auditing and assurance services chapter 4 tb

Chapter 04 - Audit Evidence and Audit Documentation

Chapter 04Audit Evidence and Audit Documentation

True / False Questions 1. Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements. True False 2. The auditor gathers audit evidence to test management's assertions. True False 3. Management assertions fall into four main categories. True False 4. The classification assertion refers to transactions and events being recorded in the correct accounting period. True False 5. The completeness assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded. True False 6. The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period. True False 7. The relevance of audit evidence or specific audit procedures depends on the assertion being tested. True False

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8. The auditor must use his or her professional judgment to determine the amount of audit evidence to be gathered. True False 9. The sufficiency of evidence refers to the quality of audit evidence. True False

Multiple Choice Questions 10. A confirmation is used to: A. Verify the inventory count is correct.B. Verify that a control is being observed.C. Verify a representation from a third party.D. Verify that a specific trend is correct. 11. Which of the following elements ultimately determines the amount of audit work that is necessary in the circumstances to afford a reasonable basis for an opinion? A. Auditor judgmentB. MaterialityC. Relative riskD. Reasonable assurance 12. Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must A. Be well documented and cross-referenced in the audit documentsB. Be based on sources that are considered reliableC. Bear a direct relationship to the audit assertionD. Be persuasive enough to enable the auditor to form an opinion

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13. Which set of assertions is tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity's balance sheet? A. Assertions about classes of transactions and eventsB. Assertions about account balances at the period endC. Assertions about presentation and disclosureD. None of the above 14. In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events, and specifically, which assertion? A. OccurrenceB. CutoffC. AuthorizationD. Classification 15. Tracing is used primarily to test which of the following assertions about classes of transactions? A. OccurrenceB. CompletenessC. CutoffD. Classification 16. Vouching is used primarily to test which of the following assertions about classes of transaction? A. OccurrenceB. CompletenessC. AuthorizationD. Classification

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17. In designing written audit programs, an auditor should plan specific audit procedures to test A. Timing of audit proceduresB. Cost-benefit of gathering evidenceC. Selected audit techniquesD. Management assertions 18. Footing is an example of A. RecalculationB. ConfirmationC. InquiriesD. Analytical procedures 19. In determining whether transactions have been recorded, the direction of the audit testing should start from the A. General ledger balancesB. Adjusted trial balanceC. Original source documentsD. General journal entries 20. To test for unsupported entries in the ledger, the direction of audit testing should start from the A. Ledger entriesB. Journal entriesC. Externally generated documentsD. Original source documents

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21. Which of the following presumptions does not relate to the appropriateness of audit evidence? A. The more effective the internal control system, the more assurance it provides about the accounting data and financial statementsB. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable costC. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entityD. The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly 22. Of the following, which is the least persuasive type of audit evidence? A. Documents mailed by outsiders to the auditorB. Correspondence between the auditor and third party vendorsC. Copies of client sales invoices inspected by the auditorD. Computations made by the auditor 23. The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents' A. Format be neat and orderly and include both a permanent file and a general fileB. Content be sufficient to provide support for the auditor's report, including the auditor's representation as to compliance with auditing standardsC. Ownership be determined by the legal statutes of the state where the auditor practicesD. Preparation be the responsibility of assistants whose work is reviewed by seniors, managers, and partners 24. Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance? A. Account analysesB. Supporting schedulesC. Control accountsD. Lead schedules

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25. The permanent (continuing) file of an auditor's working papers most likely would include copies of the A. Bank statementsB. Debt agreementsC. Lead schedulesD. Attorney's letters 26. An example of audit evidence with a medium level of reliability is: A. Scanning.B. Recalculation.C. Observation.D. All of the above. 27. Audit documentation prepared on audits of publicly held clients is the property of the A. ShareholdersB. The auditorC. The management of the entity being auditedD. The SEC 28. All of the following are typically in the current file except A. Adjusting journal entriesB. Copies of the audit reportC. Chart of accountsD. Lead schedules 29. You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying? A. Existence or occurrenceB. CompletenessC. Rights and obligationsD. Valuation or allocation

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30. You are auditing a manufacturing company which has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about? A. Existence or occurrenceB. CompletenessC. Rights and obligationsD. Accuracy 31. Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness? A. Compare a sample of shipping documents to related sales invoicesB. Observe the client's distribution of payroll checksC. Confirm a sample of recorded receivables by direct communication with the debtorsD. Review standard bank confirmations for indications of kiting 32. Which of the following best describes the primary purpose of audit procedures? A. To detect all errors or fraudulent activitiesB. To comply with generally accepted accounting principlesC. To gather corroborative evidence about management's assertionsD. To verify the accuracy of the balance sheet account balances 33. Procedures specifically outlined in an audit program are designed primarily to A. Assess risk for planning purposesB. Detect all errors or fraudulent activitiesC. Test internal control systemsD. Gather evidence about management's assertions

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34. Which statement concerning audit evidence is not valid? A. The auditor is seldom convinced beyond all doubt with respect to all aspects of the financial statements being auditedB. The auditor performs tests to collect convincing evidence that the financial statements are not misstatedC. The auditor weighs the cost of obtaining evidence with its usefulnessD. The auditor considers the amount of risk present in deciding the nature and extent of evidence to be collected 35. Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the A. Difficulty and expense involved in testing a particular itemB. Assessment of control risk at a low levelC. Low inherent risk involvedD. Relationship between the cost of obtaining evidence and its usefulness 36. Of the following, the most reliable type of evidence typically is A. ConfirmationB. Inspection of records and documentsC. ReperformanceD. Observation 37. Which of the following presumptions is correct about the reliability of audit evidence? A. Information obtained indirectly from outside sources is the most reliable audit evidenceB. To be reliable, audit evidence should be convincing rather than persuasiveC. Reliability of audit evidence refers to the amount of corroborative evidence obtainedD. An effective internal control system provides more reliable audit evidence

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38. Which of the following types of documentary evidence should the auditor consider to be the most reliable? A. A sales invoice issued by the client and supported by a delivery receipt from an outside truckerB. Confirmation of an account payable balance mailed by and returned directly to the auditorC. A check issued by the company and bearing the payee's endorsement that is included with the bank statement mailed directly to the auditorD. A working paper prepared by the client's controller and reviewed by the client's treasurer 39. Which of the following is the least persuasive documentation in support of an auditor's opinion? A. Schedules of details of physical inventory counts conducted by the clientB. Notation of auditor's inferences drawn from ratios and trendsC. Notation of appraisers' conclusions documented in the auditor's working papersD. Lists of negative confirmation requests for which no response was received by the auditor 40. Which of the following statements is generally correct about the appropriateness of audit evidence? A. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statementsB. Appropriateness of audit evidence refers to the amount of corroborative evidence obtainedC. Information obtained indirectly from independent outside sources is more persuasive than the auditor's direct personal knowledge obtained through observation and inspectionD. Appropriateness of audit evidence refers only to audit evidence obtained from outside the entity 41. Which of the following types of audit evidence is the most persuasive? A. Prenumbered client purchase order formsB. Client worksheets supporting cost allocationsC. Bank statements obtained from the clientD. Client responses to auditor inquiries

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42. Which of the following statements about accounting records and audit documentation is correct? A. Accounting records belong to the clientB. Documentation of an auditor's understanding of client's internal control system is not necessaryC. Audit documents may be regarded as a substitute for the client's accounting recordsD. The independent auditor may discard audit documents after two years 43. Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that A. Audit documents should be kept on the client's premises so that the client can have access to them for reference purposesB. Audit documents should be the primary support for the financial statements being examinedC. Audit documents should be considered as a substitute for the client's accounting recordsD. Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement 44. Audit documents that record the procedures used by the auditor to gather evidence should be A. Considered the primary support for the financial statements being examinedB. Viewed as the connecting link between the accounting records and the financial statementsC. Designed in an orderly fashion to facilitate the review of audit work by the senior, manager, and partner on the engagementD. Retained until the audited entity ceases to be a client 45. In creating lead schedules for an audit engagement, what client information is needed to begin? A. Interim financial information, such as third quarter sales, net income, and inventory and receivables balancesB. Specialized journal information, such as the invoice and purchase order numbers of the last few sales and purchases of the yearC. General ledger information, such as account numbers, prior-year account balances, and current year unadjusted informationD. Adjusting entry information, such as deferrals and accruals and reclassification journal entries

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46. Audit documentation A. Must be in electronic formB. Must be in paper form onlyC. Is not required, but is strongly recommendedD. May be in paper, electronic, or some other form 47. Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying? A. Existence or occurrenceB. CompletenessC. Rights and obligationsD. Observation 48. Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for transactions within the purchasing process are you most concerned with? A. Existence or occurrenceB. CompletenessC. Rights and obligationsD. Presentation and disclosure 49. You are concerned with unrecorded transactions in the purchasing cycle. Which audit procedure are you most likely to use when auditing purchases? A. Vouching transactions in accounting records to vendor invoicesB. Tracing vendor invoices to accounting recordsC. Recalculation of vendor invoice amountsD. Confirmation of customer accounts

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50. The following statements were made in a discussion of audit evidence between two CPAs. Which statement is not valid concerning audit evidence? A. "I am seldom convinced beyond all doubt with respect to all aspects of the statements being examined."B. "I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence."C. "I evaluate the degree of risk involved in deciding the kind of evidence I will gather."D. "I evaluate the usefulness of the evidence I can obtain against the cost of obtaining it." 51. Which of the following statements concerning audit evidence is correct? A. Appropriate evidence supporting management's assertions should be convincing rather than persuasiveB. Effective internal controls contribute little to the reliability of the evidence created within the entityC. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtainedD. A client's accounting data cannot be considered sufficient audit evidence to support the financial statements 52. The permanent audit file usually includes: A. Working trial balance.B. Organizational chart.C. Audit plan.D. Audit programs. 53. The current audit file usually includes: A. Working trial balance.B. Organizational chart.C. Accounting manual.D. Copies of important contracts.

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54. All audit documentation should have a heading, which includes: A. Name of the client.B. Title of the working paper.C. Client's year-end date.D. All of the above. 55. The audit working papers belong to the: A. The client.B. The auditor.C. The audit firm.D. Both the client and the audit firm.

Short Answer Questions 56. Explain the occurrence and completeness assertions. How does failure to meet each assertion affect the financial statements?

57. For an auditor, how are management assertions useful?

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58. The text discusses three main purposes for performing audit procedures. List and describe these three main categories of audit procedures and describe their purpose.

59. Why is appropriateness important for audit evidence? What qualities must evidence have to be considered appropriate?

60. Several factors may influence the reliability of evidence. Identify and describe two of these factors.

61. Sarah is auditing the sales of a new client. In one procedure Sarah performs, she begins with the original sales documents and then searches the accounting records to find the corresponding entry. What test is Sarah performing and what management assertion is she testing?

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62. Auditors obtain evidence about the client's inventory through, among other procedures, observing the counting of inventory. What are some limitations "observation" has as an audit procedure?

63. According to the text, what are the two functions of working papers?

64. Who is responsible for the financial statements? What does the term "assertions" mean? Identify the assertion categories and the specific assertions for each category.

65. Discuss the reliability of the types of audit evidence and identify the level of reliability for each type of evidence.

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Chapter 04 Audit Evidence and Audit Documentation Answer Key

True / False Questions 1. Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements. FALSE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 1 2. The auditor gathers audit evidence to test management's assertions. TRUE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 1 3. Management assertions fall into four main categories. FALSE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 2

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4. The classification assertion refers to transactions and events being recorded in the correct accounting period. FALSE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 2 5. The completeness assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded. TRUE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 2 6. The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period. TRUE


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7. The relevance of audit evidence or specific audit procedures depends on the assertion being tested. TRUE


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8. The auditor must use his or her professional judgment to determine the amount of audit evidence to be gathered. TRUE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 4 9. The sufficiency of evidence refers to the quality of audit evidence. FALSE


Multiple Choice Questions 10. A confirmation is used to: A. Verify the inventory count is correct.B. Verify that a control is being observed.C. Verify a representation from a third party.D. Verify that a specific trend is correct.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ComprehensionDifficulty: EasyLearning Objective: 5

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11. Which of the following elements ultimately determines the amount of audit work that is necessary in the circumstances to afford a reasonable basis for an opinion? A. Auditor judgmentB. MaterialityC. Relative riskD. Reasonable assurance

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ComprehensionDifficulty: EasyLearning Objective: 1Learning Objective: 3 12. Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must A. Be well documented and cross-referenced in the audit documentsB. Be based on sources that are considered reliableC. Bear a direct relationship to the audit assertionD. Be persuasive enough to enable the auditor to form an opinion

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: AnalysisDifficulty: EasyLearning Objective: 1Learning Objective: 4Learning Objective: 6

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13. Which set of assertions is tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity's balance sheet? A. Assertions about classes of transactions and eventsB. Assertions about account balances at the period endC. Assertions about presentation and disclosureD. None of the above

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplicationDifficulty: EasyLearning Objective: 2

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14. In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events, and specifically, which assertion? A. OccurrenceB. CutoffC. AuthorizationD. Classification

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: EasyLearning Objective: 2 15. Tracing is used primarily to test which of the following assertions about classes of transactions? A. OccurrenceB. CompletenessC. CutoffD. Classification


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16. Vouching is used primarily to test which of the following assertions about classes of transaction? A. OccurrenceB. CompletenessC. AuthorizationD. Classification


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17. In designing written audit programs, an auditor should plan specific audit procedures to test A. Timing of audit proceduresB. Cost-benefit of gathering evidenceC. Selected audit techniquesD. Management assertions

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: KnowledgeDifficulty: EasyLearning Objective: 2Learning Objective: 3 18. Footing is an example of A. RecalculationB. ConfirmationC. InquiriesD. Analytical procedures

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 5 19. In determining whether transactions have been recorded, the direction of the audit testing should start from the A. General ledger balancesB. Adjusted trial balanceC. Original source documentsD. General journal entries

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: EasyLearning Objective: 3Learning Objective: 5

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20. To test for unsupported entries in the ledger, the direction of audit testing should start from the A. Ledger entriesB. Journal entriesC. Externally generated documentsD. Original source documents

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: EasyLearning Objective: 3Learning Objective: 5 21. Which of the following presumptions does not relate to the appropriateness of audit evidence? A. The more effective the internal control system, the more assurance it provides about the accounting data and financial statementsB. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable costC. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entityD. The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionDifficulty: EasyLearning Objective: 6

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22. Of the following, which is the least persuasive type of audit evidence? A. Documents mailed by outsiders to the auditorB. Correspondence between the auditor and third party vendorsC. Copies of client sales invoices inspected by the auditorD. Computations made by the auditor

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: AnalysisDifficulty: EasyLearning Objective: 5Learning Objective: 6 23. The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents' A. Format be neat and orderly and include both a permanent file and a general fileB. Content be sufficient to provide support for the auditor's report, including the auditor's representation as to compliance with auditing standardsC. Ownership be determined by the legal statutes of the state where the auditor practicesD. Preparation be the responsibility of assistants whose work is reviewed by seniors, managers, and partners

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 7Learning Objective: 8

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24. Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance? A. Account analysesB. Supporting schedulesC. Control accountsD. Lead schedules

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 7Learning Objective: 8 25. The permanent (continuing) file of an auditor's working papers most likely would include copies of the A. Bank statementsB. Debt agreementsC. Lead schedulesD. Attorney's letters

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingBloom's: ApplicationDifficulty: EasyLearning Objective: 7Learning Objective: 8 26. An example of audit evidence with a medium level of reliability is: A. Scanning.B. Recalculation.C. Observation.D. All of the above.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 5

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27. Audit documentation prepared on audits of publicly held clients is the property of the A. ShareholdersB. The auditorC. The management of the entity being auditedD. The SEC

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 8 28. All of the following are typically in the current file except A. Adjusting journal entriesB. Copies of the audit reportC. Chart of accountsD. Lead schedules

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingBloom's: ApplicationDifficulty: EasyLearning Objective: 7Learning Objective: 8 29. You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying? A. Existence or occurrenceB. CompletenessC. Rights and obligationsD. Valuation or allocation

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBloom's: AnalysisDifficulty: ModerateLearning Objective: 2

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30. You are auditing a manufacturing company which has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about? A. Existence or occurrenceB. CompletenessC. Rights and obligationsD. Accuracy

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: AnalysisDifficulty: ModerateLearning Objective: 2 31. Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness? A. Compare a sample of shipping documents to related sales invoicesB. Observe the client's distribution of payroll checksC. Confirm a sample of recorded receivables by direct communication with the debtorsD. Review standard bank confirmations for indications of kiting

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: ModerateLearning Objective: 2Learning Objective: 3Learning Objective: 5

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32. Which of the following best describes the primary purpose of audit procedures? A. To detect all errors or fraudulent activitiesB. To comply with generally accepted accounting principlesC. To gather corroborative evidence about management's assertionsD. To verify the accuracy of the balance sheet account balances

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: AnalysisDifficulty: ModerateLearning Objective: 3

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33. Procedures specifically outlined in an audit program are designed primarily to A. Assess risk for planning purposesB. Detect all errors or fraudulent activitiesC. Test internal control systemsD. Gather evidence about management's assertions

AACSB: AnalyticAICPA BB: Leveraging TechnologyAICPA FN: MeasurementBloom's: ApplicationDifficulty: ModerateLearning Objective: 3 34. Which statement concerning audit evidence is not valid? A. The auditor is seldom convinced beyond all doubt with respect to all aspects of the financial statements being auditedB. The auditor performs tests to collect convincing evidence that the financial statements are not misstatedC. The auditor weighs the cost of obtaining evidence with its usefulnessD. The auditor considers the amount of risk present in deciding the nature and extent of evidence to be collected

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionDifficulty: ModerateLearning Objective: 4 35. Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the A. Difficulty and expense involved in testing a particular itemB. Assessment of control risk at a low levelC. Low inherent risk involvedD. Relationship between the cost of obtaining evidence and its usefulness

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: AnalysisDifficulty: ModerateLearning Objective: 4

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36. Of the following, the most reliable type of evidence typically is A. ConfirmationB. Inspection of records and documentsC. ReperformanceD. Observation

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeDifficulty: ModerateLearning Objective: 6 37. Which of the following presumptions is correct about the reliability of audit evidence? A. Information obtained indirectly from outside sources is the most reliable audit evidenceB. To be reliable, audit evidence should be convincing rather than persuasiveC. Reliability of audit evidence refers to the amount of corroborative evidence obtainedD. An effective internal control system provides more reliable audit evidence

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationDifficulty: ModerateLearning Objective: 4 38. Which of the following types of documentary evidence should the auditor consider to be the most reliable? A. A sales invoice issued by the client and supported by a delivery receipt from an outside truckerB. Confirmation of an account payable balance mailed by and returned directly to the auditorC. A check issued by the company and bearing the payee's endorsement that is included with the bank statement mailed directly to the auditorD. A working paper prepared by the client's controller and reviewed by the client's treasurer

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: AnalysisDifficulty: ModerateLearning Objective: 6

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39. Which of the following is the least persuasive documentation in support of an auditor's opinion? A. Schedules of details of physical inventory counts conducted by the clientB. Notation of auditor's inferences drawn from ratios and trendsC. Notation of appraisers' conclusions documented in the auditor's working papersD. Lists of negative confirmation requests for which no response was received by the auditor

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: AnalysisDifficulty: ModerateLearning Objective: 6 40. Which of the following statements is generally correct about the appropriateness of audit evidence? A. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statementsB. Appropriateness of audit evidence refers to the amount of corroborative evidence obtainedC. Information obtained indirectly from independent outside sources is more persuasive than the auditor's direct personal knowledge obtained through observation and inspectionD. Appropriateness of audit evidence refers only to audit evidence obtained from outside the entity

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: AnalysisDifficulty: ModerateLearning Objective: 4

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41. Which of the following types of audit evidence is the most persuasive? A. Prenumbered client purchase order formsB. Client worksheets supporting cost allocationsC. Bank statements obtained from the clientD. Client responses to auditor inquiries

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: AnalysisDifficulty: ModerateLearning Objective: 6

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42. Which of the following statements about accounting records and audit documentation is correct? A. Accounting records belong to the clientB. Documentation of an auditor's understanding of client's internal control system is not necessaryC. Audit documents may be regarded as a substitute for the client's accounting recordsD. The independent auditor may discard audit documents after two years

AACSB: CommunicationsAICPA BB: LegalAICPA FN: Decision MakingBloom's: ApplicationDifficulty: ModerateLearning Objective: 7Learning Objective: 8 43. Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that A. Audit documents should be kept on the client's premises so that the client can have access to them for reference purposesB. Audit documents should be the primary support for the financial statements being examinedC. Audit documents should be considered as a substitute for the client's accounting recordsD. Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement

AACSB: CommunicationsAICPA BB: LegalAICPA FN: Decision MakingBloom's: ApplicationDifficulty: ModerateLearning Objective: 7Learning Objective: 8

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44. Audit documents that record the procedures used by the auditor to gather evidence should be A. Considered the primary support for the financial statements being examinedB. Viewed as the connecting link between the accounting records and the financial statementsC. Designed in an orderly fashion to facilitate the review of audit work by the senior, manager, and partner on the engagementD. Retained until the audited entity ceases to be a client

AACSB: CommunicationsAICPA BB: LegalAICPA FN: ReportingBloom's: ApplicationDifficulty: ModerateLearning Objective: 7Learning Objective: 8 45. In creating lead schedules for an audit engagement, what client information is needed to begin? A. Interim financial information, such as third quarter sales, net income, and inventory and receivables balancesB. Specialized journal information, such as the invoice and purchase order numbers of the last few sales and purchases of the yearC. General ledger information, such as account numbers, prior-year account balances, and current year unadjusted informationD. Adjusting entry information, such as deferrals and accruals and reclassification journal entries

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBloom's: SynthesisDifficulty: ModerateLearning Objective: 7Learning Objective: 8

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46. Audit documentation A. Must be in electronic formB. Must be in paper form onlyC. Is not required, but is strongly recommendedD. May be in paper, electronic, or some other form

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBloom's: KnowledgeDifficulty: ModerateLearning Objective: 7Learning Objective: 8 47. Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying? A. Existence or occurrenceB. CompletenessC. Rights and obligationsD. Observation

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBloom's: AnalysisDifficulty: HardLearning Objective: 2

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48. Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for transactions within the purchasing process are you most concerned with? A. Existence or occurrenceB. CompletenessC. Rights and obligationsD. Presentation and disclosure

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBloom's: ApplicationDifficulty: HardLearning Objective: 2

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49. You are concerned with unrecorded transactions in the purchasing cycle. Which audit procedure are you most likely to use when auditing purchases? A. Vouching transactions in accounting records to vendor invoicesB. Tracing vendor invoices to accounting recordsC. Recalculation of vendor invoice amountsD. Confirmation of customer accounts

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBloom's: ApplicationDifficulty: ModerateLearning Objective: 3Learning Objective: 5 50. The following statements were made in a discussion of audit evidence between two CPAs. Which statement is not valid concerning audit evidence? A. "I am seldom convinced beyond all doubt with respect to all aspects of the statements being examined."B. "I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence."C. "I evaluate the degree of risk involved in deciding the kind of evidence I will gather."D. "I evaluate the usefulness of the evidence I can obtain against the cost of obtaining it."

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionDifficulty: ModerateLearning Objective: 4

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51. Which of the following statements concerning audit evidence is correct? A. Appropriate evidence supporting management's assertions should be convincing rather than persuasiveB. Effective internal controls contribute little to the reliability of the evidence created within the entityC. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtainedD. A client's accounting data cannot be considered sufficient audit evidence to support the financial statements

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionDifficulty: HardLearning Objective: 5Learning Objective: 6 52. The permanent audit file usually includes: A. Working trial balance.B. Organizational chart.C. Audit plan.D. Audit programs.


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53. The current audit file usually includes: A. Working trial balance.B. Organizational chart.C. Accounting manual.D. Copies of important contracts.


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54. All audit documentation should have a heading, which includes: A. Name of the client.B. Title of the working paper.C. Client's year-end date.D. All of the above.

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ComprehensionDifficulty: EasyLearning Objective: 8 55. The audit working papers belong to the: A. The client.B. The auditor.C. The audit firm.D. Both the client and the audit firm.

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 8

Short Answer Questions

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56. Explain the occurrence and completeness assertions. How does failure to meet each assertion affect the financial statements? The occurrence assertion relates to whether all recorded transactions and events have occurred and pertain to the entity. The completeness assertion relates to whether all transactions and events that occurred during the period have been recorded. Failure to meet the completeness assertion results in an understatement in the related account, while invalid recorded amounts result in an overstatement in the related account.

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ComprehensionDifficulty: EasyLearning Objective: 2 57. For an auditor, how are management assertions useful? The assertions provide a framework within which the auditor plans the audit, designs audit procedures, obtains relevant evidence, and evaluates the appropriateness and sufficiency of the evidence. The management assertions help the auditor focus his or her attention on all the various aspects of transactions, account balances and required disclosures that ought to be considered to ascertain fair presentation of financial statements to users.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: ModerateLearning Objective: 2Learning Objective: 3

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58. The text discusses three main purposes for performing audit procedures. List and describe these three main categories of audit procedures and describe their purpose. Risk assessment procedures: Risk assessment procedures are performed to obtain an understanding of the entity and its environment, including its internal control, in order to assess the risks of material misstatement at the financial statement and assertion levels.Tests of controls: Tests of controls allow the auditor to test the operating effectiveness of controls in preventing or, detecting and correcting, material misstatements at the assertion level.Substantive procedures: Substantive procedures are performed to detect material misstatements at the assertion level.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: EasyLearning Objective: 3 59. Why is appropriateness important for audit evidence? What qualities must evidence have to be considered appropriate? Appropriateness is a measure of the quality of audit evidence. Evidence is considered appropriate when it provides information that is both relevant and reliable. Relevant evidence should be related to the assertion being tested. Reliable evidence can be relied upon to signal the true state of an assertion.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionDifficulty: EasyLearning Objective: 5Learning Objective: 6

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60. Several factors may influence the reliability of evidence. Identify and describe two of these factors. Answer should include two of the following:Evidence obtained directly by the auditor from an independent source outside the entity is usually viewed as more reliable than evidence obtained solely from within the entity.When the auditor assesses the client's internal control as effective, evidence generated by that accounting system is viewed as reliable.Evidence obtained directly by the auditor is generally considered to be more reliable than evidence obtained indirectly or by inference.Audit evidence in documentary form is considered more reliable than verbal evidence.Audit evidence provided by original documents is considered more reliable than copies.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationDifficulty: EasyLearning Objective: 6 61. Sarah is auditing the sales of a new client. In one procedure Sarah performs, she begins with the original sales documents and then searches the accounting records to find the corresponding entry. What test is Sarah performing and what management assertion is she testing? Sarah is tracing, which refers to first selecting an accounting transaction (a source document) and then following it into the journal or ledger. The management assertion being tested is completeness. Testing in this direction ensures that transactions that occurred are recorded in the accounting records.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: ModerateLearning Objective: 2Learning Objective: 5

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62. Auditors obtain evidence about the client's inventory through, among other procedures, observing the counting of inventory. What are some limitations "observation" has as an audit procedure? Observation is limited to the point in time at which the observation takes place. In addition, client personnel may act differently when the auditor is not observing them.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: ModerateLearning Objective: 5Learning Objective: 6 63. According to the text, what are the two functions of working papers? Working papers provide support for the auditor's report and aid in the conduct and supervision of the audit. As support for the auditor's report, the working papers also document that the scope of the audit was adequate.

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: KnowledgeDifficulty: ModerateLearning Objective: 7

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64. Who is responsible for the financial statements? What does the term "assertions" mean? Identify the assertion categories and the specific assertions for each category. Management is responsible for the fair presentation of its financial statements.Assertions are expressed or implied representations by management that are reflected in the financial statement components.Management assertions fall into the following categories:Assertions about classes of transactions and events for the period under audit. Specific assertions for this category include: (1) occurrence, (2) completeness, (3) authorization, (4) accuracy, (5) cutoff, and (6) classification.Assertions about account balances at the period end. Specific assertions for this category include: (1) existence, (2) rights and obligations, (3) completeness, and (4) valuation and allocation.Assertions about presentation and disclosure. Specific assertions for this category include: (1) occurrence and rights and obligations, (2) completeness, (3) classification and understandability, and (4) accuracy and valuation.


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65. Discuss the reliability of the types of audit evidence and identify the level of reliability for each type of evidence. Inspection of the tangible assets, reperformance, and recalculation are generally considered of high reliability because the auditor has direct knowledge about them.Inspection of records and documents, scanning, confirmation, and analytical procedures are generally considered to be of medium reliability. The reliability of inspection of records and documents depends primarily on whether a document is internal or external, and the reliability of confirmation is affected by (1) the form of the confirmation, (2) prior experience with the entity, (3) the nature of the information being confirmed and (4) the intended respondent. The reliability of analytical procedures may be affected by the availability and reliability of the data.Observation and inquiry (other than confirmation) are generally low-reliability types of evidence because both require further corroboration by the auditor.The reliabilities of the types of evidence are summarized in below:High Reliability1. Inspection of tangible assets2. Reperformance3. RecalculationMedium Reliability1. Inspection of records and documents2. Scanning3. Confirmation4. Analytical proceduresLow Reliability1. Observation2. Inquiry


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auditing and assurance services chapter 4 tb

Documents

quality of audit evidence

relevance of audit evidence

audit assertiond

audit partner

audit work

audit documentsb

audit documentation

specific audit procedures