Chapter 10: Audit Evidence and Working Papers

Question 1

What does “professional skepticism” mean?

Answer 1

Professional skepticism means that internal auditors take nothing for granted; they continuously question what they hear and see and critically assess audit evidence

Question 2

What does “reasonable assurance” mean?

Answer 2

Reasonable assurance means that internal auditors strive to obtain sufficient appropriate evidence to
provide a reasonable basis for formulating their conclusions and advice

Question 3

Why do internal auditors provide reasonable assurance rather than absolute assurance?

Answer 3

Internal auditors are rarely, if ever, in a position to provide absolute assurance regarding the truthfulness of management’s assertions regarding the system of internal controls and performance. Even experienced internal auditors are rarely convinced beyond all doubt. This is due to the nature and extent of evidence they gather and the types of decisions they make. Frequently, internal auditors must rely on evidence that is persuasive rather than absolutely convincing, and audit decisions are rarely black and white.

Question 4

What are the defining characteristics of persuasive audit evidence?

Answer 4

The defining characteristics of persuasive evidence are relevance, reliability, and sufficiency

Question 5

What is the relationship between audit objectives and audit procedures?

Answer 5

Audit objectives specify what the engagement is intended to achieve. Audit procedures are the specifictasks performed by the internal auditor to
gather the evidence required to achieve the prescribed audit objectives.

Question 6

What do internal auditors mean when they refer to the nature, extent, and timing of audit procedures?

Answer 6

The nature of audit procedures relates to the types of tests the internal auditor performs to achieve
his or her objectives. The extent of audit procedures pertains to how much audit evidence the internal
auditor must obtain to achieve his or her objectives. The timing of audit procedures pertains to when
the tests are conducted and the period of time covered by the tests.

Question 7

What are some common characteristics of effective interviewers?

Answer 7

Characteristics among effective interviewers include:
■ Professionalism (for example, prepared, respectful, courteous, on time).
■ Outstanding interpersonal and oral communication skills, including listening skills.
■ The capacity to display confidence and command respect without being arrogant.
■ An innate curiosity.
■ Objectivity (that is, remain impartial and refrain from interjecting personal opinions).

Question 8

What is the difference between vouching and tracing?

Answer 8

• Vouching refers to the tracking of information backward from one document or record to a previously prepared document or record, or to a tangible resource. Vouching is performed specifically to test the validity of documented or recorded information.
• Tracing refers to the tracking of information forward from one document or record, or a tangible
  resource, to a subsequently prepared document or record. Tracing is performed specifically to test the
  completeness of documented or recorded information.

Question 9

What types of analytical procedures are used by internal auditors?

Answer 9

Common analytical procedures performed by internal auditors include analysis of common-size
financial statements, ratio analysis, trend analysis, analysis of future-oriented information, external
benchmarking, and internal benchmarking.

Question 10

What are some common types of CAATs?

Answer 10

Common types of computer-assisted audit techniques (CAATs) include generalized audit software, utility software, test data, application software tracing and mapping, audit expert systems, and continuous auditing.

Question 11

Professional skepticism means that internal auditors beginning an assurance engagement should:

a. Assume client personnel are dishonest until they gather evidence that clearly indicates otherwise.
b. Assume client personnel are honest until they gather evidence that clearly indicates otherwise.
c. Neither assume client personnel are honest nor assume they are dishonest.
d. Assume that internal controls are designed inadequately and/or operating ineffectively.

Answer 11

C is the best answer. Professional skepticism means that internal auditors take nothing for granted;
they continuously question what they hear and see and critically assess audit evidence. They do not
assume by default that auditee personnel are either honest or dishonest. Applying professional skepticism throughout the engagement helps internal auditors remain unbiased and maintain an open mind
to form judgments based on the preponderance of evidence gained during an engagement, and not just
individual pieces of information.

Question 12

Which of the following statements regarding audit evidence would be the least appropriate for an internal auditor to make?

a. “I consider the level of risk involved when deciding the kind of evidence I will gather.”
b. “I do not perform procedures that provide persuasive evidence because I must obtain convincing evidence.”
c. “I evaluate both the usefulness of the evidence I can obtain and the cost to obtain it.”
d. “I am seldom absolutely certain about the conclusions I reach based on the evidence I examine.”

Answer 12

B is the best answer. Internal auditors are rarely, if ever, in a position to provide absolute assurance
regarding the truthfulness of management’s assertions regarding the system of internal controls and performance. Even experienced internal auditors are rarely convinced beyond all doubt. This is due
to the nature and extent of evidence they gather and the types of decisions they make. Frequently,
internal auditors must rely on evidence that is persuasive rather than absolutely convincing, and audit decisions are rarely black and white. Moreover, internal auditors’ conclusions and advice must be
formed at a reasonable cost within a reasonable length of time to add economic value. Accordingly,
internal auditors strive to obtain sufficient appropriate evidence to provide reasonable, rather than
absolute, assurance.

Question 13

Audit evidence is generally considered sufficient when:

a. It is appropriate.
b. There is enough of it to support well-founded conclusions.
c. It is relevant, reliable, and free from bias.
d. It has been obtained via random sampling.

Answer 13

B is the best answer. An internal auditor performing assurance services must obtain sufficient appropriate evidence to support well-founded conclusions. Evidence is appropriate if it provides relevant
and reliable support for the internal auditor’s judgments. Appropriate evidence is sufficient when the internal auditor has obtained enough of it to support valid conclusions.

Question 14

Documentary evidence is one of the principal types of corroborating information used by an internal auditor. Which one of the following examples of documentary evidence generally is considered the most reliable?

a. A vendor’s invoice obtained from the accounts payable department.
b. A credit memorandum prepared by the credit manager.
c. A receiving report obtained from the receiving department.
d. A copy of a sales invoice prepared by the sales department.

Answer 14

A is the best answer. The reliability of documentary evidence depends to a large extent on its origin
and the route it follows before being examined by the internal auditor. A vendor’s invoice comes from
an outside third-party source. Credit memoranda, receiving reports, and copies of sales invoices are
created internally and are not validated by a third party before being examined by the internal auditor.

Question 15

An internal auditor must weigh the cost of an audit procedure against the persuasiveness of the evidence to be gathered. Observation is one audit procedure that involves cost-benefit tradeoffs. Which of the following statements regarding observation as an audit procedure is/are correct?

I.Observation is limited because individuals may react differently when being watched.

II.Observation is more effective for testing completeness than it is for testing existence.

III. Observation provides evidence about whether certain controls are operating as designed.

a. I only.
b. II only.
c. I and III.
d. I, II, and III.

Answer 15

C is the best answer. Observation does provide evidence about whether operating activities are aligned with prescribed policies. It is used, for example, to test segregation of duties. Individuals may, however, behave differently than they would otherwise when they know they are being observed. Observation
generally is used to test existence and occurrence, not completeness.

Question 16

Your audit objective is to determine that purchases of office supplies have been properly authorized. If purchases of office supplies are made through the purchasing department, which of the following procedures is most appropriate?

a. Vouch purchase orders to approved purchase requisitions.
b. Trace approved purchase requisitions to purchase orders.
c. Inspect purchase requisitions for proper approval.
d. Vouch receiving reports to approved purchase orders.

Answer 16

C is the best answer. Net accounts receivable as a percentage of total assets increased over the threeyear period. During this period, accounts receivable turnover decreased. Overstating sales returned for credit would cause both net sales and average accounts receivable to be understated, thus causing accounts receivable turnover to increase. Recording fictitious sales would cause both net sales and average accounts receivable to be overstated, thus causing accounts receivable turnover to decrease. Deteriorating credit and collection procedures would slow down the collection of accounts receivable, thus causing accounts receivable turnover to decrease. Understating the allowance for bad debts would cause net accounts receivable to increase, thus causing accounts receivable turnover to decrease.

Question 17

A production manager of MSM Company ordered excessive raw materials and had them delivered to a side business he operated. The manager falsified receiving reports and approved the invoices for payment. Which of the following procedures would most likely detect this fraud?

a. Vouch cash disbursements to receiving reports and invoices.
b. Confirm the amounts of raw materials purchased, purchase prices, and dates of shipment with vendors.
c. Perform ratio and trend analysis. Compare the cost of raw materials purchased with the cost of goods produced.
d. Observe the receiving dock and count materials received. Compare the counts with receiving reports completed by receiving personnel.

Answer 17

A is the best answer. Vouching involves the tracking of information backward from one document or
record to a previously prepared document or record and is performed specifically to test the validity
of documented or recorded information. In this case, the approved purchase requisitions serve as the
authorization to prepare the purchase orders that will be sent to vendors of office supplies. Tracing
purchase requisitions forward to purchase orders would not uncover instances of missing purchase
requisitions.

Question 18

An internal auditor is concerned that fraud, in the form of payments to fictitious vendors, may exist. Company purchasers, responsible for purchases of specific product lines, have been granted the authority to approve expenditures up to $10,000. Which of the following applications of generalized audit software would be most effective in addressing the auditor’s concern?

a. List all purchases over $10,000 to determine whether they were properly approved.
b. Take a random sample of all expenditures under $10,000 to determine whether they were properly approved.
c. List all major vendors by product line. Select a sample of major vendors and examine supporting documentation for goods or services received.
d. List all major vendors by product line. Select a sample of major vendors and send negative confirmations to validate that they actually provided goods or services.

Answer 18

C is the best answer. Recorded purchases of raw materials would be increasing without a corresponding increase in cost of goods produced. Vouching cash disbursements to receiving reports and invoices would be ineffective because the manager falsified receiving reports and approved the invoices for payment. Confirmations from vendors would indicate that the raw materials had been purchased and shipped. Observing the receiving dock and counting the materials received would be ineffective since the materials in question never reached the receiving dock.

Question 19

Which of the following most completely describes the appropriate content of internal audit assurance engagement working papers?

a. Objectives, procedures, and conclusions.
b. Purpose, criteria, techniques, and conclusions.
c. Objectives, procedures, facts, conclusions, and recommendations.
d. Subject, purpose, sampling information, and analysis.

Answer 19

C is the best answer. The purpose of the audit test is to determine the validity of cash disbursements,
or more specifically, the validity of the vendors to which the payments are going. All expenditures, regardless of amount, should be supported by documentation indicating that goods or services were purchased and received. Lack of supporting documentation would be an indicator of fictitious vendors. Responses to confirmations sent to fictitious vendors are likely to indicate that the payments they
received are for goods or services they provided.

Question 20

Internal audit engagement teams prepare working papers primarily for the benefit of the:

a. Auditee.
b. Internal audit function.
c. Board and senior management.
d. Independent outside auditor.

Answer 20

C is the best answer. The working papers should identify the audit objectives, that is, what the engagement team expects to achieve, the procedures the team used to achieve its objectives, and the conclusions reached by the team based on its test results. The working papers also should contain the engagement team’s observations, or “pertinent statements of fact” that “emerge by a process of comparing what should be with what is” and the team’s recommendations, which are based on its conclusions and observations.

Question 21

Which of the following represents the most competent evidence that trade receivables actually exist?

a. Positive confirmations.
b. Sales invoices.
c. Receiving reports.
d. Bills of lading.

Answer 21

B is the best answer. Working papers aid in planning and performing engagements, facilitate supervision and review of work completed, indicate whether engagement objectives were achieved, provide the
principal support for internal audit communications, serve as a basis for evaluating the internal audit
function’s quality assurance program, contribute to the professional development of the internal audit
staff, and demonstrate the internal audit function’s compliance with The IIA’s Standards.

Question 22

Competent evidence is best defined as evidence that:

a. Is reasonably free from error and bias and faithfully represents that which it purports to represent.
b. Is obtained by observing people, property, and events.
c. Is supplementary to other evidence already gathered and that tends to strengthen or confirm it.
d. Proves an intermediate fact, or group of facts, from which still other facts can be inferred.

Answer 22

A is the best answer. A confirmation from a customer is the most reliable evidence that a receivable
exists. An invoice is not particularly reliable because it is not developed external to the company and
does not consider subsequent payments. A Receiving Report is not evidence of a receivable. Bills of
Lading are not as reliable as a confirmation and do not confirm the continued existence of the receivable.

Question 23

Workpaper summaries, if prepared, can be used to:

a. Promote efficient workpaper review by internal audit supervisors.
b. Replace the detailed workpaper files for permanent retention.
c. Serve as an engagement final communication to senior management.
d. Document the full development of engagement observations and recommendations.

Answer 23

A is the best answer. Competent evidence is reliable evidence and the best attainable through the use
of appropriate audit techniques. B is incorrect. This is the definition of physical evidence. All physical
evidence is not necessarily competent; in fact, the quality of competence is more often associated with
documentary evidence. C is incorrect. This is the definition of corroborative evidence. While corroborative evidence may be competent, much competent evidence is primary rather than supplementary. D is incorrect. This is the definition of circumstantial evidence. Circumstantial evidence is not necessarily competent evidence.

Question 24

When using a rational decision-making process, the next step after defining the problem is:

a. Developing alternative solutions.
b. Identifying acceptable levels of risk.
c. Recognizing the gap between reality and expectations.
d. Confirming hypotheses.

Answer 24

A is the best answer. By tying groups of workpapers together, summaries provide an orderly and logical
flow and facilitate supervisory review. B is incorrect. Summaries are part of the workpaper file, not a
replacement. C is incorrect. Senior management is either given the entire report or provided with an
executive summary or digest of the report contents. Workpaper summaries would not be appropriate
for senior management. D is incorrect. Engagement observations are developed using the attributes of
an observation.