10.6 Flashcards
In the audit of a nonissuer, which of the following statements is correct regarding the use of external confirmations to obtain audit evidence?
A factor for an auditor to consider when designing confirmation requests is the assertion being tested.
The following factors affecting the design of the external confirmation request directly relate to the response rate and the reliability of the evidence obtained: (1) the assertions addressed; (2) specific RMMs, including fraud risks; (3) presentation of the request and method of communication; (4) management’s authorization to confirming parties; (5) prior experience on the audit; and (6) ability of the confirming parties to confirm or provide the information.
Which of the following strategies most likely could improve the response rate of the confirmations of accounts receivable?
Include a list of items or invoices that constitute the customers’ account balances.
According to AU-C 505, the auditor should consider what respondents are most readily able to confirm so as to improve the response rate and the reliability of the evidence obtained. Thus, some customers may use a voucher system that facilitates responding to confirmation requests about individual invoices rather than the total balance.
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?
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.
Which of the following procedures would provide the most reliable audit evidence?
Inspection of bank statements obtained directly from the client’s financial institution.
When documentation is prepared solely by client personnel, its reliability is 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, e.g., statements obtained from the bank, letters from attorneys, and letters from insurance brokers.
A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses a computer system is that the auditor may
Access information stored on computer files while having a limited understanding of the client’s hardware and software features.
These packages permit the auditor to audit through the computer; e.g., to extract, compare, analyze, and summarize data; and to generate output for use in the audit. Although generalized audit software requires the auditor to provide certain specifications about the client’s records, computer equipment, and file formats, a detailed knowledge of the client’s system may be unnecessary because the audit package is designed to be used in many environments.
The strongest criticism of the reliability of audit evidence that the auditor physically observes is that
The auditor may not be qualified to evaluate the items (s)he is observing.
The auditor may not be qualified to evaluate the quality or condition of the items observed, e.g., the quality of diamonds or the quantity of oil reserves. In such cases, the reliability of the evidence obtained is doubtful, and the auditor typically uses the work of an auditor’s specialist. Moreover, observation does not verify the cost or ownership of assets. Ordinarily, observation is best suited to verifying the existence of an asset.
A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about
Suspense debits that management believes will benefit future operations.
Although the auditor must evaluate relevant assertions about all accounts, the greatest risks are overstated assets and understated liabilities. The unverified suspense debits represent assets that may not exist.
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.
Accounting records alone do not provide sufficient appropriate evidence on which to base an opinion on the financial statements. Thus, the auditor should obtain other information. Which of the following is audit evidence other than accounting records?
Confirmations of A/R.
Audit evidence is all information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes (1) the accounting records underlying the financial statements and (2) other information. 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.
Under which of the following circumstances is the use of the blank form of positive confirmation of accounts receivable most likely preferable?
The recipients are likely to sign the confirmations without devoting proper attention to them.
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.
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 factors would least likely affect the form, content, and extent of audit documentation?
The medium in which it is recorded and maintained.
The medium used to prepare and maintain the audit documentation, e.g., paper or digital, does not affect its nature and extent. The form, content, and extent of documentation are determined by (1) the risks of material misstatement, (2) the extent of judgment involved in performing the work and evaluating the results, (3) the nature of the auditing procedures, (4) the significance of the evidence obtained, (5) the nature and extent of exceptions identified, (6) the need to document a conclusion or the basis for a conclusion, (7) audit methods, and (8) size and complexity of the entity.
If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting
Inspection.
If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting
What type of evidence would provide the highest level of assurance in an attestation engagement?
Evidence obtained from independent sources.
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. Thus, evidence obtained from independent sources outside the entity typically is more reliable than evidence from sources inside the organization.
When performing procedures for a physical inventory, an auditor cannot perform which of the following steps using a generalized audit software (GAS) package?
Observing inventory.
The primary use of GAS is to select and summarize a client’s records for additional testing. However, the physical observation of inventory, a required audit procedure under AU-C 501, can be done only by an auditor.
