Chapter 11: Audit Evidence and Common Audit Procedures

Question 1

What is the objective of an audit?

Answer 1

To test the validity of management’s assertions

Question 2

What is audit evidence?

Answer 2

any information acquired by the auditors that provides an indication as to the validity of one or more of management’s assertions

Question 3

What does audit evidence need to be to effectively test the validity of management’s assertions?

Answer 3

sufficient and competent

Question 4

What is sufficiency?

Answer 4

amount of audit evidence needed to provide a reasonable basis for an auditor’s opinion, auditor’s need to have enough audit evidence to provide a reasonable basis for their opinion as to the validity of management’s assertions

Question 5

What does the amount of audit evidence that is considered sufficient depend on?

Answer 5

the competency of the obtained audit evidence

Question 6

What is competency?

Answer 6

information quality of audit evidence

Question 7

What is competency a function of?

Answer 7

relevance and reliability

Question 8

What is relevance?

Answer 8

whether evidence provides an indication as to the validity of one or more of management’s assertions

Question 9

What is reliability?

Answer 9

likely accuracy of information provided by the evidence

Question 10

What factors affect the reliability of audit evidence?

Answer 10

1) Independence of the provider, 2) Degree of auditor’s direct observation, 3) Qualifications of the provider, 4) Degree of objectivity, 5) Quality of information system that produces the audit evidence

Question 11

Why is the independence of the provider important?

Answer 11

independent source less likely to intentionally mislead the auditors than a source that has an interest in the outcome of the audit

Question 12

When is audit evidence considered independent?

Answer 12

when it is provided by an external third party who has a business relationship with or has relevant information about the audited company but who does not have a significant interest in the outcome of the audit

Question 13

When is audit evidence considered objective?

Answer 13

when it is not subject to interpretation

Question 14

What are the most common audit procedures?

Answer 14

1) Observation, 2) Physical Examination, 3) Client Inquiry, 4) Confirmation, 5) Reperformance/Recalculation, 6) Inspection of Source Documents and Records, 7) Analytical Procedures

Question 15

What is observation?

Answer 15

physical observation of various client activities and is primarily used to test internal controls, moderately reliable

Question 16

What is physical examination?

Answer 16

auditors physically examining tangible assets and is relevant to the existence and completeness assertions, considered reliable

Question 17

How do you test the existence assertion of physical examination?

Answer 17

auditors select sample test items from accounting records and then go physically examine actual asset to ensure it exists

Question 18

How do you test the completeness assertion of physical examination?

Answer 18

auditors select their sample test items from the actual assets and then inspect accounting records to make sure the selected items are recorded

Question 19

What is client inquiry?

Answer 19

asking the clients questions, relevant to any account and assertion and not considered reliable because do not come from independent source

Question 20

What is confirmation?

Answer 20

hard copy letters that are sent to independent third parties to confirm or help corroborate one or more assertions, considered reliable

Question 21

What do confirmations primarily do?

Answer 21

test the existence assertion for assets and completeness assertion for liabilities

Question 22

What are the limitations for confirmations?

Answer 22

responses might not be accurate so auditors should consider reliability of respondent, response rates can be low and necessitate alternative procedures

Question 23

What is reperformance and recalculation?

Answer 23

testing mathematical accuracy of client’s work, highly reliable and used to test all accounts

Question 24

What is the inspection of source documents and records testing?

Answer 24

to make sure that accounting records are supported by source documents and that information in accounting records is consistent with information presented in source documents, moderately reliable

Question 25

What are the two procedures of inspecting source documents and records?

Answer 25

Vouching and Tracing

Question 26

What is vouching?

Answer 26

involves first selecting specific ledger or journal entries and then inspecting source documents that support entry, test occurrence assertion

Question 27

What is tracing?

Answer 27

selecting test transactions from available source documents and then following transaction through to accounting records to make sure were properly recorded, test completeness assertion

Question 28

What increases the reliability of source documents?

Answer 28

originate at an external independent source

Question 29

What decreases the reliability of source documents?

Answer 29

in client’s custody at some pint and subject to tampering

Question 30

What are analytical procedures?

Answer 30

auditors use knowledge of client’s operations, industry and environment to develop expectations regarding account balance in F/S, expectations then compared to amounts actually reported in unaudited financial F/S to determine whether amount seems reasonable, moderately reliable

Question 31

What does the reliability of analytical procedures vary based on?

Answer 31

auditor’s understanding of company and auditors’ ability to accurately develop specific expectations for account balances