Understanding Sufficient Appropriate Evidence Flashcards
Which of the following presumptions is correct about the reliability of audit evidence?
A. Information obtained indirectly from outside sources is the most reliable audit evidence.
B. To be reliable, audit evidence should be convincing rather than persuasive.
C. Reliability of audit evidence refers to the amount of corroborative evidence obtained.
D. An effective internal control structure provides more assurance about the reliability of audit evidence.
D.
Audit evidence that is generated internally is more reliable when the related controls imposed by the entity are effective. Information obtained directly, not indirectly, from outside sources would provide the most reliable evidence. The auditor may find it necessary to rely on audit evidence that is persuasive rather than conclusive. The reliability of audit evidence refers to its source and nature and is dependent on the individual circumstances under which it is obtained.
The permanent (continuing) file of an auditor’s working papers most likely would include copies of the
A. Lead schedules
B. Attorney’s letters
C. Bank statements
D. Debt agreements
D.
Permanent files contain items of continuing interest, such as debt agreements, internal control flowcharts, and articles of incorporation. The other items are of temporary interest only.
The audit working paper that reflects the major components of an amount reported in the financial statements is the
A. Inter bank transfer schedule
B. Carry forward schedule
C. Supporting schedule
D. Lead schedule
D.
Work papers for each asset, liability, and equity account begin with a lead schedule summarizing the account’s balance per the general ledger, and then showing adjusting and reclassification entries, and the final balance per audit. The lead schedule also includes the auditor’s conclusion about whether the account is stated fairly.
Which of the following factors would least likely affect the quantity and content of an auditor’s working papers?
A. The condition of the client’s records
B. The assessed risk of material misstatement
C. The nature of the auditor’s report
D. The content of the representation letter
D.
The matters noted in answers a., b., and c. would all have a significant impact on the quantity and content of the auditor’s working papers. While the content of the representation letter may affect the quantity and content of the auditor’s work papers, the effect is minimal.
Which of the following best describes the earliest date for an auditor’s report?
A. The last day of audit fieldwork.
B. The date all audit procedures have been completed and the audit file has been assembled.
C. The date audit documentation was completed.
D. The date the auditor has obtained sufficient appropriate audit evidence to support the opinion.
The correct answer is (D).
Auditor’s responsibility does not include awareness of information arising after he has stopped seeking evidence. Thus, the date the auditor has obtained sufficient appropriate audit evidence to support the opinion can be the earliest date for the auditor’s report.
(A), (B) and (C) are incorrect because even after the last day of fieldwork, or after all audit procedures and documentation are completed, some evidence (which was requested earlier) may come in the possession of the auditor. The auditor may want to consider this evidence before finalizing the audit opinion.
Which of the following sources of corroborating information would most likely increase the assurance that an auditor of a nonissuer obtains from management’s representations?
A. Reports of performance measurement routinely prepared for management’s review.
B. Minutes of meetings of the entity’s strategic planning committee.
C. Oral evidence gained from the auditor’s discussion with employees.
D. A confirmation received from the entity’s bank.
The correct answer is (D).
The presumption of reliability/validity of audit evidence is influenced by its source and nature. The persuasiveness of evidence is based on its source. Evidence obtained directly by the auditor from an outside source is considered more reliable than evidence obtained from client / inside source. Also, written evidence is more reliable than oral evidence.
Reliability of evidence in order:
- Directly obtained by auditor such as inventory observation).
- Obtained from an outsider such as bank confirmation).
- Prepared by an outsider but obtained from the client such as bank statement).
- Prepared by the client such as client sales invoice)
Based on the above, information obtained directly by the auditor is more reliable than evidence obtained by other means. Hence, A confirmation received from the entity’s bank is the most reliable evidence.
(A) & (B) are incorrect as reports of performance measurement routinely prepared for management’s review and minutes of meetings of the entity’s strategic planning committee is client prepared evidence and is not as reliable as a bank confirmation.
(C) is incorrect as oral evidence gained from the auditor’s discussion with employees is again internal and oral evidence and not as reliable as confirmation obtained from the bank.
Which of the following statements is most accurate regarding sufficient and appropriate documentation?
A. Accounting estimates are not considered sufficient and appropriate documentation
B. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.
C. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers.
D. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.
B.
Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed. It should be clear who reviewed specified elements of the audit work performed and when. Accounting estimates are an example of the significant findings or issues that should be documented along with the actions taken to address them and the basis for the final conclusions reached. If additional evidence is required to document significant findings or issues, the original evidence should not be deleted. Audit documentation is the property of the auditor, not the client. Note: The retention period of at least five years from the report release date is correct for non issuers—it is seven years for issuers. After the documentation completion date, the auditor must not delete or discard audit documentation before the end of the specified retention period; any time prior to this date, the auditor may make changes to delete super sededor in correct material.
Which of the following documents are examples of audit evidence generated by the client?
A. Customer purchase orders and bank statements
B. Shipping documents and receiving reports
C. Vendor invoices and packing slips
D. Bills of lading and accounts receivable confirmations
B.
Shipping documents (records of goods shipped by the client) and receiving reports (records of goods received by the client) are generated by the client. Customer purchase orders and bank statements are generated externally by the client’s customers and the client’s financial institutions, respectively. Vendor invoices and packing slips (records of goods shipped to the client) are generated externally by the client’s vendors. Bills of lading (records of receipt of goods by a shipper) are generated externally usually by common carriers used by the client. Accounts receivable confirmation requests are sent out by the auditor or the client; the confirmations are completed (generated) by the client’s customers and returned directly to the auditor by the client’s customers.
Which of the following types of audit evidence is the most persuasive?
A. Prenumbered client purchase order forms
B. Client work sheets supporting cost allocations
C. Bank statements obtained from the client
D. representation letter
C.
Despite being handled by the client, bank statements originate outside the entity and, therefore, are the most persuasive of the choices. Both purchase orders and work sheets originate within the client. The representation letter only documents the client’s oral representations.
Editor’s note: This is one of those questions where you have to compare answer choices to see which choice is the most conclusive. Of course we want to believe that confirmations, as well as inquiry and observation are the most persuasive but since those aren’t a part of the choices listed, the “next best thing” is a bank statement provided by the client.
Which procedures, by themselves, do not provide sufficient appropriate audit evidence on which to base an audit opinion?
I. Risk assessment procedures
II. Tests of details
III. Tests of controls
I and III
The auditor should perform risk assessment procedures to provide a basis for the identification and assessment of risks of material misstatement at the financial statement and relevant assertion levels.
Risk assessment procedures by themselves; however, do not provide sufficient appropriate audit evidence on which to base the audit opinion.
The auditor performs a test of controls to decide the Nature, Timing, and Extent of audit procedures.
With Control Risk less than maximum (controls are operating efficiently), auditors can reduce the Nature, Timing, and Extent of audit procedures. However, tests of details would still be required.
A test of details by itself can provide sufficient evidence to base an audit opinion on.
Which of the following statements is false in regard to an audit of internal control over financial reporting conducted in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB)?
A. The auditor may rely upon the judgments of others regarding the sufficiency of evidence.
B. The auditor may use the work of others to alter the nature, timing, or extent of the work that the auditor performs.
C. The extent to which the auditor may use the work of others depends on their objectivity.
D. As the risk associated with a control increases, the need for the auditor to perform his or her own work on the control increases.
A.
Judgments about evidence sufficiency and other factors affecting the opinion must be the auditor’s. The other statements are true.
Editor’s note: You’re the one signing the report with your name on it, so it better be your professional judgment (not someone else’s) that came to the opinion.
