Audit Evidence Flashcards
You are auditing the accounts receivable of XYZ Manufacturing Ltd. Your IT specialist pulled data out from the accounts receivable sub-ledger using a computer assisted auditing technique (CAAT) to obtain information — customer name, amount owing, age of receivable, and credit limit. Using only this information, which accounts receivable assertion are you primarily addressing when you develop audit procedures?
a) Accuracy, valuation and allocation
b) Existence
c) Rights and obligations
d) Completeness
a) is correct. You can use the amount owing, age, and credit limit information to develop audit procedures to help you determine if XYZ can collect the cash. This will help you determine if XYZ has properly valued the receivables.
You are auditing the completeness of the long-term debt account. Which of the following procedures provides the strongest source of audit evidence?
a) Confirm outstanding long-term debt amounts with all of the entity’s financial institutions and lenders.
b) Examine the notes to the financial statements to determine how much debt is outstanding.
c) Inquire with management about the amount of long-term debt the entity has outstanding.
d) Obtain and inspect a management report breaking down all of the outstanding long-term debt.
Answer a) is correct. External sources are the best form of audit evidence. By confirming with all of the entity’s financial institutions and lenders, you obtain evidence that management has accounted for all of the long-term debt in the financial statements. While other procedures are still needed, this is the strongest audit evidence in this situation. Note: It is strongest to obtain the third-party confirmations directly from the source, rather than obtaining third-party information from the client.
Which of the following examples of evidence is the most reliable?
a) The Bank of Canada has returned a bank confirmation to you to support the existence of the cash balance.
b) The controller provides you with an accounts receivable aging schedule for you to assess the reasonability of the allowance for doubtful accounts.
c) Brother and Sons’ has provided the controller with the response to the legal letter, which the controller has provided to you.
d) The controller has provided you inventory count sheets to support the existence of the inventory balance.
a) is correct. Externally generated evidence received directly by the auditor is considered the most reliable.
To assess whether the interest revenue appears reasonable, you have used the average monthly balance and the interest rate to recalculate the amount and have compared it to the amount recorded. What type of audit evidence is this?
a) Physical evidence
b) Confirmation evidence
c) Documentary evidence
d) Analytical evidence
d) is correct. Evaluating financial information through comparison to a supported expectation is an example of analytical evidence.
You are auditing the existence of the property, plant, and equipment. You have toured the facility and observed the items listed by comparing serial numbers. What type of evidence is this?
a) Physical evidence
b) Confirmation evidence
c) Documentary evidence
d) Analytical evidence
a) is correct. Physically examining the property, plant, and equipment is an example of physical evidence.
To audit the existence of the accounts receivable balance, you have sent out external confirmations with return envelopes. However, one of the customers has returned the confirmation directly to the client, who has passed in on to you. Which of the following statements regarding this evidence is true?
a) The evidence is no longer reliable, as it did not come directly from an external source.
b) The evidence is now considered internally generated, as it went to the client first.
c) The evidence is still more reliable than internally generated evidence.
d) The evidence is still the most reliable, as it is externally generated evidence.
c) is correct. Although externally generated evidence is the most reliable, externally generated evidence held at the client is still more reliable than internally generated, as it is created by a third party.
