10.3 Flashcards
Management’s responses to inquiries can be corroborated by each of the following, except
Preparation of the summary of unadjusted differences.
The summary of unadjusted differences is a record of all of the misstatements identified during the course of an audit. It is not the source of corroborating evidence.
The current file of the auditor’s audit documentation ordinarily should include
A copy of the financial statements.
The current file of the auditor’s audit documentation includes all working papers applicable to the current year under audit. A copy of the financial statements must be included in the current file because the amounts included in these statements are the focus of the audit.
The permanent file of an auditor’s audit documentation generally would not include
A working trial balance.
Audit documentation is usually classified into permanent and current files. Current files include schedules and analyses that relate to the current year under audit. The working trial balance is maintained in the current file.
Which of the following statements concerning audit documentation is false?
Audit documentation is the property of the client.
Audit documentation is the property of the auditor. Copies of documentation may be made available to the client if the validity and independence of the audit are not undermined.
Which of the following best describes the primary purpose of audit procedures?
To gather 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.
An auditor ordinarily uses a working trial balance resembling the financial statements without notes, but containing columns for
Reclassifications and adjustments.
A working trial balance is ordinarily used to record the year-end ledger balances prior to audit in the audit documentation. Reclassifications and adjustments are accumulated on the trial balance to reflect the final audited balances.
Two assertions for which confirmation of accounts receivable balances provides primary evidence are
Rights and obligations and existence.
An external confirmation is audit evidence obtained as a direct, written response from a third party (the confirming party). External confirmation of accounts receivable is required unless (1) the overall account balance is not material; (2) the procedure would be ineffective; or (3) the assessed RMM at the assertion level is low, and other planned substantive procedures address the assessed risk. External confirmations are frequently relevant to assertions about account balances. Assertions about account balances at period end include (1) existence, (2) rights and obligations, (3) completeness, and (4) valuation and allocation. Assertions about existence address whether assets, liabilities, or equity interests of the entity exist. Assertions about rights and obligations address whether (1) the entity holds or controls the rights to assets, and (2) liabilities are the obligations of the entity. Thus, external confirmation provides relevant evidence that receivables exist and that the client has the right of collection. The valuation and allocation assertion states whether items have been included in the financial statements at appropriate amounts, and any valuation or allocation adjustments are recorded appropriately. However, external confirmation provides less relevant evidence for the valuation of gross accounts receivable balances than for the valuation of the related allowance accounts. The completeness assertion states whether all items that should be recorded are recorded, for example, all receivables. Unrecorded receivables are usually not discovered by confirmation. Thus, confirmation provides less relevant evidence about the valuation assertion and the completeness assertion than about the existence and rights and obligations assertions.
Which of the following procedures would be most effective in reducing attestation risk?
Examination of evidence.
To express an opinion, the practitioner must gather sufficient evidence to reduce attestation risk to an acceptably low level.
Which of the following factors would most likely influence an auditor’s consideration of the reliability of data when performing analytical procedures?
Whether the data were developed under a system with adequate controls.
Reliability is affected by the source of the data and the conditions under which the data were generated. Data are considered more reliable when developed under effective internal control.
Which of the following procedures is performed first for unreturned positive confirmations of accounts receivable?
Sending second requests for confirmation of accounts receivable.
Unreturned positive confirmations should be followed by second requests.
Which of the following factors most likely affects an auditor’s judgment about the nature and extent of the auditor’s audit documentation?
The risks of material misstatement of an assertion.
The form, content, and extent of documentation are determined by the following: (1) risks of material misstatement, (2) extent of judgment involved in performing the work and evaluating the results, (3) nature of the auditing procedures, (4) significance of the evidence obtained, (5) nature and extent of exceptions identified, (6) need to document a conclusion or the basis for a conclusion not readily determinable from other documentation of the work, (7) size and complexity of the entity, and (8) audit methods.
Which of the following statements is an auditor most likely to add to the negative form of confirmation of accounts receivable to encourage timely consideration by the recipient?
“If you do not report any differences within 15 days, it will be assumed that this statement is correct.”
An issue with respect to negative confirmation requests is whether recipients are likely to disregard them (AU-C 505). Providing a time limit encourages a recipient to respond in a timely manner.
Which of the following statements is ordinarily true about the reliability of evidence?
The more effective internal control, the more assurance it provides about the reliability of the accounting data and financial statements.
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 (AU-C 500).
In confirming a client’s accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year’s audit, the auditor most likely would choose
Individual invoices.
When external confirmation of the balances of accounts receivable is difficult, confirming individual transactions represented by individual invoices is likely to be preferable. The invoices should not be difficult to reconcile with confirmed amounts.
Before performing substantive procedures at an interim date, an auditor should
Consider the increased risk that period-end misstatements will not be detected.
Certain factors should be considered before substantive procedures are performed at interim dates. For example, the auditor should consider the risk that period-end misstatements are not detected by performing appropriate substantive procedures or a combination of tests of controls and substantive procedures to cover the remaining period.
