10.2 Flashcards
Specialized audit software
May be written in a procedure-oriented language.
Specialized audit software is written to fulfill a specific set of audit tasks. The purposes and users of the software are well defined before the software is written. Auditors develop specialized audit software for the following reasons:
Unavailability of alternative software
Functional limitations of alternative software
Efficiency considerations
Increased understanding of systems
Opportunity for easy implementation
Increased auditor independence and prestige
In confirming accounts receivable, an auditor decided to confirm customers’ account balances rather than individual invoices. Which of the following most likely will be included with the client’s confirmation letter?
A client-prepared statement of account showing the details of the customer’s account balance.
A confirmation request should contain management’s authorization to the confirming party to respond. Also, an external confirmation should be requested by the client because the receiving party has no relationship with the client’s auditor. In confirming the customer’s account balance, display of the details of the balance will likely help the customer in reconciling the amount and may increase response rates. The auditor, however, will send the request directly to the customer, who will be requested to send the response directly to the auditor.
Most of the auditor’s work in forming an opinion on financial statements consists of
Obtaining and evaluating audit evidence.
According to AU-C 500, Audit Evidence, most of the auditor’s work in forming an opinion on financial statements consists of obtaining and evaluating audit evidence. Audit evidence is the information used by the auditor in drawing the conclusions on which the auditor’s opinion is based. It includes the information contained in the accounting records and sources of information other than accounting records.
Which of the following procedures would yield the most reliable evidence?
A recalculation of bad debt expense.
Subject to exceptions, the presumption is that the independent auditor’s direct personal knowledge, obtained through physical examination, observation, computation, and inspection, is more reliable than information obtained indirectly.
Which of the following statements ordinarily is true concerning the content of audit documentation?
It is appropriate to use calculator tapes with names or explanations on the tapes rather than writing separate lists onto working papers.
Audit documentation provides evidence of compliance with GAAS. But the auditor need not document every matter considered or judgment made. Moreover, the auditor need not document separately (e.g., in a checklist) compliance with matters for which compliance is demonstrated by documents in the audit file (AU-C 230). If calculator tapes containing names or explanations achieve the purposes of documentation, separate lists need not be written onto working papers.
Which of the following statements about audit evidence is true?
The sufficiency and appropriateness of audit evidence is a matter of professional judgment.
The auditor exercises professional judgment when forming a conclusion about whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level. Sufficiency measures the quantity of audit evidence. Appropriateness measures its quality (relevance and reliability). To form this conclusion, the auditor considers all relevant evidence, regardless of whether it corroborates or contradicts the assertions in the statements.
AU-C 500 describes five generalizations about the reliability of evidence. The situations given below indicate the relative degrees of assurance provided by two types of evidence obtained in different situations. Which describes an exception to one of the generalizations?
The report of an auditor’s specialist regarding the valuation of a collection of paintings held as an investment provides greater assurance than the auditor’s physical observation of the paintings.
Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or another medium; and (5) consists of original documents. Preference for the report of an auditor’s specialist over the auditor’s physical observation of works of art is acceptable because the auditor is not expected to have such expertise. Physical observation provides evidence of the existence of assets but often does not verify their value, ownership, cost, or condition. Consequently, the generalization in favor of the auditor’s direct knowledge is overcome in this case.
When compared with a nineteenth-century auditor, today’s auditor places less relative emphasis upon
Examination of documentary support.
The auditor ordinarily should perform certain auditing procedures, such as external confirmation of receivables (AU-C 505), observation of inventory (AU-C 501), and analytical procedures (AU-C 520), instead of relying completely on documentary evidence.
The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of
Transactions.
The audit of the income statement focuses on the propriety of handling transactions because most income statement accounts represent large volumes of transactions. The audit of the balance sheet concentrates on verification of account balances.
Which of the following is usually included or shown in the audit documentation?
A summary of how significant findings were addressed.
Auditors may document a summary, or completion memorandum, describing the significant findings or issues identified and how they were addressed. This summary facilitates (1) reviews of the audit documentation, (2) the auditor’s consideration of significant findings and issues, and (3) determination of whether any individual audit objective cannot be achieved that will prevent achievement of the overall audit objectives.
Which of the following presumptions is least likely to relate to the reliability of audit evidence?
An auditor’s opinion is formed within a reasonable time to achieve a balance between benefit and cost.
Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. However, the need for (1) reporting to be timely and (2) maintaining a balance between benefit and cost are inherent limitations of the audit. Thus, for the opinion to be relevant, it must be formed within a reasonable period of time.
Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?
Including a list of items or invoices that constitute the account balance.
One factor in the design of external confirmation requests is the layout and presentation. Thus, for an account receivable, displaying the details of the balance most likely helps the customer to reconcile the amount and may increase the response rate.
As part of a fraud audit, a CPA wishes to identify employees with invalid Social Security numbers in the client’s payroll-transaction data. Which of the following audit tests of controls using computer-assisted audit techniques would best meet the objective?
Comparing Social Security numbers paid in the payroll transaction file to a file of government- authorized Social Security numbers.
Comparing Social Security numbers of paid employees to the government file would identify Social Security numbers that are not valid.
In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?
A small number of accounts may be in dispute, and the accounts receivable balance arises from sales to many customers with small balances.
Negative confirmation requests may be used to reduce audit risk to an acceptably low level when (1) the assessed risk of material misstatement is low, (2) a large number of small homogeneous balances is involved, (3) a very low exception rate is expected, (4) the auditor has no reason to believe that the recipients of the requests are unlikely to consider them, and (5) the auditor has obtained sufficient appropriate evidence about the effectiveness of relevant controls (AU-C 505).
The blank form of accounts receivable confirmations may be inefficient because
More nonresponses to the requests are likely to occur.
A positive confirmation request asks for a reply in all cases. It may ask the confirming parties to state whether they agree with the information given or to provide information. Thus, positive confirmation requests obtain evidence only when responses are received. Blank confirmation requests are used to reduce the risk that recipients will respond without verifying the information. They omit the amount or other information to be confirmed and ask the confirming parties to fill in the information. The disadvantage is a lower response rate because of the additional effort required.
