Deck 7: A Framework for Audit Evidence

Question 1

Test of transactions,directional testing and substantive analytical procedures are used to provide evidence about management's assertions embedded in the financial statements.

Answer 1

True

Question 2

Audit evidence is also referred to as an audit opinion.

Answer 2

False

Question 3

The direction of testing from the source documents to recorded amounts provides evidence regarding the completeness of liabilities and expenses.

Answer 3

True

Question 4

Evidence is generally of higher quality if it involves a member of the audit team actually going out to physically observe it than if it was obtained from another source.

Question 5

A client's original signed purchase order is higher quality evidence than a confirmation returned from the client's bank.

Question 6

The amount of evidence gathered is not important to an auditor since the quality of the evidence is of primary importance.

Question 7

Assertions are relevant to the audit process because they are the representations of management embodied in the financial statements.

Question 8

Internal documentation is more reliable to the auditor if the internal control surrounding the documentation is considered strong than if it is considered weak.

Question 9

Vouching is a process that helps establish that recorded transactions are valid.

Question 10

Assertions are not relevant to an audit because they relate to the auditor and financial statements are management's responsibility instead of the auditor's.

Question 11

An auditor may test an account balance by testing the transactions that comprise the balance,by directly testing the final account balance,or a combination of both.

Question 12

Emails and faxes are documents that represent important evidence to the auditor,however,they are sometimes difficult to substantiate as authentic.

Question 13

Vouching recorded transactions involves taking a sample from the journal and tracing the items back to the source documents to ensure the transactions occurred.

Question 14

Ulanda and Mudana,CPAs are performing an audit on McArnee,Inc.Ulanda selects a sample from certain source documents and traces them forward to the accounts payable ledger.The purpose of this test is to determine the possibility of understated liabilities.

Question 15

For an auditor to test the existence assertion of assets,testing will be performed beginning with the recorded asset and ending with the source documents.

Question 16

The direction of testing from recorded amounts toward supporting documentation provides evidence as to existence of assets and revenues.

Question 17

One strategy used by auditors in testing assertions is to perform directional testing to find overstatements or understatements.

Question 18

Based upon the risk of misstatement,the auditor uses judgment to determine which balances and transactions should be tested in the financial statements.

Question 19

Presentation and disclosure assertions state that all transactions and balances are properly presented,and the company has disclosed every financial transaction and arrangement it entered into during the year in the footnotes.

Question 20

Documentation that is produced electronically by the client's internal systems is not considered appropriate to the audit process.

Question 21

The primary evidence in support of an auditor's conclusions is the auditor's documentation.

Question 22

Recent regulation requires that audit documentation be retained for at least seven years.

Question 23

The quality of electronic evidence depends on the controls built into the information system.

Question 24

The auditor multiplies the quantity of inventory on the inventory ledger by the cost of the inventory to arrive at total inventory balance per product number.This is an example of recomputation by footing.

Question 25

The extent of evidence gathered during an audit is affected by the auditor's assessment of detection risk.

Question 26

Audit documentation should include either manual or electronic initials in order to identify the audit personnel responsible for the work and the managers and partners reviewing the work.

Question 27

The auditor's concern for potential fraud in the financial statements will most likely result in increased testing for the overstatement of revenues.

Question 28

Inquiries of client personnel are not an effective means of evidence gathering by an auditor.

Question 29

Some audit procedures may be performed prior to the close of the year under audit.

Question 30

Lead schedules are often created by auditors to combine similar accounts,such as all inventory accounts for further testing and documentation.

Question 31

Auditors should mail third party confirmations through the client's mailroom.

Question 32

The auditor utilizes the same audit program and the same procedures each year for a client in order to ensure that nothing is missed in the current year audit.

Question 33

An example of physical examination is the auditor's testing of inventory by counting it to substantiate the existence assertion.

Question 34

The performance of analytical procedures is often used by an auditor as a procedure to gather certain types of audit evidence.

Question 35

Audit planning workpapers are prepared to support the foundation of the audit and are prepared for the client to assist in their understanding of the specific audit procedures that will be performed.

Question 36

The audit program specifies what the client must do to perform the audit in accordance with generally accepted accounting procedures.

Question 37

The reliability of audit evidence is a measure of the quality of the underlying evidence and is influenced by risk,potential management bias associated with the evidence,and the quality of the internal control system underlying the preparation of the evidence.

Question 38

Audit documentation serves as support for the financial statements.

Question 39

The primary importance of the audit program is its guidance of the overall conduct of the audit.

Question 40

The auditor's opinion on the financial statements taken as a whole is the single most important piece of information documenting the financial statements.

Question 41

Which one of the following statements is false?

A)Auditing includes the process of gathering evidence to test assertions.
B)No general audit program suits the needs for all situations.
C)Even though all audits are different,they can all be approached in the same manner.
D)All audits involve testing management's assertions contained in written communications to another party and independently gathering evidence to test the relevant assertions.

Question 42

Management's assertions in the financial statements are of relevance to the audit process because:

A)they are the procedures that will be performed by the audit team.
B)they are utilized by auditors in developing proper tests and procedures.
C)they are direct evidence that management has prepared financial statements in accordance with generally accepted audit standards.
D)they relate more to the audit while the financial statements belong to the auditor.

Question 43

Direct tests of account balances and of transactions are dual purpose tests.

Question 44

Dual purpose tests examine both controls and the reasonableness of dollar amounts.A good example is testing a sample of purchase transactions that occurred throughout the year.

Question 45

An advantage of directional testing is that it is more efficient by providing evidence on complementary sets of accounts.

Question 46

Directional testing involves testing transactions or balances primarily for which type of error?

A)overstatement
B)understatement
C)either overstatement or understatement
D)neither overstatement nor understatement

Question 47

In the performance of audit procedures there is a preference by auditors to focus on changes in account balances during the year if the opening balances were audited the previous year.

Question 48

The process of vouching helps establish that all recorded transactions

A)have been recorded.
B)are complete.
C)are valid.
D)are presented properly.

Question 49

Which one of the following would be considered the most persuasive type of audit evidence?

A)purchase orders from vendors
B)customer accounts receivable files
C)computerized general ledger
D)confirmations from banks

Question 50

Footing,cross-footing,and tests of extensions are examples of which approach to gathering evidence?

A)reprocessing
B)recalculation
C)vouching
D)examination of documentation

Question 51

Reliable evidence usually exists more for transactions than for items making up an ending balance.

Question 52

Which one of the following assertions regarding an inventory of ski equipment for Matterhorn,Inc.would be considered an incorrect statement?

A)The inventory exists at the balance sheet date.
B)The inventory is owned by Matterhorn.
C)Footnote disclosures concerning inventory are not required given the objective nature of this account.
D)The inventories are properly valued.

Question 53

Which one of the following would be the least persuasive type of evidence?

A)Confirmations returned by bank directly to the auditor.
B)Letters of communication from the Securities Exchange Commission.
C)Physical examination of perpetual inventory.
D)General ledger information.

Question 54

The client's original signed purchase orders and invoices are a more persuasive type of evidence than evidence directly observed by the auditor.

Question 55

Which one of the following would be the most persuasive type of evidence?

A)check register
B)bank statement
C)observation of assets
D)inquiry with the in-house attorney

Question 56

Analytical procedures are a type of substantive evidence.

Question 57

Underlying accounting records consists of evidence of controls as well as supporting records such as checks,invoices,the general and subsidiary ledger and journal entries.

Question 58

Taft company only holds cash in the local currency of the country in which it operates.Which one of the following management assertions would require the least amount of audit procedures for the cash account of Taft?

A)existence
B)valuation
C)completeness
D)presentation

Question 59

For the financial statements to be presented in accordance with generally accepted accounting principles,the information included must:

A)embody the appropriate assertions of management.
B)be consistent,comparable and fully accurate.
C)have full and adequate disclosure of all transactions.
D)be prepared by an independent auditor.

Question 60

Testimonial evidence concerns review of publicly available information about the client.

Question 61

When may audit procedures be performed? I - on the balance sheet date.
II - prior to the balance sheet date.
III - subsequent to the balance sheet date.

A)I only.
B)I and III only.
C)II only.
D)I,II,and III.

Question 62

Sufficient evidence gathered by the auditor involves which of the following?

A)The amount of evidence to be obtained.
B)The type of evidence to be obtained.
C)Obtaining limited evidence to achieve efficiency.
D)The use of an audit program to obtain evidence.

Question 63

Which of the following is the primary source for evidence to corroborate the existence of pending litigation?

A)vendor confirmations
B)disclosures in financial statements
C)management representation letters
D)attorney confirmations

Question 64

Which one of the following original documents would most likely be found in the audit working papers?

A)Vendor invoices
B)Check registers
C)Returned confirmation requests
D)Payroll time cards

Question 65

Conclusions are typically documented by auditors in which type of work paper?

A)audit planning memo
B)audit program
C)audit memoranda
D)representation letter

Question 66

The reliability of a client's internal documentation is most affected by which of the following?

A)the auditor's independence.
B)management's motivation to misstate accounts.
C)the type of audit report that will be issued.
D)management's ability to understand generally accepted audit standards.

Question 67

Directional testing is important to an auditor because of which of the following factors?

A)Certain accounts are more prone to be misstated by overstatement than others.
B)The auditor must remain organized when conducting an audit.
C)The primary concern of the auditor is the understatement of asset and revenue accounts.
D)It tests for existence and completeness simultaneously.

Question 68

How would an auditor most likely test the mechanical accuracy of a 6,000 page inventory report?

A)Examine a random sample of inventory documents.
B)Use generalized audit software to foot and recalculate.
C)Send confirmations to vendors.
D)Inquire of the inventory manager as to the accuracy.

Question 69

Which of the following provides the primary support of an audit?

A)the financial statements.
B)the audit working papers.
C)the audit report.
D)the confirmation documentation.

Question 70

An auditor selects a sample of items recorded and traces them back to the supporting documentation.This is an example of which of the following?

A)directional testing for existence.
B)directional testing for completeness.
C)direct testing for valuation.
D)direct testing for rights.

Question 71

External documentation may lack reliability.Which of the following is the most probable reason for that?

A)the external party may be competent in performing duties.
B)the documentation may be properly understood by the client in the response.
C)the auditor may decide not to use the documentation and replace it with other documents.
D)the documentation may have been altered if the process is not controlled from inception.

Question 72

An audit program is created to specify which of the following?

A)the type of audit opinion to be rendered based upon procedures performed.
B)the audit procedures that will be performed every year for the client.
C)how an auditor should think while performing audit procedures.
D)audit objectives and procedures to be followed during the audit process.

Question 73

The audit firm of Lake and South,LLP is wrapping up its audit of Brycestone,Inc.The evidence has been relatively easy to obtain except in one case.Which of the following would represent a balance or transaction that would be most difficult for Lake and South to obtain evidence?

A)prepaid expenses
B)cash
C)accrued wages and salaries
D)accrued warranties

Question 74

Which of the following is an example of poorly-developed audit documentation?

A)clear communication as to how testing was performed,the results and conclusions.
B)organization and assembly of documentation in an orderly fashion.
C)headings that include the name and signature of the client representative that the auditor interacted with while performing testing.
D)authenticated identification of the person responsible for completing the procedure and conclusions.

Question 75

The audit team asks the client to pull a sample of vendor files and examines the invoices supporting the purchases of inventory items during the year.What is the most probable reason for the use of this evidence?

A)Confirmation of vendors supplying inventory for existence.
B)Analytical procedures to determine completeness of inventory.
C)Testing for the valuation of inventory using the FIFO cost flow assumption.
D)Reading the terms of the arrangements with vendors for disclosure.

Question 76

Performance of audit procedures at an interim date causes the risk of material misstatement occurring between the interim date and the end of the year to

A)decrease.
B)increase.
C)remain the same.
D)become more difficult to ascertain.

Question 77

Reprocessing of transactions helps establish that all valid items have been recorded.Reprocessing tests which of the following assertions?

A)occurrence.
B)rights.
C)existence.
D)completeness.

Question 78

Which of the following assertions is the primary assertion that is satisfied by physically observing the client's count of inventory?

A)rights.
B)valuation.
C)completeness.
D)existence.

Question 79

Which one of the following is the primary reason for documenting audit work?

A)to prevent litigation by other parties that question the audit performance.
B)to provide a stand-alone medium that gives audit conclusions and supports the opinion.
C)to give the client a full reporting of all work performed on their behalf.
D)to supply a point of reference for all auditors performing the work subsequently.

Question 80

The extent of procedures is affected mostly by which of the following factors?

A)the sheer volume of procedures to be applied by the auditor.
B)the time of year in which the client takes a physical inventory in the warehouse.
C)the auditor's judgment that misstatements are probable in certain balances.
D)the availability of the client's staff at or near the balance sheet date.