M6-Procedures to Obtain Evidence

Question 1

C the FIVE CARROT WARS identifies the procedures used in an audit to be victorious.

Answer 1

C=Confirmation

F=Footing, cross-footing, and reconciliation
I=Inquiry
V=Vouching
E=Examination/inspection

C=Cutoff review
A=Analytical procedures
R=Reperformance
R=Reconciliation
O=Observation
T=Tracing

W=Walk-through
A=Auditing Related Accounts Simultaneously
R=Representation letter
S=Subsequent events review

Question 2

The manager and partner on a specific job generally bear a great deal of responsibility for the audit and the report. Typically they would perform analytical procedures during the final review stage, to evaluate overall financial statement presentation and to assess the conclusions reached. In order to evaluate the results of the analysis and to perform an effective review, the manager or partner should have comprehensive knowledge of the client’s business and the industry. (true or false)

Answer 2

true

Question 3

If analytical procedures suggest unexpected relationships, the auditor would perform additional tests of details of the accounts involved. (true or false)

Answer 3

true

Question 4

The objective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing conclusions reached and in the evaluation of the overall financial statement presentation. Analytical procedures applied in the overall review stage are used to consider the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning the audit, and to identify unusual or unexpected balances or relationships that were not previously identified. (true or false)

Answer 4

true

Question 5

Substantive tests are concerned with dollar amounts and consist of tests of details of transactions and balances and analytical procedures. The objective of tests of details of transactions performed as substantive tests is to detect material (dollar) misstatements in the financial statements. (true or false)

Answer 5

true

Question 6

Relationships among income statement accounts tend to be more predictable than balance sheet accounts (accounts receivable, accounts payable) because they represent transactions over a period of time rather than at one point in time. In addition, relationships involving transactions subject to management discretion (travel and entertainment) are less predictable. (true or false)

Answer 6

true

Question 7

When an analytical procedure is used as the principal substantive tests of significant financial statement assertion, the auditor is required to document both the auditor’s expectation and the factors considered in developing that expectation. (true or false)

Answer 7

true

Question 8

Analytical procedures involve comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Projecting an error rate from a statistical sample does not involve such a comparison. (true or false)

Answer 8

true

Question 9

The decision as to whether or not to use analytical procedures as substantive tests is based in part on the availability, reliability, and precision of the data used to develop expectations. (true or false)

Answer 9

true

Question 10

To audit the statement of cash flows, the auditor reconciles the amounts on the statement to amounts on other financial statements. (true or false)

Answer 10

true

Question 11

Identifying reasonable explanations for unexpected differences before talking to client management helps the auditor in assessing if management’s explanation is reasonable. Management’s explanation should always be corroborated with other evidence. (true or false)

Answer 11

true

Question 12

If the results of an analytical procedure disclose unexpected differences, the auditor should consider that the financial statements may contain a material misstatement. (true or false)

Answer 12

true

Question 13

To determine whether transactions have been recorded (completeness assertion), the auditor should trace from the source documents to the accounting records (general ledger, trial balances, etc.) (true or false)

Answer 13

true

Question 14

Testing from the accounting records to the source documents provides evidences of existence or occurrence, not completeness. (true or false)

Answer 14

true

Question 15

“The entity holds or controls the rights to assets” and “liabilities are obligations of the entity” are management assertions that relate to the rights and obligation assertion about ACCOUNT BALANCES AT YEAR END. (true or false)

Answer 15

true

Question 16

Analytical procedures are required during an audit’s planning and final review. (true or false)

Answer 16

true

Question 17

Analytical procedures used in planning an audit should focus on enhancing the auditor’s understanding of the client’s business. (true or false)

Answer 17

true

Question 18

Inspection involves examining records or documents. The terms of inspection and examination are often used interchangeably in audit. (true or false)

Answer 18

true

Question 19

If the objective of a test of details is to detect overstatements of sales (existence assertion), the auditor should trace transactions from the accounting records (i.e., sales journal) to the source documents (e.g., customer order, sales order, shipping documents, etc.) (true or false)

Answer 19

true

Question 20

When evaluating whether and to what extent analytical procedures should be used, the auditor should consider the nature of the assertion tested. The other factors the auditor considers are the plausibility and predictability of the data relationship, availability and reliability of data used to develop the expectation, and the precision of the expectation. (true or false)

Answer 20

true