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Chapter 10: Audit Evidence and Working Papers
Terms in this set (11)
1. Professional skepticism means that internal auditors beginning an assurance engagement should:
a. Assume client personnel are dishonest until they gather evidence that clearly indicates otherwise.
b. Assume client personnel are honest until they gather evidence that clearly indicates otherwise.
c. Neither assume client personnel are honest nor assume they are dishonest.
d. Assume that internal controls are designed inadequately and/ or operating ineffectively.
1. C is the best answer. Professional skepticism means that internal auditors take nothing for granted; they continuously question what they hear and see and critically assess audit evidence. They do not assume by default that auditee personnel are either honest or dishonest. Applying professional skepticism throughout the engagement helps internal auditors remain unbiased and maintain an open mind to form judgments based on the preponderance of evidence gained during an engagement, and not just individual pieces of information.
2. Which of the following statements regarding audit evidence would be the least appropriate for an internal auditor to make?
a. "I consider the level of risk involved when deciding the kind of evidence I will gather."
b. "I do not perform procedures that provide persuasive evidence because I must obtain convincing evidence."
c. "I evaluate both the usefulness of the evidence I can obtain and the cost to obtain it."
d. "I am seldom absolutely certain about the conclusions I reach based on the evidence I examine."
2. B is the best answer. Internal auditors are rarely, if ever, in a position to provide absolute assurance regarding the truthfulness of management's assertions regarding the system of internal controls and performance. Even experienced internal auditors are rarely convinced beyond all doubt. This is due to the nature and extent of evidence they gather and the types of decisions they make. Frequently, internal auditors must rely on evidence that is persuasive rather than absolutely convincing, and audit decisions are rarely black and white. Moreover, internal auditors' conclusions and advice must be formed at a reasonable cost within a reasonable length of time to add economic value. Accordingly, internal auditors strive to obtain sufficient appropriate evidence to provide reasonable, rather than absolute, assurance.
3. Audit evidence is generally considered sufficient when:
a. It is appropriate.
b. There is enough of it to support well-founded conclusions.
c. It is relevant, reliable, and free from bias.
d. It has been obtained via random sampling.
3. B is the best answer. An internal auditor performing assurance services must obtain sufficient appropriate evidence to support well-founded conclusions. Evidence is appropriate if it provides relevant and reliable support for the internal auditor's judgments. Appropriate evidence is sufficient when the internal auditor has obtained enough of it to support valid conclusions.
4. Documentary evidence is one of the principal types of corroborating information used by an internal auditor. Which one of the following examples of documentary evidence generally is considered the most reliable? a. A vendor's invoice obtained from the accounts payable department. b. A credit memorandum prepared by the credit manager. c. A receiving report obtained from the receiving department. d. A copy of a sales invoice prepared by the sales department.
4. A is the best answer. The reliability of documentary evidence depends to a large extent on its origin and the route it follows before being examined by the internal auditor. A vendor's invoice comes from an outside third-party source. Credit memoranda, receiving reports, and copies of sales invoices are created internally and are not validated by a third party before being examined by the internal auditor.
5. An internal auditor must weigh the cost of an audit procedure against the persuasiveness of the evidence to be gathered. Observation is one audit procedure that involves cost-benefit tradeoffs. Which of the following statements regarding observation as an audit procedure is/ are correct?
I. Observation is limited because individuals may react differently when being watched.
II. Observation is more effective for testing completeness than it is for testing existence.
III. Observation provides evidence about whether certain controls are operating as designed.
a. I only.
b. II only.
c. I and III.
d. I, II, and III.
5. C is the best answer. Observation does provide evidence about whether operating activities are aligned with prescribed policies. It is used, for example, to test segregation of duties. Individuals may, however, behave differently than they would otherwise when they know they are being observed. Observation generally is used to test existence and occurrence, not completeness.
6. An internal auditor gathered the following accounts receivable trend and ratio analysis information: CHART Which of the following is the least reasonable explanation for the changes observed by the auditor? a. Fictitious sales may have been recorded in years 2 and 3. b. The effectiveness of credit and collection procedures deteriorated over the three-year period. c. Sales returned for credit were overstated in years 2 and 3. d. The allowance for bad debts was understated in years 2 and 3.
6. C is the best answer. Net accounts receivable as a percentage of total assets increased over the three- year period. During this period, accounts receivable turnover decreased. Overstating sales returned for credit would cause both net sales and average accounts receivable to be understated, thus causing accounts receivable turnover to increase. Recording fictitious sales would cause both net sales and average accounts receivable to be overstated, thus causing accounts receivable turnover to decrease. Deteriorating credit and collection procedures would slow down the collection of accounts receivable, thus causing accounts receivable turnover to decrease. Understating the allowance for bad debts would cause net accounts receivable to increase, thus causing accounts receivable turnover to decrease.
7. Your audit objective is to determine that purchases of office supplies have been properly authorized. If purchases of office supplies are made through the purchasing department, which of the following procedures is most appropriate?
a. Vouch purchase orders to approved purchase requisitions.
b. Trace approved purchase requisitions to purchase orders.
c. Inspect purchase requisitions for proper approval.
d. Vouch receiving reports to approved purchase orders.
7. A is the best answer. Vouching involves the tracking of information backward from one document or record to a previously prepared document or record and is performed specifically to test the validity of documented or recorded information. In this case, the approved purchase requisitions serve as the authorization to prepare the purchase orders that will be sent to vendors of office supplies. Tracing purchase requisitions forward to purchase orders would not uncover instances of missing purchase requisitions.
8. A production manager of MSM Company ordered excessive raw materials and had them delivered to a side business he operated. The manager falsified receiving reports and approved the invoices for payment. Which of the following procedures would most likely detect this fraud?
a. Vouch cash disbursements to receiving reports and invoices.
b. Confirm the amounts of raw materials purchased, purchase prices, and dates of shipment with vendors.
c. Perform ratio and trend analysis. Compare the cost of raw materials purchased with the cost of goods produced.
d. Observe the receiving dock and count materials received. Compare the counts with receiving reports completed by receiving personnel.
8. C is the best answer. Recorded purchases of raw materials would be increasing without a corresponding increase in cost of goods produced. Vouching cash disbursements to receiving reports and invoices would be ineffective because the manager falsified receiving reports and approved the invoices for payment. Confirmations from vendors would indicate that the raw materials had been purchased and shipped. Observing the receiving dock and counting the materials received would be ineffective since the materials in question never reached the receiving dock.
9. An internal auditor is concerned that fraud, in the form of payments to fictitious vendors, may exist. Company purchasers, responsible for purchases of specific product lines, have been granted the authority to approve expenditures up to $ 10,000. Which of the following applications of generalized audit software would be most effective in addressing the auditor's concern?
a. List all purchases over $ 10,000 to determine whether they were properly approved.
b. Take a random sample of all expenditures under $ 10,000 to determine whether they were properly approved.
c. List all major vendors by product line. Select a sample of major vendors and examine supporting documentation for goods or services received.
d. List all major vendors by product line. Select a sample of major vendors and send negative confirmations to validate that they actually provided goods or services.
9. C is the best answer. The purpose of the audit test is to determine the validity of cash disbursements, or more specifically, the validity of the vendors to which the payments are going. All expenditures, regardless of amount, should be supported by documentation indicating that goods or services were purchased and received. Lack of supporting documentation would be an indicator of fictitious vendors. Responses to confirmations sent to fictitious vendors are likely to indicate that the payments they received are for goods or services they provided.
10. Which of the following most completely describes the appropriate content of internal audit assurance engagement working papers?
a. Objectives, procedures, and conclusions.
b. Purpose, criteria, techniques, and conclusions.
c. Objectives, procedures, facts, conclusions, and recommendations.
d. Subject, purpose, sampling information, and analysis.
10. C is the best answer. The working papers should identify the audit objectives, that is, what the engagement team expects to achieve, the procedures the team used to achieve its objectives, and the conclusions reached by the team based on its test results. The working papers also should contain the engagement team's observations, or "pertinent statements of fact" that "emerge by a process of comparing what should be with what is" and the team's recommendations, which are based on its conclusions and observations.
11. Internal audit engagement teams prepare working papers primarily for the benefit of the:
b. Internal audit function.
c. Board and senior management.
d. Independent outside auditor.
11. B is the best answer. Working papers aid in planning and performing engagements, facilitate supervision and review of work completed, indicate whether engagement objectives were achieved, provide the principal support for internal audit communications, serve as a basis for evaluating the internal audit function's quality assurance program, contribute to the professional development of the internal audit staff, and demonstrated the internal audit function's compliance with The IIA Standards.
THIS SET IS OFTEN IN FOLDERS WITH...
Chapter 1: Introduction to Internal Auditing
Chapter 2: The International Professional Practice…
Chapter 3: Governance
Chapter 4: Risk Management
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