10.4 Flashcards
Auditors may use positive or negative forms of confirmation requests. An auditor most likely will use
the negative form for small businesses.
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). A combination of the two forms is often used.
An auditor will most likely use computer-assisted audit techniques, rather than manual techniques, when it is necessary to
Examine all data in an accounts payable file.
Computer-assisted audit techniques are most useful in analyzing large-volume accounts such as accounts payable.
Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
Prenumbered purchase order forms.
When documentation, such as purchase order forms, is prepared solely by client personnel, its persuasiveness will be less than that prepared by the auditor or an independent party. Ordinarily, the most reliable documentation is created outside the entity and has never been within the client’s control.
Which of the following statements is correct about actions taken after the documentation completion date?
The auditor must not make any deletions to audit documentation before the end of the specified retention period.
Audit documentation must not be deleted or discarded after the documentation completion date. However, information may be added.
To test for unsupported entries in the ledger, the direction of audit testing should be from the
Ledger entries.
To discover unsupported entries in the ledger, a sample of entries should be selected to determine whether any entry lacks proper support. The direction of testing is from the ledger entries to the books of original entry, then to the source documents.
Which of the following audit techniques most likely will provide an auditor with the most assurance about the effectiveness of the operation of a control?
Observation of client personnel.
Evidence about the effectiveness of the operation of a control obtained directly, such as by observation of client personnel, is more reliable than evidence obtained indirectly, such as through inquiry. Thus, evidence obtained by the auditor’s own observation of a client employee’s application of a control most likely provides greater assurance than an inquiry about the application of the control. Moreover, mere inquiry without corroboration ordinarily will not provide sufficient appropriate evidence to support a conclusion about the effectiveness of the operation of the control.
The auditor’s inventory observation test counts are traced to the client’s inventory listing to test for which of the following financial statement assertions?
Completeness.
Tracing the details of test counts to the final inventory schedule assures the auditor that items in the observed physical inventory are included in the inventory records.
Observation is considered a reliable audit procedure but one that is limited in usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique?
It is most persuasive about the performance of a process but is limited to the moment in time at which the observation takes place.
Observation consists of looking at a process or procedure being performed by others. It provides audit evidence about the process or procedure but is limited to that moment in time by the fact that the act of being observed may affect how the process or procedure is performed.
An auditor would be least likely to use external confirmations in connection with the audit of
Refundable income taxes.
Income taxes are paid to governmental entities, which are in a better position to state what amounts have been paid than what amounts are refundable based on a tax return that may not yet have been filed. The U.S. government usually does not respond to confirmation requests.
The current file of an auditor’s audit documentation most likely would include a copy of the
Bank reconciliation.
The current file of an auditor’s audit documentation includes all working papers applicable to the current year under audit. A bank reconciliation supports a specific amount on the audited year’s financial statements. Thus, it belongs in the current file.
Which of the following factors would most likely influence the form and extent of the auditor’s documentation of an entity’s internal control environment?
Complexity and size of the entity.
GAAS require documentation of the understanding of the entity and its environment, including its internal control. This documentation includes each control component, e.g., the control environment. The form, content, and extent of audit documentation are determined by many factors, for example, the complexity and size of the entity.
Which of the following tasks can be achieved using generalized audit software?
Filtering data based on accounts receivable data recording.
Generalized audit software is used to analyze data to identify anomalies, errors, and omissions. It improves efficiency by automating manual procedures. It can sort and filter data based on various criteria.
An auditor decides to use the blank form of accounts receivable confirmation rather than the traditional positive form. The auditor should be aware that the blank form may be less efficient because
More nonresponses are likely to occur.
The blank form of accounts receivable confirmation requests the recipient to complete the confirmation by providing the balance due to the client. This procedure may require more effort by the recipient and thus limit response rates. Accordingly, the auditor may have to perform alternative procedures.
Which of the following presumptions is correct about the reliability of audit evidence?
Effective internal control provides more assurance about the reliability of audit evidence.
The more effective the internal control, the more reliable the evidence generated internally by the entity, e.g., the accounting records and financial statements.
An auditor’s audit documentation will least likely show how the
Client’s schedules were prepared.
The objectives of audit documentation are to provide (1) a sufficient and appropriate record of the basis of the auditor’s report and (2) evidence that the audit was performed in accordance with GAAS and other requirements. Audit documentation is the record of (1) the audit procedures performed, (2) relevant evidence obtained, and (3) conclusions reached. But how the client’s schedules were prepared may not be relevant to the audit.
