Chapter 5

Question 1

In testing the existence assertion for an asset, an auditor ordinarily works from the

a. Financial statements to the potentially unrecorded items.
b. Potentially unrecorded items to the financial statements.
c. Accounting records to the supporting documents.
d. Supporting documents to the accounting records

Answer 1

c.Accounting records to the supporting documents.

Question 2

Which of the following procedures would an auditor most likely rely on to verify management’s assertion of completeness?

a. Reviewing standard bank confirmations for indications of cash manipulations.
b. Comparing a sample of shipping documents to related sales invoices.
c. Observing the entity’s distribution of payroll checks.
d. Confirming a sample of recorded receivables by direct communication with the debtor

Answer 2

b.Comparing a sample of shipping documents to related sales invoices.

Question 3

Which of the following statements concerning audit evidence is correct?
a. To be appropriate, audit evidence should be either persuasive or relevant but need not be both.
b.The measure of the reliability of audit evidence lies in the auditor’s judgment.
c.The difficulty and expense of obtaining audit evidence concerning an account
balance are a valid basis for omitting the test.
d. An entity’s general ledger may be sufficient audit evidence to support the financial statements.

Answer 3

b.The measure of the reliability of audit evidence lies in the auditor’s judgment.

Question 4

Which of the following presumptions is least likely to relate to the reliability of audit evidence?
a.The more effective internal control, the more assurance it provides about the
accounting data and financial statements.
b.An auditor’s opinion is formed within a reasonable time to achieve a balance
between benefit and cost.
c.Evidence obtained from independent sources outside the entity is more reliable
than evidence secured solely within the entity
d.The independent auditor’s direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.

Answer 4

b.An auditor’s opinion is formed within a reasonable time to achieve a balance
between benefit and cost.

Question 5

Which of the following types of audit evidence is the least reliable?

a. Prenumbered purchase order forms prepared by the entity.
b. Bank statements obtained from the entity.
c. Test counts of inventory performed by the auditor.
d. Correspondence from the entity’s attorney about litigation.

Answer 5

a.Prenumbered purchase order forms prepared by the entity.

Question 6

Audit evidence can come in different forms with different degrees of reliability.
Which of the following is the most persuasive type of evidence?
a.Bank statements obtained from the entity.
b.Computations made by the auditor.
c.Prenumbered entity sales invoices.
d.Vendors’ invoices included in the entity’s files.

Answer 6

b.Computations made by the auditor.

Question 7

An auditor would be least likely to use confirmations in connection with the examination of

a. Inventory held in a third-party warehouse.
b. Refundable income taxes.
c. Long-term debt.
d. Stockholders’ equity.

Answer 7

b.Refundable income taxes.

Question 8

The assurance bucket is filled with all of the following types of evidence except

a. Test of controls.
b. The audit report.
c. Substantive analytical procedures.
d. Tests of details.

Answer 8

b.The audit report.

Question 9

The current file of the auditor’s working papers should generally include

a. A flowchart of the accounting system.
b. Organization charts.
c. A copy of the financial statements.
d. Copies of bond and note indentures.

Answer 9

c.A copy of the financial statements.

Question 10

The permanent file section of the working papers that is kept for each audit client
most likely contains
a.Review notes pertaining to questions and comments regarding the audit work
performed.
b.A schedule of time spent on the engagement by each individual auditor.
c.Correspondence with the entity’s legal counsel concerning pending litigation.
d.Narrative descriptions of the entity’s accounting system and control
procedures.

Answer 10

d.Narrative descriptions of the entity’s accounting system and control
procedures.

Question 11

An audit document that reflects the major components of an amount reported in the
financial statements is referred to as a(n)
a.Lead schedule.
b.Supporting schedule.
c.Audit control account.
d.Working trial balance.

Answer 11

a.Lead schedule.

Question 12

The primary objective of final analytical procedures is to
a.Obtain evidence from details tested to corroborate particular assertions.
b.Identify areas that represent specific risks relevant to the audit.
c.Assist the auditor in assessing the validity of the conclusions reached on the
audit.
d.Satisfy doubts when questions arise about an entity’s ability to continue in
existence.

Answer 12

c.Assist the auditor in assessing the validity of the conclusions reached on the
audit.

Question 13

The substantive analytical procedure known as trend analysis is best described by

a. The comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data.
b. Development of a model to form an expectation using financial data, nonfinancial data, or both to test account balances or changes in account balances between accounting periods.
c. The examination of changes in an account over time.
d. The comparison of common-size financial statements over time.

Answer 13

c.The examination of changes in an account over time.

Question 14

Discussions with the owner-manager of an entity under audit reveal to the auditor that the company is more concerned with minimizing its income tax payments than maximizing income. Based on this information, which management assertion will the auditor be most concerned about verifying with regard to sales revenue?
	A)	Existence and occurrence.
	B)	Completeness.
	C)	Rights and obligations.
	D)	Valuation.

Answer 14

B) Completeness.

Question 15

Which of the following primary assertions is satisfied when an auditor observes the entity's physical count of inventory?
	A)	Valuation.
	B)	Completeness.
	C)	Existence.
	D)	Rights and obligations.

Answer 15

C) Existence.

Question 16

Which of the following statements is correct with regard to the quality or appropriateness of evidential matter?
A) The auditor’s direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.
B) Evidential matter must be either valid or relevant but need not be both.
C) Internal accounting data alone may be considered sufficient appropriate evidential matter to issue an unqualified opinion on financial statements.
D) Appropriateness of evidential matter refers to the amount of corroborative evidence to be obtained.

Answer 16

A) The auditor’s direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.

Question 17

Which of the following audit procedures would most likely be used to test the mathematical accuracy of a five-hundred page inventory listing?
A) Send confirmations to selected vendors to verify amounts.
B) Examine a random sample of inventory documents.
C) Manually foot, or sum, several randomly-selected pages.
D) Use generalized audit software to foot, or sum, the entire listing.

Answer 17

D) Use generalized audit software to foot, or sum, the entire listing.

Question 18

Confirmations would normally be most likely used as a type of audit evidence in connection with which of the following?
	A)	Goodwill.
	B)	Deferred Taxes.
	C)	Machinery and Equipment.
	D)	Accounts Receivable.

Answer 18

D) Accounts Receivable.

Question 19

One of the main objectives of performing analytical review procedures during the planning phase of the audit is to identify:
A) Transactions that have not been properly authorized.
B) Illegal acts undetected as a result of poor internal controls.
C) Inefficient operations.
D) Unusual changes that may signal possible account misstatements.

Answer 19

D) Unusual changes that may signal possible account misstatements.

Question 20

Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
A) Vendor confirmations of accounts payable balances.
B) Copies of bank statements obtained from the entity under audit.
C) Pre-numbered sales invoices.
D) The opinion of an outside specialist regarding inventory valuation.

Answer 20

C) Pre-numbered sales invoices.

Question 21

Which of the following presumptions is correct regarding the reliability of audit evidence?
A) To be reliable, evidence should be convincing rather than simply persuasive.
B) Information obtained directly from outside sources is considered to be the most reliable type of evidence.
C) An effective internal control system provides increased assurance with regard to the reliability of audit evidence.
D) Reliability generally refers to the amount and relevance of corroborative audit evidence obtained.

Answer 21

C) An effective internal control system provides increased assurance with regard to the reliability of audit evidence.

Question 22

Which of the following is true relating to audit work paper documentation?
A) It serves as the basis of review for audit supervisors to determine if sufficient, appropriate evidence has been gathered.
B) It should not include copies of any client-generated documents.
C) It is generally examined and utilized by the client after the audit is completed.
D) It must be destroyed once the audit is complete and the opinion is rendered.

Answer 22

A) It serves as the basis of review for audit supervisors to determine if sufficient, appropriate evidence has been gathered.

Question 23

Which of the following items is generally not included as part of audit documentation?
	A)	Heading.
	B)	Indexing.
	C)	Client review notation.
	D)	Tickmarks.

Answer 23

C) Client review notation.

Question 24

According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a low level of reliability is:
	A)	Reperformance.
	B)	Inspection.
	C)	Observation.
	D)	Analytical procedures.

Answer 24

C) Observation.

Question 25

According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a high level of reliability is:
	A)	Scanning.
	B)	Recalculation.
	C)	Observation.
	D)	Confirmation.

Answer 25

B) Recalculation.

Question 26

Audit documentation provides the principal support for which of the following?
A) Demonstrate how the audit complied with auditing and related professional practice standards.
B) Support the basis for the auditor’s conclusions concerning every material financial statement assertion.
C) Demonstrate that the underlying accounting records agreed or reconciled with the financial statements.
D) All of the above.

Answer 26

D) All of the above.

Question 27

According to the text, each of the following is a main purpose for performing audit procedures except:
A) To obtain an understanding of the entity and its environment.
B) To test the operating effectiveness of controls.
C) To develop recommendations for the control system.
D) To detect material misstatements in the financial statements.

Answer 27

C) To develop recommendations for the control system.

Question 28

Which of the following is true regarding audit evidence?
A) Auditors typically gather audit evidence about one whole financial statement at a time rather than one account at a time.
B) Auditors rarely gather audit evidence about one business process at a time.
C) Audit evidence is gathered to determine whether each relevant financial statement assertion is being supported.
D) When audit evidence supports management’s assertions, a qualified audit report can be issued.

Answer 28

C) Audit evidence is gathered to determine whether each relevant financial statement assertion is being supported.