Chapter 7

Question 1

7-23a

Which of the following types of documentary evidence should the auditor consider to be the most reliable?

1. Confirmation of an account payable balance mailed by and returned directly to the auditor
2. A sales invoice issued by the client and supported by a delivery receipt from an outside trucker.
3. A check, issued by the company and bearing the payee’s endorsement, that is included with the bank statements mailed directly to the auditor
4. An audit schedule prepared by the client’s controller and reviewed by the client’s treasurer

Answer 1

1. Confirmation of an account payable balance mailed by and returned directly to the auditor

Question 2

7-23b

Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?

1. Vendor’s invoice
2. Bank statement obtained from the client
3. Prenumbered sales invoices
4. Computations made by the auditor

Answer 2

3. Prenumbered sales invoices

Question 3

7-23c

Which of the following presumptions is correct about the reliability of audit evidence?

1. Information obtained indirectly from outside sources is the most reliable audit evidence.
2. To be reliable, audit evidence should be convincing rather than merely persuasive.
3. Reliability of audit evidence refers to the amount of corroborative evidence obtained.
4. Effective internal control provides more assurance about the reliability of audit evidence.

Answer 3

4. Effective internal control provides more assurance about the reliability of audit evidence.

Question 4

7-24a

For all audits of financial statements made in accordance with auditing standards, the use of analytical procedures is required to some extent

1. Planning Stage = Yes; As substantive test = No; Completion Stage = No
2. Planning Stage = No; As substantive test = Yes; Completion Stage = No
3. Planning Stage = No; As substantive test = Yes; Completion Stage = Yes
4. Planning Stage = Yes; As substantive test = No; Completion Stage = Yes

Answer 4

4. Planning Stage = Yes; As substantive test = No; Completion Stage = Yes

Question 5

7-24b

Which of the following situations has the best chance of being detected when a CPA compares 2019 revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage?

1. An increase in property tax has not been recognized in the company’s 2019 accrual.
2. The cashier began lapping accounts receivable in 2019.
3. Because of worsening economic conditions, the 2019 provision for uncollectible accounts was inadequate.
4. The company changed its capitalization policy for small tools in 2019.

Answer 5

4. The company changed its capitalization policy for small tools in 2019.

Question 6

7-24c

Which of the following would not be considered to be an analytical procedure?

1. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked.
2. Projecting the error rate by comparing the results of a statistical sample with the actual population characteristics.
3. Computing accounts receivable turnover by dividing credit sales by the average net receivables.
4. Developing the expected current-year sales based on the sales trend of the prior 5 years.

Answer 6

2. Projecting the error rate by comparing the results of a statistical sample with the actual population characteristics.

Question 7

7-25a

Which of the following is NOT a primary purpose of audit documentation?

1. To coordinate the audit
2. To assist in preparation of the audit report
3. To support the financial statements
4. To provide evidence of the audit work performed

Answer 7

3. To support the financial statements

Question 8

7-25b

During an audit engagement, pertinent data are compiled and included in the audit files. The audit files primarily are considered to be

1. evidence supporting financial statements.
2. a client-owned record of conclusions reached by the auditors who performed the engagement.
3. support for the auditor’s representations as to compliance with auditing standards.
4. a record to be used as a basis for the following year’s engagement.

Answer 8

3. support for the auditor’s representations as to compliance with auditing standards.

Question 9

7-25c

Although the quantity, type, and competence of the audit documentation will vary with the circumstances, audit documentation generally will include the

1. copies of those client records examined by the auditor during the course of the engagement.
2. evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit.
3. auditor’s comments concerning the efficiency and competence of client management personnel.
4. auditing procedures followed and the testing performed in obtaining audit evidence.

Answer 9

4. auditing procedures followed and the testing performed in obtaining audit evidence.

Question 10

7-26a

According to the PCAOB audit standards, audit documentation must be retained for

1. one year.
2. three years.
3. five years.
4. seven years.

Answer 10

4. seven years.

Question 11

7-26b

Which of the following types of audit evidence is generally the most reliable?

1. A bank confirmation
2. A bank statement
3. Analytical procedures
4. Inquiries of the audit committee

Answer 11

1. A bank confirmation

Question 12

7-26c

An auditor most likely would apply analytical procedures in the overall review stage of an audit to

1. identify unusual or unexpected balances that were not previously identified.
2. obtain an understanding of high-risk areas.
3. evaluate the design and implementation of internal control.
4. identify related party transactions that may not have been previously identified.

Answer 12

1. identify unusual or unexpected balances that were not previously identified.