Chapter 05-QUIZ-Audit Evidence andDocumentation 80 terms by Arsalaan_Arif

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The professional standards considercalculating depreciation expense a"routine" transaction. True False

FALSE

The most reliable form of documentaryevidence generally is considered to bedocuments created by the client. True False

FALSE

A vendor's invoice is an example ofdocumentary evidence created by athird party and held by the client. True False

TRUE

In performing analytical procedures, theauditors may use dollar amounts,physical quantities, or percentages. True False

TRUE

The primary purpose of a letter ofrepresentations is to obtain additionalevidence about specific accounts. True False

FALSE

The auditors should propose anadjusting journal entry for all materialrelated-party transactions. True False

FALSE

When the risk of material misstatementfor an account is high, the auditors mayperform additional substantiveprocedures to restrict detection risk to alower level. True False

TRUE

Working papers of continuing auditinterest usually are filed with theadministrative working papers. True False

FALSE

The use of lead schedules is designed toincrease the detail of the working trialbalance. True False

FALSE

Adjusting journal entries are ordinarilyrecorded by the client, whilereclassifying journal entries need not berecorded. True False

TRUE

To be effective, analytical procedures inthe overall review stage of an auditengagement should be performed by. A. The staff accountant who performedthe substantive auditing procedures.B. A beginning staff accountant who hashad no other work related to theengagement.C. A manager or partner who has acomprehensive knowledge of theclient's business and industry.D. The CPA firm's quality controlmanager.

C. A manager or partner who has acomprehensive knowledge of theclient's business and industry.

The components of the risk ofmisstatement are:Inherent Risk: YES NOControl Risk: YES NODetection Risk: YES NO

YES YES NO

Financial statement assertions areestablished for classes of transactions,Account Balances: YES NODisclosures: YES NO

YES YES

Which of the following is correctconcerning a "fraud risk factor"? A. It may affect the auditor's assessmentof fraud risk.B. It requires modification of plannedaudit procedures.C. It is also a material weakness ininternal control.D. If it involves senior management, it islikely to result in resignation of theauditor.

A. It may affect the auditor's assessmentof fraud risk.

When performing a financial statementaudit, auditors are required to explicitlyassess the risk of material misstatementdue to: A. Fraud.B. Misappropriation.C. Illegal Acts.D. Business risk.

A. Fraud.

As planning materiality is decreased, theauditor should plan more work onindividual accounts to. A. Find smaller misstatements.B. Find larger misstatements.C. Increase the tolerable misstatementin the accounts.D. Decrease the risk of assessing controlrisk too low.

A. Find smaller misstatements.

Further audit procedures include:Risk Assessment Procedures: YES NOTest of Control: YES NO

NO YES

Assertions that have a meaningfulbearing on whether an account balance,transaction class or disclosure is fairlystated are referred to as: A. Appropriate assertions.B. Sufficient assertions.C. Relevant assertions.D. Reliable assertions.

C. Relevant assertions.

Which of the following is not anassertion relating to classes oftransactions? A. Accuracy.B. Sufficiency.C. Cutoff.D. Classification.

B. Sufficiency.

Which of the following is requireddocumentation in an audit? A. A written engagement letterformalizing the level of services to beprovided.B. A flowchart of the client'sorganization.C. A written audit program.D. A memo setting forth the scope ofthe audit.

C. A written audit program.

Which of the following is not consideredto be an analytical procedure? A. Comparisons of financial statementamounts with source documents.B. Comparisons of financial statementamounts with nonfinancial data.C. Comparisons of financial statementamounts with budgeted amounts.D. Comparisons of financial statementamounts with comparable prior yearamounts.

A. Comparisons of financial statementamounts with source documents.

An auditor plans to apply substantivetests to the details of asset and liabilityaccounts as of an interim date ratherthan as of the balance sheet date. Theauditor should be aware that thispractice A. Eliminates the use of certainstatistical sampling methods that wouldotherwise be available.B. Presumes that the auditor willreperform the tests as of the balancesheet date.C. Should be especially consideredwhen there are rapidly changingeconomic conditions.D. Potentially increases the risk thaterrors that exist at the balance sheetdate will not be detected.

D. Potentially increases the risk thaterrors that exist at the balance sheetdate will not be detected.

An auditor compared the current-yeargross margin with the prior-year grossmargin to determine if cost of sales isreasonable. What type of auditprocedure was performed? A. Test of transactions.B. Analytical procedures.C. Test of controls.D. Test of details.

B. Analytical procedures.

The inspection of a vendor's invoice bythe auditors is: A. Direct evidence about occurrence of atransaction.B. Physical evidence about occurrenceof a transaction.C. Documentary evidence aboutoccurrence of a transaction.D. Part of the client's accountingsystem.

C. Documentary evidence aboutoccurrence of a transaction.

The auditors of Smith Electronics wishto limit the audit risk of materialmisstatement in the test of accountsreceivable to 5 percent. They believethat inherent risk is 100%, and there is a40% risk that material misstatementcould have bypassed the client's systemof internal control. What is themaximum detection risk the auditorsshould specify in their substantiveprocedures of details of accountsreceivable? A. 5%.B. 12.5%.C. 42.7%.D. 60%.

B. 12.5%

Analytical procedures are required atthe planning stage of all audits and as: A. Tests of internal control.B. Substantive procedures.C. A part of the final overall review.D. Computer generated procedures.

C. A part of the final overall review.

During financial statement audits,auditors seek to restrict which type ofrisk? A. Control risk.B. Detection risk.C. Inherent risk.D. Account risk.

B. Detection risk.

Which of the following groups are notconsidered a specialist by AICPAProfessional Standards: A. Appraisers.B. Internal auditors.C. Engineers.D. Geologists.

B. Internal auditors.

CPA wishes to use a representationletter as a substitute for performingother audit procedures. Doing so: A. Violates professional standards.B. Is acceptable, but should only bedone when cost justified.C. Is acceptable, but only for non-publicclients.D. Is acceptable and desirable under allconditions.

A. Violates professional standards.

Which of the following best describesthe problem with the use of publishedindustry averages for analyticalprocedures? A. Lack of comparability.B. Lack of sufficiency.C. Lack of accuracy.D. Lack of availability.

A. Lack of comparability.

In auditing an asset valued at fair value,which of the following potentiallyprovides the auditor with the strongestevidence? A. A price for a similar asset obtainedfrom an active market.B. An appraisal obtained discountingfuture cash flows.C. Management's judgment of the costto purchase an equivalent asset.D. The historical cost of the asset.

A. A price for a similar asset obtainedfrom an active market.

An auditor should expect that fair valueis the price that would be received tosell an asset in an orderly transactionbetween the market participants at the: A. Acquisition date of the asset.B. Audit report date.C. Expected replacement date of theasset.D. Measurement date (ordinarily thedate of the financial statements).

D. Measurement date (ordinarily thedate of the financial statements).

Which of the following best describesthe reason that auditors are concernedwith the detection of related partytransactions? A. The financial statements must oftenbe adjusted for the effects of materialrelated party transactions.B. Material related party transactionsmust be disclosed in the notes to thefinancial statements.C. The substance of related partytransactions will differ from their form.D. In a related party transaction oneparty has the ability to exercisesignificant influence over the otherparty.

B. Material related party transactionsmust be disclosed in the notes to thefinancial statements.

Which of the following is not a basicprocedure used in an audit? A. Risk assessment procedures.B. Substantive procedures.C. Tests of controls.D. Tests of direct evidence.

D. Tests of direct evidence.

Which of the following is not a financialstatement assertion relating to accountbalances? A. CompletenessB. Existence.C. Rights and obligations.D. Valuation and allowances.

D. Valuation and allowances.

Which of the following is generally trueabout the sufficiency of audit evidence? A. The amount of evidence that issufficient varies inversely with the riskof material misstatement.B. The amount of evidence concerning aparticular account varies inversely withthe materiality of the account.C. The amount of evidence concerning aparticular account varies inversely withthe inherent risk of the account.D. When evidence is appropriate withrespect to an account it is alsosufficient.

A. The amount of evidence that issufficient varies inversely with the riskof material misstatement.

Which of the following is true aboutanalytical procedures? A. Performing analytical proceduresresults in the most reliable form ofevidence.B. Analytical procedures are tests ofcontrols used to evaluate the quality ofa client's internal control.C. Analytical procedures are used forplanning, but they should not be usedto obtain evidence as to thereasonableness of specific accountbalances.D. Analytical procedures are used inplanning, as a substantive procedure forspecific accounts, and in the final reviewof the audited financial statements.

D. Analytical procedures are used inplanning, as a substantive procedure forspecific accounts, and in the final reviewof the audited financial statements.

Which of the following is a basicapproach often used by auditors toevaluate the reasonableness ofaccounting estimates? A. Confirmation.B. Observation.C. Reviewing subsequent events ortransactions.D. Analyzing corporate organizationalstructure.

C. Reviewing subsequent events ortransactions.

An auditor is performing an analyticalprocedure that involves comparing aclient's account balances over time. Thistechnique is referred to as: A. Vertical analysis.B. Horizontal analysis.C. Cross-sectional analysis.D. Comparison analysis.

B. Horizontal analysis.

An auditor is performing an analyticalprocedure that involves comparing aclient's ratios with other companies inthe same industry. This technique isreferred to as: A. Vertical analysis.B. Horizontal analysis.C. Cross-sectional analysis.D. Comparison analysis.

C. Cross-sectional analysis.

An auditor is performing an analyticalprocedure that involves developingcommon-size financial statements. Thistechnique is referred to as: A. Vertical analysis.B. Horizontal analysis.C. Cross-sectional analysis.D. Comparison analysis.

A. Vertical analysis.

Which of the following is not a basicapproach often used by auditors toevaluate the reasonableness ofaccounting estimates? A. Confirmation of amounts.B. Review of management's process ofdevelopment.C. Independent development of anestimate.D. Review of subsequent events.

A. Confirmation of amounts.

The audit time budget is an example of: A. A supporting schedule.B. An administrative working paper.C. A lead schedule.D. A corroborative working paper.

B. An administrative working paper.

A schedule set up to combine similargeneral ledger accounts, the total ofwhich appears on the working trialbalance as a single amount, is referredto as a: A. Supporting schedule.B. Lead schedule.C. Corroborating schedule.D. Reconciling schedule.

B. Lead schedule.

Which of the following is not a functionof working papers? A. Provide support for the auditors'report.B. Provide support for the accountingrecords.C. Aid partners in planning andconducting future audits.D. Document staff compliance withgenerally accepted auditing standards.

B. Provide support for the accountingrecords.

A schedule listing account balances forthe current and previous years, andcolumns for adjusting and reclassifyingentries proposed by the auditors toarrive at the final amount that willappear in the financial statement, isreferred to as a: A. Working trial balance.B. Lead schedule.C. Summarizing schedule.D. Supporting schedule.

A. Working trial balance.

The auditors use analytical proceduresduring the course of an audit. The mostimportant phase of performing theseprocedures is the: A. Vouching of all data supportingvarious ratios.B. Investigation of significant variationsand unusual relationships.C. Comparison of client-computedstatistics with industry data on aquarterly and full-year basis.D. Recalculation of industry date.

B. Investigation of significant variationsand unusual relationships.

The auditors must obtain written clientrepresentations that normally should besigned by: A. The president and the chairperson ofthe board.B. The treasurer and the internalauditor.C. The chief executive officer and thechief financial officer.D. The corporate counsel and the auditcommittee chairperson.

C. The chief executive officer and thechief financial officer.

Which of the following ultimatelydetermines the specific auditprocedures necessary to provideindependent auditors with a reasonablebasis for the expression of an opinion? A. The audit time budget.B. The auditors' judgment.C. Generally accepted accountingquality standards.D. The auditors' working papers.

B. The auditors' judgment.

Failure to detect material dollar errorsin the financial statements is a riskwhich the auditors primarily mitigateby: A. Performing substantive procedures.B. Performing tests of controls.C. Assessing control risk.D. Obtaining a client representationletter.

A. Performing substantive procedures.

An independent auditor finds that theSimmer Corporation occupies officespace, at no charge, in an office buildingowned by a shareholder. This findingindicates the existence of: A. Management fraud.B. Related party transactions.C. Window dressing.D. Weak internal control.

B. Related party transactions.

Which of the following would notnecessarily be considered a relatedparty transaction? A. Payment of a bonus to the president.B. Purchases from another corporationthat is controlled by the corporation'schief stockholder.C. Loan from the corporation to a majorstockholder.D. Sale of land to the corporation by thespouse of a director.

A. Payment of a bonus to the president.

The date of the managementrepresentation letter should coincidewith the: A. Date of the auditor's report.B. Balance sheet date.C. Date of the latest subsequent eventreferred to in the notes to the financialstatements.D. Date of the engagement agreement.

A. Date of the auditor's report.

An example of an analytical procedureis the comparison of: A. Financial information with similarinformation regarding the industry inwhich the entity operates.B. Recorded amounts of majordisbursements with appropriateinvoices.C. Results of a statistical sample withthe expected characteristics of theactual population.D. EDP generated data with similar datagenerated by a manual accountingsystem.

A. Financial information with similarinformation regarding the industry inwhich the entity operates.

When considering the use ofmanagement's written representationsas audit evidence about thecompleteness assertion, an auditorshould understand that suchrepresentations: A. Complement, but do not replace,substantive procedures designed tosupport the assertion.B. Constitute sufficient evidence tosupport the assertion when consideredin combination with a moderateassessed level of control risk.C. Are generally sufficient auditevidence to support the assertionregardless of the assessed level ofcontrol risk.D. Replace the assessed level of controlrisk as evidence to support theassertions.

A. Complement, but do not replace,substantive procedures designed tosupport the assertion.

Which of the following expressions isleast likely to be included in a client'srepresentation letter? A. No events have occurred subsequentto the balance sheet date that requireadjustment to, or disclosure in, thefinancial statements.B. The company has complied with allaspects of contractual agreements thatwould have a material effect on thefinancial statements in the event ofnoncompliance.C. Management acknowledgesresponsibility for illegal actionscommitted by employees.D. Management has made available allfinancial statements, including notes.

C. Management acknowledgesresponsibility for illegal actionscommitted by employees.

Which of the following statements isgenerally correct about audit evidence? A. The auditor's direct personalknowledge, obtained throughobservation and inspection, is morepersuasive than information obtainedindirectly from independent outsidesources.B. To be appropriate, audit evidencemust be sufficient.C. Accounting data alone may beconsidered sufficient appropriate auditevidence to issue an unqualifiedopinion on financial statements.D. Appropriateness of audit evidencerefers to the amount of corroborativeevidence to be obtained.

A. The auditor's direct personalknowledge, obtained throughobservation and inspection, is morepersuasive than information obtainedindirectly from independent outsidesources.

Which of the following statementsrelating to audit evidence is the mostaccurate statement? A. Audit evidence gathered by anauditor from outside an enterprise isreliable.B. Accounting data developed undersatisfactory conditions of internalcontrol are more relevant than datadeveloped under unsatisfactory internalcontrol conditions.C. Oral representations made bymanagement are not valid evidence.D. The auditor must obtain sufficientappropriate audit evidence.

D. The auditor must obtain sufficientappropriate audit evidence.

Which of the following is not a typicalanalytical procedure? A. Study of relationships of the financialinformation with relevant nonfinancialinformation.B. Comparison of the financialinformation with similar informationregarding the industry in which theentity operates.C. Comparison of recorded amounts ofmajor disbursements with appropriateinvoices.D. Comparison of the financialinformation with budgeted amounts.

C. Comparison of recorded amounts ofmajor disbursements with appropriateinvoices.

Which of the following is not a primarypurpose of audit working papers? A. To coordinate the examination.B. To assist in preparation of the auditreport.C. To support the financial statements.D. To provide evidence of the auditwork performed.

C. To support the financial statements.

Concerning retention of workingpapers, the Sarbanes-Oxley Act: A. Has no provisions.B. Requires permanent retention.C. Requires retention for at least 7years.D. Requires retention for a period of 4or less years.

C. Requires retention for at least 7years.

During an audit engagement pertinentdata are prepared and included in theaudit working papers. The workingpapers primarily are considered to be: A. A client-owned record of conclusionsreached by the auditors who performedthe engagement.B. Evidence supporting financialstatements.C. Support for the auditors'representations as to compliance withgenerally accepted auditing standards.D. A record to be used as a basis for thefollowing year's engagement.

C. Support for the auditors'representations as to compliance withgenerally accepted auditing standards.

Although the quantity, type, and contentof working papers will vary with thecircumstances, the working papersgenerally would include the: A. Copies of those client recordsexamined by the auditor during thecourse of the engagement.B. Evaluation of the efficiency andcompetence of the audit staff assistantsby the partner responsible for the audit.C. Auditor's comments concerning theefficiency and competence of clientmanagement personnel.D. Auditing procedures followed andthe testing performed in obtaining auditevidence.

D. Auditing procedures followed andthe testing performed in obtaining auditevidence.

The permanent file section of theworking papers that is kept for eachaudit client most likely contains: A. Review notes pertaining to questionsand comments regarding the audit workperformed.B. A schedule of time spent on theengagement by each individual auditor.C. Correspondence with the client's legalcounsel concerning pending litigation.D. Narrative descriptions of the client'saccounting procedures and controls.

D. Narrative descriptions of the client'saccounting procedures and controls.

Working papers that record theprocedures used by the auditor togather evidence should be: A. Considered the primary support forthe financial statements beingexamined.B. Viewed as the connecting linkbetween the books of account and thefinancial statements.C. Designed to meet the circumstancesof the particular engagement.D. Destroyed when the audited entityceases to be a client.

C. Designed to meet the circumstancesof the particular engagement.

In general, which of the followingstatements is correct with respect toownership, possession, or access toworking papers prepared by a CPA firmin connection with an audit? A. The working papers may be obtainedby third parties where they appear to berelevant to issues raised in litigation.B. The working papers are subject to theprivileged communication rule which, ina majority of jurisdictions, preventsthird-party access to the workingpapers.C. The working papers are the propertyof the client after the client pays the fee.D. The working papers must be retainedby the CPA firm for a period of tenyears.

A. The working papers may be obtainedby third parties where they appear to berelevant to issues raised in litigation.

Confirmation would be most effective inaddressing the existence assertion forthe: A. Addition of a milling machine to amachine shop.B. Payment of payroll during regularcourse of business.C. Inventory held on consignment.D. Granting of a patent for a specialprocess developed by the organization.

C. Inventory held on consignment.

An auditor performs analyticalprocedures that involve comparing thegross margins of various divisionaloperations with those of other divisionsand with the individual division'sperformance in previous years. Theauditor notes a significant increase inthe gross margin at one division. Theauditor does some preliminaryinvestigation and also notes that therewere no changes in products,production methods, or divisionalmanagement during the year. Based onthe above information, the most likelycause of the increase in gross marginwould be: A. An increase in the number ofcompetitors selling similar products.B. A decrease in the number ofsuppliers of the material used inmanufacturing the product.C. An overstatement of year-endinventory.D. An understatement of year-endaccounts receivable.

C. An overstatement of year-endinventory.

Management is concerned about thelower level of profitability in the Mid-Central Region. Which of the followingwould be a reasonable possibleexplanation(s) of the lower profitabilityfor the Mid-Central Region? I. The lower number of stores in theMid-Central Region.II. Sales employees are not asproductive in generating sales as thosein other regions.III. The Mid-Central Region has a lowergross margin. A. I only.B. II only.C. II and III only.D. I, II and III.

C. II and III only.

Based on the previous information,which of the following preliminaryconclusions can the auditor use as abasis for further investigations? A. Sales per store are directly related tothe size of the store.B. Sale clerks are less productive inlarger size stores.C. Gross margin is directly related to thesize of the store.D. Average square feet of storecorrelates with the number of stores inthe district.

A. Sales per store are directly related tothe size of the store.

Which of the following statements is notcorrect regarding the auditor's furtheranalysis? A. The Mid-Central Region has feweraverage full-time equivalent employeesper store than the other regions perstore.B. The other regions all generate highersales per square foot than the Mid-Central Region.C. The Mid-Central Region has thehighest average wages per full-timeequivalent employee.D. The largest contributor to totalcorporate profits is the SouthwestRegion.

B. The other regions all generate highersales per square foot than the Mid-Central Region.

Management has centralizedpurchasing and uses a model basedupon previous year's sales withadjustments for trends in the marketplace, e.g., the trend to more casualshoes. A staff auditor has suggested thatthe centralized purchasing may be oneof the reasons for the lower level ofprofitability in the Mid-Central Region.Which of the following would be thebest single audit procedure to addressthe staff auditor's assertion? A. Take a sample of receivingdocuments at stores and trace topurchase orders to determine thelength of time between the purchaseand delivery of the goods.B. Interview store managers in the Mid-Central Region to determine theirattitude toward centralized purchasing.C. Perform an inventory count atselected stores in the Mid-CentralRegion and determine if adjustmentsare needed to the perpetual records.D. Perform a product-line analysis ofsales and purchases in the Mid-CentralRegion and compare with other regions.

D. Perform a product-line analysis ofsales and purchases in the Mid-CentralRegion and compare with other regions.

What type of transactions ordinarilyhave high inherent risk because theyinvolve management judgments orassumptions in formulating accountingbalances? A. Estimation.B. Nonroutine.C. Qualified.D. Routine.

A. Estimation.

Assertions with high inherent risk areleast likely to involve: A. Complex calculations.B. Difficult accounting issues.C. Routine transactions.D. Significant judgment bymanagement.

C. Routine transactions.

The date on which no information maybe deleted from audit documentation isthe A. Client's year-end.B. Documentation completion date.C. Last date of significant fieldwork.D. All of the above are incorrect in thatno information may ever be deletedfrom audit documentation.

B. Documentation completion date.

In evaluating an entity's accountingestimates, one of the auditor'sobjectives is to determine whether theestimates are A. Prepared in a satisfactory controlenvironment.B. Consistent with industry guidelines.C. Based on verifiable objectiveassumptions.D. Reasonable in the circumstances.

D. Reasonable in the circumstances.

Analytical procedures are substantiveprocedures that may be used to provideevidence about specific accounts andclasses of transactions. a. Describe three major types ofcomparisons the auditor might make inperforming analytical procedures.

a. Comparisons made in performinganalytical procedures include (onlythree required): Comparisons with prior years' data. Comparisons with budgets andforecasts. Comparisons with industry statistics. Comparisons with nonfinancial data. Comparisons of predictablerelationships based on past history.

Analytical procedures are substantiveprocedures that may be used to provideevidence about specific accounts andclasses of transactions. b. At what stages of the audit areanalytical procedures performed andwhat purpose do they serve at eachstage?

b. Analytical procedures may beperformed:1. During planning to identify items thatrequire more audit attention.2. Throughout the audit as a substantiveprocedure for accounts or classes oftransactions.3. At the conclusion of the audit for anoverall review of the audited financialstatements.

Audit working papers are an integralpart of an examination in accordancewith generally accepted auditingstandards. a. Describe three major functions of theaudit working papers.

a. The functions of audit working papersinclude (only three required): Provide a means of assigning andcoordinating audit work. Aid in review of the work. Provide support for the auditors'report. Document compliance with generallyaccepted auditing standards. Aid in planning and conducting futureaudits.

Audit working papers are an integralpart of an examination in accordancewith generally accepted auditingstandards. b. Distinguish between the permanentworking paper file and the currentworking paper file.

b. The permanent file is used toorganize working papers of continuingaudit interest over a number of years.The current file contains theadministrative and evidence workingpapers for the year under examination.