Chapter 7

Question 1

What four major decisions does an auditor must make regarding what to gather and how much to accumulate? (4)

Answer 1

1. Which audit procedures to use?
2. What sample size to select for a given procedure?
3. Which items to select from the population?
4. When to perform the procedures?

Question 2

What does audit program includes?

Answer 2

An audit program, also called an audit plan, is an action plan that documents what procedures an auditor will follow to validate that an organization is in conformance with compliance regulations. … The framework should explain the audit’s objectives, its scope and its timeline.

Question 3

What is sufficiency of evidence

Answer 3

refers to the quantity of evidence obtained.

Question 4

What are the 2 factors of the samples sizes?

Answer 4

1. The auditor’s expectation of misstatements

2. The effectiveness of the client’s internal controls

Question 5

What is Appropriateness mean?

Answer 5

refers to the quality of evidence obtained

Question 6

What is Appropriateness depended on? (2)

Answer 6

1. Relevance of evidence means that the evidence must pertain to or be relevant to the audit objective that is being tested.
2. Reliability of evidence refers to the degree to which evidence is believable or worthy of trust.

Question 7

Reliability depends on the following characteristics: (6)

Answer 7

1. Independence of provider
2. Effectiveness of client’s internal controls
3. Auditor’s direct knowledge
4. Qualifications of individuals providing the information
5. Degree of objectivity
6. Timeliness

Question 8

What is the Combined Effect?

Answer 8

The persuasiveness of the evidence can be evaluated only after considering the combination of appropriateness and sufficiency.

Question 9

How many types of Audit Evidence are there? (8)

Answer 9

(8)

1. Physical examination
2. Confirmation
3. Inspection (documentation)
4. Analytical procedures
5. Inquiries of the client
6. Recalculation
7. Reperformance
8. Observation

Question 10

Physical examination

Answer 10

The inspection or count of a tangible asset by the auditor.

Question 11

Confirmation

Answer 11

Receipt of a written or oral response.

Question 12

Inspection (documentation)

Answer 12

The auditor’s examination of the client’s documents (internal or external) and records to substantiate the information in the financial statements. Using documents to support recorded transactions (occurrence) is called vouching. Testing from source documents to recorded amounts (completeness objective) is called tracing.

Question 13

Analytical procedures

Answer 13

Comparisons and relationships used to assess whether account balances or other data appear reasonable

Question 14

Inquiries of the client

Answer 14

Obtaining written or oral information from the client.

Question 15

Recalculation

Answer 15

Repeating a sample of calculations made by the client.

Question 16

Reperformance

Answer 16

Redoing a sample of procedures other than calculations performed by the client

Question 17

Observation

Answer 17

Watching a process or procedure being performed by others.

Question 18

Cost of Types of Evidence? (3 groups)

Answer 18

Most expensive: Physical Examination and Confirmation
Moderately costly: Inspection, Analytical Procedures, and Reperformance
Least expensive: Observation, Inquiries of the Client, Recalculation

Question 19

What is Purposes of Analytical Procedures during the audit engagement? (3)

Answer 19

1. Analytical procedures are required in the planning phase as part of risk assessment to understand the client’s business and industry.
2. Analytical procedures are often done (but not required) during the testing phase of the audit as substantive tests in support of an account balance.
3. Analytical procedures are required during the completion phase of the audit, serving as a final review for material misstatements.

Question 20

Types of Analytical Procedures—Auditors compare client data with: (4)

Answer 20

1. Industry data
2. Similar prior-period data
3. Client-determined expected results
4. Auditor-determined expected results

Question 21

Financial ratios fall into several categories: (4)

Answer 21

1. Short-Term Debt-Paying Ability
   2 .Liquidity Activity Ratios
2. Ability to Meet Long-Term Debt Obligations
3. Profitability Ratios

Question 22

Short-Term Debt-Paying Ability: (3)

Answer 22

1. Cash ratio
2. Quick ratio
3. Current ratio

Question 23

Liquidity Activity Ratios: (4)

Answer 23

1. Accounts receivable turnover
2. Days to collect receivables
3. Inventory turnover
4. Days to sell inventory

Question 24

Ability to Meet Long-Term Debt Obligations: (2)

Answer 24

1. Debt to equity

2. Times interest earned

Question 25

Profitability Ratios: (5)

Answer 25

1. Earnings per share
2. Gross profit percentage
3. Profit margin
4. Return on assets
5. Return on common equity

Question 26

What is Audit Documentation?

Answer 26

is the record of the audit procedures performed, relevant audit evidence, and conclusions the auditor reached.

Question 27

Purpose for Audit Documentation? (4)

Answer 27

1. Basis for planning the audit
2. Record of the evidence accumulated and the results of the tests
3. Data for determining the proper type of audit report
4. Basis for review by supervisors and partners

Question 28

Who owns the audit flies?

Answer 28

All audit files are the property of the auditor.

Question 29

How can a member in public practice disclose any confidential client information?

Answer 29

With specific consent of the client.

Question 30

Requirements for Retention of Audit Documentation: (2)

Answer 30

1. Auditing standards require records of Private Companies be retained for a minimum of Five Years.
2. Sarbanes-Oxley Act requires auditors of Public Companies to maintain audit files for a minimum of Seven Years.

Question 31

Current Flies are what? plus 4 examples

Answer 31

Include all documentation for the current year audit including:

1. Audit Program
2. Working Trial Balance—Each line in the trial balance is supported by a lead schedule. A typical lead schedule for Cash is included in Figure 7-4.
3. Adjusting Entries—Auditors propose adjusting entries for material misstatements.
4. Supporting schedules as needed.

Question 32

Permanent Flies are what? plus 4 examples

Answer 32

Contain data of a historical or continuing nature. These provide a convenient source of information that is used from year to year:

1. Copies of company documents such as articles of incorporation, bylaws, bond indentures, and long-term contracts
2. Analyses of accounts from previous years that have continuing importance
3. Information related to understanding internal controls and assessing control risk
4. Results of analytical procedures from prior years’ audits for comparison

Question 33

Preparation of Audit Documentation means what?

Answer 33

Audit documentation should be in sufficient detail to provide a clear understanding of the work performed, evidence obtained, and conclusions reached.

Question 34

Documentation should have these characteristics: (5)

Answer 34

1. Identifies the client’s name, period covered, description of the contents, initials of the preparer, date of preparation, and an index code.
2. Indexed and cross-referenced to aid in organization.
3. Clearly indicates the audit work performed through memos, initialing the procedures in the audit program, or tick marks on the schedules.
4. Includes sufficient information to fulfill the audit objectives.
5. Communicates clearly the conclusions reached about the segment of the audit.

Question 35

Which types of evidence is an auditor more likely to use? (3)

Answer 35

1. Observation
2. Inquiries of the Client
3. Recalculation