1) Auditors must make decisions about what evidence to gather and how much is needed. They consider sample size and timing of audit procedures.
2) Audit evidence has two primary qualities - relevance and reliability. Evidence from an external confirmation of accounts receivable is generally the most reliable.
3) For evidence to be sufficient, it must provide evidence that proves or disproves an audit objective/assertion.
1) Auditors must make decisions about what evidence to gather and how much is needed. They consider sample size and timing of audit procedures.
2) Audit evidence has two primary qualities - relevance and reliability. Evidence from an external confirmation of accounts receivable is generally the most reliable.
3) For evidence to be sufficient, it must provide evidence that proves or disproves an audit objective/assertion.
1) Auditors must make decisions about what evidence to gather and how much is needed. They consider sample size and timing of audit procedures.
2) Audit evidence has two primary qualities - relevance and reliability. Evidence from an external confirmation of accounts receivable is generally the most reliable.
3) For evidence to be sufficient, it must provide evidence that proves or disproves an audit objective/assertion.
1) Auditors must make decisions about what evidence to gather and how much is needed. They consider sample size and timing of audit procedures.
2) Audit evidence has two primary qualities - relevance and reliability. Evidence from an external confirmation of accounts receivable is generally the most reliable.
3) For evidence to be sufficient, it must provide evidence that proves or disproves an audit objective/assertion.
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The key takeaways are that auditors must gather sufficient and appropriate evidence to form an opinion on the client's financial statements. Audit evidence has qualities of relevance and reliability for the auditor.
The primary qualities of audit evidence for an auditor are relevance and reliability. Reliable evidence provides evidence that is more persuasive to the auditor, such as a confirmation of accounts receivable directly from a customer.
The characteristics of reliable evidence are independence of the information provider and timeliness of the evidence. Education of the auditor is not a characteristic of reliability.
Auditing and Assurance Services, 15e, Global Edition (Arens)
Chapter 7 Nature and Type of Audit Evidence
Learning Objective 7-1 1) All evidence must have the same level of persuasiveness. A) True B) alse Ans!er" B #) Auditors use evidence to help them dra! conclusions. A) True B) alse Ans!er" A Learning Objective 7-# 1) Auditors must ma$e decisions regarding !hat evidence to gather and ho! much to accumulate. %hich of the follo!ing is a decision that must be made b& auditors related to evidence' A) (ample si)e Timing of audit procedures *es *es B) (ample si)e Timing of audit procedures +o +o ,) (ample si)e Timing of audit procedures *es +o -) (ample si)e Timing of audit procedures +o *es Ans!er" A #) Audit procedures are concerned !ith the nature. e/tent. and timing in gathering audit evidence. %hich. of the follo!ing. is true as to the timing of audit procedures' A) 0rior to the fiscal &ear-end of the client (ubse1uent to the fiscal &ear- end of the client *es *es 1 ,op&right 2 #314 0earson 5ducation B) 0rior to the fiscal &ear-end of the client (ubse1uent to the fiscal &ear- end of the client +o +o ,) 0rior to the fiscal &ear-end of the client (ubse1uent to the fiscal &ear- end of the client *es +o -) 0rior to the fiscal &ear-end of the client (ubse1uent to the fiscal &ear- end of the client +o *es Ans!er" A 6) A7n) 88888888 is the detailed instruction that e/plains the audit evidence to be obtained during the audit. A) audit objectives B) audit procedure ,) audit assertion -) audit program Ans!er" B # ,op&right 2 #314 0earson 5ducation 4) %hich of the follo!ing is not one of the four decisions about !hat evidence to gather and ho! much of it to accumulate' A) %hich audit procedures to use B) %hich accounts must agree to the general ledger ,) %hen to perform the procedures -) %hat sample si)e to select for a given procedure Ans!er" B Learning Objective 7-6 1) Audit evidence has t!o primar& 1ualities for the auditor9 relevance and reliabilit&. :iven the choices belo!. !hich provides the auditor !ith the most reliable audit evidence' A) :eneral ledger account balances B) ,onfirmation of accounts receivable balance received from a customer ,) ;nternal memo e/plaining the issuance of a credit memo -) ,op& of month-end adjusting entries Ans!er" B #) %hich of the follo!ing is not a characteristic of the reliabilit& of evidence' A) 5ffectiveness of client internal controls B) 5ducation of auditor ,) ;ndependence of information provider -) Timeliness Ans!er" B 6) The auditor must gather sufficient and appropriate evidence during the course of the audit. (ufficient evidence must" A) be !ell documented and cross-referenced in the audit documents. B) be based on sources that are e/ternal to compan&. ,) provide evidence that prove or disprove an audit objective<assertion. -) be persuasive enough to enable the auditor to issue an audit report. Ans!er" - 4) Audit evidence obtained directl& b& the auditor !ill not be reliable if" A) the auditor lac$s the competence to evaluate the evidence. B) it is provided b& the client=s attorne&. ,) the client denies its veracit&. -) it is impossible for the auditor to obtain additional corroborator& evidence. Ans!er" A >) Appropriateness of evidence is a measure of the" A) 1uantit& of evidence. B) 1ualit& of evidence. ,) sufficienc& of evidence. -) meaning of evidence. Ans!er" B 6 ,op&right 2 #314 0earson 5ducation ?) %hich of the follo!ing statements regarding the relevance of evidence is correct' A) To be relevant. evidence must pertain to the audit objective of the evidence. B) To be relevant. evidence must be persuasive. ,) To be relevant. evidence must relate to multiple audit objectives. -) To be relevant. evidence must be derived from a s&stem including effective internal controls. Ans!er" A 7) T!o determinants of the persuasiveness of evidence are" A) competence and sufficienc&. B) relevance and reliabilit&. ,) appropriateness and sufficienc&. -) independence and effectiveness. Ans!er" , @) The t!o characteristics of the appropriateness of evidence are" A) relevance and timeliness. B) relevance and accurac&. ,) relevance and reliabilit&. -) reliabilit& and accurac&. Ans!er" , A) %hich of the follo!ing forms of evidence !ould be least persuasive in forming the auditor=s opinion about mar$etable securities and other investments held b& the compan&' A) Besponses to auditor=s 1uestions b& the president and controller regarding the investments account B) ,orrespondence !ith a stoc$bro$er regarding the 1uantit& of client=s investments held in street name b& the bro$er ,) Cinutes of the board of directors authori)ing the purchase of stoc$ as an investment -) The auditor=s count of mar$etable securities Ans!er" A 13) %hich of the follo!ing statements is not correct' A) ;t is possible to var& the sample si)e from one unit to 133D of the items in the population. B) The decision of ho! man& items to test should not be influenced b& the increased costs of performing the additional tests. ,) The decision of ho! man& items to test must be made b& the auditor for each audit procedure. -) The sample si)e for an& given procedure is li$el& to var& from audit to audit. Ans!er" B 11) or audit evidence to be compelling to the auditor it must be sufficient and appropriate. %hich statement belo! is not correct regarding the appropriateness of audit evidence' A) The more effective the internal control s&stem. the more assurance it provides the auditor about the reliabilit& of financial reporting b& the client. B) An auditor=s opinion. to be economicall& useful and profitable to the auditing firm needs to be formed !ithin a reasonable time and based on evidence obtained that assures profits for the auditing firm. 4 ,op&right 2 #314 0earson 5ducation ,) 5vidence obtained from independent sources outside the entit& is generall& more reliable than evidence secured solel& !ithin the entit&. -) The independent auditor=s direct personal $no!ledge. obtained through in1uir&. observation and inspection. is generall& more persuasive than information obtained indirectl&. Ans!er" B 1#) %hich of the follo!ing is a correct statement regarding audit evidence' A) A large sample of evidence provided b& an independent part& is al!a&s considered persuasive evidence. B) A small sample of onl& one or t!o pieces of highl& appropriate evidence is al!a&s considered persuasive evidence. ,) The auditor must obtain a sufficient amount of relevant and reliable evidence to form an opinion on the fairness of the financial statements. -) 5vidence is usuall& more reliable for balance sheet accounts !hen it is obtained !ithin si/ months of the balance sheet date. 16) %hich of the follo!ing is the most objective t&pe of evidence' A) A letter !ritten b& the client=s attorne& discussing the li$el& outcome of outstanding la!suits B) The ph&sical count of securities and cash ,) ;n1uiries of the credit manager about the collectabilit& of noncurrent accounts receivable -) Observation of cob!ebs on some inventor& bins Ans!er" B > ,op&right 2 #314 0earson 5ducation 14) %hich items affect the sufficienc& of evidence !hen choosing a sample' A) (electing items !ith a high li$elihood of misstatement The randomness of the items selected *es *es B) (electing items !ith a high li$elihood of misstatement The randomness of the items selected +o +o ,) (electing items !ith a high li$elihood of misstatement The randomness of the items selected *es +o -) (electing items !ith a high li$elihood of misstatement The randomness of the items selected +o *es Ans!er" , 1>) -etermine !hich of the follo!ing is most correct regarding the reliabilit& of audit evidence. A) ;nformation that is indirectl& obtained from e/ternal sources is the most reliable audit evidence. B) Beliabilit& of audit evidence is dependent upon the evidence being subjective. ,) Beliabilit& of evidence refers to the amount of evidence obtained. -) ;f internal controls are effective. evidence obtained is more reliable than !hen the controls are not effective. Ans!er" - 1?) 5vidence is generall& considered appropriate !hen" A) it has been obtained b& random selection. B) there is enough of it to afford a reasonable basis for an opinion on financial statements. ,) it is relevant to the audit objective being tested. -) it consists of !ritten statements made b& managers of the compan& under audit. Ans!er" , 17) :iven the economic and time constraints in !hich auditors can collect evidence about management assertions about the financial statements. the auditor normall& gathers evidence that is" A) irrefutable. B) conclusive. ,) persuasive. -) completel& convincing. Ans!er" , ? ,op&right 2 #314 0earson 5ducation 1@) %hich of the follo!ing statements is not a correct statement regarding audit evidence' A) 5vidence obtained from an independent source outside the client organi)ation is more reliable than that obtained from !ithin. B) -ocumentar& evidence is more reliable !hen it is received b& the auditor indirectl& rather than directl&. ,) -ocuments that originate outside the compan& are considered more reliable than those that originate !ithin the client=s organi)ation. -) 5/ternal evidence. such as communications from ban$s. is generall& regarded as more reliable than ans!ers obtained from in1uiries of the client. Ans!er" B 1A) 5vidence is usuall& more persuasive for balance sheet accounts !hen it is obtained" A) as close to the balance sheet date as possible. B) onl& from transactions occurring on the balance sheet date. ,) from various times throughout the client=s &ear. -) from the time period !hen transactions in that account !ere most numerous during the fiscal period. Ans!er" A #3) %hich of the follo!ing statements is true' A) 5vidence must be relevant to all of the audit objectives. B) ;f evidence is subjective. it cannot be reliable. ,) 5vidence obtained directl& b& the auditor ma& not be reliable if the auditor lac$s the 1ualifications to evaluate the evidence. -) The persuasiveness of evidence can be evaluated after considering its sufficienc&. Ans!er" , ##) -iscuss three of the follo!ing influences on the persuasiveness of evidence. 1. Belevance #. ;ndependence of provider 6. 5ffectiveness of client=s internal controls 4. Auditor=s direct $no!ledge >. -egree of objectivit& ?. Timeliness Ans!er" 1. Belevance E 5vidence must pertain to the audit objective if it is to be persuasive. Belevance must be considered in terms of specific audit objectives as evidence ma& be relevant to one objective and not another. #. ;ndependence of provider E 5vidence obtained from a source outside the entit& is more reliable and persuasive than that obtained from !ithin. 6. 5ffectiveness of client=s internal controls E %hen a client=s internal controls are effective. evidence obtained is more reliable than !hen the& are !ea$. 4. Auditor=s direct $no!ledge E 5vidence obtained directl& b& the auditor through ph&sical e/amination. observation. computation and inspection is more competent than information obtained indirectl&. >. -egree of objectivit& E Objective evidence is more reliable than evidence that re1uires 7 ,op&right 2 #314 0earson 5ducation considerable judgment to determine !hether it is correct. ?. Timeliness E The timeliness of audit evidence can refer either to !hen it is accumulated or to the period covered b& the audit. 5vidence is usuall& more reliable for balance sheet accounts !hen it is obtained as close to the balance sheet date as possible. #6) %h& is the appropriateness of audit evidence obtained b& the auditor important in forming an audit opinion' -escribe the 1ualities information should have to be considered appropriate b& the auditor. Ans!er" Appropriateness is a measure of the 1ualit& of evidence. Audit evidence that is considered appropriate contains the characteristics of relevance and reliabilit&. Belevant evidence relates to the assertion being tested. Beliabilit& refers to the degree to !hich evidence can be believable or !orth& of trust. #4) The reliabilit& of evidence refers to the degree to !hich evidence is considered believable or trust!orth&. There are si/ factors that affect the reliabilit& of audit evidence. One factor is the independence of the provider9 i.e.. evidence obtained from a source outside the client compan& is more reliable than that obtained !ithin. ;dentif& and discuss an& t!o of the remaining five factors" Ans!er" The remaining four factors that affect the reliabilit& of evidence are" F Effectiveness of client's internal control. %hen a client=s internal controls are effective. evidence obtained from the client is more reliable than !hen controls are !ea$. F Auditor's direct knowledge. 5vidence obtained directl& b& the auditor is more reliable than information obtained indirectl&. F Qualifications of individuals providing the information. Although the source of the information ma& be independent. the evidence !ill not be reliable unless the individual providing it is 1ualified to do so. Also. evidence obtained directl& b& the auditor man& not be reliable if the auditor lac$s the 1ualifications to evaluate the evidence. F Degree of objectivity. Objective evidence is more reliable than evidence that re1uires considerable judgment to determine !hether it is correct. F Timeliness E The timeliness of audit evidence can refer either to !hen it is accumulated or to the period covered b& the audit. 5vidence is usuall& more reliable for balance sheet accounts !hen it is obtained as close to the balance sheet date as possible. Learning Objective 7-4 1) ,alculating the gross margin for the current &ear under audit as a percent of sales and comparing it !ith previous &ears is !hat t&pe of evidence' A) 0h&sical e/amination B) Anal&tical procedures ,) Observation -) ;n1uir& Ans!er" B @ ,op&right 2 #314 0earson 5ducation #) %hen the auditor develops supporting evidence for amounts posted to account balances !ith documentar& evidence. that process is called" A) in1uir&. B) confirmation. ,) vouching. -) ph&sical e/amination. Ans!er" , 6) An e/ample of an e/ternal document that provides reliable information for the auditor is" A) emplo&ees= time reports. B) ban$ statements. ,) purchase order for compan& purchases. -) carbon copies of chec$s. Ans!er" B 4) An e/ample of a document the auditor receives from the client. but !hich !as prepared b& someone outside the client=s organi)ation. is a" A) confirmation. B) sales invoice. ,) vendor invoice. -) ban$ reconciliation. Ans!er" , >) The evaluations of financial information through anal&sis of plausible relationships among financial and nonfinancial data is the definition of" A) anal&tical procedures. B) tests of transactions. ,) tests of balances. -) auditing. Ans!er" A A ,op&right 2 #314 0earson 5ducation ?) Audit procedures can result in significant. une/pected differences. The auditor should investigate further if" A) (ignificant differences are not e/pected but do e/ist (ignificant differences are e/pected but do not e/ist *es *es B) (ignificant differences are not e/pected but do e/ist (ignificant differences are e/pected but do not e/ist +o +o ,) (ignificant differences are not e/pected but do e/ist (ignificant differences are e/pected but do not e/ist *es +o -) (ignificant differences are not e/pected but do e/ist (ignificant differences are e/pected but do not e/ist +o *es Ans!er" A 7) %hen the auditor uses tracing as an audit procedure for tests of transactions she is primaril& concerned !ith !hich audit objective' A) Occurrence B) ,ompleteness ,) ,utoff -) ,lassification Ans!er" B 13 ,op&right 2 #314 0earson 5ducation @) %hen the auditor uses the audit procedure vouching she is primaril& concerned !ith !hich of the follo!ing audit objectives !hen testing classes of transactions' A) Occurrence B) ,ompleteness ,) Authori)ation -) ,lassification Ans!er" A A) %hen auditors use documentation to support recorded transactions and amounts. the process is usuall& called" A) tracing. B) confirmations. ,) vouching. -) reperformance. Ans!er" , 13) Anal&tical procedures must be used during !hich phase7s) of the audit' A) Test of ,ontrols 0lanning ,ompletion *es *es *es B) Test of ,ontrols 0lanning ,ompletion +o *es *es ,) Test of ,ontrols 0lanning ,ompletion *es +o +o -) Test of ,ontrols 0lanning ,ompletion +o +o +o Ans!er" B 11) Auditors ma& decide to replace tests of details !ith anal&tical procedures !hen possible because the" A) anal&tical procedures are more reliable. B) anal&tical procedures are considerabl& less e/pensive. ,) anal&tical procedures are more persuasive. -) tests of details are more difficult to interpret. Ans!er" B 1#) %hen ma$ing decisions about evidence for a given audit. the auditor=s goal is to obtain a sufficient amount of timel&. reliable evidence that is relevant to the information being verified. ;n addition. the goal of audit efficienc& is to gather and evaluate the information" A) no matter the cost involved in obtaining such evidence. 11 ,op&right 2 #314 0earson 5ducation B) even if cost is irrelevant to the auditor. because the& bill the client for costs incurred. ,) at the lo!est possible total cost. -) at the cost suggested in the engagement letter. Ans!er" , 16) G0h&sical e/aminationG is the inspection or count b& the auditor of items such as" A) cash. inventor&. and pa&roll timecards. B) cash. inventor&. canceled chec$s. and sales documents. ,) cash. inventor&. canceled chec$s. and tangible fi/ed assets. -) cash. inventor&. securities. notes receivable. and tangible fi/ed assets. Ans!er" - 14) %hich of the follo!ing statements is most correct regarding the primar& purpose of audit procedures' A) To detect all errors or fraudulent activities as !ell as illegal activities B) To compl& !ith auditing standards promulgated b& the 0,AOB for publicl& held clients ,) To gather corroborative audit evidence about management=s assertions regarding the client=s financial statements -) To determine the amount of errors in the balance sheet accounts in order to adjust the accounts to actual Ans!er" , 1>) %hich of the follo!ing generall& provides the most reliable evidence' A) ,onfirmations B) Becalculation ,) Beperformance -) Observations Ans!er" A 1?) %hen practical and reasonable. H.(. auditing standards re1uire the confirmation of" A) individual transactions bet!een organi)ations. such as sales transactions. B) accounts receivable. ,) fi/ed asset additions. -) pa&roll e/penses. Ans!er" B 17) To be considered reliable evidence. confirmations must be controlled b&" A) the client=s emplo&ee responsible for accounts receivable. B) the e/ternal auditor. ,) the client=s internal audit department. -) the client=s controller or ,O. Ans!er" B 1# ,op&right 2 #314 0earson 5ducation 1@) ;ndicate !hether confirmation of accounts receivable and accounts pa&able. provided the& each are significant accounts. is re1uired or optional" A) Accounts Beceivable Accounts 0a&able Be1uired Be1uired B) Accounts Beceivable Accounts 0a&able Be1uired Optional ,) Accounts Beceivable Accounts 0a&able Optional Be1uired -) Accounts Beceivable Accounts 0a&able Optional Optional Ans!er" B 1A) The Auditing (tandards Board has concluded that anal&tical procedures are so important that the& are re1uired during" A) planning and test of control phases. B) planning and completion phases. ,) test of control and completion phases. -) planning. test of control. and completion phases. Ans!er" B #3) A benefit obtained from using industr& averages is that it provides a7n)" A) benchmar$ to compare the compan&=s results. B) indication !here errors e/ist in the statements. ,) benchmar$ to be used in evaluating a client=s budgets. -) comparison of G!hat isG !ith G!hat should be.G Ans!er" A #1) 0h&sical e/amination" A) is a direct means of verif&ing that an asset reall& e/ists. B) is sufficient evidence to verif& that the e/isting assets are o!ned b& the client. ,) can be used for both tangible assets and documents. -) is not generall& a reliable t&pe of audit evidence. Ans!er" A ##) %hich of the follo!ing is not a correct combination of terms and related t&pe of audit evidence' A) ;n1uire E in1uiries of client B) ,ount E ph&sical e/amination 16 ,op&right 2 #314 0earson 5ducation ,) Becompute E documentation -) Bead E documentation Ans!er" , #6) %hich of the follo!ing is a correct statement regarding confirmations' A) ,onfirmations can be in oral or !ritten form. B) 5lectronic confirmations are not acceptable under generall& accepted auditing standards. ,) ,onfirmations are generall& used in the audit of fi/ed asset additions. -) Auditors consider alternative evidence available !hen determining if confirmations should be used. Ans!er" - #4) An important benefit of industr& comparisons is as" A) an aid to understanding the client=s business. B) an indicator of errors. ,) an indicator of fraud. -) a least-cost indicator for audit procedures. Ans!er" A #>) The auditor is concerned that a client is failing to bill customers for shipments. An audit procedure that !ould gather relevant evidence !ould be to" A) select a sample of duplicate sales invoices and trace each to related shipping documents. B) trace a sample of shipping documents to related duplicate sales invoices. ,) trace a sample of (ales Iournal entries to the Accounts Beceivable subsidiar& ledger. -) compare the total of the (chedule of Accounts Beceivable !ith the balance of the Accounts Beceivable account in the general ledger. Ans!er" B #?) 88888888 is the auditor=s e/amination of the client=s documents and records to substantiate that the information is included in the financial statements. A) ;nspection B) Becalculation ,) Observation -) Jerification Ans!er" A #7) One purpose of performing anal&tical procedures in the planning phase of an audit is to assess the client=s financial condition. 5/plain ho! the assessment of a client=s financial condition can affect the auditor=s decisions concerning evidence accumulation in later phases of the audit. Ans!er" Auditors must obtain $no!ledge about a client=s industr& and business as a part of planning an audit. B& conducting anal&tical procedures in !hich the current &ear=s unaudited information is compared !ith prior &ears= audited information or industr& data. changes are highlighted. These changes can represent important trends or specific events. all of !hich !ill influence audit planning. The use of anal&tical procedures is often a useful indicator for determining !hether the client 14 ,op&right 2 #314 0earson 5ducation compan& has financial problems and if substantial doubt e/ists about the entit&=s abilit& to continue as a going concern. ,ertain anal&tical procedures can help the auditor assess the li$elihood of failure. The anal&tical procedures could also indicate the presence of possible misstatements in the financial statements if significant une/pected fluctuations occur. These items ma& !arrant increased audit procedures. !hereas !hen the anal&tical procedures reveal no unusual fluctuations. the possibilit& of material misstatement is minimi)ed and it is possible to perform fe!er detailed tests on related accounts or to eliminate certain audit procedures. reduce sample si)es. or to move the procedures farther a!a& from the balance sheet date. #@) There are four important purposes of anal&tical procedures. ;dentif& three of these four purposes and. for each purpose. give a specific e/ample of an anal&tical procedure that an auditor might perform. Ans!er" our important purposes of anal&tical procedures are" F To help the auditor understand the client=s industr& and business. the auditor might anal&)e recent trends in the client=s gross margin percentages to assess the effects of competition in the industr&. F To aid in the assessment of the client=s abilit& to continue as a going concern. the auditor might anal&)e several of the client=s $e& ratios including the ratio of long-term debt to net !orth. the ratio of profits to total assets. and the current ratio. F To indicate the presence of possible misstatements in the financial statements. the auditor might compare the current &ear=s unaudited account balances !ith the previous &ear=s audited balances. F To reduce the e/tent of detailed tests. the auditor might perform a simple anal&tical procedure such as multipl&ing the client=s monthl& rent times 1# as a test of the client=s rent e/pense account. ;f the product agrees !ith the balance in rent e/pense. no additional testing of the account ma& be necessar&. #A) -efine the follo!ing terms commonl& used in audit procedures" 1. 5/amine #. (can 6. ,ompute 4. oot >. ,ompare ?. ,ount 7. Jouch Ans!er" 1. 5/amine E A reasonabl& detailed stud& of a specific document or record to determine specific facts about it. ;t is the inspection or count b& the auditor of a tangible asset. #. (can E A less detailed e/amination of a document or record to determine !hether there is something unusual !arranting further investigation. 6. ,ompute E A calculation done b& the auditor independent of the client. 4. oot E Addition of a column of numbers to determine !hether the total is the same as the client=s. >. ,ompare E A comparison of information in t!o different locations. ?. ,ount E A determination of assets on hand at a given time. This is associated !ith evidence 1> ,op&right 2 #314 0earson 5ducation defined as ph&sical e/amination. 7. Jouch E The use of documents to verif& recorded transactions or amounts. 63) Belo! are 1# audit procedures. ,lassif& each procedure according to the follo!ing t&pes of audit evidence" 71) ph&sical e/amination. 7#) confirmation. 76) documentation. 74) observation. 7>) in1uir& of the client. 7?) reperformance. and 77) anal&tical procedure. T&pe of 5vidence Audit 0rocedures 1. %atch client emplo&ees count inventor& to determine !hether compan& procedures are being follo!ed. #. ,ount inventor& items and record the amount in the audit files. 6. Trace postings from the sales journal to the general ledger accounts. 4. ,alculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross margin relative to the preceding &ear. >. Obtain information about the client=s internal controls b& as$ing 1uestions of client personnel. ?. Trace column totals from the cash disbursements journal to the general ledger. 7. 5/amine a piece of e1uipment to ma$e sure a recent purchase of e1uipment !as actuall& received and is in operation. @. Bevie! the total of repairs and maintenance for each month to determine !hether an& month=s total !as unusuall& large. A. ,ompare vendor names and amounts on purchase invoices !ith entries in the purchases journal. 13. oot entries in the sales journal to determine !hether the& !ere correctl& totaled b& the client. 11. Ca$e a surprise count of pett& cash to verif& that the amount of the pett& cash fund is intact. 1#. Obtain a !ritten statement from the client=s ban$ stating the client=s &ear-end balance on deposit. Ans!er" 1. Observation #. 0h&sical e/amination 6. Beperformance 4. Anal&tical procedure >. ;n1uir& of the client ?. Beperformance 7. 0h&sical e/amination @. Anal&tical procedure A. -ocumentation 13. Beperformance 11. 0h&sical e/amination 1#. ,onfirmation 1? ,op&right 2 #314 0earson 5ducation 61) Catch nine of the terms 7a-$) !ith the definitions provided belo! 71-A)" a. oot b. ,ompute c. (can d. ;n1uire e. ,ount f. Trace g. Beperform h. Bead i. 5/amine j. Observe $. ,ompare
88888888 1. A calculation done b& the auditor independent of the client.
88888888 #. Addition of a column of numbers to determine if the total is the same as the client=s.
88888888 6. A comparison of information in t!o different locations.
88888888 4. A use of the senses to assess certain activities.
88888888 >. ollo!ing details of transactions from original documents to journals.
88888888 ?. A less detailed e/amination of a document or record to determine if there is something unusual !arranting further investigation.
88888888 7. Obtaining information from the client in response to specific 1uestions.
88888888 @. A determination of assets on hand at a given time.
88888888 A. An e/amination of !ritten information to determine facts pertinent to the audit. Ans!er" 1. b #. a 6. $ 4. j >. f ?. c 7. d @. e A. h 17 ,op&right 2 #314 0earson 5ducation 6#) Catch five of the terms 7a-h) !ith the definitions provided belo! 71->)" a. Audit documentation b. Audit procedures c. Audit objectives d. Anal&tical procedures e. Budgets f. Beliabilit& of evidence g. (ufficienc& of evidence h. 0ersuasiveness of evidence 88888888 1. Hse of comparisons and relationships to assess the reasonableness of account balances.
88888888 #. -etailed instructions for the collection of a t&pe of audit evidence.
88888888 6. The degree to !hich evidence can be considered believable or trust!orth&.
88888888 4. ,ontains all the information that the auditor considers necessar& to conduct an ade1uate audit and to provide support for the audit report.
88888888 >. This is determined b& the amount of evidence obtained. Ans!er" 1. d #. b 6. f 4. a >. g 66) Belo! are 13 documents t&picall& e/amined during an audit. ,lassif& each document as either internal or e/ternal. T&pe of -ocument -ocuments 1. ,anceled chec$s for pa&ments of accounts pa&able. #. 0a&roll time cards. 6. -uplicate sales invoices. 4. Jendors= invoices. >. Ban$ statements. ?. Cinutes of the board of directors= meetings. 7. (igned lease agreements. @. +otes receivable. A. (ubsidiar& accounts receivable records. 13. Bemittance advices. Ans!er" 1. 5/ternal ?. ;nternal #. ;nternal 7. 5/ternal 1@ ,op&right 2 #314 0earson 5ducation 6. ;nternal @. 5/ternal 4. 5/ternal A. ;nternal >. 5/ternal 13. 5/ternal 64) -istinguish bet!een internal documentation and e/ternal documentation as t&pes of audit evidence. :ive t!o e/amples of each. %hich t&pe is considered more reliable' Ans!er" ;nternal documentation involves the auditor=s e/amination of documents that have been prepared and used !ithin the client=s organi)ation and are retained !ithout ever going to an outside part&. 5/amples !ould include duplicate sales invoices. emplo&ees= time reports. and inventor& receiving reports.
5/ternal documentation involves the auditor=s e/amination of documents that have been in the hands of someone outside the client=s organi)ation. 5/amples include vendors= invoices. cancelled chec$s. cancelled notes pa&able. and insurance policies. 5/ternal documents are regarded as more reliable evidence than internal documents. Learning Objective 7-> 1) %hich of the follo!ing best describes one of the primar& objectives of audit documentation' A) -efend against claims of a deficient audit. B) 0rovide a basis for revie!ing the !or$ of subordinates. ,) 0rovide reasonable assurance that the audit !as conducted in accordance !ith auditing standards. -) 0rovide additional support of recorded amounts to the client. Ans!er" , #) Audit documents" A) are $ept b& the client for eas& reference for their accounting staff. B) should be considered as a substitute for the clients accounting records. ,) are designed to facilitate the revie! and supervision of the !or$ performed b& the audit team b& a revie!ing partner. -) prepared during the engagement are the propert& of the client once the audit bill is paid. Ans!er" , 6) Audit documentation" A) should identif& the items tested !hen the audit procedures involve sampling of transactions or balances. B) does not aid in the preparation of the ta/ return since accounting and ta/ rules differ. ,) is another term for the audit program. -) should not be given to an&one outside the audit firm. even if a subpoena has been issued. Ans!er" A s 1A ,op&right 2 #314 0earson 5ducation 4) -ue professional care. the third general standard. is concerned !ith !hat is done b& the independent auditor and ho! !ell it is done. or e/ample. due care in the matter of audit documentation re1uires that audit documentation of the evidence gathered b& the auditor meets !hich of the follo!ing criteria' A) %or$papers are prepared in sufficient detail so that the& can be given to the client for future reference. B) The content is sufficient to provide support for the auditor=s opinion. including the auditor=s representation as to compliance !ith auditing standards. ,) Audit evidence is principall& gathered to determine if the client=s financial statements. as prepared b& management. can be relied upon to ma$e managerial decisions about the firm. -) Audit evidence as displa&ed in the !or$papers is primaril& performed to protect the auditing firm in the case of a la!suit b& investors. Ans!er" B Learning Objective 7-? 1) %hen preparing and organi)ing audit files" A) The rules established b& the (5, and 0,AOB must be follo!ed. B) A lead schedule contains the detailed accounts from the general ledger ma$ing up the line item on the trial balance. ,) A !or$ing trial balance is considered part of the permanent file. -) The audit program is not part of the audit files. Ans!er" B #) Audit documentation should possess certain characteristics. %hich of the follo!ing is true regarding those characteristics' A) Audit documentation should be inde/ed and cross-referenced Audit documentation should be organi)ed to benefit the client=s staff *es *es B) Audit documentation should be inde/ed and cross-referenced Audit documentation should be organi)ed to benefit the client=s staff +o +o ,) Audit documentation should be inde/ed and cross-referenced Audit documentation should be organi)ed to benefit the client=s staff *es +o -) Audit documentation should be inde/ed and cross-referenced Audit documentation should be organi)ed to benefit the client=s staff +o *es Ans!er" , #3 ,op&right 2 #314 0earson 5ducation 6) The permanent audit file !ould usuall& include the follo!ing" A) client=s !or$ing trial balance B) summar& of the ris$ assessment procedures performed ,) organi)ational chart of the compan&=s emplo&ees -) summar& of the auditors test of controls for the current &ears audit Ans!er" , 4) The permanent files included as part of audit documentation do not normall& include" A) a cop& of the current and prior &ears= audit programs. B) copies of articles of incorporation. b&la!s and contracts. ,) information related to the understanding of internal control. -) results of anal&tical procedures from prior &ears. Ans!er" A >) %hen determining sufficient and appropriate audit evidence in order to form an opinion on the client=s financial statements the auditor compiles audit documentation to support the opinion. The largest portion of audit documentation !ill include detailed supporting schedules prepared b& the client or the auditor in support of specific accounts on the financial statements. The major t&pes of supporting schedules include anal&sis schedules and tests of reasonableness. -iscuss those t!o schedules and give an e/ample for each schedule. Ans!er" Anal&sis" designed to sho! the activit& in a general ledger account during the entire period under audit. t&ing together the beginning and ending balances. or e/ample. mar$etable securities. propert&. plant and e1uipment. long-term debt. e1uit& accounts. Auditors are focusing on the significance of the activit& in the account during the &ear. Tests of Beasonableness" ,ontains information that enables the auditor to evaluate !hether the client=s balance appears to contain a misstatement. 5/ample. depreciation e/pense. allo!ance for uncollectibles. income ta/ provision. Tests are primaril& anal&tical procedure tests in !hich the auditor forms an e/pectation of the balance that appears in the !or$ing trial balance. Learning Objective 7-7 1) Audit evidence is often available onl& in electronic form. and auditors must evaluate ho! this affects their abilit& to gather sufficient. appropriate evidence. A) True B) alse Ans!er" A #) An auditor can use engagement management soft!are to facilitate trac$ing audit progress. A) True B) alse Ans!er" A #1 ,op&right 2 #314 0earson 5ducation