The Nature of Audit Evidence

Question 1

Which of the following types of audit evidence is the least persuasive?

Prenumbered purchase order forms.

Bank statements obtained from the client.

Test counts of inventory performed by the auditor.

Correspondence from the client’s attorney about litigation.

Answer 1

Prenumbered purchase order forms.

The requirement is to identify the least persuasive type of evidence. Answer (a) is correct because evidence secured solely from within the entity, here prenumbered purchase order forms, is considered less persuasive than evidence obtained from independent sources. Answer (b) is incorrect because a bank statement (even though received from the client) is externally created and therefore more persuasive than audit evidence secured solely from within the entity. Answer (c) is incorrect because evidence obtained directly by the auditor through observation is considered relatively persuasive. Answer (d) is incorrect because correspondence from the client’s attorney about litigation is obtained directly from independent sources and is therefore more persuasive than audit evidence secured from within the entity.

Question 2

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

Information obtained indirectly from outside sources is the most reliable audit evidence.

To be reliable, audit evidence should be convincing rather than persuasive.

Reliability of audit evidence refers to the amount of corroborative evidence obtained.

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

Answer 2

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

The requirement is to identify a correct presumption about the reliability of audit evidence. Answer (d) is correct because AU-C 500 indicates that effective internal control provides more assurance about the reliability of audit evidence than ineffective control. Answer (a) is incorrect because information obtained directly is considered more reliable than that obtained indirectly. Answer (b) is incorrect because audit evidence is normally persuasive rather than convincing. Answer (c) is incorrect because reliability of audit evidence relates to the appropriateness of audit evidence.

Question 3

Which of the following is not an assertion relating account balances?

Completeness.

Existence.

Rights and obligations.

Understandability.

Answer 3

Understandability.

This answer is correct because understandability is not an assertion relating to account balances. Those assertions are (1) existence, (2) rights and obligations, (3) completeness, and (4) valuation and allocation.

Question 4

Which of the following procedures would be most effective in reducing attestation risk?

Discussion with responsible individuals.

Examination of evidence.
Inquiries of senior management.

Analytical procedures.

Answer 4

Examination of evidence.

This answer is correct because basic to the attest engagement is the examination of evidence to form an opinion on the information.

Question 5

When management prepares financial statements in conformity with generally accepted accounting principles, assertions are made about account balances and
Classes of transactions
Disclosures
Yes     Yes
Yes      No
No      Yes
No       No

Answer 5

Yes Yes

This answer is correct because the professional standards identify and classify assertions for account balances, transaction classes, and disclosures.

Question 6

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?

The entity has rights to the inventory.

Inventory is properly valued.

Inventory is properly presented in the financial statements.

Inventory is complete.

Answer 6

Inventory is complete.

This is correct because the completeness assertion most directly relates to whether “all” of an item is reflected.

Question 7

Following the Professional Standards which of the following is not one of the assertions made by management for account balances?

Completeness.

Existence.

Valuation and allocation.

Relevance and reliability.

Answer 7

Relevance and reliability.

This answer is correct because relevance and reliability are not included in the professional standards as an account balance assertion.

Question 8

Which of the following statements is generally correct about the reliability of audit evidence?

The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements.

Appropriate audit evidence refers to the amount of evidence obtained.

Information obtained indirectly from independent outside sources is more persuasive than the auditor’s direct personal knowledge obtained through observation and inspection.

Appropriate audit evidence relates only to the audit evidence obtained from outside the entity.

Answer 8

The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements.

This answer is correct because the professional standards state that the more effective an internal control, the more assurance it provides about the reliability of the accounting data and financial statements.

Question 9

Which of the following statements concerning audit evidence is correct?

To be appropriate, audit evidence should be both relevant and reliable.

Reliable evidence is equivalent to sufficient evidence.

The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.

A client’s accounting data can be sufficient audit evidence to support the financial statements.

Answer 9

To be appropriate, audit evidence should be both relevant and reliable.

This answer is correct because appropriate evidence is both relevant and reliable.

Question 10

Which of the following is the least persuasive documentation in support of an auditor’s opinion?

Schedules of details of physical inventory counts conducted by the client.

Notation of inferences drawn from ratios and trends.

Notation of appraisers’ conclusions documented in the auditor’s working papers.

Lists of negative confirmation requests for which no response was received by the auditor.

Answer 10

Schedules of details of physical inventory counts conducted by the client.

This answer is correct because schedules of details of physical inventory counts conducted by the client is least persuasive because it is developed solely within the entity.

Question 11

What type of evidence would provide the highest level of assurance in an attestation engagement?

Evidence secured solely from within the entity.

Evidence obtained from independent sources.

Evidence obtained indirectly.

Evidence obtained from multiple internal inquiries.

Answer 11

Evidence obtained from independent sources.

This answer is correct because the attestation standards indicate that evidence from independent sources, from the attester’s direct personal knowledge, and obtained under effective controls provide the highest level of assurance.

Question 12

Which of the following procedures would provide the most reliable audit evidence?

Inquiries of the client’s internal audit staff held in private.

Inspection of prenumbered client purchase orders filed in the vouchers payable department.

Analytical procedures performed by the auditor on the entity’s trial balance.

Inspection of bank statements obtained directly from the client’s financial institution.

Answer 12

Inspection of bank statements obtained directly from the client’s financial institution.

This answer is correct because audit evidence obtained from independent sources outside the entity (such as bank statements received directly from a financial institution) provide greater assurance of reliability than that secured solely within the entity.

Question 13

Which of the following statements concerning audit evidence is correct?

Appropriate evidence supporting management’s assertions should be conclusive rather than merely persuasive.

Effective internal control contributes little to the reliability of the evidence created within the entity.

The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.

A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.

Answer 13

A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.

This answer is correct because auditors must obtain evidence beyond the accounting data.

Question 14

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management’s assertion of

Presentation.

Completeness.

Rights.

Existence

Answer 14

Completeness.

This answer is correct because the completeness assertion deals with whether all transactions have been included in the proper period.

Question 15

Which of the following procedures would yield the most reliable evidence?

A scanning of trial balances.

An inquiry of client personnel.

A comparison of beginning and ending retained earnings.

A recalculation of bad debt expense.

Answer 15

A recalculation of bad debt expense.

This answer is correct because recomputation of amounts represents highly reliable evidence.

Question 16

Which of the following types of audit evidence is the most persuasive?

Prenumbered client purchase order forms.

Client work sheets supporting cost allocations.

Bank statements obtained from the client.

Client representation letter.

Answer 16

Bank statements obtained from the client.

The requirement is to identify the most persuasive type of evidence. Answer (c) is correct because a bank statement represents evidence prepared outside of the entity and is considered an audit evidence source which provides the auditor with a high level of assurance. Answers (a), (b), and (d) are incorrect because prenumbered client purchase order forms, client work sheets and a representation letter all represent internally generated documents, generally considered less persuasive than externally generated documents.

Question 17

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

Inquiries made of management.

Confirmation of account information.

Analytical procedures.

Review of prior year audit procedures.

Answer 17

Confirmation of account information.

This answer is correct because evidence obtained from external parties and received directly by the auditor is generally considered most reliable.

Question 18

Of the following, which is the least persuasive type of audit evidence?

Documents mailed by outsiders to the auditor.

Correspondence between auditor and vendors.

Copies of sales invoices inspected by the auditor.

Computations made by the auditor.

Answer 18

Copies of sales invoices inspected by the auditor.

This answer is correct because copies of sales invoices represent internally generated evidence, which is considered less reliable than externally generated evidence received directly by the auditor.

Question 19

Most of the independent auditor’s work in formulating an opinion on financial statements consists of

Considering internal control.

Obtaining and examining audit evidence.

Examining cash transactions.

Comparing recorded accountability with assets.

Answer 19

Obtaining and examining audit evidence.

This answer is correct because the auditor’s report is based upon audit evidence which is obtained through the application of audit procedures to the financial statements and underlying accounting records.

Question 20

Which of the following procedures would provide the most reliable audit evidence?

Inquiries of the client’s internal audit staff held in private.

Inspection of prenumbered client purchase orders filed in the vouchers payable department.

Analytical procedures performed by the auditor on the entity’s trial balance.

Inspection of bank statements obtained directly from the client’s financial institution.

Answer 20

Inspection of bank statements obtained directly from the client’s financial institution.

Bank statements obtained directly from the financial institution would provide the most reliable evidence as they were obtained from an independent source outside the client.

Question 21

Which of the following is a management assertion regarding account balances at the period end?

Transactions and events that have been recorded have occurred and pertain to the entity.

Transactions and events have been recorded in the proper accounts.

The entity holds or controls the rights to assets, and liabilities are obligations of the entity.

Amounts and other data related to transactions and events have been recorded appropriately.

Answer 21

The entity holds or controls the rights to assets, and liabilities are obligations of the entity.

There are 4 assertions applicable to account balances at the period end: (1) existence; (2) completeness; (3) rights or obligations; and (4) valuation and allocation.

Question 22

Which of the following internal control procedures would an entity be most likely to use to assist in satisfying the completeness assertion related to long-term investments?

Senior management verifies that securities in the bank safe deposit box are registered in the entity’s name.

The internal auditor compares the securities in the bank safe deposit box with recorded investments.

The treasurer vouches the acquisition of securities by comparing brokers’ advices with canceled checks.

The controller compares the current market prices of recorded investments with the brokers’ advices on file.

Answer 22

The internal auditor compares the securities in the bank safe deposit box with recorded investments.

The completeness assertion for long-term investments addresses the proper inclusion of all long-term investments. An internal control satisfying the completeness assertion would compare the securities on hand with those recorded to ensure that all recorded securities held were actually held.

Question 23

Which of the following presumptions does not relate to the appropriateness of audit evidence?

The more effective the internal control structure, the more assurance it provides about the accounting data and financial statements.

An auditor’s opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.

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

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

Answer 23

An auditor’s opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.

Note that this is another negatively worded question. They want the presumption that does NOT relate to the appropriateness of audit evidence. The appropriateness of evidence addresses the reliability of that evidence. The fact that an audit must be performed within a reasonable time period and at reasonable cost is not relevant to the appropriateness of evidence. It does, however, relate to the sufficiency of evidence.

Question 24

Which of the following types of audit evidence is the most persuasive?

Prenumbered client purchase order forms.

Client work sheets supporting cost allocations.

Bank statements obtained from the client.

Client representation letter.

Answer 24

Bank statements obtained from the client.

Greater reliability (and thus, persuasiveness) is achieved from evidence obtained from sources outside the entity, even when that evidence is obtained from the client.

Question 25

Which of the following statements concerning evidential matter is correct?

Competent evidence supporting management’s assertions should be convincing rather than merely persuasive.

An effective internal control structure contributes little to the reliability of the evidence created within the entity.

The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.

A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.

Answer 25

A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.

While the accounting records - including the general and subsidiary ledgers, the journals, and supporting worksheets - are considered to constitute evidence in support of the financial statements, accounting data, by itself, cannot be considered sufficient support for the financial statements. The auditor must test the accounting data in order to develop persuasive evidence to support the opinion.

Question 26

An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers.

This test of controls most likely was performed to support management’s financial statement assertion(s) of

Presentation and disclosure    Rights and obligations
Yes    Yes
Yes     No
No     Yes
No      No

Answer 26

No Yes

Follow-up on errors reported by customers provides evidence that the customers exist and that the receivables are valid; i.e., that the client has the rights to the assets. The auditor’s test of controls thus provides evidence to support the assertion of rights and obligations. It does not address presentation and disclosure.

Question 27

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher?

Are purchase requisitions prenumbered and independently matched with vendor invoices?

Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions?

Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

Answer 27

Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

The standard control for completeness is controlling prenumbered forms. A question, therefore, which would appear in an internal control questionnaire addressing completeness is “Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?”

Question 28

Which of the following statements concerning audit evidence is correct?

To be appropriate, audit evidence should be either persuasive or relevant, but need not be both.

The measure of the validity of audit evidence lies in the auditor’s judgment.

The difficulty and expense of obtaining audit evidence concerning an account balance are a valid basis for omitting the test.

A client’s accounting data can be sufficient audit evidence to support the financial statements.

Answer 28

The measure of the validity of audit evidence lies in the auditor’s judgment.

Audit evidence differs from legal evidence, which is bound by rigid rules. The validity of audit evidence is a matter of the auditor’s judgment.

Question 29

Which of the following ultimately determines the sufficiency and appropriateness of audit evidence to support the auditor’s conclusions?

Professional requirements.

Professional standards.

Professional experience.

Professional judgment.

Answer 29

Professional judgment.

CORRECT! Professional judgement is required to determine when sufficient appropriate audit evidence has been obtained as a reasonable basis for the auditor’s conclusions.

Question 30

Which of the following assertions is most closely related to the audit objective to verify that all sales have been recorded?

Completeness.

Occurrence.

Accuracy.

Cutoff.

Answer 30

Completeness.

CORRECT! Determining whether all sales have, in fact, been recorded addresses the risk of omission, which involves the completeness assertion.