Chapter 3

Question 1

What should be the characteristics of audit evidence?

Answer 1

Audit Evidence should be sufficient and appropriate.

Question 2

What is sufficient audit evidence?

Answer 2

Sufficiency is the measure of quantity of audit evidence

Question 3

Sufficency of audit evidence is effected by which things?

Answer 3

1- Assessed risk of material misstatement.
2- Materiality and complexity of item.
3- Auditor’s knowledge and experience of business.
4- Quality of audit evidence.
5- Strength of internal control system of entity.

Question 4

What if audit evidence is not sufficient?

Answer 4

• • Discuss with management.
• • Obtaining more evidence by performing further audit procedures.
• • Modify opinion.

Question 5

What is meant by appropriatenes of audit evidence?

Answer 5

Appropriateness is the measure of quality of audit evidence.

Question 6

On what factors appropriateness of audit evidence depends?

Answer 6

Appropriateness if audit evidence is affected by relevance and reliability of information on which it is based.

Question 7

What is reliability of audit evidence?

Answer 7

Reliability of audit evidence depends on its source nature and circumstances under which it is obtained.

Question 8

What are the examples of relevance of audit evidence?

Answer 8

1 : If auditor wants to test occurence , relevant procedure will be to test recorded amounts. However if auditor wants to test completeness , relevant procedure will be to test information outside accounting system.
2: A procedure may provide evidence for one assertion but not relevant for other assertions.
3 : If we want to check internal controls , relevant evidence will be obtained by tests of controls which will identify conditions indicating performance of or deviation from controls.
4 : If we want to check financial statements , relevant procedure will be substantive procedures which will identify misstatements.

Question 9

What are the examples of reliability?

Answer 9

1 : Internal evidence is more reliable when controls are operating effectively.
2 : Evidence in documentary form is more reliable than in oral form.
3 : Evidence obtained directly is more relevant than obtained indirectly.
4 : Evidence obtained from external sources is more relevant then internal sources.
5 : Evidence in the form of original documents is more reliable than photocopy.

Question 10

What is audit procedure:

Answer 10

Audit procedures are methods and techniques used by the auditor to gather audit evidence.

Question 11

What are the types of audit procedures?

Answer 11

1. Inquiry.
2. Observation.
3. Inspection.
4. External confirmation.
5. Recalculation.
6. Reperformance.
7. Analytical Procedures.

Question 12

What are the three phases of obtaining evidence?

Answer 12

1. Risk Assessment Procedures.
2. Test of controls.
3. Substantive procedures.

Question 13

What are the levels of inherent risk?

Answer 13

1. At financial statement level.

2. At assertion level.

Question 14

What is risk at financial statement level?

Answer 14

It refers to risk that affect financial statements pervasively and potentially affect many assertions.

Question 15

What are examples of risk at financial statement level?

Answer 15

1. Risk of fraud by management.
2. Lac of competence and integrity of management.
3. Risk of managemeny override of controls.
4. Going Concern Issues.

Question 16

What are responses to risk at financial statement level?

Answer 16

1. Increased professional skepticism level.
2. Decrease materiality level.
3. More experienced and specialized staff.
4. Supervision and review.
5. Imcorporate Unpredictibility.
6. More audit procedures on year end.
7. More reliable audit evidence.

Question 17

What is risk at assertion level?

Answer 17

It refers to risk that do not affect financial statements pervasively and affect onlu specific identifiable assertions.

Question 18

What are examples of risk at assertion level?

Answer 18

1. Precious and portable inventory.
2. Complex and non routine transactions.
3. Large sale transactions at year end.
4. Liability may not be recorded.

Question 19

What are the response to risk at assertion level?

Answer 19

1. Tests of controls.

2. Substantive procedures.

Question 20

What is control risk?

Answer 20

Control risk = Risk of material misstatement.

Question 21

What if controls are weak?

Answer 21

Increased control risk i.e no test of control.

Question 22

What if controls are strong?

Answer 22

Less control risk i.e Perform test of controls.

Question 23

How financial statements are verified?

Answer 23

By performing substantive procedures to detect misstatement. Considering inherent risk and control risk which results in detection risk.

Question 24

How to verify financial statements?

Answer 24

1. Direction testing

2. Assertion Testing

Question 25

What are assertions about classes of transactions for the period?

Answer 25

1. Completeness
2. Occurrence.
3. Accuracy.
4. Cut off.
5. Classification.
6. Presentation.

Question 26

What are assertions about account balances at year end?

Answer 26

1. Completeness.
2. Existence.
3. Accuracy valuation and allocation.
4. Rights and obligations.
5. Classification.
6. Presentation.

Question 27

What should auditor do if there are doubts over reliability of evidence?

Answer 27

1. Perform additional audit procedures.

2. Effect on other aspects of audit.

Question 28

What should auditor do if information produced by entity is used by auditor?

Answer 28

Checking it’s accuracy and completeness

Question 29

What should auditor do if work of management’s expert is needed in audit?

Answer 29

1. Evaluate the competence , capability, and objectivity.
   2 obtain an understanding of work of that expert.
2. Evaluate the appropriateness of that expert’s work.