Audit Evidence

Question 1

Completeness

Answer 1

Completeness
– all transactions and events that should have been recorded have been recorded
– all assets, liabilities, and equity interests that should have been recorded have been recorded
– all disclosures that should have been included in the financial statements have been included

Question 2

Occurrence

Answer 2

Occurrence
– transactions and events have been RECORDED have OCCURRED and PERTAIN to the entity
– disclosed events, transactions, and other matters have OCCURRED and PERTAINING to the entity

Question 3

COCA – CURVE (pneumonic)

Answer 3

C Completeness
O Occurrence
C Cut off
A Accuracy

C  Classification
U  Understandability
R  Rights And Obligations
V  Valuation and Allocation
E  Existence

Question 4

Cutoff

Answer 4

Cutoff

– transactions and events have been recorded in the direct accounting period.

Question 5

Accuracy

Answer 5

Accuracy
– Amounts and other data relating to corporate transactions and events have been recorded appropriately
– Financial and other information is disclosed fairly and in appropriate amounts

Question 6

Classification

Answer 6

Classification
– Transactions and events have been recorded in the proper accounts
– Financial information is appropriately presented and described

Question 7

Understandability

Answer 7

Understandability

– Disclosures are clearly expressed

Question 8

Rights and Obligations

Answer 8

Rights and Obligations
– The entity holds or controls the rights to assets, and liabilities are the obligation of the entity
– Disclosed events, transactions, and other matters pertain to the entity

Question 9

Valuation and Allocation

Answer 9

Valuation and Allocation
– Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and the resulting valuation or allocation adjustments are appropriately recorded
– Financials and other information is disclosed fairly and in appropriate amounts

Question 10

Existence

Answer 10

Existence

– Assets, liabilities, and equity interests exist

Question 11

U – PERCV (pneumonic)

Answer 11

U – PERCV

U – UNDERSTANDABILITY and CLASSIFICATION (information is presented and described clearly and events have been recorded in proper accounts
P – PRESENTATION and DISCLOSURE (presented in the proper section of the financial statements and all necessary information is disclosed)
E – EXISTENCE or OCCURRENCE (all assets, liabilities and equity interests listed on the balance sheet and disclosed transactions and events that have been recorded have occurred, and pertain to the entity
R – RIGHTS and OBLIGATIONS (the legal owner of all assets listed on the financial statements and that the liabilities represent legal obligations of entity, all disclosed events pertain to the entity
V – VALUATION, ALLOCATION, and ACCURACY

Question 12

Audit Procedures

Answer 12

Audit Procedures
– Risk Assessment Procedures
– Test of Controls
– Substantive Procedures

Question 13

Steps to Substantive Testing

Answer 13

Steps to Substantive Testing

1) determined the suitability of particular substantive analytical procedures for a given the assertion
2) Evaluate the reliability of data from which the auditor’s expectations is developed
3) develop an expectation for a recorded amount or ratio
4) evaluate whether the expectation is sufficiently precise to identify a misstatement that may cause F/S to be materially misstatement
5) determine the amount of discrepancy between the recorded amount for ratio and the auditor’s expectation that would not require further investigation
6) compare the recorded amount or ratios with the expectations
7) investigate any differences from the expectations

Question 14

Documentation required for an audit in accordance with GAAS?

Answer 14

At a minimum, the auditor’s working papers MUST
1) DOCUMENT that the financial statements AGREE to the records,
2) The audit work was SUPERVISED,
3) The work is SUFFICIENT to support the opinion,
4) provide support that a GAAS AUDIT was performed.
The auditor is REQUIRED to DOCUMENT the UNDERSTANDING of I/C but is not required to use a flowchart or questionnaire. The auditor is required to DOCUMENT the basis for CONCLUDING that the ASSESSED LEVEL of CONTROL RISK is at the MAXIMUM level, it is ONLY required for RELEVANT assertions, not all assertions.

Question 15

Procedures appropriate to test the existence assertion during an audit of accounts receivable?

Answer 15

The auditor can obtain evidence about the EXISTENCE of receivables by obtaining CONFIRMATIONS from the customers who owe the amounts. Tracing transactions from the subsidiary ledger to the general ledger, tracing a sample of invoices to the general ledger, and determining that all shipments before year-end are recorded as sales all provide evidence of COMPLETENESS, NOT existence.

Question 16

The assertions related to accounts receivable will confirmations be LEAST likely to provide evidence in support of?

Answer 16

Confirmations provide the auditor with evidence supporting:
1) RIGHTS and OBLIGATIONS since the debtor is indicating that the money is owed to the client;
2) ALLOCATION and VALUATION, since the debtor is indicating the amount owed, which can be compared to the recorded amount; and
3 EXISTENCE, since the debtor is acknowledging the debt.
It does NOT provide evidence about COMPLETENESS as confirmations will not be sent to debtors if receivables are not recorded.

Question 17

Approving credit before goods are shipped?

Answer 17

Approving credit before goods are shipped reduces the likelihood that customers will default on their account with the entity. Assessing this control is part of the auditor’s evaluation of the VALUATION of accounts receivable at its net realizable value.

Question 18

Tracing subsequent payments to amounts included on the accounts payable?

Answer 18

Tracing subsequent payments to amounts included on the accounts payable listing will provide evidence that ALL amounts that the entity was LIABLE for and ultimately paid had been RECORDED, supporting COMPLETENESS. Tracing items on the accounts payable listing to subsequent payments, tracing amounts recorded to original transaction documentation, and sending confirmations to vendors included on the accounts payable listing will provide evidence that the items on the list are legitimate, supporting EXISTENCE, RIGHTS & OBLIGATIONS, and VALUATION & ALLOCATION, but NOT completeness.

Question 19

Analytical procedures most likely would be used during the planning of an audit?

Answer 19

By comparing the current-year to prior-year sales volumes, the auditor can evaluate whether a change in volume will affect how the audit is conducted, which will assist in the planning. Comparing the current-year ratio of aggregate salaries paid to the number of employees to the prior-year’s ratio is a SUBSTANTIVE ANALYTICAL procedure as it provides evidence about the amount reported as salaries. The auditor obtains and reads the letter from the client’s attorney regarding litigation at the CONCLUSION of the audit to obtain evidence that may affect amounts required to be reported or disclosed as of the balance sheet date.

Question 20

Tracing inventory to purchase documents?

Answer 20

Tracing inventory to purchase documents provides evidence that the entity actually purchased goods included in inventory, supporting the RIGHTS and OBLIGATIONS assertion. It also provides the auditor evidence of the cost of the inventory, which can be used in cost or market evaluations, supporting the VALUATION and ALLOCATION assertion. To test completeness, the auditor will vouch items from the physical count of inventory to the accounting records. To test existence, the auditor will trace items from the accounting records to the physical counts.

Question 21

By examining the repairs and maintenance account?

Answer 21

By examining the repairs and maintenance account, the auditor can determine if items that should have been capitalized as property, plant, and equipment were inappropriately recognized as expense and excluded from recorded amounts, supporting the assertion of COMPLETENESS since costs related to property, plant, and equipment that are not recorded in repairs and maintenance are likely recorded in the asset accounts. The auditor will test EXISTENCE by observing property, plant, and equipment. VALUATION and ALLOCATION and RIGHTS and OBLIGATIONS can both be supported by tracing items to purchase documents.

Question 22

Which types of audit evidence is the least persuasive?

Answer 22

The source of audit evidence is a significant factor in evaluating whether or not the auditor considers it persuasive.

1) Evidence obtained DIRECTLY by the auditor, such as through test counts of inventory is the most persuasive.
2) Evidence obtained DIRECTLY from OUTSIDE sources, such as correspondence from the client’s attorney about litigation, is persuasive but less so than evidence obtained directly by the auditor.
3) Evidence obtained from OUTSIDE sources THROUGH the CLIENT, such as bank statements obtained from the client are even less persuasive.
4) The LEAST persuasive evidence, however, is that GENERATED by the CLIENT, such as pre-numbered purchase-order forms.

Question 23

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year end?

Answer 23

If all confirmations sent at an INTERIM date were returned without exception, the auditor would likely conclude that the process for recording accounts receivable was EFFECTIVE. As a result, the auditor would evaluate any changes or unusual transactions occurring BETWEEN the INTERIM DATE and YEAR-END for investigation.

Question 24

Corroborative Evidence is?

Answer 24

Corroborative evidence, which SUPPORTS the information DERIVED from the accounting records, includes MINUTES, CONFIRMATIONS, DATA about competitors, and information obtained by the auditor through INQUIRY, OBSERVATION, and INSPECTION of documents. Checks, invoices, and contracts; general and subsidiary ledgers; and worksheets and spreadsheets supporting cost allocations, computations, reconciliations, and disclosures make up the ACCOUNTING RECORDS.

Question 25

The permanent file is used to?

Answer 25

The permanent file is used to maintain information that is RELEVANT to the client and may pertain to MORE THAN ONE period while the current file includes information that is relevant to the current engagement. Audit programs and lead schedules for account balances relate to the CURRENT PERIOD’S audit of the CURRENT PERIOD’S financial statements and do not have ongoing significance for future audits. An analysis of capital stock and other stockholders’ equity, long-term leases, and depreciation schedules, contractual arrangements, articles of incorporation, and the documentation of the auditor’s understanding of internal controls items that have ongoing significance are more likely to be included in the permanent file.

Question 26

Tracing payable to the original transaction documentation will?

Answer 26

Tracing payable to the original transaction documentation will provide evidence that the entity actually ENTERED into the transaction and RECEIVED the goods or services ordered, supporting EXISTENCE and RIGHTS & OBLIGATIONS. The documentation will show amounts which supports the VALUATION and ALLOCATION assertion. To obtain evidence about completeness, the auditor would TRACE items from the ORIGINAL documentation to the accounting records (Books).

Question 27

Which of type of evidential matter generally is the most competent?

Answer 27

Information obtained from outside sources, such as through confirmation, is MORE reliable than information obtained from WITHIN the entity. Inquiries of management provide evidence exclusively from the company and is the LEAST RELIABLE. Analytical procedures involve COMPARING client data to auditor EXPECTATIONS, which identify areas requiring further investigation but do NOT provide RELIABLE evidence that an item is not misstated. Reviewing prior-year audit procedures would NOT provide evidence relevant to the current year’s financial statements.

Question 28

Risk Assessment Procedures

Answer 28

The procedures used by an auditor to obtain an understanding of a client and its environment, including its internal controls, which include INQURIES, OBSERVATIONS, and ANALYTICAL PROCEDURES, are referred to as RISKS ASSESSMENT PROCEDURES. One analytical procedure MAY involve developing an EXPECTATION of the entity’s net income for the period, which MAY involve REVIEWING the client’s FORECASTS and INTERIM FINANCIAL STATEMENTS, and COMPARING that amount to REPORTED net income to determine, at the highest level, if it appears as if there is a high risk that the financial statements are materially misstated. Although performing walkthroughs of internal control is part of obtaining the understanding of the entity and its environment, it is NOT an analytical procedure.

Question 29

An entity is require to recognize a loss if?

Answer 29

An entity is require to recognize a loss if it is PROBABLE and ESTIMABLE, but is ONLY required to disclose it if it is REASONABLY POSSIBLE. Contingent gains are not recognized. Since the PROBABLE outcome is a gain, no accrual is required and the accountant would not propose an adjusting entry.

Question 30

Audit documentation must always include?

Answer 30

1) AUDIT PROGRAMS - documentation of procedures performed,
2) DOCUMENTATION of CONTROL RISK - information about conclusions drawn,
3) CLIENT REPRESENTATION LETTER, which PROFESSIONAL STANDARDS REQUIRE the auditor to obtain, provides information about the evidence obtained.

Question 31

Predictability of analytical procedures in a financial statement audit?

Answer 31

Relationships involving I/S ACCOUNTS, such as the relationship between sales and cost of sales, tend to be MORE PREDICABLE than relationships involving only B/S accounts. Although the relationship between A/P and inventory may be somewhat predictable, MOST B/S accounts have predictable relationships that involve I/S accounts as well such as sales to A/R, cost of sales to accounts payable, interest income to notes receivable, and interest expense to notes payable.

Question 32

Which statements concerning evidential matter is correct?

Answer 32

A client’s accounting data alone is NOT sufficient evidence to support the financial statements because the auditor is REQUIRED to obtain CORROBORATING evidence. Because the auditor provides reasonable assurance, the evidence MUST be PERSUASIVE, NOT CONVINCING. The effectiveness of internal control will contribute to the reliability of evidence. If controls prove to be effective, the auditor would be able to place GREATER RELIANCE on the evidence created by the entity. The auditor will consider the cost of obtaining evidence when considering what evidence should be obtained.

Question 33

Audit documentation is required to?

Answer 33

Audit documentation is required to enable an experienced auditor with no previous connection to the audit to understand the NATURE, TIMING, and EXTENT of procedures performed; the RESULTS of procedures performed and EVIDENCE OBTAINED; and SIGNIFICANT FINDINGS, CONCLUSIONS REACHED, and JUDGEMENTS MADE.

Question 34

When an auditor confirms accounts receivable balances rather than individual invoices, it’s beneficial to include what with the confirmations?

Answer 34

A list of invoices providing details of account balances will make it easier for customers to verify amounts on confirmations and increase the likelihood that customers will respond.

Question 35

Completeness is?

Answer 35

Completeness is an assertion that applies to BOTH CLASSES of events and TRANSACTIONS as well as to account balances. Assertions related to inventory, which represents an account balance, include RIGHTS and OBLIGATIONS, ALLOCATION and VALUATION, EXISTENCE, and COMPLETENESS. Occurrence, classification, and cutoff are assertions that relate to classes of events and transactions but not to account balances.

Question 36

The assertions related to events and transactions include?

Answer 36

The assertions related to EVENTS and TRANSACTIONS include:

1) COMPLETENESS,
2) CUTOFF,
3) ACCURACY,
4) CLASSIFICATION,
5) OCCURRENCE.

Existence is an assertion related to ACCOUNT BALANCES.

Question 37

A standard bank confirmation will?

Answer 37

A standard bank confirmation will provide information about BALANCES in DEPOSIT accounts and BALANCES of outstanding LOANS as of the balance sheet date. It also provides information about arrangements related to COMPENSATING BALANCES and COLLATERAL for loans. It does not ordinarily provide information about the dates on which inactive accounts were closed.

Question 38

When auditing debt obligations?

Answer 38

When auditing debt obligations, the auditor will often perform an analytical procedure involving developing an expectation for INTEREST EXPENSE based on outstanding debt and the auditor’s knowledge of its terms and comparing that amount to the amount recorded as interest expense. If the amount recorded as expense is NOT REASONABLY close, it may be an indication of UNRECORDED debt or debt that is OVERSTATED. To determine if debt is UNDERSTATED, the auditor will test management’s assertion related to COMPLETENESS. Testing of EXISTENCE will indicate if debt is OVERSTATED.

Question 39

Internal control can be tested?

Answer 39

Internal control can be tested at an INTERIM period when controls over the remaining period are EFFECTIVE. With effective controls, the auditor will be able to RELY on information available that will report inventory related activity between the INdate and the end of the period. A new sales incentive program does not affect the decision. A high turnover of senior management, or an audit of a new client increase risk and would discourage the use of interim testing.

Question 40

An error in recording amortization of the excess of the investor’s cost over the investment’s underlying book value will?

Answer 40

An error in recording amortization of the excess of the investor’s COST over the investment’s underlying BOOK VALUE will result in a misstatement of the income recognized under the equity method and would misstate the return on investment. Dividends are recognized as a reduction in the investment and are not recognized as income.

Question 41

The acceptable level of detection risk is inversely related to the?

Answer 41

Detection risk is the risk that the auditor will NOT detect a misstatement. Detection risk is INVERSELY related to the amount of SUBSTANTIVE TESTING. As the auditor INCREASES the amount of substantive TESTING, detection risk would DECREASE because the auditor is LESS LIKELY to OVERLOOK a misstatement. The opposite is true when the amount of substantive testing decreases. The risk of MISAPPLYING auditing procedures has a DIRECT relationship with DETECTION RISK since the greater the risk that a procedure will be misapplied, the more likely it is that the auditor will overlook a misstatement. The risk of failing to discover material misstatements is detection risk.

Question 42

Detection risk

Answer 42

Detection risk relates to the auditor NOT detecting a material misstatement in the financial statements when the financial statements are materially misstated.

Question 43

Sampling risk

Answer 43

Sampling risk concerns the possibility that a statistical sample does NOT represent a given population.

Question 44

Non-sampling risk

Answer 44

Non-sampling risk refers to the risk that the auditor will NOT evaluate a sample properly.

Question 45

Evidence

Answer 45

Evidence provided by the entity is LESS reliable than evidence provided by INDEPENDENT sources, and evidence generated INTERNALLY is LESS RELIABLE than evidence generated by OUTSIDE sources. The bank statement is more reliable since it was generated by an EXTERNAL party, the bank. Prenumbered client purchase order forms, client work sheets supporting cost allocations, and the client representation letter, are all generated by the entity.

Question 46

Reviewing evidence of a client’s procedures for handling errors communicated by customers based on their monthly statements?

Answer 46

Reviewing evidence of a client’s procedures for handling errors communicated by customers based on their monthly statements provided evidence to the auditor that those responding acknowledge an obligation to the client, supporting EXISTENCE; that the client is entitled to payment, supporting RIGHTS and OBLIGATIONS; and that the amount is correct, supporting VALUATION and ALLOCATION. To obtain evidence supporting management’s COMPLETENESS assertion, the auditor will perform procedures to items selected from a population of all transactions, which would be TRACED to the accounting records.

Question 47

When management refuses to provide the auditor with a representation letter?

Answer 47

When management refuses to provide the auditor with a representation letter, the auditor should either issue a DISCLAIMER of opinion or WITHDRAW from the engagement.

If a representation letter is provided that is NOT COMPLETE, the auditor may DISCUSS the matter with management, CONSIDER the effect on the reliability of other evidence obtained, and DETERMINE the EFFECTS on the auditor’s report.

Question 48

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

Answer 48

Checks outstanding and deposits in transit would presumably CLEAR the bank shortly after year-end and would be REFLECTED in the CUTOFF statement. Deposits in transit on the CUTOFF statement would be deposits that were made AFTER year-end but NOT yet CLEARED and would NOT be on the year-end reconciliation. Checks dated after year-end would NOT be on the year-end reconciliation. Although deposits made after year-end would be in the cutoff statement, the auditor would not be concerned about them as the purpose of the cutoff statement is to obtain evidence about the year-end balance.

Question 49

Ways in which an auditor can determine whether or not to rely on management’s estimates?

Answer 49

There are several ways in which an auditor can determine whether or not to rely on management’s estimates.

1) Test the process used by management in developing estimates, evaluating whether the method is appropriate, assumptions are reasonable, and data on which the estimates are based are reasonably reliable.
2) Auditor independently develop an estimate, either in the form of an amount or a range, and compare it to the client’s.
3) The auditor may also evaluate subsequent events to determine if they provide evidence as to the RELIABILITY or ESTIMATES, or may TEST the operating EFFECTIVENESS of the I/C related to the development of estimates.

It is a presumptively MANDATORY requirement that the auditor apply one or more of these processes, but none is specifically required.

Question 50

Inventory listing are valid?

Answer 50

To make certain that items in an inventory listing are valid, the auditor will draw from a population of items on the listing and TRACE them to inventory TAGS and auditor COUNT SHEETS. TRACING tags to receiving reports and vendors’ invoices may indicate that the inventory is OWNED by the client but will NOT provide evidence about items on the listing since it is not included in the procedure. Tracing goods RECEIVED to the LISTING or inventory tags noted to the listing WILL indicate that goods received or counted are INCLUDED on the listing but will not indicate if all goods on the listing were received or counted.

Question 51

Accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that?

Answer 51

Accounts receivable turnover is equal to credit sales DIVIDED by average accounts receivable. LAPPING occurs when collections are misappropriated, resulting in an OVERSTATEMENT of accounts receivable, REDUCING the turnover rate – but if the LAPPING has been occurring over BOTH YEARS, there should NOT be a substantial reduction from one year to the other year. FICTITIOUS CREDIT SALES would increase sales and accounts receivable, with the increase in average accounts receivable being proportionately higher than the increase in sales, since the fake sales are NOT getting collected, DECREASING the turnover rate. Tightening CREDIT POLICIES generally result in selling to FEWER SLOW PAYING customers, INCREASING the SPEED that receivables are collected, INCREASING the turnover rate.

Question 52

If the internal control structure is effective then?

Answer 52

If the internal control structure is effective, the auditor will be able to RELY on the EVDENTIAL MATTER and financial statements that are produced from it. Information GENERATED by the AUDITOR is the MOST PERSUASIVE evidence. To be RELIABLE, evidence MUST be PERSUASIVE, not convincing. SUFFICIENCY, not reliability relates to the AMOUNT of CORROBORATIVE evidence obtained.

Question 53

Factor(s) affecting the internal auditor’s objectivity?

Answer 53

The ORGANIZATIONAL LEVEL to which an internal auditor reports is a factor affecting the internal auditor’s OBJECTIVITY. Factors affecting COMPETENCE, which is the ability of the internal auditor to PERFORM the tasks EFFECTIVELY, include EDUCATION, EXPERIENCE, and PROFESSIONAL CERTIFICATION.

Question 54

Compensating balance arrangements are?

Answer 54

Compensating balance arrangements are often indications of RELATED PARTY transactions and reviewing confirmations for them may provide evidence of them.