cutoff
Select all that apply Which of the following statements are correct? o Material misstatement may not significantly affect some ratios. o Financial ratios should not be evaluated in isolation. o Industry averages are always the best way to analyze an entity's financial ratios. o Accounting principle choices can impact some ratios.
o Material misstatement may not significantly affect some ratios. o Financial ratios should not be evaluated in isolation. o Accounting principle choices can impact some ratios.
Auditing standards use the word ______ to reflect that transactions and events have been recorded correctly and properly authorized. o accuracy o occurrence o completeness o classification
o accuracy
Management stating that the cost of plant and equipment is being appropriately depreciated is an example of the ______ assertion. o classification o allocation o rights and obligations o completeness
o allocation
Select all that apply When a substantive analytical procedure is used as the principal substantive procedure for a significant financial statement assertion, the auditor should document ______. o any additional auditing procedures performed in response to significant differences identified o conversations between the auditor and the audit committee concerning differences identified o results of comparisons between the entity and industry competitors o the expectation and how it was developed o results of the comparison of the expectation to the recorded amounts
o any additional auditing procedures performed in response to significant differences identified o the expectation and how it was developed o results of the comparison of the expectation to the recorded amounts
Select all that apply The audit documentation needs to be organized so that ______ can find the audit evidence that supports each financial statement account. o entity management o the Board of Directors o any member of the audit team o reviewers
o any member of the audit team o reviewers
Select all that apply Confirmations ______. o are used extensively on audits o provide reliable evidence for the existence assertion o may provide evidence about the completeness assertion o do not provide evidence about the rights and obligations assertion
o are used extensively on audits o provide reliable evidence for the existence assertion o may provide evidence about the completeness assertion
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) ______. o auditing standards o generally accepted auditing principles o management assertions regarding the financial statements o generally accepted accounting principles
o auditing standards
An example of the ______ assertion is that ordinary repairs to assets are charged to the repairs and maintenance expense account and not capitalized. o cutoff o authorization o classification o accuracy
o 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. o classification o completeness o accuracy o rights and obligations
o classification
When a substantive analytical procedure is used as the principal substantive procedure for a significant financial statement assertion, the auditor is NOT required to document ______. o results of the comparison of the expectation to the recorded amounts o any additional auditing procedures performed in response to significant differences identified o the expectation and how it was developed o conversations between the auditor and the audit committee concerning differences identified
o conversations between the auditor and the audit committee concerning differences identified
When testing the occurrence and completeness assertions, the ______ of testing between the accounting records and source documents is important. o relevance o reliability o direction o type
o direction
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. o completeness o rights and obligations o existence o valuation and allocation
o existence
The auditor calculates inventory turnover to be 6.1 times per year. If the industry average is 7.9, this suggests ______. o the entity is selling goods that appeal to consumers o inventory contains obsolete or slow-moving goods o management is doing an effective job of managing inventory
o inventory contains obsolete or slow-moving goods
There is a(n) ______ relationship between the sufficiency and appropriateness of audit evidence o indirect o inverse o material o direct
o inverse
Select all that apply The precision of the expectation ______. o is a measure of potential effectiveness o may lead to a cost-benefit trade-off due to an increase in testing o needs to be very precise if the assertion being tested requires a high level of detection risk o is a function of materiality and required detection risk
o is a measure of potential effectiveness o may lead to a cost-benefit trade-off due to an increase in testing o is a function of materiality and required detection risk
When documenting the quantity of evidence gathered through inspection of documents or confirmation of balances, the auditor should identify the ______. o items tested o source of the evidence o identify of the confirming party
o items tested
Evidence obtained from an independent source from outside the entity is generally viewed as ______ reliable when compared to evidence obtained solely within the entity. o less o more o equally
o more
The ______ of the audit evidence refers to the form or type of information, which includes accounting records and other available information. o appropriateness o nature o evaluation o sufficiency
o nature
The ______ assertion relates to whether all recorded transactions and events have happened and pertain to the entity. o accuracy o authorization o occurrence o completeness
o occurrence
The ______ assertion relates to whether all recorded transactions and events have happened and pertain to the entity. o occurrence o accuracy o completeness o authorization
o occurrence
Ensuring that disclosures related to transaction and events are relevant and understandable in the context of the requirements of the applicable financial reporting framework is addressed by the ______ assertion. o accuracy o cutoff o presentation o classification
o presentation
Select all that apply The functions of audit documentation are to ______. o provide principal support that the audit was conducted in accordance with GAAP o provide principal support that the audit was conducted in accordance with GAAS o provide justification for the fees charged for audit services rendered o provide the basis for the review of the quality of work o aid in the planning, performance and supervision of the audit
o provide principal support that the audit was conducted in accordance with GAAS o provide the basis for the review of the quality of work o aid in the planning, performance and supervision of the audit
Modeling the association between certain elements of the balance sheet and related income statement accounts is typically done using ______ analysis. o predictability o reasonableness o trend o ratio
o reasonableness
If the auditor relies on evidence that is unrelated to the assertion, an incorrect conclusion may be reached because the evidence used was not ______. o accurate o reliable o effective o relevant
o relevant
The source, nature, and individual circumstances under which it is obtained all influence the ______ of audit evidence. o sufficiency o relevance o appropriateness o reliability
o reliability
A management statement that the entity is making payments and has control of a leased asset is an example of the ______ assertion. o valuation and allocation o classification o rights and obligations o completeness
o rights and obligations
Select all that apply Analytical procedures can be used by auditors to accomplish ______ procedures. o substantive analytical o final analytical o detection assessment o control assessment o risk assessment
o substantive analytical o final analytical o risk assessment
If an entity's trade terms are 2/10, net/30 and the auditor calculates days outstanding in accounts receivable as 41, this suggests ______. o the entity needs to consider revising credit terms o there may be a material amount of bad debts o management is doing an effective job of managing accounts receivable
o there may be a material amount of bad debts
Select all that apply In evaluating audit evidence, the auditor must ______. o understand the types of evidence available o remain objective o be unbiased o only consider evidence that is 100% reliable
o understand the types of evidence available o remain objective o be unbiased
When management states that inventory is carried at lower of cost or market on the balance sheet a(n) ______ assertion is being made. o completeness o rights and obligations o existence o valuation
o valuation
Select all that apply Factors that affect the reliability of evidence include ______. o whether the evidence comes from a manager or an employee o whether it is obtained internally or externally o the format of the evidence o the effectiveness of the entity's internal controls
o whether it is obtained internally or externally o the format of the evidence o the effectiveness of the entity's internal controls
The reliability of inspection of records and documents depends primarily on ______. o the dollar amount involved in the record o when the record or document was prepared o who prepared the document o whether the document is internal or external
o whether the document is internal or external
Because the entity's personnel might have incentives to record fictitious transactions, the ___________ assertion is relevant for revenue transactions.
occurrence
Because the entity's personnel might have incentives to record fictitious transactions, the __________ assertion is relevant for revenue transactions.
occurrence or validity
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
The relationship of audit evidence to the assertion being tested is called the ___________ of the evidence.
relevance
Assertions about ____________ and _____________ address whether the entity owns or controls the assets included on the financial statements, and that liabilities are debts of the entity.
rights and obligations
Audit documentation is referred to as ____________ ________________ or the audit file.
working papers
The focal point for reviewing the work of subordinates and for quality control reviewers are the ____________ __________.
working papers
Whether amounts and other data relating to recorded transactions and events have been recorded appropriately is addressed by the ______ assertions. o authorization o accuracy o occurrence o cutoff
o accuracy
This consists of evaluations of financial information through the examination of plausible relationships among both financial and non-financial data. o Analytical Procedures o Recalculation o Inquiry of tangible assets o Reperformance
o Analytical Procedures
Select all that apply Identify the sources that can be used to develop an expectation for an analytical procedure. o Budgets and forecasts o Auditing standards o Investing data o Competitor information o Industry publications
o Budgets and forecasts o Competitor information o Industry publications
This assertion address whether all assets, liabilities and equity interests that should have been included as ending balances on the financial statements have been included. o Completeness o Rights and Obligations o Valuation and Allocation o Existence
o Completeness
This assertion address whether all assets, liabilities and equity interests that should have been included as ending balances on the financial statements have been included. o Existence o Rights and Obligations o Completeness o Valuation and Allocation
o Completeness
Select all that apply Which of these are generally low-reliability types of evidence because they require further corroboration by the auditor? o Observation o Scanning o Inquiry o Recalculation
o Observation o Inquiry
Whether transactions and events have been recorded in the proper accounts is the concern of the ____________ assertion.
Classification
True or false: Auditing standards dictate how audit documentation should be organized.
False
True or false: The auditor is concerned with the completeness assertion because failure of this assertion always leads to an overstatement of income.
False
True or false: The auditor's concern with the completeness assertions is the same as the concern for occurrence.
False It's the opposite
The activity in a particular account for the period is generally included in the _________ ____________ working papers.
account analysis
A company generated total sales of $1,500,000 and has accounts receivables of $14,550. If 85% of sales are made on credit, the receivables turnover ratio is ______. o 103.1 o 15.5 o 11.4 o 87.6
o 87.6 $1,500,000 x 85% = $1,275,000 / $14,550 = 87.6
Select all that apply Identify the categories of financial ratios that are used by auditors as analytical procedures. o Activity o Earnings o Profitability o Materiality o Short-term Liquidity o Solvency o Coverage
o Activity o Profitability o Short-term Liquidity o Coverage
The accuracy assertion is based on ______. o IFRS o GAAP o GAAS o IRS code
o GAAP
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 ______. o base his or her evaluation on the 20 accounts that responded o discard the sample and select a different set of 25 customers o still gather sufficient evidence on each of the 25 accounts
o still gather sufficient evidence on each of the 25 accounts
Vouching provides evidence for the ______ assertion. o completeness o occurrence
o occurrence
To effectively help the auditor determine if asset accounts contain material misstatements, __________ ratios may be used.
activity
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
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
