Audit Evidence

Question 1

Analytical Procedures

Answer 1

Comparison 
Develop expectations
Use Ratios
Estimating
Computing
(NOT PROJECTION)

Question 2

Analytical Procedures are appropriate for which accounts?

Answer 2

Income Statement accounts

Question 3

The Auditor’s risk assessment affects the nature, extent, and timing of the audit procedures but does not determine…

Answer 3

the relevance of the audit evidence

Question 4

Check Kiting occurs when….

Answer 4

a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank.

High levels of deposits coupled with a low average balance

Question 5

Treasurer Department SOD

Answer 5

Signs checks
Mails the checks
Authorization of Write-offs of Uncollectible accounts

Question 6

What set of information is confirmed on one form?

Answer 6

Cash in Bank and collateral on Loans - Bank Confirmations forms have spaces to confirm the two balances.

Question 7

Test whether payments were for goods actually ordered

Answer 7

To verify that cash disbursements were for goods actually ordered, a sample of cash disbursements should be vouched back to purchase orders

Question 8

Verify that cash disbursements were for goods actually received

Answer 8

To verify that cash disbursements were for goods actually received, a sample of cash disbursements should be vouched back to the receiving reports

Question 9

Matching invoice to receiving report is what in the ARC?

Answer 9

Authorization

Question 10

If both the disbursement and receipt were recorded in the same year, there is no cash misstatement.

Answer 10

Disbursement recorded in one year and the receipt is recorded in another year, the cash is misstated

Question 11

By ensuring the credit approval is obtained before goods are shipped to customers, the auditor is testing management’s assertion that

Answer 11

Accounts Receivable are collectible (Allocation and Valuation)
Does not support the rights and obligations assertion

Question 12

Purchase orders should be issued by…

Answer 12

Purchasing department; not the accounts payable department

Question 13

Good Internal Control for cash includes:

Answer 13

Separation of cash handling, recordkeeping, and reconciliation of bank statements.

Question 14

Attestation Standards:

Answer 14

Require the gathering of sufficient evidence to support the opinion expressed

• Require that the report identify the assertions being reported on and the character of the engagement.
• Require that the work be planned and supervised
• DOES NOT REQUIRE AN UNDERSTANDING OF INTERNAL CONTROL STRUCTURE (This is required for an audit of the financial statements)

Question 15

Depreciation assertions:

Answer 15

Valuation, allocation, and accuracy

Question 16

Analytical procedures are facilitated (effective) when the entity:

Answer 16

Uses a standard cost system that produces variance reports (comparison of actual to budget is already performed)

Question 17

Which type of transaction is best for analytical procedures?

1) Acquisitions and Disposals of fixed assets
2) Long-term debt transactions
3) Payroll and benefit liabilities
4) Operating expense transactions

Answer 17

Relations in the income statement account are more predictable.

Operating EXPENSE transaction

Question 18

How does an auditor audit the statement of cash flow?

Answer 18

The auditor reconciles the amounts on the statement to amounts on other financial statements

Question 19

Management’s assertion that relate to the rights and obligations assertion about ACCOUNT BALANCES AT PERIOD END.

Answer 19

“The entity holds or controls the rights to ASSETS, and LIABILITIES are obligations of the entity.

Question 20

On receiving a client’s bank cutoff statement, an auditor most likely would trace:

Answer 20

Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.
(Agreeing prior year deposits in transits and outstanding checks to the cutoff bank statement) Pg. 32 A4

Question 21

Procedure to search for unrecorded liabilities:

Answer 21

Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.

Question 22

Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger would NOT be an internal control designed to reduce the risk of errors in the billing process. True or False?

Answer 22

True; Errors that exist in the prep of the invoices can carry over to the AR

Question 23

Internal control activities performed within the Vouchers Payable department:

Answer 23

1) Approving vouchers for payment by having an authorized employee sign the vouchers
2) Matching the vendor’s invoice with the related receiving report
3) Indicating the asset and expense accounts to be debited.

NOT Accounting for unused prenumbered purchase orders and receiving reports (That’s done in the purchasing department)

Question 24

Objective of auditing procedures applied to segmented information:

Answer 24

The information is presented in conformity with the GAAP rules on segment information.

Question 25

The appropriate audit evidence required by this standard may be obtained, in part, through:

Answer 25

Analytical procedures

Question 26

Audit evidence consists of the underlying accounting data and all corroborating information available to the auditor. A client’s accounting data by itself is not considered sufficient audit evidence to support the financial statements. Correct or not?

Answer 26

Correct.
Reliable evidence supporting management’s assertions needs to corroborative or persuasive.
An effective internal control structure contributes greatly to the reliability of the evidence.
The cost of obtaining evidence is an important consideration to the auditor. Valid to omit if there are other procedures

Question 27

Inspecting agreements to determine whether any inventory is pledged as collateral or subject to an liens. What is the management’s assertion?

Answer 27

Assertion of rights and obligations related to inventory.

The documents will verify ownership and show lenders’ restrictions on the inventories.

Question 28

Observing the client’s distribution of payroll checks would test what management’s assertion?

Answer 28

Existence of employees

Question 29

The measure of the sufficiency of the audit evidence lies in the:

Answer 29

Auditor’s judgement

Question 30

An auditor’s opinion, to be economically, useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.

Answer 30

The cost-benefit concept bears no relationship to the reliability of audit evidence.

Question 31

Accounting estimates may:

Answer 31

1) Measure the effects of past transactions that CANNOT be determined in a timely cost-effective manner.
2) Measure the effects of the present status of an asset or liability.
3) Be used to approximate an account pending the outcome of a future event.

Question 32

To identify a contingent liability by obtaining a:

Answer 32

Standard bank confirmation

Question 33

Negative confirmations

Answer 33

Less effective than positive confirmations of AR because the auditor cannot infer that all nonrespondents have verified their account information.

Question 34

Confirmations of AP are not necessary because:

Answer 34

There is likely to be other reliable external evidence available to support balances

Question 35

Negative request forms of AR confirmations is useful particularly when:

Answer 35

• Assessed level of control risk is low
• Many small balances
• Consideration of the confirmation by the recipient is likely.

Question 36

Alternate procedures to AR confirmations that did not receive replies to second requests?

Answer 36

Inspect shipping records documenting the merchandise sold to the debtors.
Reviewing the Cash receipt journal subsequent to the year end

Question 37

Circumstances that justify the negative form of AR confirmations?

Answer 37

A small number of accounts in dispute with many customers with small balances

Question 38

Using Analytical review as the primary audit procedure for testing long-term investments to ascertain the reasonableness of the:

Answer 38

Completeness of recorded investment income

Question 39

To satisfy the valuation assertion when auditing an investment accounted for by the equity method, the auditor must:

Answer 39

Examine the audited financial statements of the investee company

Question 40

To satisfy the valuation assertion when auditing an investment accounted for by the COST METHOD, the auditor must:

Answer 40

Obtain market quotations from financial newspaper or periodicals.

Question 41

If the auditor is unable to count the securities at the balance sheet date, the auditor should:

Answer 41

Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date.

Question 42

If there is no insurance policy document in possession of the equipment, then that means:

Answer 42

There is a lien on the equipment and the Lien holder has the insurance policy

Question 43

Procedures that may be effective in the audit of contingent liabilities:

Answer 43

• A standard bank confirmation
• Examining professional invoices
• Reviewing the board minutes
• Discussing long-term purchase commitments with the purchasing agent
• Reviewing long-term leases.
• Obtaining client representation letter

Question 44

The scope of an audit may be restricted when an attorney’s response is limited to:

Answer 44

• An evaluation of the likelihood of an unfavorable outcome of the matter disclosed by the entity
• The attorney’s opinion of the entity’s historical experience in recent similar litigation
• The probably outcome of asserted claims and pending or threatened litigation

Question 45

Long-term debt audit program includes:

Answer 45

• Examining the bond trust indentures

- correlating interest expense recorded for the period with outstanding debt

Question 46

An auditor should trace corporate stock issuances and treasury stock transactions to the:

Answer 46

Minutes of the board of directors.

Question 47

Account’s Payable - Focus primarily on which management’s assertion?

Answer 47

Completeness

AP = Liability = Understatement = Not complete

Question 48

Primary responsibility of a bank acting as a registrar of capital stock:

Answer 48

Verify that stock is issued only with proper authorization

Question 49

Primary purpose of sending a standard confirmation request to a bank:

Answer 49

Corroborate information regarding deposit and loan balances.

*Seeking information about the contingent liabilities and security agreement is achieved through the confirmation but it is not the primary purpose

Question 50

For effective Internal accounting control, the AP department should compare the information on the vendor’s invoice to:

Answer 50

The receiving report and the purchase order

Voucher (Not authorized) + PO is authorized

Question 51

What does the voucher payable dept, treasury/cash disbursement dept, and purchasing dept do?

Answer 51

Voucher Payable department - Establish the agreement of the vendor’s invoice with the receiving report and purchase order

Purchasing dept - Verify that each requisition has been properly approved
Obliterate the “quantity ordered” on the receiving dept. copy of the purchase order

Treasury/Cash disbursement dept - Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.