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Audit Quiz 10.1

Terms in this set (49)

Which of the following statements about audit evidence is true?
The sufficiency and appropriateness of audit evidence is a matter of professional judgment.

bc: The auditor exercises professional judgment when forming a conclusion about whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level. Sufficiency measures the quantity of audit evidence. Appropriateness measures its quality (relevance and reliability). To form this conclusion, the auditor considers all relevant evidence, regardless of whether it corroborates or contradicts the assertions in the statements.
The objective of tests of details of transactions performed as substantive procedures is to
Detect material misstatements at the relevant assertion level.

bc: Substantive procedures are (1) tests of the details of transaction classes, balances, and disclosures and (2) substantive analytical procedures. They are performed to detect material misstatements at the relevant assertion level. The auditor performs substantive procedures as a response to the related assessment of the RMMs (AU-C 330).
Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion?
Auditor judgment.

bc: Professional judgment involves applying relevant knowledge and experience to the facts and circumstances of an audit. The auditor exercises judgment to (1) interpret ethical requirements and GAAS and (2) make informed decisions, for example, about the sufficiency and appropriateness of audit evidence. The auditor also plans and performs the audit with professional skepticism. This is an attitude that includes (1) a questioning mind, (2) being alert to possible misstatements, and (3) a critical assessment of audit evidence (AU-C 500). Thus, judgment is required to select the specific auditing procedures needed to obtain that evidence.
A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about
Suspense debits that management believes will benefit future operations.

bc: Although the auditor must evaluate relevant assertions about all accounts, the greatest risks are overstated assets and understated liabilities. The unverified suspense debits represent assets that may not exist.
Which of the following statements about evidence is true?
A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion.

bc: Audit evidence consists of accounting records (initial entries and supporting records, such as ledgers, worksheets, and spreadsheets) and other information (minutes of meetings, confirmations, information obtained by inquiry, etc.). But accounting records alone do not provide sufficient appropriate evidence as a basis for an opinion on the financial statements.
In determining whether transactions have been recorded, the direction of the audit testing should begin from the
Original source documents.

bc: Determining whether transactions have been recorded is a test of the completeness assertion. Thus, beginning with the original source documents and tracing the transactions to the appropriate accounting records determines whether they were recorded.
A retail entity uses electronic data interchange (EDI) in executing and recording most of its purchase transactions. The entity's auditor recognizes that the documentation of the transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would
Perform tests several times during the year, rather than only at year end.

bc: Accounting records and other evidence may be available only in electronic form. For example, if EDI is used, purchase, shipping, billing, cash receipt, and cash payment transactions often occur by exchange of electronic messages instead of source documents. In an image processing system, documents are scanned and converted into electronic form for storage purposes, and the source documents may not be retained. Thus, electronic evidence may exist at a given moment in time, but it may not be retrievable after a specified period if files are changed and no backups exist. Consequently, the auditor should consider the time during which information is available to determine the nature, timing, and extent of substantive tests and tests of controls. For example, the auditor may change the timing of audit tests by performing them several times during the year instead of only at year end.
Which of the following documents are examples of audit evidence generated by the client?
Shipping documents and receiving reports.

bc: Shipping documents and receiving reports are a result of the operations of the client. As goods are shipped to customers, a shipping document is prepared by the client. As goods are received from vendors, a receiving report is prepared by the client.
Which of the following types of audit evidence is the most persuasive?
Bank statements obtained from the client.

bc: Evidence from independent sources outside the entity provides greater assurance of reliability for purposes of an audit than evidence secured or prepared solely within the entity. Although the bank statements are in the possession of the client, they originated outside of the client and, relative to the other responses, they are the most persuasive.
Which of the following presumptions is least likely to relate to the reliability of audit evidence?
An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost.

bc: Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. However, the need for (1) reporting to be timely and (2) maintaining a balance between benefit and cost are inherent limitations of the audit. Thus, for the opinion to be relevant, it must be formed within a reasonable period of time.
Accounting records alone do not provide sufficient appropriate evidence on which to base an opinion on the financial statements. Thus, the auditor should obtain other information. Which of the following is audit evidence other than accounting records?
Confirmations of accounts receivable.

bc: Audit evidence is all information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes (1) the accounting records underlying the financial statements and (2) other information. Sources of information other than accounting records include (1) minutes of meetings; (2) external confirmations; (3) analysts' reports; (4) comparable data about competitors; and (5) information obtained by the auditor from (a) inquiries (e.g., management's written representations), (b) observation, (c) inspection, (d) recalculation, (e) reperformance, and (f) analytical procedures.
Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
Prenumbered purchase order forms.

bc: When documentation, such as purchase order forms, is prepared solely by client personnel, its persuasiveness will be less than that prepared by the auditor or an independent party. Ordinarily, the most reliable documentation is created outside the entity and has never been within the client's control.
Which statement about audit evidence is false?
The auditor should not perform a procedure that provides persuasive evidence rather than conclusive evidence.

bc: In most cases, evidence that is obtained to enable an auditor to draw reasonable conclusions on which to base the opinion is necessarily persuasive rather than conclusive. The cost of obtaining conclusive evidence may outweigh the benefits. But the difficulty, time, or cost is not in itself a valid reason (1) to omit an audit procedure for which no alternative exists or (2) to be satisfied with less than persuasive evidence (AU-C 200).
Which of the following presumptions is correct about the reliability of audit evidence?
Effective internal control provides more assurance about the reliability of audit evidence.

bc: The more effective the internal control, the more reliable the evidence generated internally by the entity, e.g., the accounting records and financial statements.
Each of the following might, by itself, form a valid basis for an auditor to decide to omit a procedure except for the
Difficulty and cost involved in testing a particular item.

bc: The costs and benefits of obtaining evidence should have a rational relationship. However, the difficulty, time, or cost required to perform a procedure is not in itself a valid reason for its omission if no alternative is available. Such matters also do not justify being satisfied with audit evidence that is less than persuasive (AU-C 500).
AU-C 500 describes five generalizations about the reliability of evidence. The situations given below indicate the relative degrees of assurance provided by two types of evidence obtained in different situations. Which describes an exception to one of the generalizations?
The report of an auditor's specialist regarding the valuation of a collection of paintings held as an investment provides greater assurance than the auditor's physical observation of the paintings.

bc: Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or another medium; and (5) consists of original documents. Preference for the report of an auditor's specialist over the auditor's physical observation of works of art is acceptable because the auditor is not expected to have such expertise. Physical observation provides evidence of the existence of assets but often does not verify their value, ownership, cost, or condition. Consequently, the generalization in favor of the auditor's direct knowledge is overcome in this case.
Which of the following procedures would provide the most reliable audit evidence?
Inspection of bank statements obtained directly from the client's financial institution.

bc: When documentation is prepared solely by client personnel, its reliability is less than that prepared by the auditor or an independent party. Ordinarily, the most reliable documentation is created outside the entity and has never been within the client's control, e.g., statements obtained from the bank, letters from attorneys, and letters from insurance brokers.
Evidence supporting the financial statements consists of the accounting records and all other information available to the auditor. Which of the following is an example of other information?
Minutes of meetings

bc: Audit evidence is all information used by the auditor to draw the conclusions on which the auditor's opinion is based. It consists of (1) accounting records and (2) sources of information other than accounting records. Accounting records by themselves do not provide sufficient appropriate evidence. They include initial entries (manual or electronic) and supporting records. Examples are (1) checks, (2) electronic funds transfers (EFTs), (3) invoices, (4) contracts, (5) the general and subsidiary ledgers, (6) journal entries and other adjustments of the statements, (7) worksheets, (8) spreadsheets, (9) reconciliations, (10) cost allocations, (11) computations, and (12) disclosures. Sources of information other than accounting records include (1) minutes of meetings; (2) external confirmations; (3) analysts' reports; (4) comparable data about competitors; and (5) information obtained by the auditor from (a) inquiries (e.g., management's written representations), (b) observation, (c) inspection, (d) recalculation, (e) reperformance, and (f) analytical procedures.
Which of the following statements is ordinarily true about the reliability of evidence?
The more effective internal control, the more assurance it provides about the reliability of the accounting data and financial statements.

bc: Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents (AU-C 500).
Most of the auditor's work in forming an opinion on financial statements consists of
Obtaining and evaluating audit evidence.

bc: According to AU-C 500, Audit Evidence, most of the auditor's work in forming an opinion on financial statements consists of obtaining and evaluating audit evidence. Audit evidence is the information used by the auditor in drawing the conclusions on which the auditor's opinion is based. It includes the information contained in the accounting records and sources of information other than accounting records.
Question: 21 The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification
Transactions.

bc: The audit of the income statement focuses on the propriety of handling transactions because most income statement accounts represent large volumes of transactions. The audit of the balance sheet concentrates on verification of account balances.
The strongest criticism of the reliability of audit evidence that the auditor physically observes is that
The auditor may not be qualified to evaluate the items (s)he is observing.

bc: The auditor may not be qualified to evaluate the quality or condition of the items observed, e.g., the quality of diamonds or the quantity of oil reserves. In such cases, the reliability of the evidence obtained is doubtful, and the auditor typically uses the work of an auditor's specialist. Moreover, observation does not verify the cost or ownership of assets. Ordinarily, observation is best suited to verifying the existence of an asset.
To test for unsupported entries in the ledger, the direction of audit testing should be from the
Ledger entries

bc: To discover unsupported entries in the ledger, a sample of entries should be selected to determine whether any entry lacks proper support. The direction of testing is from the ledger entries to the books of original entry, then to the source documents.
The following statements were made in a discussion of audit evidence between two CPAs. Which statement about evidence is not valid?
"I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence."

bc: Most evidence on which the auditor bases the opinion is persuasive, not conclusive, because of the inherent limitations of the audit: (1) the nature of financial reporting (e.g., use of accounting estimates dependent on forecasts), (2) the nature of audit procedures (e.g., the possibility of fraud involving collusion or the failure of management to provide all the information requested), and (3) the need to perform the audit (a) within a reasonable period of time and (b) to achieve a balance between benefit and cost. However, the difficulty, time, or cost of obtaining evidence is not a valid reason for (1) omitting an audit procedure for which no alternative exists or (2) being satisfied with evidence that is less than persuasive (AU-C 200).
Which of the following best describes the primary purpose of audit procedures?
To gather evidence.

bc: According to AU-C 500, Audit Evidence, most of the auditor's work in forming an opinion on financial statements consists of obtaining and evaluating audit evidence. Audit evidence is the information used by the auditor in drawing the conclusions on which the auditor's opinion is based. It includes the information contained in the accounting records and sources of information other than accounting records.
When compared with a nineteenth-century auditor, today's auditor places less relative emphasis upon
Examination of documentary support.

bc: The auditor ordinarily should perform certain auditing procedures, such as external confirmation of receivables (AU-C 505), observation of inventory (AU-C 501), and analytical procedures (AU-C 520), instead of relying completely on documentary evidence.
Which of the following procedures would yield the most reliable evidence?
A recalculation of bad debt expense

bc: Subject to exceptions, the presumption is that the independent auditor's direct personal knowledge, obtained through physical examination, observation, computation, and inspection, is more reliable than information obtained indirectly.
A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would
Perform tests several times during the year, rather than only at year end.

bc: Accounting records and other evidence may be available only in electronic form. For example, when the Internet is used, transactions often occur by exchange of electronic messages instead of source documents. Electronic evidence may exist at a given moment in time, but it may not be retrievable after a specified period if files are changed and no backups exist. Consequently, the auditor should consider requesting retention of some information or performing procedures when information is available (AU-C 500). For example, the auditor may change the timing of audit procedures by performing them several times during the year instead of only at year end.
Which of the following factors would most likely influence an auditor's consideration of the reliability of data when performing analytical procedures?
Whether the data were developed under a system with adequate controls.

bc: Reliability is affected by the source of the data and the conditions under which the data were generated. Data are considered more reliable when developed under effective internal control.
At the conclusion of an audit, an auditor is reviewing the audit evidence obtained. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's assertions. Which of the following actions is the auditor most likely to take?
Obtain additional evidence regarding the valuation of inventory.

bc: If the audit evidence is not sufficient and appropriate, the auditor should perform other procedures, such as tests of details or analytical procedures.
The auditor's inventory observation test counts are traced to the client's inventory listing to test for which of the following financial statement assertions?
Completeness.

bc: Tracing the details of test counts to the final inventory schedule assures the auditor that items in the observed physical inventory are included in the inventory records.
After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management's financial statement assertion(s) of

Rights and obligations
Valuation and allocation
No
Yes

bc: The proper approval of credit provides assurance that the account receivable is collectible. Thus, it is related to the valuation assertion that accounts receivable are recorded at net realizable value.
Which of the following types of evidence generally is the most reliable?
Confirmation of account information from third parties.

bc: Audit evidence should be sufficient and appropriate. Appropriate evidence is reliable and relevant. Ordinarily, evidence obtained from independent sources (e.g., from external confirmation of account information) is usually reliable (AU-C 500).
Before performing substantive procedures at an interim date, an auditor should
Consider the increased risk that period-end misstatements will not be detected.

bc: Certain factors should be considered before substantive procedures are performed at interim dates. For example, the auditor should consider the risk that period-end misstatements are not detected by performing appropriate substantive procedures or a combination of tests of controls and substantive procedures to cover the remaining period.
What type of evidence would provide the highest level of assurance in an attestation engagement?
Evidence obtained from independent sources.

bc: Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. Thus, evidence obtained from independent sources outside the entity typically is more reliable than evidence from sources inside the organization.
An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?
Inquiry and inspection of records.

bc: Inquiry is seeking information from knowledgeable persons. The controller, who is usually the chief accounting officer, is such a person. Inspection of records or documents is the examination of records or documents, whether internal or external, in paper, electronic, or other media. The auditor's verification of the reconciliation and the controller's review are procedures requiring inspection of the underlying records or documents.
According to the auditing standards, which of the following terms identifies a requirement for audit evidence?
Appropriate.

bc: AU-C 500, Audit Evidence, requires the auditor to obtain sufficient appropriate audit evidence on which to base the opinion. Appropriate evidence is relevant and reliable in supporting conclusions on which the opinion is based.
Which of the following audit techniques most likely will provide an auditor with the most assurance about the effectiveness of the operation of a control?
Observation of client personnel.

bc: Evidence about the effectiveness of the operation of a control obtained directly, such as by observation of client personnel, is more reliable than evidence obtained indirectly, such as through inquiry. Thus, evidence obtained by the auditor's own observation of a client employee's application of a control most likely provides greater assurance than an inquiry about the application of the control. Moreover, mere inquiry without corroboration ordinarily will not provide sufficient appropriate evidence to support a conclusion about the effectiveness of the operation of the control.
In gathering evidence in the performance of substantive procedures, the auditor most likely
Relies on persuasive rather than conclusive evidence in the majority of cases.

bc: To be appropriate, audit evidence should be relevant and reliable. Also, because of the inherent limitations of the audit, most audit evidence is persuasive rather than conclusive. However, although the cost of obtaining evidence and its usefulness should be rationally related, the matter of difficulty, time, or cost is not in itself a valid basis for (1) omitting a procedure when no alternative exists or (2) being satisfied with less than persuasive evidence.
The appropriateness of evidence available to an auditor is least likely to be affected by the
Sampling method employed by the auditor to obtain a sample of such evidence.

bc: Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. The sample selection method does not affect the appropriateness of evidence as long as the sample is representative of the population.
The most reliable forms of documentary evidence are those documents that are
Authorized by a responsible official.

bc:Documents generated externally by independent sources are more reliable than those produced by the auditee. However, the reliability of internal evidence is enhanced if it is subject to effective control. Accordingly, authorization by an appropriate party lends credibility to a document because it increases the probability that the underlying transaction is valid.
Observation is considered a reliable audit procedure but one that is limited in usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique?
It is most persuasive about the performance of a process but is limited to the moment in time at which the observation takes place.

bc: Observation consists of looking at a process or procedure being performed by others. It provides audit evidence about the process or procedure but is limited to that moment in time by the fact that the act of being observed may affect how the process or procedure is performed.
Which of the following types of audit evidence provides the least assurance of reliability?
Prenumbered receiving reports completed by the client's employees.

bc: The reliability of information used as audit evidence is affected by (1) its source, (2) its nature, and (3) how it is obtained. These circumstances include controls over its preparation and maintenance. Evidence is generally more reliable when it is (1) obtained from knowledgeable independent sources outside the entity, (2) generated internally by the entity under effective internal control, (3) obtained directly by the auditor, (4) in documentary form (in any medium), and (5) represented by original documents (rather than photocopies). Thus, prenumbered receiving reports completed by the client's employees tend to be less reliable than such externally produced documents as receivable confirmations, bank statements, and tax bills
Which of the following audit procedures would be most appropriate to test the valuation of the collateral of a delinquent loan receivable?
Obtaining a current value appraisal of the collateral.

bc: The auditor can test the valuation of the collateral by obtaining an external current value appraisal.
An auditor of a nonissuer exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately
A.
Consider the reliability of information to be used as audit evidence.

bc: Professional skepticism should be maintained in considering the risk of material misstatement due to fraud. When the auditor exercises professional skepticism with respect to the risks of material misstatement due to fraud, the auditor should consider the reliability of information to be used as audit evidence.
If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting
An inspection.

bc: Inspection is the examination of records or documents, whether internal or external, in paper, electronic, or other media. The auditor performs inspection of documents to verify proper authorization of transactions.
Which of the following procedures would be most effective in reducing attestation risk?
Examination of evidence.

bc: To express an opinion, the practitioner must gather sufficient evidence to reduce attestation risk to an acceptably low level.
Which of the following ultimately determines the sufficiency and appropriateness of audit evidence to support the auditor's conclusions?
Professional judgment.

bc: The auditor's professional judgment must determine the necessary audit plans and the specific audit procedures that will gather sufficient appropriate evidence to reduce audit risk to an acceptably low level and enable the auditor to draw reasonable conclusions on which to base the opinion.
Management's responses to inquiries can be corroborated by each of the following, except
Preparation of the summary of unadjusted differences.

bc: The summary of unadjusted differences is a record of all of the misstatements identified during the course of an audit. It is not the source of corroborating evidence.
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