10.5

Question 1

Which of the following procedures would yield the most reliable evidence?

Answer 1

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.

Question 2

The permanent (continuing) file of an auditor’s audit documentation most likely would include copies of the

Answer 2

Debt agreements.

The permanent section of the audit documentation usually contains copies of important company documents of continuing interest. The section may include (1) the articles of incorporation, share options, contracts, and bylaws; (2) the engagement letter; (3) analyses from previous audits of accounts of special importance to the auditor; and (4) information about internal control, e.g., flowcharts.

Question 3

An auditor of a nonissuer exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately

Answer 3

Consider the reliability of information to be used as audit evidence.

Professional skepticism should be maintained in considering the risk of material misstatement due to fraud. When the auditor exercises professional skepticism with respect to the risks of material misstatement due to fraud, the auditor should consider the reliability of information to be used as audit evidence.

Question 4

Using personal computers in auditing may affect the methods used to review the work of staff assistants because

Answer 4

Audit documentation may not contain readily observable details of calculations.

With the introduction of computers, accountants have been able to perform fewer manual calculations. Usually, the necessary numbers are entered into computer spreadsheets, and the answer is produced. Thus, the use of computers makes the review of a staff assistant’s work different from that needed when the calculations are done manually.

Question 5

In creating lead schedules for an audit engagement, a CPA often uses automated audit documentation software. What client information is needed to begin this process?

Answer 5

General ledger information, such as account numbers, prior-year account balances, and current-year unadjusted information.

Lead schedules are summaries of detailed schedules. To create these summaries, general ledger information is needed. A lead schedule contains the detailed accounts from the general ledger making up the line item total. For example, a cash lead schedule may summarize findings recorded on the cash in bank, petty cash, and count-of-cash-on-hand detail schedules.

Question 6

An auditor has identified the controller’s review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?

Answer 6

Inquiry and inspection of records.

Inquiry is seeking information from knowledgeable persons. The controller, who is usually the chief accounting officer, is such a person. Inspection of records or documents is the examination of records or documents, whether internal or external, in paper, electronic, or other media. The auditor’s verification of the reconciliation and the controller’s review are procedures requiring inspection of the underlying records or documents.

Question 7

Which of the following documentation is required for an audit in accordance with PCAOB standards?

Answer 7

An indication that the accounting records agree or reconcile with the financial statements.

Audit documentation should (1) demonstrate that the engagement complied with PCAOB standards, (2) support the basis for conclusions about all relevant assertions, and (3) demonstrate that the accounting records agree or reconcile with the financial statements.

Question 8

An auditor using audit software probably would be least interested in which of the following fields in a computerized perpetual inventory file?

Answer 8

Economic order quantity.

The economic order quantity, which is based on the most cost effective combination of ordering and carrying costs, is a management decision with little effect on the fairness of the inventory balance on the financial statements.

Question 9

After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management’s financial statement assertion(s) of

Rights & Obligations:
Valuation & allocation:

Answer 9

No
Yes

The proper approval of credit provides assurance that the account receivable is collectible. Thus, it is related to the valuation assertion that accounts receivable are recorded at net realizable value.

Question 10

Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion?

Answer 10

Auditor judgement.

Professional judgment involves applying relevant knowledge and experience to the facts and circumstances of an audit. The auditor exercises judgment to (1) interpret ethical requirements and GAAS and (2) make informed decisions, for example, about the sufficiency and appropriateness of audit evidence. The auditor also plans and performs the audit with professional skepticism. This is an attitude that includes (1) a questioning mind, (2) being alert to possible misstatements, and (3) a critical assessment of audit evidence (AU-C 500). Thus, judgment is required to select the specific auditing procedures needed to obtain that evidence.

Question 11

Evidence supporting the financial statements consists of the accounting records and all other information available to the auditor. Which of the following is an example of other information?

Answer 11

Minutes to meetings.

Audit evidence is all information used by the auditor to draw the conclusions on which the auditor’s opinion is based. It consists of (1) accounting records and (2) sources of information other than accounting records. Accounting records by themselves do not provide sufficient appropriate evidence. They include initial entries (manual or electronic) and supporting records. Examples are (1) checks, (2) electronic funds transfers (EFTs), (3) invoices, (4) contracts, (5) the general and subsidiary ledgers, (6) journal entries and other adjustments of the statements, (7) worksheets, (8) spreadsheets, (9) reconciliations, (10) cost allocations, (11) computations, and (12) disclosures. Sources of information other than accounting records include (1) minutes of meetings; (2) external confirmations; (3) analysts’ reports; (4) comparable data about competitors; and (5) information obtained by the auditor from (a) inquiries (e.g., management’s written representations), (b) observation, (c) inspection, (d) recalculation, (e) reperformance, and (f) analytical procedures.

Question 12

Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations?

Answer 12

Recipients are likely to sign other types of positive confirmations without careful investigation.

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. 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.

Question 13

The confirmation of customers’ accounts receivable rarely provides reliable evidence about the completeness assertion because

Answer 13

Customers may not be inclined to report understatement errors in their accounts.

Confirmations do not address all assertions with equal effectiveness. For example, confirmations of accounts receivable do not necessarily provide reliable evidence about the completeness assertion because customers may not report understatements. Also, confirmations may not be designed to provide assurance about information not given in the request forms.

Question 14

Which of the following ultimately determines the sufficiency and appropriateness of audit evidence to support the auditor’s conclusions?

Answer 14

Professional judgement.

The auditor’s professional judgment must determine the necessary audit plans and the specific audit procedures that will gather sufficient appropriate evidence to reduce audit risk to an acceptably low level and enable the auditor to draw reasonable conclusions on which to base the opinion.

Question 15

When compared with a nineteenth-century auditor, today’s auditor places less relative emphasis upon

Answer 15

Examination of documentary evidence.

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.

Question 16

During the confirmation of accounts receivable, an auditor receives a confirmation via the client’s fax machine. Which of the following actions should an auditor take?

Answer 16

Accept the confirmation but verify the source and content through a telephone call to the respondent.

When responses other than mailed written communications (e.g., responses received electronically, such as by fax or email) are received, additional evidence may be required to support their validity. The auditor may wish to verify the sources by calling the purported senders or by having the sender mail the original confirmation directly to the auditor. But an electronic confirmation system may be sufficiently secure and well controlled to mitigate the risks of interception or alteration. For example, encryption, electronic signatures, or procedures to verify website authenticity may be used.

Question 17

The following statements were made in a discussion of audit evidence between two CPAs. Which statement about evidence is not valid?

Answer 17

“I would not undertake that procedure because at best the results would only be persuasive and I’m looking for convincing evidence.”

Most evidence on which the auditor bases the opinion is persuasive, not conclusive, because of the inherent limitations of the audit: (1) the nature of financial reporting (e.g., use of accounting estimates dependent on forecasts), (2) the nature of audit procedures (e.g., the possibility of fraud involving collusion or the failure of management to provide all the information requested), and (3) the need to perform the audit (a) within a reasonable period of time and (b) to achieve a balance between benefit and cost. However, the difficulty, time, or cost of obtaining evidence is not a valid reason for (1) omitting an audit procedure for which no alternative exists or (2) being satisfied with evidence that is less than persuasive (AU-C 200).

Question 18

Although the quantity and content of audit documentation vary with each engagement, an auditor’s permanent files most likely include

Answer 18

Analyses of capital stock and other owners’ equity accounts.

The permanent section of audit documentation usually contains copies of important client documents. They may include (1) the articles of incorporation, stock options, contracts, and bylaws; (2) the engagement letter, the contract between the auditor and the client; (3) analyses from previous audits of accounts of special importance to the auditor, such as noncurrent debt, PP&E, and equity; and (4) information concerning internal control, e.g., flowcharts, organization charts, and questionnaires.

Question 19

Which of the following statements is most accurate regarding audit documentation requirements?

Answer 19

The auditor should document findings that could result in a modification of the auditor’s report.

Significant audit findings or issues to be documented include findings that could result in modification of the report.

Question 20

Which of the following statements is correct concerning the use of negative confirmation requests?

Answer 20

Unreturned negative confirmation requests rarely provide significant explicit evidence.

Unreturned negative confirmation requests rarely provide significant evidence about assertions other than certain aspects of existence. Also, unreturned negative confirmations do not provide explicit evidence that the intended parties received the requests and verified the information provided.