Chapter 7: Audit Evidence

Question 1

Which of the following is an accurate statement regarding audit evidence?

A) Responses to the auditor’s questions by client employees is considered highly persuasive evidence.

B) Audit evidence should provide an absolute level of assurance.

C) The auditor uses evidence to determine whether the statements are fairly presented.

D) All evidence must be highly persuasive.

Answer 1

C) The auditor uses evidence to determine whether the statements are fairly presented.

Question 2

All evidence must have the same level of persuasiveness.

TRUE OR FALSE

Answer 2

FALSE

Question 3

Auditors use evidence to help them draw conclusions.

TRUE OR FALSE

Answer 3

TRUE

Question 4

A(n) ________ is the detailed instruction that explains the audit evidence to be obtained during the audit.

A) audit objective

B) audit procedure

C) audit assertion

D) audit program

Answer 4

B) audit procedure

Question 5

Which of the following is notone of the four decisions about what evidence to gather and how much of it to accumulate?

A) which audit procedures to use

B) which accounts must agree to the general ledger

C) when to perform the procedures

D) what sample size to select for a given procedure

Answer 5

B) which accounts must agree to the general ledger

Question 6

When making audit evidence decisions,

A) the auditor decides which items in the population to test before determining the sample size.

B) the sample size for any given procedure must remain constant from audit to audit.

C) audit engagement software can assist the auditor in making evidence decisions.

D) the auditor is required to use the sample sizes that are determined by the PCAOB

Answer 6

C) audit engagement software can assist the auditor in making evidence decisions.

Question 7

An audit program is the list of audit procedures for an audit area or an entire audit.

TRUE OR FALSE

Answer 7

TRUE

Question 8

Audit evidence has two primary qualities for the auditor; relevance and reliability. Given the choices below, which provides the auditor with the most reliable audit evidence?

A) general ledger account balances

B) confirmation of accounts receivable balance received from a customer

C) internal memo explaining the issuance of a credit memo

D) copy of month-end adjusting entries

Answer 8

B) confirmation of accounts receivable balance received from a customer

Question 9

Which of the following is nota characteristic of the reliability of evidence?

A) effectiveness of client internal controls

B) education of auditor

C) independence of information provider

D) timeliness

Answer 9

B) education of auditor

Question 10

The auditor must gather sufficient and appropriate evidence during the course of the audit. Sufficient evidence must

A) be well documented and cross-referenced in the audit documents.

B) be based on sources that are external to company.

C) provide evidence that prove or disprove an audit objective/assertion.

D) be persuasive enough to enable the auditor to issue an audit report.

Answer 10

D) be persuasive enough to enable the auditor to issue an audit report.

Question 11

Audit evidence obtained directly by the auditor will notbe reliable if

A) the auditor lacks the competence to evaluate the evidence.

B) it is provided by the client’s attorney.

C) the client denies its veracity.

D) it is impossible for the auditor to obtain additional corroboratory evidence.

Answer 11

A) the auditor lacks the competence to evaluate the evidence.

Question 12

Appropriateness of evidence is a measure of the

A) quantity of evidence.

B) quality of evidence.

C) sufficiency of evidence.

D) meaning of evidence.

Answer 12

B) quality of evidence.

Question 13

Which of the following statements regarding the relevance of evidence is correct?

A) To be relevant, evidence must pertain to the audit objective of the evidence.

B) To be relevant, evidence must be persuasive.

C) To be relevant, evidence must relate to multiple audit objectives.

D) To be relevant, evidence must be derived from a system including effective internal controls.

Answer 13

A) To be relevant, evidence must pertain to the audit objective of the evidence.

Question 14

Two determinants of the persuasiveness of evidence are

A) competence and sufficiency.

B) relevance and reliability.

C) appropriateness and sufficiency.

D) independence and effectiveness.

Answer 14

C) appropriateness and sufficiency.

Question 15

The two characteristics of the appropriateness of evidence are

A) relevance and timeliness.

B) relevance and accuracy.

C) relevance and reliability.

D) reliability and accuracy.

Answer 15

C) relevance and reliability.

Question 16

Which of the following forms of evidence would be least persuasive in forming the auditor’s opinion about marketable securities and other investments held by the company?

A) responses to auditor’s questions by the president and controller regarding the investments account

B) correspondence with a stockbroker regarding the quantity of client’s investments held in street name by the broker

C) minutes of the board of directors authorizing the purchase of stock as an investment

D) the auditor’s count of marketable securities

Answer 16

A) responses to auditor’s questions by the president and controller regarding the investments account

Question 17

Which of the following statements is notcorrect?

A) It is possible to vary the sample size from one unit to 100% of the items in the population.

B) Cost is an adequate justification for not gathering an adequate sample size.

C) The decision of how many items to test must be made by the auditor for each audit procedure.

D) The sample size for any given procedure is likely to vary from audit to audit.

Answer 17

B) Cost is an adequate justification for not gathering an adequate sample size.

Question 18

For audit evidence to be compelling to the auditor it must be sufficient and appropriate. Which statement below is notcorrect regarding the appropriateness of audit evidence?

A) The more effective the internal control system, the more assurance it provides the auditor about the reliability of financial reporting by the client.

B) An auditor’s opinion, to be economically useful and profitable to the auditing firm needs to be formed within a reasonable time and based on evidence obtained that assures profits for the auditing firm.

C) Evidence obtained from independent sources outside the entity is generally more reliable than evidence secured solely within the entity.

D) The independent auditor’s direct personal knowledge, obtained through inquiry, observation and inspection, is generally more persuasive than information obtained indirectly.

Answer 18

B) An auditor’s opinion, to be economically useful and profitable to the auditing firm needs to be formed within a reasonable time and based on evidence obtained that assures profits for the auditing firm.

Question 19

Which of the following is a correct statement regarding audit evidence?

A) A large sample of evidence provided by an independent party is always considered persuasive evidence.

B) A small sample of only one or two pieces of highly appropriate evidence is always considered persuasive evidence.

C) The auditor must obtain a sufficient amount of relevant and reliable evidence to form an opinion on the fairness of the financial statements.

D) Evidence is usually more reliable for balance sheet accounts when it is obtained within six months of the balance sheet date.

Answer 19

C) The auditor must obtain a sufficient amount of relevant and reliable evidence to form an opinion on the fairness of the financial statements.

Question 20

Which of the following is the most objective type of evidence?

A) a letter written by the client’s attorney discussing the likely outcome of outstanding lawsuits

B) the physical count of securities and cash

C) inquiries of the credit manager about the collectability of noncurrent accounts receivable

D) observation of cobwebs on some inventory bins

Answer 20

B) the physical count of securities and cash

Question 21

Determine which of the following is most correct statement regarding the reliability of audit evidence.

A) Information that is indirectly obtained from external sources is the most reliable audit evidence.

B) Reliability of audit evidence is dependent upon the evidence being subjective.

C) Reliability of evidence refers to the amount of evidence obtained.

D) If internal controls are effective, evidence obtained is more reliable than when the controls are not effective.

Answer 21

D) If internal controls are effective, evidence obtained is more reliable than when the controls are not effective.

Question 22

Evidence is generally considered appropriate when

A) it has been obtained by random selection.

B) there is enough of it to afford a reasonable basis for an opinion on financial statements.

C) it is relevant to the audit objective being tested.

D) it consists of written statements made by managers of the company under audit.

Answer 22

C) it is relevant to the audit objective being tested.

Question 23

Given the economic and time constraints in which auditors can collect evidence regarding management assertions about the financial statements, the auditor normally gathers evidence that is

A) irrefutable.

B) conclusive.

C) persuasive.

D) completely convincing.

Answer 23

C) persuasive.

Question 24

Which of the following statements is nota correct statement regarding audit evidence?

A) Evidence obtained from an independent source outside the client organization is more reliable than that obtained from within.

B) Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly.

C) Documents that originate outside the company are considered more reliable than those that originate within the client’s organization.

D) External evidence, such as communications from banks, is generally regarded as more reliable than answers obtained from inquiries of the client.

Answer 24

B) Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly.

Question 25

Evidence is usually more persuasive for balance sheet accounts when it is obtained

A) as close to the balance sheet date as possible.

B) only from transactions occurring on the balance sheet date.

C) from various times throughout the client’s year.

D) from the time period when transactions in that account were most numerous during the fiscal period.

Answer 25

A) as close to the balance sheet date as possible.

Question 26

Which of the following statements is true?

A) Evidence must be relevant to all of the audit objectives.

B) If evidence is subjective, it cannot be reliable.

C) Evidence obtained directly by the auditor may not be reliable if the auditor lacks the qualifications to evaluate the evidence.

D) The persuasiveness of evidence can be evaluated after considering its sufficiency.

Answer 26

C) Evidence obtained directly by the auditor may not be reliable if the auditor lacks the qualifications to evaluate the evidence.

Question 27

Which of the following statements relating to the competence of evidential matter is always true?

A) Evidence from outside an enterprise is always reliable.

B) Accounting data developed under satisfactory conditions of internal control is not reliable.

C) Oral representations made by management are not reliable evidence.

D) Evidence must be both reliable and relevant to be considered appropriate.

Answer 27

D) Evidence must be both reliable and relevant to be considered appropriate.

Question 28

Audit evidence to support an opinion about the fairness of a client’s financial statements consists entirely of written information.

TRUE OR FALSE

Answer 28

FALSE

Question 29

The relevance of audit evidence depends on the audit objective being tested.

TRUE OR FALSE

Answer 29

TRUE

Question 30

Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an audit objective.

TRUE OR FALSE

Answer 30

FALSE

Question 31

Objective evidence is more reliable, and hence more persuasive, than subjective evidence.

TRUE OR FALSE

Answer 31

TRUE

Question 32

The two most important factors when determining the appropriate sample size in an audit are the auditor’s expectation of misstatements and the objectivity of the evidence.

TRUE OR FALSE

Answer 32

FALSE

Question 33

Calculating the gross margin for the current audit year as a percent of sales and comparing it with previous years is what type of evidence?

A) physical examination

B) analytical procedures

C) observation

D) inquiry

Answer 33

B) analytical procedures

Question 34

When the auditor uses supporting evidence for amounts posted to account balances with documentary evidence, that process is called

A) inquiry.

B) confirmation.

C) vouching.

D) physical examination

Answer 34

C) vouching.

Question 35

An example of an external document that provides reliable information for the auditor is: a(n)

A) employees’ time report.

B) bank statement.

C) purchase order for company purchases.

D) carbon copies of a check.

Answer 35

B) bank statement.

Question 36

An example of a document the auditor receives from the client, but which was prepared by someone outside the client’s organization is a

A) confirmation.

B) sales invoice.

C) vendor invoice.

D) bank reconciliation

Answer 36

C) vendor invoice.

Question 37

The evaluations of financial information through analysis of plausible relationships among financial and nonfinancial data is the definition of

A) analytical procedures.

B) tests of transactions.

C) tests of balances.

D) auditing.

Answer 37

A) analytical procedures.

Question 38

When the auditor uses tracing as an audit procedure for tests of transactions, she is primarily concerned with which audit objective?

A) occurrence

B) completeness

C) cutoff

D) classification

Answer 38

B) completeness

Question 39

When the auditor uses the audit procedure vouching she is primarily concerned with which of the following audit objectives when testing classes of transactions?

A) occurrence

B) completeness

C) authorization

D) classification

Answer 39

A) occurrence

Question 40

When auditors use documentation to support recorded transactions and amounts, the process is usually called

A) tracing.

B) confirmations.

C) vouching.

D) reperformance.

Answer 40

C) vouching.

Question 41

Auditors may decide to replace tests of details with analytical procedures when possible because the

A) analytical procedures are more reliable.

B) analytical procedures are considerably less expensive.

C) analytical procedures are more persuasive.

D) tests of details are more difficult to interpret.

Answer 41

B) analytical procedures are considerably less expensive.

Question 42

Factors that determine the auditor’s willingness to accept a document as reliable evidence include

A) whether it is internal or external.

B) whether it was created and processed under conditions of effective internal control.

C) whether it is an original document or a photocopy.

D) all of the above.

Answer 42

D) all of the above.

Question 43

“Physical examination” is the inspection or count by the auditor of items such as

A) cash, inventory, and payroll timecards.

B) cash, inventory, canceled checks, and sales documents.

C) cash, inventory, canceled checks, and tangible fixed assets.

D) cash, inventory, securities, notes receivable, and tangible fixed assets.

Answer 43

D) cash, inventory, securities, notes receivable, and tangible fixed assets.

Question 44

The primary purpose of audit procedures is to

A) detect all errors or fraudulent activities as well as illegal activities.

B) comply with auditing standards promulgated by the PCAOB for publicly held clients.

C) gather corroborative audit evidence about management’s assertions regarding the client’s financial statements.

D) determine the amount of errors in the balance sheet accounts in order to adjust the accounts to actual.

Answer 44

C) gather corroborative audit evidence about management’s assertions regarding the client’s financial statements.

Question 45

________ generally provide the most reliable evidence.

A) Confirmations

B) Recalculations

C) Reperformances

D) Observations

Answer 45

A) Confirmations

Question 46

When practical and reasonable, U.S. auditing standards require the confirmation of

A) individual transactions between organizations, such as sales transactions.

B) accounts receivable.

C) fixed asset additions.

D) payroll expenses.

Answer 46

B) accounts receivable.

Question 47

To be considered reliable evidence, confirmations must be controlled by

A) the client’s employee responsible for accounts receivable.

B) the external auditor.

C) the client’s internal audit department.

D) the client’s controller or CFO.

Answer 47

B) the external auditor.

Question 48

Physical examination

A) is a direct means of verifying that an asset really exists.

B) is sufficient evidence to verify that the existing assets are owned by the client.

C) can be used for both tangible assets and documents.

D) is not generally a reliable type of audit evidence.

Answer 48

A) is a direct means of verifying that an asset really exists.

Question 49

Which of the following is nota correct combination of terms and related type of audit evidence?

A) inquire — inquiries of client

B) count — physical examination

C) recompute — recalculation

D) read — documentation

Answer 49

D) read — documentation

Question 50

Which of the following is a correct statement regarding confirmations?

A) Confirmations can be in oral or written form.

B) Electronic confirmations are not acceptable under generally accepted auditing standards.

C) Confirmations are generally used in the audit of fixed asset additions.

D) Auditors consider alternative evidence available when determining if confirmations should be used.

Answer 50

D) Auditors consider alternative evidence available when determining if confirmations should be used.

Question 51

The auditor is concerned that a client is failing to bill customers for shipments. An audit procedure that would gather relevant evidence would be to

A) select a sample of duplicate sales invoices and trace each to related shipping documents.

B) trace a sample of shipping documents to related duplicate sales invoices.

C) trace a sample of Sales Journal entries to the Accounts Receivable subsidiary ledger.

D) compare the total of the Schedule of Accounts Receivable with the balance of the Accounts Receivable account in the general ledger.

Answer 51

B) trace a sample of shipping documents to related duplicate sales invoices.

Question 52

________ is the auditor’s examination of the client’s documents and records to substantiate that the information is included in the financial statements.

A) Inspection

B) Recalculation

C) Observation

D) Verification

Answer 52

A) Inspection

Question 53

When the auditor scans the sales journal looking for large and unusual transactions, he is gathering what type of evidence?

A) inspection

B) recalculation

C) physical examination

D) analytical procedures

Answer 53

D) analytical procedures

Question 54

You are auditing the company’s purchasing process for goods and services. You are primarily concerned with the company not recording all purchase transactions. Which audit procedure below would be the most effective audit procedure in this case?

A) vouching from the accounts payable account to the vendor invoices

B) tracing vendor invoices to recorded amounts in the accounts payable account

C) confirmation accounts payable recorded amounts

D) reconciling the accounts payable subsidiary ledger to the accounts payable account

Answer 54

B) tracing vendor invoices to recorded amounts in the accounts payable account

Question 55

Which of the following discoveries through the use of analytical procedures would most likely indicate a relatively high risk of financial failure?

A) a decline in gross margin percentages

B) an increase in the balance in fixed assets

C) an increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at the same time accounts receivable turnover also decreased

D) a higher than normal ratio of long-term debt to net worth as well as a lower than average ratio of profits to total assets

Answer 55

D) a higher than normal ratio of long-term debt to net worth as well as a lower than average ratio of profits to total assets

Question 56

Confirmations are among the most expensive type of evidence to obtain.

TRUE OR FALSE

Answer 56

TRUE

Question 57

Whenever practical and reasonable, the confirmation of accounts receivable is required of CPAs.

TRUE OR FALSE

Answer 57

TRUE

Question 58

Inquiries of clients and recalculations normally have a low cost associated with them.

TRUE OR FALSE

Answer 58

TRUE

Question 59

When analytical procedures reveal unusual fluctuations in an account balance, the auditor will probably perform fewer tests of details for that account and increase the tests of controls related to the account.

TRUE OR FALSE

Answer 59

FALSE

Question 60

The type of audit evidence known as inquiry requires the auditor to obtain oral or written information from the client in response to questions.

TRUE OR FALSE

Answer 60

TRUE

Question 61

Auditor judgment is the primary determinant in determining the amount of evidence gathered.

TRUE OR FALSE

Answer 61

TRUE

Question 62

Analytical procedures must be used in the planning and completion phases of the audit.

TRUE OR FALSE

Answer 62

TRUE

Question 63

Confirmations are ordinarily used to verify account balances, but may be used to verify transactions.

TRUE OR FALSE

Answer 63

TRUE

Question 64

Accounts receivable confirmations must be controlled by the client from the time they are prepared until the time they are returned to the auditor.

TRUE OR FALSE

Answer 64

FALSE

Question 65

Cost is never an adequate justification for omitting a necessary procedure or not gathering an adequate sample size.

TRUE OR FALSE

Answer 65

TRUE

Question 66

When the auditor foots the journals and the subsidiary ledgers, it is considered reperformance.

TRUE OR FALSE

Answer 66

FALSE

Question 67

Inspection consists of looking at a process or procedure being performed by others.

TRUE OR FALSE

Answer 67

FALSE

Question 68

A canceled check written by the client, made payable to a local supplier and drawn on the client’s bank account is one type of internal document.

TRUE OR FALSE

Answer 68

FALSE

Question 69

Analytical procedures are so important that they are required during the

A) planning and test of control phases.

B) planning and completion phases.

C) test of control and completion phases.

D) planning, test of control, and completion phases.

Answer 69

B) planning and completion phases.

Question 70

A benefit obtained from using industry averages is that it provides a(n)

A) benchmark to compare the company’s results.

B) indication where errors exist in the statements.

C) benchmark to be used in evaluating a client’s budgets.

D) comparison of “what is” with “what should be.”

Answer 70

A) benchmark to compare the company’s results.

Question 71

Industry comparisons can be used as

A) an aid to understanding the client’s business.

B) an indicator of errors.

C) an indicator of fraud.

D) an aid to internal controls.

Answer 71

A) an aid to understanding the client’s business.

Question 72

Analytical procedures

A) performed during the audit planning phase generally use aggregate data.

B) are never performed during the testing phase of an audit.

C) are declining in importance as a type of audit evidence.

D) performed during the audit planning stage help the auditor take a final objective look at the audited financial statements.

Answer 72

A) performed during the audit planning phase generally use aggregate data.

Question 73

Analytical procedures performed during the planning phase of the audit

A) are used as a substantive test in support of account balances.

B) are used to assist in determining the nature, extent, and timing of audit procedures

C) are used to detect fraud.

D) are mandatory only for public companies.

Answer 73

B) are used to assist in determining the nature, extent, and timing of audit procedures

Question 74

Analytical procedures performed during the completion stage of the audit

A) help the auditor understand the client’s business and industry.

B) are typically performed by a senior partner with extensive knowledge of the client’s business.

C) help the auditor identify significant matters requiring special attention later in the engagement.

D) all of the above

Answer 74

B) are typically performed by a senior partner with extensive knowledge of the client’s business.

Question 75

Substantive analytical procedures performed during the testing phase of the audit

A) are required under generally accepted auditing standards.

B) are always done independently from other audit procedures.

C) are used as a substantive test in support of account balances.

D) do not need to be documented in the working papers.

Answer 75

C) are used as a substantive test in support of account balances.

Question 76

Auditors compare client data with

A) industry data.

B) client-determined expected results.

C) similar prior-period data.

D) all of the above.

Answer 76

D) all of the above.

Question 77

Which of the following is nota weakness of using industry averages for auditing?

A) The industry data are broad averages.

B) Different companies follow different accounting methods.

C) They can be helpful in identifying potential misstatements.

D) All of the above are weaknesses.

Answer 77

C) They can be helpful in identifying potential misstatements.

Question 78

When comparing client data with similar prior-period data,

A) if there has been no significant changes in the client’s operations in the current year, much of the detail making up the totals in the financial statements should remain unchanged.

B) comparison of details must take the form of details over time.

C) comparing totals with previous years considers growth in the business activity.

D) percent relationships fail to consider declines in the business activity.

Answer 78

A) if there has been no significant changes in the client’s operations in the current year, much of the detail making up the totals in the financial statements should remain unchanged.

Question 79

Which of the following is accurate regarding the comparison of client data?

A) Since budgets are only projections, auditors can ignore the differences between budgeted and actual results.

B) One approach to overcome the limitations of industry averages is to compare the client to one or more benchmark firms in the industry.

C) It is impractical to relate one account balance to another balance sheet or income statement account.

D) it is extremely difficult to get industry data for comparative purposes.

Answer 79

B) One approach to overcome the limitations of industry averages is to compare the client to one or more benchmark firms in the industry.

Question 80

Substantive analytical procedures performed in all phases of the audit generally use aggregate data to help understand where misstatements are more likely to occur.

TRUE OR FALSE

Answer 80

FALSE

Question 81

There has been an increased emphasis on the use of analytical procedures during an audit.

TRUE OR FALSE

Answer 81

TRUE

Question 82

The usefulness of analytical procedures as audit evidence depends significantly on appropriate comparison data.

TRUE OR FALSE

Answer 82

TRUE

Question 83

The most important benefits of industry comparisons are to aid in understanding the client’s business and as an indication of the likelihood of financial failure.

TRUE OR FALSE

Answer 83

TRUE

Question 84

One substantive analytical procedure involves the auditor calculating an expected balance for an account and then comparing it to the actual account balance.

TRUE OR FALSE

Answer 84

TRUE

Question 85

Financial ratios

A) are used during the planning and final review phases of the audit.

B) can be linked to the trial balance so that calculations are automatically updated as adjustments are made.

C) should be compared to previous years and industry averages.

D) all of the above

Answer 85

D) all of the above

Question 86

Which of the following ratios is nota measure of a company’s short-term debt paying ability?

A) accounts receivable turnover

B) cash ratio

C) current ratio

D) quick ratio

Answer 86

A) accounts receivable turnover

Question 87

Which financial ratio is computed by dividing current assets by current liabilities?

A) quick ratio

B) debt to equity

C) accounts receivable turnover

D) current ratio

Answer 87

D) current ratio

Question 88

Which account is used in the current ratio but notthe quick ratio?

A) marketable securities

B) accounts payable

C) accounts receivable

D) inventory

Answer 88

D) inventory

Question 89

To determine accounts receivable turnover, net sales is divided by

A) beginning net accounts receivable.

B) average gross receivables.

C) cost of goods sold.

D) 365 days.

Answer 89

B) average gross receivables.

Question 90

A company’s long-term solvency

A) can be measured by the gross profit percentage.

B) depends on the success of its operations and on its ability to raise capital for expansion.

C) can be measured by the days to collect receivables ratio.

D) depends on its ability to generate cash for the payment of dividends.

Answer 90

B) depends on the success of its operations and on its ability to raise capital for expansion.

Question 91

Which of the following is an accurate statement regarding a company’s ability to meet its long-term debt obligations?

A) If the debt-to-equity ratio is too high, it may indicate that the company has used up its borrowing capacity.

B) If the debt-to-equity ratio is too high, it may mean that available leverage is not being used to the owners’ benefit.

C) The times interest earned ratio indicates if a company can make its principal and interest payments.

D) The key ratios that are used to measure a long-term solvency are debt to equity, return on assets, and times interest earned.

Answer 91

A) If the debt-to-equity ratio is too high, it may indicate that the company has used up its borrowing capacity.

Question 92

Which ratio do auditors find useful for assessing misstatements in sales, cost of goods sold, accounts receivable, and inventory?

A) earnings per share

B) profit margin

C) gross profit percent

D) current ratio

Answer 92

C) gross profit percent

Question 93

Which ratio is computed by dividing operating income by net sales?

A) gross profit percent

B) profit margin

C) return on sales

D) return on assets

Answer 93

B) profit margin

Question 94

Auditors use trends in the accounts receivable turnover ratio to assess the reasonableness of the company’s credit policies.

TRUE OR FALSE

Answer 94

FALSE

Question 95

Auditors use trends in the inventory turnover ratio to identify potential inventory obsolescence.

TRUE OR FALSE

Answer 95

TRUE

Question 96

The most widely used profitability ratio is the gross profit percent.

TRUE OR FALSE

Answer 96

FALSE

Question 97

Which of the following best describes one of the primary objectives of audit documentation?

A) defend against claims of a deficient audit

B) provide a basis for reviewing the work of subordinates

C) provide reasonable assurance that the audit was conducted in accordance with auditing standards

D) provide additional support of recorded amounts to the client

Answer 97

C) provide reasonable assurance that the audit was conducted in accordance with auditing standards

Question 98

Audit documents

A) are kept by the client for easy reference for their accounting staff.

B) should be considered as a substitute for the clients accounting records.

C) are designed to facilitate the review and supervision of the work performed by the audit team by a reviewing partner.

D) prepared during the engagement are the property of the client once the audit bill is paid.

Answer 98

C) are designed to facilitate the review and supervision of the work performed by the audit team by a reviewing partner.

Question 99

Audit documentation

A) should identify the items tested when the audit procedures involve sampling of transactions or balances.

B) does not aid in the preparation of the tax return since accounting and tax rules differ.

C) is another term for the audit program.

D) should not be given to anyone outside the audit firm, even if a subpoena has been issued.

Answer 99

A) should identify the items tested when the audit procedures involve sampling of transactions or balances.

Question 100

Audit documentation of the evidence gathered by the auditor should meet which of the following criteria?

A) Workpapers are prepared in sufficient detail so that they can be given to the client for future reference.

B) The content is sufficient to provide support for the auditor’s opinion, including the auditor’s representation as to compliance with auditing standards.

C) Audit evidence is principally gathered to determine if the client’s financial statements, as prepared by management, can be relied upon to make managerial decisions about the firm.

D) Audit evidence as displayed in the workpapers is primarily performed to protect the auditing firm in the case of a lawsuit by investors.

Answer 100

B) The content is sufficient to provide support for the auditor’s opinion, including the auditor’s representation as to compliance with auditing standards.

Question 101

Audit documents are the joint property of the auditor and the audit client.

TRUE OR FALSE

Answer 101

FALSE

Question 102

Auditing standards require that records for audits of private companies be retained for a minimum of seven years.

TRUE OR FALSE

Answer 102

FALSE

Question 103

The SEC requires the auditors of public companies to retain e-mail correspondence related to the audit.

TRUE OR FALSE

Answer 103

TRUE

Question 104

When preparing and organizing audit files,

A) the rules established by the SEC and PCAOB must be followed.

B) a lead schedule contains the detailed accounts from the general ledger making up the line item on the trial balance.

C) a working trial balance is considered part of the permanent file.

D) the audit program is not part of the audit files.

Answer 104

B) a lead schedule contains the detailed accounts from the general ledger making up the line item on the trial balance.

Question 105

The permanent audit file would usually include the

A) client’s working trial balance.

B) summary of the risk assessment procedures performed.

C) organizational chart of the company’s employees.

D) summary of the auditors test of controls for the current years audit.

Answer 105

C) organizational chart of the company’s employees.

Question 106

The permanent files included as part of audit documentation do notnormally include

A) a copy of the current and prior years’ audit programs.

B) copies of articles of incorporation, bylaws and contracts.

C) information related to the understanding of internal control.

D) results of analytical procedures from prior years.

Answer 106

A) a copy of the current and prior years’ audit programs.

Question 107

Supporting schedules

A) must be prepared by the auditor.

B) make up the largest portion of audit documentation.

C) must consist of either reconciliation of amounts or substantive analytical procedures.

D) all of the above

Answer 107

B) make up the largest portion of audit documentation.

Question 108

What type of supporting schedule is designed to show detailed tests performed, does nottie in to the general ledger, but must state a positive or negative conclusion about the objective of the test?

A) outside documentation

B) reconciliation of amounts

C) examination of supporting documents

D) substantive analytical procedures

Answer 108

C) examination of supporting documents

Question 109

A(n) ________ is a supporting schedule that supports a specific amount and is normally expected to tie the amount recorded in the client’s records to another source of information.

A) reconciliation of amounts

B) analysis

C) summary of procedures

D) informational document

Answer 109

A) reconciliation of amounts

Question 110

Which type of supporting schedule is designed to show the activity in a general ledger account during the entire period under audit?

A) trial balance

B) reconciliation of amounts

C) summary of procedures

D) analysis

Answer 110

D) analysis

Question 111

Auditors use tick marks, which are symbols adjacent to the detail on the body of the schedule.

TRUE OR FALSE

Answer 111

TRUE

Question 112

An example of a supporting schedule is a reconciliation of amounts, which consists of the details that make up a year-end balance.

TRUE OR FALSE

Answer 112

FALSE

Question 113

Since confirmation replies and copies of client agreements are notconsidered schedules in the usual sense, they are notindexed and filed.

TRUE OR FALSE

Answer 113

FALSE

Question 114

An auditor can use engagement management software to facilitate tracking audit progress.

TRUE OR FALSE

Answer 114

TRUE