Audit evidence obtained directly by the auditor will not be reliable if: easy ab. Which of the following statements regarding analytical procedures is not correct.. Which of the followin
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Multiple-Choice Questions
1
Easy
c
Auditors must make decisions regarding what evidence to gather and how much to accumulate Which of the following is a decision that must be made by auditors related to evidence?
Sample size Timing of audit procedures
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
2 Audit procedures may be performed:
Easy
a Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
3 Which of the following forms of evidence is most reliable?
easy a General ledger account balances
b b Confirmation of accounts receivable balance received from a customer
c Internal memo explaining the issuance of a credit memo
d Copy of month-end adjusting entries
4 Which of the following is not a characteristic of the reliability of evidence?
easy a Effectiveness of client internal controls
c Independence of information provider
d Timeliness
5 Which of the following is not a characteristic of the reliability of evidence?
easy a Qualification of individual providing information
c Degree of subjectivity
d Degree of objectivity
6
easy
Calculating the gross margin as a percent of sales and comparing it with previous periods is what type of evidence?
b Analytical procedures
c Observation
d Inquiry
7 Audit evidence obtained directly by the auditor will not be reliable if:
easy a the auditor lacks the qualifications to evaluate the evidence
a b it is provided by the client’s attorney
c the client denies its veracity
d it is impossible for the auditor to obtain additional corroboratory evidence
8 Appropriateness of evidence is a measure of the:
easy a quantity of evidence
Trang 2b b quality of evidence
c sufficiency of evidence
d meaning of evidence
9 Which of the following statements regarding the relevance of evidence is correct?
easy a To be relevant, evidence must pertain to the audit objective of the evidence
a b To be relevant, evidence must be persuasive
c To be relevant, evidence must relate to multiple audit objectives
d To be relevant, evidence must be derived from a system including effective internal controls
10 Two determinants of the persuasiveness of evidence are:
easy a competence and sufficiency
c b relevance and reliability
c appropriateness and sufficiency
d independence and effectiveness
11
easy
c
Three common types of confirmations used by auditors are (1) negative confirmations, (2) blank form positive confirmations, and (3) positive confirmations with information included Place the confirmations in order of reliability from highest to lowest
a 1, 2, 3
b 3, 2, 1
c 2, 3, 1
d 3, 1, 2
12 When auditors use documents to support recorded transactions, the process is often called:
c vouching
d physical examination
13 An example of an external document is:
easy a employees’ time reports
c purchase order for company purchases
d carbon copies of checks
14
easy
An example of a document the auditor receives from the client, but which was prepared by someone outside the client’s organization, is a(n):
b sales invoice
c vendor invoice
d bank reconciliation
15
easy
a
―Evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data involving comparisons of recorded amounts to expectations developed by the auditor‖ is a definition of:
a analytical procedures
b tests of transactions
c tests of balances
d auditing
16 Often, auditor procedures result in significant differences being discovered by the auditor The
auditor should investigate further if:
Easy
Trang 3expected but do exist do not exist
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
17 Which of the following is not a purpose of analytical procedures?
easy a Understand the client’s industry
c b Assess the client’s ability to continue as a going concern
c Evaluate internal controls
d Reduce detailed audit tests
18
medium
Which of the following forms of evidence would be least persuasive in forming the auditor’s opinion?
a a Responses to auditor’s questions by the president and controller regarding the investments
account
b Correspondence with a stockbroker regarding the quantity of client’s investments held in street name by the broker
c Minutes of the board of directors authorizing the purchase of stock as an investment
d The auditor’s count of marketable securities
19 Which of the following statements is not true? ―The evidence-gathering technique of inquiry: medium a cannot be regarded as conclusive.‖
c b requires the gathering of corroborative evidence.‖
c is the auditor’s principal method of evaluating the client’s internal control.‖
d does not provide evidence from an independent source.‖
20 (SOX)
medium
Sarbanes-Oxley requires auditors of public companies to maintain audit documentation for what period of time?
b Not less than 5 years
c Not less than 7 years
d Through the issuance of the financial statements
21 Analytical procedures must be used during which phase(s) of the audit?
medium
22 Which of the following statements is not correct?
medium a It is possible to vary the sample size from one unit to 100% of the items in the population
b b The decision of how many items to test should not be influenced by the increased costs of
performing the additional tests
c The decision of how many items to test must be made by the auditor for each audit procedure
d The sample size for any given procedure is likely to vary from audit to audit
23 Auditors will replace tests of details with analytical procedures when possible because the: medium a analytical procedures are more reliable
b b tests of details are more expensive
c analytical procedures are more persuasive
d tests of details are more difficult to interpret
Trang 424 Which of the following statements is not correct?
medium a Persuasiveness of evidence is partially determined by the reliability of evidence
c b The quantity of evidence obtained determines its sufficiency
c The auditor need not consider the independence of an information source when obtaining evidence
d Evidence obtained directly by the auditor is ordinarily more reliable than evidence obtained from other sources
25 Which one of the following is not one of the primary purposes of audit documentation?
medium a A basis for planning the audit
d b A record of the evidence accumulated and the results of the tests
c A basis for review by supervisors and partners
d A basis for determining work deficiencies by peer review teams
26 Which of the following is the most objective type of evidence?
medium a A letter written by the client’s attorney discussing the likely outcome of outstanding
lawsuits
b b The physical count of securities and cash
c Inquiries of the credit manager about the collectibility of noncurrent accounts receivable
d Observation of cobwebs on some inventory bins
27 Which of the following statements regarding documentation is not correct?
medium
b
a Documentation includes examining client records such as general ledgers and supporting journals
b Internal documents are documents that are generated within the company and used to communicate with external parties
c External documents are documents that are generated outside of the company and are used
to communicate the results of a transaction
d External documents are considered more reliable than internal documents
28
medium
c
When making decisions about evidence for a given audit, the auditor’s goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified, and to do so:
a no matter the cost involved in obtaining such evidence
b at any cost because the costs are billed to the client
c at the lowest possible total cost
d at the cost suggested in the engagement letter
29 ―Physical examination‖ is the inspection or count by the auditor of items such as:
medium a cash, inventory, and payroll timecards
d b cash, inventory, canceled checks, and sales documents
c cash, inventory, canceled checks, and tangible fixed assets
d cash, inventory, securities, notes receivable, and tangible fixed assets
30 Which items affect the sufficiency of evidence when choosing a sample?
medium
c Selecting items with a high likelihood of
misstatement
The randomness of the items selected
31 Which of the following is an example of vouching?
medium a Trace inventory purchases from the acquisitions journal to supporting invoices
a b Trace selected sales invoices to the sales journal
Trang 5c Trace details of employee paychecks to the payroll journal
d All of the above are examples of vouching
32 Which of the following statements about confirmations is true?
medium a Confirmations are expensive and so are often not used
b b Confirmations may inconvenience those asked to supply them, but they are widely used
c Confirmations are sometimes not reliable and so auditors use them only as necessary
d Confirmations are required for several balance sheet accounts but no income statement accounts
33 Traditionally, confirmations are used to verify:
medium a individual transactions between organizations, such as sales transactions
b b bank balances and accounts receivable
c fixed asset additions
d payroll expenses
34 To be considered reliable evidence, confirmations must be controlled by:
medium a a client employee responsible for accounts receivable
b b a financial statement auditor
c a client’s internal audit department
d a client’s controller or CFO
35
medium
Indicate whether confirmation of accounts receivable and accounts payable is required or optional:
b
Accounts Receivable Accounts Payable
36
medium
The Auditing Standards Board has concluded that analytical procedures are so important that they are required during:
b a planning and test of control phases
b planning and completion phases
c test of control and completion phases
d planning, test of control, and completion phases
37 Which of the following statements regarding analytical procedures is not correct?
medium a Analytical tests emphasize a comparison of client internal controls to GAAP
a b Analytical procedures are required on all audits
c Analytical procedures can be used as substantive tests
d For certain accounts with small balances, analytical procedures alone may be sufficient evidence
38
medium
A benefit obtained from comparing the client’s data with industry averages is that it provides a(n):
a a indication of the likelihood of financial problems
b indication where errors exist in the statements
c benchmark to be used in evaluating a client’s budgets
d comparison of ―what is‖ with ―what should be.‖
39
medium
a
The primary purpose of performing analytical procedures in the planning phase of an audit is to:
a help the auditor obtain an understanding of the client’s industry and business
b assess the going concern assumption
Trang 6c indicate possible misstatements
d reduce detailed tests
40 Which of the following is not a correct combination of terms and related type of audit evidence? medium a Foot – reperformance
c Vouch – documentation
d Trace – analytical procedures
41 Which of the following is not a correct combination of terms and related type of audit evidence? medium a Inquire – inquiries of client
c Recompute – documentation
d Read – documentation
42 Which of the following is not one of the major types of analytical procedures?
medium a Compare client with industry averages
d b Compare client with prior year
c Compare client with budget
d Compare client with SEC averages
43 What is the overall objective of audit documentation?
medium a Defend against claims of a deficient audit
c b Provide a basis for reviewing the work of subordinates
c Provide reasonable assurance that the audit was conducted in accordance with standards
d Provide additional support of recorded amounts to the client
44 An important benefit of industry comparisons is as:
medium a an aid to understanding the client’s business
c an indicator of fraud
d a least-cost indicator for audit procedures
45 The permanent files included as part of audit documentation do not normally include:
medium a a copy of the current and prior years’ audit programs
a b copies of articles of incorporation, bylaws and contracts
c information related to the understanding of internal control
d results of analytical procedures from prior years
46 Those procedures specifically outlined in an audit program are primarily designed to
medium a prevent litigation
d b detect errors or irregularities
c test internal systems
d gather evidence
47 Evidence is generally considered appropriate when:
medium a it has been obtained by random selection
c b there is enough of it to afford a reasonable basis for an opinion on financial statements
c it has the qualities of being relevant, objective, and free from known bias
d it consists of written statements made by managers of the enterprise under audit
48
challenging
Given the economic constraints in which auditors collect evidence, the auditor normally gathers evidence that is:
b conclusive
c persuasive
Trang 7d completely convincing
49
challenging
The auditor is concerned that a client is failing to bill customers for shipments An audit procedure that would gather relevant evidence would be to:
b 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
c trace a sample of Sales Journal entries to the Accounts Receivable subsidiary ledger
d compare the total of the Schedule of Accounts Receivable with the balance of the Accounts Receivable account in the general ledger
50 Relevance can be considered only in terms of:
challenging a general audit objectives
b b specific audit objectives
c transaction audit objectives
d balance audit objectives
51
challenging
Audit documentation should possess certain characteristics Which of the following is one of the characteristics?
c
Audit documentation should be indexed
and cross-referenced
Audit documentation should be organized to benefit the client’s staff
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
52 Which of the following statements is not a correct use of the terminology?
medium
b
a Evidence obtained from an independent source outside the client organization is more reliable than that obtained from within
b Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly
c Documents that originate outside the company are considered more reliable than those that originate within the client’s organization
d External evidence, such as communications from banks, is generally regarded as more reliable than answers obtained from inquiries of the client
53 Evidence is usually more persuasive for balance sheet accounts when it is obtained:
challenging a as close to the balance sheet date as possible
a b only from transactions occurring on the balance sheet date
c from various times throughout the client’s year
d from the time period when transactions in that account were most numerous during the fiscal period
54 Audit documentation should provide support for:
medium
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
Trang 855 Which of the following statements is not correct concerning audit documentation?
challenging
a
a Audit documentation is acquired to defend against claims that the auditor performed a deficient audit
b The only time anyone has a legal right to examine audit documentation is when the documentation is subpoenaed by a court as legal evidence
c Audit documentation is the primary frame of reference used by supervisory personnel to evaluate the sufficiency of evidence
d The auditor may deny requests by the client to review audit evidence
56 Which of the following statements is not true?
challenging
d
a A large sample of highly competent evidence is not persuasive unless it is relevant to the objective being tested
b A large sample of evidence that is neither competent nor timely is not persuasive
c A small sample of only one or two pieces of relevant, competent, and timely evidence lacks persuasiveness
d The persuasiveness of evidence can be evaluated after considering its competence and its sufficiency
57 Which of the following statements is not correct?
challenging
d
a Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively
b For certain immaterial accounts, analytical procedures may be the only evidence needed
c In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable
d Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures
58 Which of the following statements is not correct?
challenging
a
a The effectiveness of the client’s internal control has little effect on the reliability of most types of evidence
b Analytical procedures may be reliable even if tests of internal controls indicate control weaknesses
c Both physical examination and mechanical accuracy are likely to be highly reliable if the internal control is effective
d A specific type of evidence is rarely sufficient by itself to provide reliable evidence to satisfy any audit objective
59
challenging
a
Audit evidence supporting the financial statements consists of the underlying accounting data and all corroborating information available to the auditor Which of the following is an example of corroborating information?
a Minutes of meetings
b General and subsidiary ledgers
c Accounting manuals
d Worksheets supporting cost allocations
60
challenging
Which of the following discoveries through the use of analytical procedures would indicate a relatively high risk of financial failure?
d a A decline in gross margin percentages
b An increase in the balance in fixed assets
c An increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at the same time accounts receivable turnover also decreased
d A higher than normal ratio of long-term debt to net worth as well as a lower than average ratio of profits to total assets
61 Which of the following statements is correct regarding the costs involved in obtaining
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challenging
d Physical examination is usually the
least expensive type of audit
evidence
Cost of obtaining evidence may be a factor in deciding whether to obtain that evidence
a Yes
b No
c Yes
d No
Yes
No
No Yes
62
challenging
A common comparison occurs when the auditor calculates the expected balance and compares it with the actual balance The auditor’s expected account balance may be determined by:
b using Dun and Bradstreet reports
c relating it to some other balance sheet or income statement account or accounts
d inquiry of the client
63 Two analytical procedures available to the auditor are:
medium Compare current year’s balances with the preceding year
b Compare details of a particular account’s balance with the preceding year
Shortcomings of these two procedures are that:
a the first ignores effects of tests of controls and the second fails to consider possible changes in client personnel
b the first fails to consider growth or decline in business activity and the second ignores relationships of data to other data
c both fail to consider growth or decline in business activity and ignore relationships of data
d it is difficult, time consuming, and, therefore, costly to perform these procedures
64
challenging
Which of the following statements relating to the competence of evidential matter is always true?
d a Evidence from outside an enterprise is always reliable
b Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions
c Oral representations made by management are not reliable evidence
d Evidence must be both reliable and relevant to be considered appropriate
Essay Questions
65
easy
One purpose of performing analytical procedures in the planning phase of an audit is to assess the client’s financial condition Explain how the assessment of a client’s financial condition can affect the auditor’s decisions concerning evidence accumulation in later phases of the audit
Answer:
All things being equal, the weaker the client’s financial condition, the more assurance the auditor will require that the financial statements are free of material misstatements As the auditor requires greater assurance, he or she can (1) perform detailed testing closer to the balance sheet date, (2) increase the extent of detailed testing, or (3) perform more reliable procedures In extreme cases, however, if the auditor believes the entity is not a going concern, he or she may withdraw from the engagement and perform no additional tests
66
medium
Distinguish between internal documentation and external documentation as types of audit evidence Give two examples of each Which type is considered more reliable?
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Internal documentation involves the auditor’s examination of documents that have been prepared and used within the client’s organization and are retained without ever going to
an outside party Examples would include duplicate sales invoices, employees’ time reports, and inventory receiving reports
External documentation involves the auditor’s examination of documents that have been in the hands of someone outside the client’s organization Examples include vendors’ invoices, cancelled checks, cancelled notes payable, and insurance policies
External documents are regarded as more reliable evidence than internal documents
67
medium
Identify the three common types of confirmations used by auditors Indicate which type is most reliable and explain your answer In addition, indicate which type is least reliable and explain your answer
Answer:
In order of reliability, the three common types of confirmations used by auditors are: positive confirmation with a request for information to be supplied by the recipient positive confirmation with the information to be confirmed included on the form negative confirmation
The positive confirmation with a request for information to be supplied by the recipient is the most reliable because the recipient must supply the information from his or her records If this information agrees with the information in the client’s records, the likelihood that the information is correct is high The positive confirmation with the information to be confirmed included on the form is not as reliable as the first type because the recipient may sign and return the confirmation without carefully examining the information The negative confirmation is the least reliable because a nonresponse could be due to either the recipient agreeing with the information or the recipient ignoring the confirmation request