Evidence - Objectives and Nature - Gleim Chapter 10 Flashcards
Observation, Inspection, Inquiry, Recalculation, Reperformance, Analytical or Guaranteeing: The auditor obtained a copy of the entity’s accounting manual and read the section on inventory to prepare for the physical inventory observation.
Inspection. Inspection of records or documents is the examination of records or documents, whether internal or external, in paper, electronic, or other media.
Observation, Inspection, Inquiry, Recalculation, Reperformance, Analytical or Guaranteeing: The auditor initiated a request for a letter to the entity’s legal counsel by management for information about pending or threatened litigation, claims and assessments.
Inquiry. Inquiry seeks information from knowledgeable persons within or outside the entity. A letter of inquiry to external legal counsel is the auditor’s primary means of corroborating the information about material litigation, claims and assessments provided by management.
Observation, Inspection, Inquiry, Recalculation, Reperformance, Analytical or Guaranteeing: The auditor scanned the repairs and maintenance account of unusually large amounts.
Analytical: Analytical procedures are evaluations of financial data made by a study of plausible relationships among both financial and nonfinancial data.
Is a year-end ledger balance given to the auditors before the start of the audit a current file, permanent file, lead schedule or working trial balance?
Working trial balance. A working trial balance is ordinarily used to record the year-end ledger balances prior to audit. Reclassifications and adjustments are accumulated on the trial balance to reflect the final audited balances.
When compared with a nineteenth-century auditor, today’s auditor places less relative emphasis upon Overall tests of ratios and trends. Examination of documentary support. External confirmation. Physical observation.
Examination of documentary support.
The auditor ordinarily should perform certain auditing procedures, such as external confirmation of receivables (AU-C 505), observation of inventory (AU-C 501), and analytical procedures (AU-C 520), instead of relying completely on documentary evidence.
An auditor ordinarily uses a working trial balance resembling the financial statements without notes, but containing columns for Accruals and deferrals. Reclassifications and adjustments. Reconciliations and tick marks. Expense and revenue summaries.
Reclassifications and adjustments.
The audit process begins with the balances from the ledger recorded on a working trial balance, which is a vehicle for controlling preparation of other audit documentation and summarizing data. As the audit proceeds, material reclassifications and adjustments are documented in the working papers and recorded on the working trial balance. Reclassifications relate to proper presentation of accurate balances, for example, the transfer of a noncurrent payable due in the next period to a current liability account. Adjustments correct client misstatements and affect balances to be reported.
Two assertions for which confirmation of accounts receivable balances provides primary evidence are Rights and obligations and existence. Completeness and valuation. Valuation and rights and obligations. Existence and completeness.
Rights and obligations and existence.
An external confirmation is audit evidence obtained as a direct, written response from a third party (the confirming party). External confirmation of accounts receivable is required unless (1) the overall account balance is not material; (2) the procedure would be ineffective; or (3) the assessed RMM at the assertion level is low, and other planned substantive procedures address the assessed risk. External confirmations are frequently relevant to assertions about account balances. Assertions about account balances at period end include (1) existence, (2) rights and obligations, (3) completeness, and (4) valuation and allocation. Assertions about existence address whether assets, liabilities, or equity interests of the entity exist. Assertions about rights and obligations address whether (1) the entity holds or controls the rights to assets, and (2) liabilities are the obligations of the entity. Thus, external confirmation provides relevant evidence that receivables exist and that the client has the right of collection. The valuation and allocation assertion states whether items have been included in the financial statements at appropriate amounts, and any valuation or allocation adjustments are recorded appropriately. However, external confirmation provides less relevant evidence for the valuation of gross accounts receivable balances than for the valuation of the related allowance accounts. The completeness assertion states whether all items that should be recorded are recorded, for example, all receivables. Unrecorded receivables are usually not discovered by confirmation. Thus, confirmation provides less relevant evidence about the valuation assertion and the completeness assertion than about the existence and rights and obligations assertions.
Which of the following statements ordinarily is true concerning the content of audit documentation?
Whenever possible, the auditor’s staff, rather than the entity’s employees, should prepare schedules and analyses.
It is appropriate to use calculator tapes with names or explanations on the tapes rather than writing separate lists onto working papers.
It is preferable to have negative figures indicated in red instead of in parentheses to emphasize amounts being subtracted.
The analysis of asset accounts and their related expense or income accounts should not appear on the same working paper.
It is appropriate to use calculator tapes with names or explanations on the tapes rather than writing separate lists onto working papers.
Audit documentation provides evidence of compliance with GAAS. But the auditor need not document every matter considered or judgment made. Moreover, the auditor need not document separately (e.g., in a checklist) compliance with matters for which compliance is demonstrated by documents in the audit file (AU-C 230). If calculator tapes containing names or explanations achieve the purposes of documentation, separate lists need not be written onto working papers.
Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion? Reasonable assurance. Auditor judgment. Audit risk. Materiality.
Auditor judgment.
Professional judgment involves applying relevant knowledge and experience to the facts and circumstances of an audit. The auditor exercises judgment to (1) interpret ethical requirements and GAAS and (2) make informed decisions, for example, about the sufficiency and appropriateness of audit evidence. The auditor also plans and performs the audit with professional skepticism. This is an attitude that includes (1) a questioning mind, (2) being alert to possible misstatements, and (3) a critical assessment of audit evidence (AU-C 500). Thus, judgment is required to select the specific auditing procedures needed to obtain that evidence.
Which of the following statements about evidence is true?
Appropriate evidence supporting management’s assertions should be conclusive rather than merely persuasive.
The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.
Effective internal control contributes little to the reliability of the evidence created within the entity.
A client’s accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor’s opinion.
A client’s accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor’s opinion.
Audit evidence consists of accounting records (initial entries and supporting records, such as ledgers, worksheets, and spreadsheets) and other information (minutes of meetings, confirmations, information obtained by inquiry, etc.). But accounting records alone do not provide sufficient appropriate evidence as a basis for an opinion on the financial statements.
An auditor would be least likely to use external confirmations in connection with the audit of Refundable income taxes. Shareholders’ equity. Inventories. Noncurrent debt.
Refundable income taxes.
Income taxes are paid to governmental entities, which are in a better position to state what amounts have been paid than what amounts are refundable based on a tax return that may not yet have been filed. The U.S. government usually does not respond to confirmation requests.
After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management’s financial statement assertion(s) of:
Rights and obiligation
Valuation and allocation
Both
NeitherValuation and allocation.
The proper approval of credit provides assurance that the account receivable is collectible. Thus, it is related to the valuation assertion that accounts receivable are recorded at net realizable value.
An auditor using audit software probably would be least interested in which of the following fields in a computerized perpetual inventory file? Date of last purchase. Warehouse location. Economic order quantity. Quantity sold.
Economic order quantity.
The economic order quantity, which is based on the most cost effective combination of ordering and carrying costs, is a management decision with little effect on the fairness of the inventory balance on the financial statements.
When companies use information technology (IT) extensively, evidence may be available only in electronic form. What is an auditor’s best course of action in such situations?
Use audit software to perform analytical procedures.
Assess the risks of material misstatement as high.
Use generalized audit software to extract evidence from client databases.
Perform limited tests of controls over electronic data.
Use generalized audit software to extract evidence from client databases.
In a largely IT environment, generalized audit software (GAS) is useful for both tests of controls and substantive procedures. It is software that is written to interface with many different client systems. In this case, assuming the control environment is effective, GAS provides the best means for gathering substantive evidence.
The permanent file section of the audit documentation that is kept for each audit client most likely contains
A schedule of time spent on the engagement by each individual auditor.
Narrative descriptions of the client’s accounting procedures and internal control.
Review notes pertaining to questions and comments regarding the audit work performed.
Correspondence with the client’s legal counsel concerning pending litigation.
Narrative descriptions of the client’s accounting procedures and internal control.
The permanent section of the auditor’s audit documentation usually contains copies of important entity documents. They may include (1) the articles of incorporation, share options, contracts, and bylaws; (2) the engagement letter, which is the contract between the auditor and the client; (3) analyses from previous audits of accounts of special importance to the auditor, such as noncurrent debt, PP&E, and shareholders’ equity; and (4) information about internal control, e.g., flowcharts, organization charts, and questionnaires.
