10.7 Flashcards
Generalized audit software is useful for
Test of controls:
Substantive procedures:
Yes
Yes
Generalized audit software is useful for both tests of controls and substantive procedures. It can be used to perform audit tasks such as (1) sampling and selecting items; (2) testing extensions, footings, and calculations; (3) examining records; (4) summarizing and sorting data; and (5) performing analytical procedures.
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.
A retailing entity uses the Internet to execute and record its purchase transactions. The entity’s auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would
Perform tests several times during the year, rather than only at year end.
Accounting records and other evidence may be available only in electronic form. For example, when the Internet is used, transactions often occur by exchange of electronic messages instead of source documents. Electronic evidence may exist at a given moment in time, but it may not be retrievable after a specified period if files are changed and no backups exist. Consequently, the auditor should consider requesting retention of some information or performing procedures when information is available (AU-C 500). For example, the auditor may change the timing of audit procedures by performing them several times during the year instead of only at year end.
Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation?
Performance of audit tests on a continuous basis.
The audit trail for transactions processed in electronic form may be available for only a short period of time. The auditor may conclude that it is necessary to time audit procedures so that they correspond to the availability of the evidence. Thus, audit modules may be embedded in the client’s software for this purpose.
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 accounts receivable.
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.
Which statement about audit evidence is false?
The auditor should not perform a procedure that provides persuasive evidence rather than conclusive evidence.
In most cases, evidence that is obtained to enable an auditor to draw reasonable conclusions on which to base the opinion is necessarily persuasive rather than conclusive. The cost of obtaining conclusive evidence may outweigh the benefits. But the difficulty, time, or cost is not in itself a valid reason (1) to omit an audit procedure for which no alternative exists or (2) to be satisfied with less than persuasive evidence (AU-C 200).
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.
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?
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.
Which of the following documents the procedures that are applied and the conclusions reached in an audit engagement?
Working papers.
Sufficient appropriate audit documentation (working papers) should be prepared on a timely basis. Documentation records the work performed (including the nature, timing, extent, and results of audit procedures), the audit evidence obtained, and the conclusions reached. Audit documentation should provide (1) a sufficient and appropriate record of the basis for the auditor’s report and (2) evidence that the audit was planned and performed in accordance with GAAS and legal and regulatory requirements (AU-C 230).
An audit supervisor reviewed the work performed by the staff to determine if the audit was adequately performed. The supervisor accomplished this by primarily reviewing which of the following?
Working papers.
Audit documentation (working papers) should be prepared to provide a clear understanding of the work performed, the audit evidence obtained and its source, and the conclusions reached.
The auditor is required to retain audit documentation
For a period to satisfy applicable legal or regulatory requirements.
AICPA standards require the auditor to retain audit documentation for a period sufficient to meet the needs of his or her practice and to satisfy any applicable legal or regulatory requirements, but not less than 5 years. The PCAOB’s AS 1215, Audit Documentation, implements the requirement of the Sarbanes-Oxley Act of 2002 that registered public accounting firms, when performing engagements under PCAOB standards, retain audit documentation for 7 years from the audit report release date.
Two assertions for which confirmation of accounts receivable balances provides primary evidence are
Rights & obligations & 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 statements is correct concerning the use of negative confirmation requests?
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.
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.
In gathering evidence in the performance of substantive procedures, the auditor most likely
Relies on persuasive rather than conclusive evidence in the majority of cases.
To be appropriate, audit evidence should be relevant and reliable. Also, because of the inherent limitations of the audit, most audit evidence is persuasive rather than conclusive. However, although the cost of obtaining evidence and its usefulness should be rationally related, the matter of difficulty, time, or cost is not in itself a valid basis for (1) omitting a procedure when no alternative exists or (2) being satisfied with less than persuasive evidence.
