Chapter 6 [Audit Evidence]

Question 1

The records of initial accounting entries and supporting records.

Answer 1

Accounting records

Question 2

Evaluations of financial information through analyzing plausible relationships among both financial and nonfinancial data.

Answer 2

Analytical procedures

Question 3

A measure of the quality of audit evidence, and includes both the relevance and reliability of the evidence.

Answer 3

Appropriateness of audit evidence

Question 4

Correction of a misstatement of financial statements that was, or should have been, proposed by the auditor, whether or not recorded by management, that could, either individually or when aggregated with other misstatements, have a material effect on the company’s financial statements.

Answer 4

Audit adjustment

Question 5

The written record that forms the basis for the auditor’s conclusions.

Answer 5

Audit documentation

Question 6

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An ________________ may be either an auditor’s internal specialist (who is a partner or staff, including temporary staff, of the auditor’s firm or a network firm) or an auditor’s external specialist.

Answer 6

Auditor’s specialist

Question 7

Obtaining sufficient evidence that management’s explanation is accurate.

Answer 7

Corroboration

Question 8

Checking the agreement of the cross-addition of a number of columns of figures that sum to a grand total.

Answer 8

Cross-footing

Question 9

File that includes schedules, documents, and analyses that are relevant to the current-year audit.

Answer 9

Current file

Question 10

A period of time usually covering several days before and after the client’s balance sheet date.

Answer 10

Cutoff period

Question 11

Procedures applied to transactions selected from those recorded during the cutoff period to provide evidence as to whether the transactions have been recorded in the proper period.

Answer 11

Cutoff tests

Question 12

Qualitative and quantitative techniques and processes that auditors use to enhance their productivity and effectiveness; auditors extract, categorize, identify and analyze patterns or trends in the data; ____________ vary according to organizational requirements.

Answer 12

Data analytics tools

Question 13

Audit evidence that requires only one inference to reach a conclusion about the assertion being tested. Usually that inference is that the sample taken is representative of the population as a whole.

Answer 13

Direct evidence

Question 14

An approach to testing account balances that considers the type of misstatement likely to occur in the account balance and the corresponding evidence provided by other accounts that have been tested. The auditor normally tests assets and expenses for overstatement, and liabilities and revenues for understatement, because: (1) the major risks of misstatements on those accounts are in those directions, or (2) tests of other accounts provide evidence of possible misstatements in the other direction.

Answer 14

Directional testing

Question 15

Breaking data down into their component parts, such as different time periods, geographical locations, customer type, or product lines.

Answer 15

Disaggregation

Question 16

An agreement between two trading partners whereby they routinely exchange relevant data via the computer, e.g., for routine purchase orders.

Answer 16

Electronic data interchange

Question 17

Adding a column of figures to verify the correctness of the client’s totals.

Answer 17

Footing

Question 18

Audit evidence that requires a linkage of inferences to provide assurance about the assertion being tested, that is, one or more inferences are made. Examples include inferences made when using analytical procedures as audit evidence.

Answer 18

Indirect evidence

Question 19

A date at which audit evidence is collected earlier than the balance sheet date.

Answer 19

Interim date

Question 20

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the client to assist management in preparing the financial statements.

Answer 20

Management’s specialist

Question 21

File that includes schedules, documents, and records that are relevant for the current and future audits.

Answer 21

Permanent file

Question 22

Determining whether management’s explanation for observed differences can, in fact, account for the observed difference.

Answer 22

Quantification

Question 23

The development of an expected value of an account by using data partly or wholly independent of the client’s accounting information system.

Answer 23

Reasonableness test

Question 24

Recomputing an amount that the client has already estimated, such as recomputing the allowance for doubtful accounts based on a formula related to the aging of accounts receivable ending balances.

Answer 24

Recalculating estimated amounts

Question 25

Transactions that a client has with other companies or people who may be related to either the client or client’s senior management.

Answer 25

Related-party transactions

Question 26

Evidence that provides insight on the validity of the assertion being tested; that is, the evidence bears directly on the assertion being tested.

Answer 26

Relevance of evidence

Question 27

A measure of the quality of the underlying evidence. It is influenced by risk, potential management bias associated with the evidence, and the quality of the internal control system underlying the preparation of the evidence.

Answer 27

Reliability of evidence

Question 28

The auditor’s independent execution of controls that were originally performed as part of the entity’s internal control.

Answer 28

Reperformance

Question 29

The period between the confirmation date and the balance sheet date.

Answer 29

Roll-forward period

Question 30

A type of analytical procedure involving the auditor’s review of accounting data to identify significant or unusual items to test.

Answer 30

Scanning

Question 31

Substantive matters that are important to the procedures performed, evidence obtained, or conclusions reached on an audit.

Answer 31

Significant finding or issues

Question 32

Measure of the quantity of audit evidence.

Answer 32

Sufficiency of evidence

Question 33

Recomputing items involving multiplication.

Answer 33

Tests of extensions

Question 34

Abbreviations and symbols used by auditors to document the work they have performed and any issues identified during their work.

Answer 34

Tick marks

Question 35

Taking a sample of original source documents and ensuring that the transactions related to the source documents have been recorded in the appropriate journal and general ledger

Answer 35

Tracing

Question 36

Taking a sample of recorded transactions and obtaining the original source documents supporting the recorded transaction.

Answer 36

Vouching

Question 37

The appropriateness of audit evidence refers to its relevance and reliability.

T or F?

Answer 37

TRUE

Question 38

The sufficiency of evidence is a measure of evidence quality.

T or F?

Answer 38

FALSE

The sufficiency of evidence is a measure of evidence quantity.

Question 39

An auditor determines that management integrity is high, the risk of material misstatement is low, and the client’s internal controls are effective. Which of the following conclusions can be reached regarding the need to obtain direct evidence about the account balances?

a. Direct evidence can be limited to material account balances, and the extent of testing should be sufficient to corroborate the auditor’s assessment of low risk.
b. Direct evidence of account balances is not needed.
c. Direct evidence can be obtained solely through analytical procedures.
d. Direct evidence should be obtained for all accounts, regardless of the auditor’s assessment of control risk.

Answer 39

a

Question 40

Which of the following statements is true regarding the sufficiency of evidence needed to test an account?

a. Evidence sufficiency is a measure of evidence quality.
b. Evidence sufficiency is affected by the quality of evidence.
c. A relationship does not exist between evidence sufficiency and evidence quality.
d. For a specific client, evidence sufficiency will be the same across all accounts.

Answer 40

b

Question 41

A procedure that involves only inspection of documentation is usually considered to be of lower quality than a procedure involving reperformance.

T or F?

Answer 41

TRUE

Question 42

All audit procedures need to be performed at or after the client’s balance sheet date.

T or F?

Answer 42

FALSE

Question 43

The auditor is testing the completeness assertion. Which of the following statements is true regarding the auditor’s
work?

a. The auditor would take a sample of recorded transactions and obtain supporting documentation for those
transactions.
b. The auditor would perform a process referred to as tracing.
c. The auditor would take a sample of source documents and obtain additional supporting documents for those transactions.
d. For a sample of items recorded in the sales journal, the auditor would obtain the related shipping documents and customer orders

Answer 43

b

Question 44

The auditor is gathering evidence to test the assertion that the client’s capitalization of leased equipment assets is properly valued. Which of the following sources of evidence will the auditor generally find to be of the highest quality (most reliable and relevant)?

a. Inspection of the leased equipment.
b. Inspection of documents, including the lease contract and recalculation of capitalized amount and current amortization.
c. Confirmation of the current purchase price for similar equipment with vendors.
d. Confirmation of the original cost of the equipment with the lessor.

Answer 44

b

Question 45

Substantive analytical procedures are required on every audit.

T or F?

Answer 45

FALSE

Question 46

One of the most rigorous approaches to substantive analytical procedures is regression analysis.

T or F?

Answer 46

TRUE

Question 47

In which of the following scenarios are analytical procedures most appropriate as a substantive audit procedure?

a. The auditor’s primary objective is to reduce audit costs to a minimum.
b. Internal control risk is high, and therefore it is not efficient to test controls.
c. Planning analytical procedures indicate that misstatements are likely to occur in significant account balances.
d. Substantive analytical procedures would not be appropriate in any of the above scenarios.

Answer 47

d

Question 48

Which of the following statements is false regarding substantive analytical procedures?

a. Substantive analytical procedures are not required to be performed on all audit engagements.
b. If the results of substantive analytical procedures suggest that an account balance is materially correct, the auditor can reduce the evidence needed from tests of details.
c. The auditor would perform substantive analytical procedures after tests of details.
d. All of the above statements are true.

Answer 48

c

Question 49

When testing management estimates, the auditor should understand the process that management uses to develop estimates.

T or F?

Answer 49

TRUE

Question 50

When the auditor uses the work of an auditor specialist, the auditor’s responsibility for the audit opinion is reduced.

T or F?

Answer 50

FALSE

Question 51

Which of the following transactions would be least likely to be a related-party transaction?

a. A purchase transaction between an entity and its owners.
b. A debt-related transaction between an entity and one of its SPEs.
c. An exchange of property between an entity and a joint venture in which the entity has part ownership.
d. Writing off obsolete inventory prior to year-end.

Answer 51

d

Question 52

Which of the following procedures would an auditor typically perform first when assessing the reasonableness of management’s estimate of its pension liability?

a. Inspect documentation related to the pension transactions that the client has recorded.
b. Develop an understanding of management’s process for developing the estimate.
c. Identify sensitive management assumptions.
d. Review transactions occurring prior to the report release date to assess the reasonableness of management estimates.

Answer 52

b

Question 53

The auditor should document significant issues that were identified and how they were resolved.

T or F?

Answer 53

TRUE

Question 54

The auditor should use a standardized audit program, without any modifications, for all clients.

T or F?

Answer 54

FALSE

Question 55

Which of the following statements is true regarding audit documentation?

a. Auditors document only those significant issues that have not been resolved by the audit report date.
b. Audit documentation provides the principal support for the audit opinion expressed by the auditor.
c. Audit documentation would identify who reviewed the audit work but not who performed the audit work.
d. Documentation must be in paper format.

Answer 55

b

Question 56

Which of the following statements describes a purpose of an audit program?

a. An audit program is used to specify the procedures to be performed in obtaining audit evidence.
b. An audit program is used to record the completion of each audit step.
c. An audit program is useful for monitoring the progress of the audit.
d. All of the above statements describe the purpose of an audit program.

Answer 56

d