Audit Evidence - Concepts & Standards

Question 1

The objective of tests of details of transactions performed as substantive tests is to

Answer 1

Detect material misstatements in the financial statements.
Substantive tests of transactions, like substantive tests of balances, are performed to detect material misstatements in the financial statements.

Question 2

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

Answer 2

Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?
The standard control for completeness is controlling prenumbered forms. A question, therefore, which would appear in an internal control questionnaire addressing completeness is “Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?”

Question 3

Which of the following presumptions is correct about the reliability of evidential matter?

Answer 3

An effective internal control structure provides more assurance about the reliability of evidential matter.
The effectiveness of the internal control structure directly impacts the reliability of the accounting data and financial statements. The more effective the internal control structure, the greater the assurance provided as to the reliability of evidential matter.

Question 4

An auditor would most likely review an entity’s periodic accounting for the numerical sequence of shipping documents and invoices to support management’s financial statement assertion of

Answer 4

Completeness
Reviewing the use of and accounting for prenumbered shipping documents and invoices supports management’s financial statement assertion of completeness. The numbering helps assure that transactions do not get lost and thus that all transactions are properly included.

Question 5

Which of the following is a management assertion regarding account balances at the period end?

Answer 5

The entity holds or controls the rights to assets, and liabilities are obligations of the entity.
There are 4 assertions applicable to account balances at the period end: (1) existence; (2) completeness; (3) rights or obligations; and (4) valuation and allocation.

Question 6

An auditor tests an entity’s policy of obtaining credit approval before shipping goods to customers in support of management’s financial statement assertion of

Answer 6

Valuation or allocation.
Testing credit approval before shipping goods to customers tests the valuation assertion. This test addresses the collectibility of accounts receivable.

Question 7

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?

Answer 7

The planned level of assurance at the relevant assertion level.
The auditor should consider whether the assessments of the risks of material misstatement at the relevant assertion level in engagement planning are appropriate in light of the auditor’s substantive procedures.

Question 8

Which of the following procedures would an auditor most likely perform during an audit engagement’s overall review stage in formulating an opinion on an entity’s financial statements?

Answer 8

Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud.
During the overall review stage, the auditor assesses the conclusions reached and the evaluation of the overall financial statement presentation. As part of that evaluation, he/she would consider whether the results of the audit procedures performed affect the risk of material misstatement due to fraud. The overall review would include considering the adequacy of the evidence gathered in response to unusual or unexpected balances and whether such balances reflected a misstatement due to fraud.

Question 9

Which of the following procedures would an auditor most likely perform to test controls relating to management’s assertion about the completeness of cash receipts for cash sales at a retail outlet?

Answer 9

Observe the consistency of the employees’ use of cash registers and tapes.
The cardinal rule regarding cash receipts is to ensure that they are recorded. By requiring employees to record all sales in the cash register and to give customers the cash register tape evidencing the sale, companies can ensure that all cash sales are recorded (the completeness of cash receipts for cash sales.) The auditor can test controls by observing employees’ use of cash registers and tapes.

Question 10

Which of the following is required documentation in an audit, in accordance with generally accepted auditing standards?

Answer 10

An audit program setting forth in detail the procedures necessary to accomplish the engagement’s objectives.
GAAS require that a written audit program be prepared that details the audit procedures considered necessary to achieve the objectives of the audit.

Question 11

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

Answer 11

A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
The use of negative accounts receivable confirmations requires:
1) a low risk of material misstatement;
2) a large number of small balances; and
3) an expected very low exception rate;
4) no reason to believe that the recipients of the confirmations would not review them properly. Having a small number of accounts in dispute and an accounts receivable balance arising from sales to many customers with small balances meets two of the fourthree criteria and would be more likely to justify the use of negative confirmations.

Question 12

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?

Answer 12

When the combined assessed level of inherent and control risk over the sale is high.
The auditor would be more likely to confirm certain relevant contract terms as the risk of material misstatement increases. In this case, the risk of material misstatement is said to be “high,” which is consistent with the need to perform additional procedures to address revenue-recognition issues.

Question 13

The auditor’s responsibility to communicate with those charged with governance about fair value measurements and disclosure issues is best described by the following statement:

Answer 13

The auditor should determine whether those charged with governance are informed about management’s processes in developing material fair value estimates, including significant assumptions used by management.

Question 14

When auditing material for fair value measurements and disclosures, the auditors substantive audit procedures might include all of the following, except for

Answer 14

Performing tests of control to evaluate the effectiveness of controls affecting the fair value measurements.
Tests of control are not “substantive” audit procedures.

Question 15

Which of the following procedures would be most likely to assist an auditor in identifying litigation, claims, and assessments?

Answer 15

Read the file of correspondence from taxing authorities.
A taxing authority could impose an assessment on an entity related to tax matters. The auditor might then identify the existence of such an assessment by reviewing correspondence between the entity and the taxing authority.

Question 16

An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year end but arose after year end. These events may be important to the auditor because they may

Answer 16

Require disclosure to keep the financial statements from being misleading.
Events that did not exist at year end but arose after year end require disclosure.

Question 17

Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity’s ability to continue as a going concern?

Answer 17

Review of compliance with terms of debt agreements.
The normal effect of violating the terms of debt agreements (including debt covenants) is to render the associated debt immediately due, which may cause significant financial stress on the entity and cause the auditor to have substantial doubt about the entity’s ability to continue as a going concern.

Question 18

Confirmation procedures applicable to assets (e.g., accounts receivable) fundamentally address which assertion associated with account balances at the end of the period?

Answer 18

Existence.
GAAS indicate that external confirmations are frequently used to verify account balances. In doing so, they provide stronger evidence for the existence assertion than for the other assertions identified.

Question 19

Which of the following presumptions does not relate to the appropriateness of audit evidence?

Answer 19

An auditor’s opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.
Note that this is another negatively worded question. They want the presumption that does NOT relate to the appropriateness of audit evidence. The appropriateness of evidence addresses the reliability of that evidence. The fact that an audit must be performed within a reasonable time period and at reasonable cost is not relevant to the appropriateness of evidence. It does, however, relate to the sufficiency of evidence.

Question 20

Samples to test internal control structure procedures are intended to provide a basis for an auditor to conclude whether:

Answer 20

The control procedures are operating effectively.

Tests of controls are intended to enable the auditor to ascertain whether the controls are operating effectively.

Question 21

When auditing related party transactions, an auditor places primary emphasis on

Answer 21

Evaluating the disclosure of the related party transactions.
The auditor’s primary responsibility pertaining to related parties is to ensure that disclosure of related party transactions in the audited financial statements is adequate.

Question 22

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Answer 22

Inquiring of the entity’s legal counsel concerning litigation, claims, and assessments arising after year end.
An auditor performs a variety of procedures to obtain evidence about subsequent events. These procedures include inquiring with the entity’s legal counsel concerning litigation, claims, and assessments arising after year end.

Question 23

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?

Answer 23

Confirming with third parties the details of arrangements to maintain financial support.
GAAS indicate that it is not necessary to design procedures solely directed toward an entity’s going concern capabilities. Auditing procedures designed for other purposes may also be used to investigate potential going concern issues. Suggested procedures include the confirmation of financial support arrangements with third parties.