Auditing A Business Risk Approach with Cases 8th Edition By Rittenberg – Test Bank

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Auditing A Business Risk Approach with Cases 8th Edition By Rittenberg – Test Bank

Chapter 6: Performing an Integrated Audit

Student: ___________________________________________________________________________

  1. A company with a strong control environment demonstrates a culture of high integrity and ethics.
    True    False

 

  1. The requirement to report on internal control placed on public companies resulted from one particular type of internal control breakdown: front line employees of some major public companies overrode their control systems and issued misleading financial statements.
    True    False

 

  1. During the course of the audit, the auditor should continually gather and update information on business risk, including the identification of any fraud risk factors noted during preliminary audit planning.
    True    False

 

  1. The auditor should not attempt to analyze potential management motivations to misstate account balances since auditor is an accounting expert and not expected to perform behavioral assessments.
    True    False

 

  1. Substantive procedures performed by the auditor will include procedures to address fraud risks.
    True    False

 

  1. Recent research by COSO reinforces the concept that the control environment is not a very important factor associated with fraud
    True    False

 

  1. A material weakness in internal control is a deficiency in the design or operation of the control that adversely affects the company’s ability to initiate, record, process or report external financial data reliably in accordance with GAAP.
    True    False

 

  1. The concept of reasonable assurance regarding controls recognizes that the benefits of internal controls should not exceed the cost.
    True    False

 

  1. The auditor is required to report material weaknesses in internal control to the audit committee.
    True    False

 

  1. In an integrated audit both management and the auditor are required to report on the fairness of the internal control of the company.
    True    False

 

  1. The purpose of tests of controls is to determine that account balances are properly stated.
    True    False

 

  1. The purpose of the auditor consideration of the strength of internal controls is to determine the nature, extent and timing of substantive testing.
    True    False

 

  1. Pervasive controls are those that affect the processing of specific computer applications of the client.
    True    False

 

  1. In an integrated audit the auditor is responsible to only form an opinion on the fairness of the financial statements.
    True    False

 

  1. If the auditor finds material weaknesses in the internal controls of the client a qualified report would be issued.
    True    False

 

  1. The auditor’s report on the internal controls and the financial statements of the client are required to be reported in the same report.
    True    False

 

  1. The major changes in guidance since the original issuance of AS 2 include encouragement to both management and auditors to implement a top down, risk-based approach.
    True    False

 

  1. Internal control reporting must be based on evidence of both the design and the operation of internal controls.
    True    False

 

  1. In an integrated audit the auditor is required to issue two separate reports. One on the fairness of the internal controls and a second on the fairness of the financial statements.
    True    False

 

  1. In an integrated audit the auditor is required to issue a report expressing an opinion on management’s assessment of the effectiveness of controls.
    True    False

 

  1. If management’s report on internal control indicates one or more material weaknesses, the auditor would express an adverse opinion on the internal controls.
    True    False

 

  1. If management’s report on internal control indicates a material weakness, the auditor would express a qualified opinion on the internal controls.
    True    False

 

  1. The auditor is responsible to understand the controls of the client and to test all of its controls in the process of evaluating the strength of the internal control system.
    True    False

 

  1. Controls of the client that the auditor expects to depend upon in reducing substantive testing must be tested.
    True    False

 

  1. A risk-based approach to an integrated audit requires auditors to consider the materiality of account balances and processes along with the risks that the account balance may be misstated
    True    False

 

  1. Controls for all assertions need not be tested if the auditor believes that a misstatement related to a particular assertion would not be material.
    True    False

 

  1. The direct tests of account balances are determined, in large part, by the specific nature of the identified control deficiencies.
    True    False

 

  1. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is more severe than a material weakness.
    True    False

 

  1. In evaluating the strength of internal control in determining the nature, timing and extent of substantive audit evidence to collect the auditor must form their own independent assessment. Audit evidence cannot be reduced based upon the work of the internal auditor.
    True    False

 

  1. In evaluating the strength of internal control in determining the nature, timing and extent of substantive audit evidence to collect the auditor must form their own independent assessment. Audit evidence can be reduced based upon the effectiveness of management’s monitoring controls.
    True    False

 

  1. The assessment of internal control is at the end of the client’s reporting period. There is often an opportunity to correct a deficiency before the end of the year if it is identified early enough.
    True    False

 

  1. If the auditor finds material weaknesses in the internal controls of the client an adverse report would be issued.
    True    False

 

  1. The size of the account (materiality) influences, but does not totally dictate, whether substantive testing should be performed.`
    True    False

 

  1. To some extent, the external auditor can rely on some of the company‘s evaluation and/or testing of controls, particularly work performed by a competent and independent internal audit function.
    True    False

 

  1. The external auditor can never rely to any extent on  some of the company‘s evaluation and/or testing of controls, even when performed by a competent and independent internal audit function.
    True    False

 

  1. No matter how low control risk is assessed, some substantive testing of account balances must be conducted for material account balances.
    True    False

 

  1. Under AS 5,  the auditor’s objective in an audit of internal control over financial reporting is to express an opinion on the effectiveness of the company’s internal control over financial reporting.
    True    False

 

  1. In an integrated audit the auditor conducts their audit of the internal controls of the company in accordance with the standards of COSO, which requires reasonable assurance of maintenance in material respects.
    True    False

 

  1. In an integrated audit an unqualified opinion on the internal controls over financial reporting can be issued by the auditor if no misstatements are found in the financial statement audit.
    True    False

 

  1. Management is responsible to document the COSO control elements, especially the control environment, risk analysis, and monitoring.
    True    False

 

  1. The financial competencies needed by an organization are directly correlated with the complexity of transactions in which the company engages and the size of the company.
    True    False

 

  1. Once a company establishes that it has effective internal control over processes, monitoring can be effective by assuring that any changes made to the processes are fully documented and tested and that controls have not deteriorated.
    True    False

 

  1. Regardless of the level of assessed control risk, the auditor must conduct some substantive procedures for material account balances.
    True    False

 

  1. In the risk-based audit approach the control environment serves as the first line of defense in mitigating the risks that a company has to manage.
    True    False

 

  1. Management’s evaluation of internal controls often presents opportunities to improve both the quality of controls and the efficiency of processing.
    True    False

 

  1. A company with a strong control environment demonstrates which of the following:
    A. a culture of high integrity and ethics.
    B. a commitment to financial reporting competencies.
    C. an independent, active, and knowledgeable audit committee.
    D. all of the above.

 

  1. Regardless of the level of assessed control risk, the auditor must conduct some substantive procedures for material account balances. These procedures may include which of the following.
    A. input from the audit team‘s brainstorming analysis regarding potential for fraud.
    B. the size of the account balance.
    C. how IT affects the company’s flow of transactions.
    D. all of the above.

 

  1. Research has found that the most fraudulent financial reporting, such as misleading reporting was perpetrated by which of the following.
    A. lower-level employees.
    B. external auditors.
    C. internal auditors.
    D. senior management.

 

  1. The auditor considers internal control in order to determine
    A. the nature, timing and extent of substantive testing to perform.
    B. inherent risk in an account balance.
    C. an acceptable level of control risk for an account balance.
    D. Both B and C.

 

  1. For the auditor to assess control risk for account balances at less than the maximum
    A. no significant weaknesses must have occurred.
    B. the internal auditor must test and evaluate some of the controls.
    C. the external auditor must test and evaluate some of the controls.
    D. management must test and evaluate some of the controls.

 

  1. Under what circumstance is it appropriate for the auditor to rely on the work of an internal auditor?
    A. It is never acceptable for the external auditor to rely upon the work of the internal auditor.
    B. The external auditor may relay on certain of the work of the internal auditor after making a comprehensive assessment of the auditor and his/her work.
    C. The external auditor may rely on the work of the internal auditor if he/she is also a CPA.
    D. There is no restriction in relying upon the work of internal auditors.

 

  1. The risk-based audit approach requires the auditor to identify
    A. account balances or related disclosures that might be materially misstated.
    B. potential causes of the misstatement.
    C. important processes that may affect one or more account balances.
    D. all of the above.

 

  1. An adverse report on internal controls is rendered when the auditor finds
    A. a significant weakness in the internal controls of the client.
    B. a material weakness in the internal controls of the client.
    C. a deficiency in operation of the internal controls of the client.
    D. all of the above would result in an adverse opinion.

 

  1. The amount of direct testing to be performed by the auditor is directly related to
    A. audit risk
    B. business risk.
    C. subjectivity of account balances.
    D. both B and C.

 

  1. The amount of direct testing to be performed by the auditor is inversely related to
    A. audit risk.
    B. enterprise risk.
    C. subjectivity of accounting process.
    D. materiality of account balance.

 

  1. If the auditor assesses control risk dealing with account balances as being weak, the effect on residual risk is to
    A. reduce residual risk.
    B. increase residual risk.
    C. no effect on residual risk.
    D. either A or B depending upon presence or absence of significant deficiencies.

 

  1. In evaluating the extent to which the external auditor can rely on the work of the internal auditor, which of the following factors would the external auditor consider?
    A. The independence of the function from management.
    B. The design and comprehensiveness of the internal audit testing approach.
    C. The documentation of the internal audit testing.
    D. All would be considered.

 

  1. If the auditor finds a material weakness in the controls of the client, it represents a deficiency in the design or operation of a control
    A. that adversely affects the company’s ability to initiate, record, process, or report external financial data reliably in accordance with GAAP.
    B. that negatively affects the company’s ability to initiate, record, process, or report external financial data reliably in accordance with GAAP.
    C. that results in a remote possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.
    D. that results in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.

 

  1. In planning the audit, auditors assess control risk for
    A. each relevant assertion.
    B. important classes of transactions.
    C. significant account balances.
    D. all of the above.

 

  1. When would the auditor issue an unqualified opinion on the internal controls of a client?
    A. No material weaknesses in internal controls are found.
    B. No significant deficiencies in internal controls are found.
    C. No errors are found in the account balances of the client.
    D. Either A or B.

 

  1. Which assertions and controls must be tested by the auditor?
    A. All controls and assertions must be tested.
    B. A sample of controls and assertions must be tested.
    C. Material controls and assertions must be tested.
    D. The majority of controls and assertions of the client must be tested.

 

  1. In examining controls for transactions and events, which of the following assertions would be included:
    A. occurrence.
    B. completeness.
    C. valuation.
    D. all are included.

 

  1. Which of the following is not correct about the performance of tests of controls?
    A. Tests of controls must be performed for every account.
    B. Some tests of controls must be performed to rely upon controls to reduce substantive testing.
    C. The work of the internal auditor can be used to reduce substantive testing.
    D. All of the above are correct.

 

  1. In evaluating residual risk of account balances, tests of controls by the auditor involves the assessment of
    A. the design of controls.
    B. the operation of controls.
    C. the strength of the control environment.
    D. all of the above

 

  1. In assessing internal controls the auditor is suppose to apply the concept of reasonable assurance, which indicates that
    A. there should be a clear separation of duties between personnel who authorize, record, and hold assets.
    B. the costs of a control should not exceed its benefits.
    C. testing of the controls should provide assurance that they work most of the time.
    D. testing of the controls should provide reasonable assurance that they are working properly.

 

  1. Which of the following statements about internal control is not correct?
    A. The costs of the control should not exceed the benefits.
    B. The auditor’s assessment of detection risk is inversely related to the assessment of control risk.
    C. Stronger internal controls result in an increase in the number of required substantive audit procedures.
    D. Management is responsible for the maintenance of internal control.

 

  1. When assessing the client which of the following factors is considered pervasive and creates both an attitude and culture that affects the client‘s reporting system, the process of recording transactions, and the process of making estimates and adjustments.
    A. The control environment.
    B. Audit testing of processes and controls.
    C. Design and operation of controls.
    D. Inherent and control risk.

 

  1. Segregation of duties deals with the segregation of which functions?
    A. Recording and physical custody of assets.
    B. Authorizing and recording assets.
    C. Authorizing, recording, and physical custody of assets.
    D. Authorizing, recording, physical custody, and access to assets.

 

  1. If the auditor’s assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of direct testing performed by the auditor?
    A. Increase in direct testing.
    B. Decrease in direct testing
    C. No change in direct testing.
    D. Direct testing is not needed.

 

  1. If the auditor’s assessment of an account balance is material, what is the effect on the amount of direct testing performed by the auditor?
    A. Increase in direct testing.
    B. Decrease in direct testing
    C. No change in direct testing.
    D. Direct testing is not needed.

 

  1. If the auditor’s assessment of an internal control is that it is effective, what is the effect on the amount of direct testing performed by the auditor?
    A. Increase in direct testing.
    B. decrease in direct testing
    C. No change in direct testing.
    D. Direct testing is not needed.

 

  1. Large public company audited financial statements are required to be accompanied by:
    A. management’s report on internal control over financial reporting.
    B. an external audit report on the financial statements and the effectiveness of internal control over financial reporting.
    C. the internal auditor’s report on the financial statements.
    D. both A and B.
    E. all of the above.

 

  1. Control deficiencies result when there are deficiencies in the design or operation of controls and may result in
    A. reportable deficiencies.
    B. significant deficiencies.
    C. material weaknesses.
    D. either B or C.
    E. all of the above.

 

  1. In an integrated audit the auditor must test the controls of all material processes of  the client unless
    A. substantive testing would be more effective and efficient.
    B. the controls were in place last year.
    C. there have been changes to the controls during the year.
    D. the design of the control would not prevent material misstatements.

 

  1. Even though there was a material weakness in internal control, management of the company issues an unqualified report. What types of report(s) would the auditor issue?
    A. An adverse opinion on management’s assessment of internal control and in their report on internal control.
    B. An unqualified opinion on management’s assessment of internal control and an adverse opinion in their report on internal control.
    C. An unqualified opinion on management’s assessment of internal control and in their report on internal control.
    D. An adverse opinion on management’s assessment of internal control and an unqualified report on internal control.

 

  1. In an integrated audit the auditor’s report on internal control does not require the statement that
    A. the audit was conducted in accordance with AICPA auditing standards.
    B. management is responsible for maintaining effective internal control.
    C. used COSO’s internal control framework.
    D. a reasonable basis exists for their opinion.

 

  1. Which of the following factor(s) is considered by the auditor in evaluating the potential for residual risk remaining in an account balance or class of transactions?
    A. Sources of potential misstatement.
    B. Extent of potential misstatement.
    C. Type of potential misstatement.
    D. All of the above should be considered.

 

  1. Which of the following is not one of the phases in planning an integrated audit?
    A. identifying and assessing business risk.
    B. documenting all controls.
    C. assessing fraud risk.
    D. determining the most efficient manner in which to conduct an integrated audit.

 

  1. Ultimately, the starting point of the integrated audit should be to understand all of the following except
    A. the risks that the business faces in meeting its objectives, with a focus on the objective of accurate financial reporting
    B. the incentives that may motivate management or other employees to misstate the financial statements
    C. the risks inherent in important business processes
    D. the results of direct account substantive testing

 

  1. The auditor could assess control risk for an account at the maximum when
    A. immaterial control deficiencies exists in the account.
    B. significant control deficiencies exists in an account.
    C. material weaknesses exists in an account.
    D. both A and B.

 

  1. In an integrated audit, the amount of direct testing of account balances is inversely related to
    A. subjectivity of estimates.
    B. riskiness of the account.
    C. effectiveness of internal control.
    D. materiality of the account.

 

  1. The types of opinion on internal control that may be issued are
    A. Unqualified.
    B. Qualified.
    C. Adverse.
    D. Either A or C.
    E. All of the above.

 

  1. Indicate the proper sequence of steps  in planning an integrated audit:
    1. Consider the Possibility of Account Misstatements.
    2. Complete Preliminary Analytical Procedures.
    3. Identify Controls to Test.
    4. Update Information about Various Risks.
    5. Understand the Client’s Internal Controls.
    A. 4, 2, 3, 5, 1
    B. 4, 1, 2, 5, 3
    C. 1, 4, 5, 2, 3
    D. 1, 4, 2, 5, 3

 

  1. The probability that an account balance might be misstated after processes are complete and internal controls have been applied is
    A. residual risk.
    B. business risk.
    C. audit risk.
    D. control risk.

 

  1. Direct testing examines
    A. Controls.
    B. Processes.
    C. Account balances.
    D. Both A and C.

 

  1. Reporting requirementsDiscuss the reporting requirements of an integrated audit under Sarbanes Oxley Act for both management and the auditor.

 

 

 

 

 

  1. Reporting requirementsDiscuss elements that should be included in the auditor’s unqualified report.

 

 

 

 

 

  1. Planning an integrated auditDiscuss the different steps and phases that are required in planning an integrated audit.

 

 

 

 

 

  1. Changes in guidanceWhat are the major changes in guidance since the original issuance of AS 2.

 

 

 

 

 

  1. Integrated AuditThe framework for audit evidence in an integrated audit contains several key elements for the auditor to consider. Identify and discuss these key elements.

 

 

 

 

 

  1. Identifying audit workWhat are the fundamental questions that the auditor must address to determine the optimal amount of audit work.

 

 

 

 

 

  1. Risk-based audit approachIn conducting an integrated audit, discuss the potential effect of management’s monitoring controls on the auditor’s determination of the amount of direct testing of account balances that may be needed.

 

 

 

 

 

 

 

Chapter 6: Performing an Integrated Audit Key

  1. A company with a strong control environment demonstrates a culture of high integrity and ethics.
    TRUE

 

  1. The requirement to report on internal control placed on public companies resulted from one particular type of internal control breakdown: front line employees of some major public companies overrode their control systems and issued misleading financial statements.
    FALSE

 

  1. During the course of the audit, the auditor should continually gather and update information on business risk, including the identification of any fraud risk factors noted during preliminary audit planning.
    TRUE

 

  1. The auditor should not attempt to analyze potential management motivations to misstate account balances since auditor is an accounting expert and not expected to perform behavioral assessments.
    FALSE

 

  1. Substantive procedures performed by the auditor will include procedures to address fraud risks.
    TRUE

 

  1. Recent research by COSO reinforces the concept that the control environment is not a very important factor associated with fraud
    FALSE

 

  1. A material weakness in internal control is a deficiency in the design or operation of the control that adversely affects the company’s ability to initiate, record, process or report external financial data reliably in accordance with GAAP.
    FALSE

 

  1. The concept of reasonable assurance regarding controls recognizes that the benefits of internal controls should not exceed the cost.
    FALSE

 

  1. The auditor is required to report material weaknesses in internal control to the audit committee.
    TRUE

 

  1. In an integrated audit both management and the auditor are required to report on the fairness of the internal control of the company.
    TRUE

 

  1. The purpose of tests of controls is to determine that account balances are properly stated.
    FALSE

 

  1. The purpose of the auditor consideration of the strength of internal controls is to determine the nature, extent and timing of substantive testing.
    TRUE

 

  1. Pervasive controls are those that affect the processing of specific computer applications of the client.
    FALSE

 

  1. In an integrated audit the auditor is responsible to only form an opinion on the fairness of the financial statements.
    FALSE

 

  1. If the auditor finds material weaknesses in the internal controls of the client a qualified report would be issued.
    FALSE

 

  1. The auditor’s report on the internal controls and the financial statements of the client are required to be reported in the same report.
    FALSE

 

  1. The major changes in guidance since the original issuance of AS 2 include encouragement to both management and auditors to implement a top down, risk-based approach.
    TRUE

 

  1. Internal control reporting must be based on evidence of both the design and the operation of internal controls.
    TRUE

 

  1. In an integrated audit the auditor is required to issue two separate reports. One on the fairness of the internal controls and a second on the fairness of the financial statements.
    FALSE

 

  1. In an integrated audit the auditor is required to issue a report expressing an opinion on management’s assessment of the effectiveness of controls.
    TRUE

 

  1. If management’s report on internal control indicates one or more material weaknesses, the auditor would express an adverse opinion on the internal controls.
    TRUE

 

  1. If management’s report on internal control indicates a material weakness, the auditor would express a qualified opinion on the internal controls.
    FALSE

 

  1. The auditor is responsible to understand the controls of the client and to test all of its controls in the process of evaluating the strength of the internal control system.
    FALSE

 

  1. Controls of the client that the auditor expects to depend upon in reducing substantive testing must be tested.
    TRUE

 

  1. A risk-based approach to an integrated audit requires auditors to consider the materiality of account balances and processes along with the risks that the account balance may be misstated
    TRUE

 

  1. Controls for all assertions need not be tested if the auditor believes that a misstatement related to a particular assertion would not be material.
    TRUE

 

  1. The direct tests of account balances are determined, in large part, by the specific nature of the identified control deficiencies.
    TRUE

 

  1. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is more severe than a material weakness.
    FALSE

 

  1. In evaluating the strength of internal control in determining the nature, timing and extent of substantive audit evidence to collect the auditor must form their own independent assessment. Audit evidence cannot be reduced based upon the work of the internal auditor.
    FALSE

 

  1. In evaluating the strength of internal control in determining the nature, timing and extent of substantive audit evidence to collect the auditor must form their own independent assessment. Audit evidence can be reduced based upon the effectiveness of management’s monitoring controls.
    TRUE

 

  1. The assessment of internal control is at the end of the client’s reporting period. There is often an opportunity to correct a deficiency before the end of the year if it is identified early enough.
    TRUE

 

  1. If the auditor finds material weaknesses in the internal controls of the client an adverse report would be issued.
    TRUE

 

  1. The size of the account (materiality) influences, but does not totally dictate, whether substantive testing should be performed.`
    TRUE

 

  1. To some extent, the external auditor can rely on some of the company‘s evaluation and/or testing of controls, particularly work performed by a competent and independent internal audit function.
    TRUE

 

  1. The external auditor can never rely to any extent on  some of the company‘s evaluation and/or testing of controls, even when performed by a competent and independent internal audit function.
    FALSE

 

  1. No matter how low control risk is assessed, some substantive testing of account balances must be conducted for material account balances.
    TRUE

 

  1. Under AS 5,  the auditor’s objective in an audit of internal control over financial reporting is to express an opinion on the effectiveness of the company’s internal control over financial reporting.
    TRUE

 

  1. In an integrated audit the auditor conducts their audit of the internal controls of the company in accordance with the standards of COSO, which requires reasonable assurance of maintenance in material respects.
    FALSE

 

  1. In an integrated audit an unqualified opinion on the internal controls over financial reporting can be issued by the auditor if no misstatements are found in the financial statement audit.
    FALSE

 

  1. Management is responsible to document the COSO control elements, especially the control environment, risk analysis, and monitoring.
    TRUE

 

  1. The financial competencies needed by an organization are directly correlated with the complexity of transactions in which the company engages and the size of the company.
    TRUE

 

  1. Once a company establishes that it has effective internal control over processes, monitoring can be effective by assuring that any changes made to the processes are fully documented and tested and that controls have not deteriorated.
    TRUE

 

  1. Regardless of the level of assessed control risk, the auditor must conduct some substantive procedures for material account balances.
    TRUE

 

  1. In the risk-based audit approach the control environment serves as the first line of defense in mitigating the risks that a company has to manage.
    TRUE

 

  1. Management’s evaluation of internal controls often presents opportunities to improve both the quality of controls and the efficiency of processing.
    TRUE

 

  1. A company with a strong control environment demonstrates which of the following:
    A.a culture of high integrity and ethics.
    B. a commitment to financial reporting competencies.
    C. an independent, active, and knowledgeable audit committee.
    D. all of the above.

 

  1. Regardless of the level of assessed control risk, the auditor must conduct some substantive procedures for material account balances. These procedures may include which of the following.
    A.input from the audit team‘s brainstorming analysis regarding potential for fraud.
    B. the size of the account balance.
    C. how IT affects the company’s flow of transactions.
    D. all of the above.

 

  1. Research has found that the most fraudulent financial reporting, such as misleading reporting was perpetrated by which of the following.
    A.lower-level employees.
    B. external auditors.
    C. internal auditors.
    D. senior management.

 

  1. The auditor considers internal control in order to determine
    A.the nature, timing and extent of substantive testing to perform.
    B. inherent risk in an account balance.
    C. an acceptable level of control risk for an account balance.
    D. Both B and C.

 

  1. For the auditor to assess control risk for account balances at less than the maximum
    A.no significant weaknesses must have occurred.
    B. the internal auditor must test and evaluate some of the controls.
    C. the external auditor must test and evaluate some of the controls.
    D. management must test and evaluate some of the controls.

 

  1. Under what circumstance is it appropriate for the auditor to rely on the work of an internal auditor?
    A.It is never acceptable for the external auditor to rely upon the work of the internal auditor.
    B. The external auditor may relay on certain of the work of the internal auditor after making a comprehensive assessment of the auditor and his/her work.
    C. The external auditor may rely on the work of the internal auditor if he/she is also a CPA.
    D. There is no restriction in relying upon the work of internal auditors.

 

  1. The risk-based audit approach requires the auditor to identify
    A.account balances or related disclosures that might be materially misstated.
    B. potential causes of the misstatement.
    C. important processes that may affect one or more account balances.
    D. all of the above.

 

  1. An adverse report on internal controls is rendered when the auditor finds
    A.a significant weakness in the internal controls of the client.
    B. a material weakness in the internal controls of the client.
    C. a deficiency in operation of the internal controls of the client.
    D. all of the above would result in an adverse opinion.

 

  1. The amount of direct testing to be performed by the auditor is directly related to
    A.audit risk
    B. business risk.
    C. subjectivity of account balances.
    D. both B and C.

 

  1. The amount of direct testing to be performed by the auditor is inversely related to
    A.audit risk.
    B. enterprise risk.
    C. subjectivity of accounting process.
    D. materiality of account balance.

 

  1. If the auditor assesses control risk dealing with account balances as being weak, the effect on residual risk is to
    A.reduce residual risk.
    B. increase residual risk.
    C. no effect on residual risk.
    D. either A or B depending upon presence or absence of significant deficiencies.

 

  1. In evaluating the extent to which the external auditor can rely on the work of the internal auditor, which of the following factors would the external auditor consider?
    A.The independence of the function from management.
    B. The design and comprehensiveness of the internal audit testing approach.
    C. The documentation of the internal audit testing.
    D. All would be considered.

 

  1. If the auditor finds a material weakness in the controls of the client, it represents a deficiency in the design or operation of a control
    A.that adversely affects the company’s ability to initiate, record, process, or report external financial data reliably in accordance with GAAP.
    B. that negatively affects the company’s ability to initiate, record, process, or report external financial data reliably in accordance with GAAP.
    C. that results in a remote possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.
    D. that results in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.

 

  1. In planning the audit, auditors assess control risk for
    A.each relevant assertion.
    B. important classes of transactions.
    C. significant account balances.
    D. all of the above.

 

  1. When would the auditor issue an unqualified opinion on the internal controls of a client?
    A.No material weaknesses in internal controls are found.
    B. No significant deficiencies in internal controls are found.
    C. No errors are found in the account balances of the client.
    D. Either A or B.

 

  1. Which assertions and controls must be tested by the auditor?
    A.All controls and assertions must be tested.
    B. A sample of controls and assertions must be tested.
    C. Material controls and assertions must be tested.
    D. The majority of controls and assertions of the client must be tested.

 

  1. In examining controls for transactions and events, which of the following assertions would be included:
    A.occurrence.
    B. completeness.
    C. valuation.
    D. all are included.

 

  1. Which of the following is not correct about the performance of tests of controls?
    A.Tests of controls must be performed for every account.
    B. Some tests of controls must be performed to rely upon controls to reduce substantive testing.
    C. The work of the internal auditor can be used to reduce substantive testing.
    D. All of the above are correct.

 

  1. In evaluating residual risk of account balances, tests of controls by the auditor involves the assessment of
    A.the design of controls.
    B. the operation of controls.
    C. the strength of the control environment.
    D. all of the above

 

  1. In assessing internal controls the auditor is suppose to apply the concept of reasonable assurance, which indicates that
    A.there should be a clear separation of duties between personnel who authorize, record, and hold assets.
    B. the costs of a control should not exceed its benefits.
    C. testing of the controls should provide assurance that they work most of the time.
    D. testing of the controls should provide reasonable assurance that they are working properly.

 

  1. Which of the following statements about internal control is not correct?
    A.The costs of the control should not exceed the benefits.
    B. The auditor’s assessment of detection risk is inversely related to the assessment of control risk.
    C. Stronger internal controls result in an increase in the number of required substantive audit procedures.
    D. Management is responsible for the maintenance of internal control.

 

  1. When assessing the client which of the following factors is considered pervasive and creates both an attitude and culture that affects the client‘s reporting system, the process of recording transactions, and the process of making estimates and adjustments.
    A.The control environment.
    B. Audit testing of processes and controls.
    C. Design and operation of controls.
    D. Inherent and control risk.

 

  1. Segregation of duties deals with the segregation of which functions?
    A.Recording and physical custody of assets.
    B. Authorizing and recording assets.
    C. Authorizing, recording, and physical custody of assets.
    D. Authorizing, recording, physical custody, and access to assets.

 

  1. If the auditor’s assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of direct testing performed by the auditor?
    A.Increase in direct testing.
    B. Decrease in direct testing
    C. No change in direct testing.
    D. Direct testing is not needed.

 

  1. If the auditor’s assessment of an account balance is material, what is the effect on the amount of direct testing performed by the auditor?
    A.Increase in direct testing.
    B. Decrease in direct testing
    C. No change in direct testing.
    D. Direct testing is not needed.

 

  1. If the auditor’s assessment of an internal control is that it is effective, what is the effect on the amount of direct testing performed by the auditor?
    A.Increase in direct testing.
    B. decrease in direct testing
    C. No change in direct testing.
    D. Direct testing is not needed.

 

  1. Large public company audited financial statements are required to be accompanied by:
    A.management’s report on internal control over financial reporting.
    B. an external audit report on the financial statements and the effectiveness of internal control over financial reporting.
    C. the internal auditor’s report on the financial statements.
    D. both A and B.
    E. all of the above.

 

  1. Control deficiencies result when there are deficiencies in the design or operation of controls and may result in
    A.reportable deficiencies.
    B. significant deficiencies.
    C. material weaknesses.
    D. either B or C.
    E. all of the above.

 

  1. In an integrated audit the auditor must test the controls of all material processes of  the client unless
    A. substantive testing would be more effective and efficient.
    B. the controls were in place last year.
    C. there have been changes to the controls during the year.
    D. the design of the control would not prevent material misstatements.

 

  1. Even though there was a material weakness in internal control, management of the company issues an unqualified report. What types of report(s) would the auditor issue?
    A.An adverse opinion on management’s assessment of internal control and in their report on internal control.
    B. An unqualified opinion on management’s assessment of internal control and an adverse opinion in their report on internal control.
    C. An unqualified opinion on management’s assessment of internal control and in their report on internal control.
    D. An adverse opinion on management’s assessment of internal control and an unqualified report on internal control.

 

  1. In an integrated audit the auditor’s report on internal control does not require the statement that
    A.the audit was conducted in accordance with AICPA auditing standards.
    B. management is responsible for maintaining effective internal control.
    C. used COSO’s internal control framework.
    D. a reasonable basis exists for their opinion.

 

  1. Which of the following factor(s) is considered by the auditor in evaluating the potential for residual risk remaining in an account balance or class of transactions?
    A.Sources of potential misstatement.
    B. Extent of potential misstatement.
    C. Type of potential misstatement.
    D. All of the above should be considered.

 

  1. Which of the following is not one of the phases in planning an integrated audit?
    A.identifying and assessing business risk.
    B. documenting all controls.
    C. assessing fraud risk.
    D. determining the most efficient manner in which to conduct an integrated audit.

 

  1. Ultimately, the starting point of the integrated audit should be to understand all of the following except
    A.the risks that the business faces in meeting its objectives, with a focus on the objective of accurate financial reporting
    B. the incentives that may motivate management or other employees to misstate the financial statements
    C. the risks inherent in important business processes
    D. the results of direct account substantive testing

 

  1. The auditor could assess control risk for an account at the maximum when
    A.immaterial control deficiencies exists in the account.
    B. significant control deficiencies exists in an account.
    C. material weaknesses exists in an account.
    D. both A and B.

 

  1. In an integrated audit, the amount of direct testing of account balances is inversely related to
    A.subjectivity of estimates.
    B. riskiness of the account.
    C. effectiveness of internal control.
    D. materiality of the account.

 

  1. The types of opinion on internal control that may be issued are
    A.Unqualified.
    B. Qualified.
    C. Adverse.
    D. Either A or C.
    E. All of the above.

 

  1. Indicate the proper sequence of steps  in planning an integrated audit:
    1. Consider the Possibility of Account Misstatements.
    2. Complete Preliminary Analytical Procedures.
    3. Identify Controls to Test.
    4. Update Information about Various Risks.
    5. Understand the Client’s Internal Controls.
    A.4, 2, 3, 5, 1
    B. 4, 1, 2, 5, 3
    C. 1, 4, 5, 2, 3
    D. 1, 4, 2, 5, 3

 

  1. The probability that an account balance might be misstated after processes are complete and internal controls have been applied is
    A.residual risk.
    B. business risk.
    C. audit risk.
    D. control risk.

 

  1. Direct testing examines
    A.Controls.
    B. Processes.
    C. Account balances.
    D. Both A and C.

 

  1. Reporting requirementsDiscuss the reporting requirements of an integrated audit under Sarbanes Oxley Act for both management and the auditor.

Management is responsible to issue a report assessing the effectiveness of the company’s internal controls over financial reporting.

The auditor is responsible to issue three reports:

1) express an opinion on management’s assertion of the effectiveness of the company’s internal controls over financial reporting.

2) express an opinion about the effectiveness of the company’s internal controls over financial reporting.

3) express an opinion on the fairness of the financial statements in accordance with GAAP.

 

  1. Reporting requirementsDiscuss elements that should be included in the auditor’s unqualified report.

The auditors unqualified report should contain the following elements:

-The internal control report is contained in the same report that contains the opinion on the financial statements. An acceptable alternative is to issue two reports: one on the financial statements and the other on internal controls. However, if separate reports are issued, each report must refer to the other report.

-The auditor provides an opinion on the effectiveness of internal control in the context of agreed upon criteria, that is, the COSO Internal Control, Integrated Framework.

-The auditor recognizes and conveys to users that there are limitations of internal control that can affect its effectiveness in the future.

 

  1. Planning an integrated auditDiscuss the different steps and phases that are required in planning an integrated audit.

The planning of an integrated audit consists of five phases:

Phase 1 & 2

Update Information about Various Risks.

Consider the Possibility of Account Misstatements.

Complete Preliminary Analytical Procedures.

Understand the Client’s Internal Controls.

Phase 3 & 4

Identify controls to test.

Make a plan to test the controls and execute that plan.

Consider the results of control testing.

Conduct substantive audit tests.

 

  1. Changes in guidanceWhat are the major changes in guidance since the original issuance of AS 2.

* Encouragement to both management and auditors to implement a top-down, risk-based approach.
* Clarity in the definition of material weakness that there should be a reasonable possibility that a material misstatement could occur in an account balance because of the control deficiency.
* Recognition that the external auditor can rely on the work of management in assessing internal controls, particularly on work performed by a competent and independent internal audit function.
* Additional emphasis on the need to document the auditor’s reasoning process linking control deficiencies to specific tests of account balances.
* Increased focus on improving audit efficiency by encouraging greater reliance on effective internal controls in reducing the amount of substantive tests of account.

 

  1. Integrated AuditThe framework for audit evidence in an integrated audit contains several key elements for the auditor to consider. Identify and discuss these key elements.

* The quality of internal control affects the reliability of financial statement data.
* The control environment is pervasive and affects the process of recording transactions, making estimates, and making adjusting entries.
* If the control environment is strong and the controls over transaction processing, adjusting, and estimating are good, then both management and the auditor would have a high degree of confidence that the financial accounts are fairly stated and financial disclosures are adequate.
* A potential for misstatements exists in inputting, processing, estimating, or adjusting account balances.
* There is always a need to perform some substantive testing of material account balances, but the nature, timing, and extent of that testing will depend on the quality of internal controls.
* The auditor’s evidence is based on testing internal controls, testing transactions, and substantive tests of account balances, including substantive analytical procedures and direct tests of account balances.

 

  1. Identifying audit workWhat are the fundamental questions that the auditor must address to determine the optimal amount of audit work.

How much assurance can be obtained regarding audit risk when internal control is present and working?

If control activities within major processes are working properly throughout the year, what is the residual risk that remains that an account balance can still be misstated?

What is the risk that the auditor’s evaluation of internal controls might be incorrect?

Which account balances contain more than an acceptable amount of risk that a material misstatement could occur?

How would a misstatement in a material account balance most likely occur?

What are the most effective substantive tests of account balances to determine whether there is a misstatement in the account balance?

 

  1. Risk-based audit approachIn conducting an integrated audit, discuss the potential effect of management’s monitoring controls on the auditor’s determination of the amount of direct testing of account balances that may be needed.

Monitoring is the process by which the organization determines whether its other control procedures are operating effectively. Section 404 of SOX requires that organizations have a monitoring component to their internal control system.

The amount of direct testing of account balances by the auditor depends upon the thoroughness of management’s assessment process, i.e., the adequacy of their controls and of their testing and documentation of those controls, including for example the strength of the internal control department.The auditor is allowed to rely upon the work performed within the organization so long as certain conditions are met. The auditor has to independently determine which controls need to be tested and to take samples based on their planning parameters, audit sampling principles, and the independence and reliability of management’s tests. The level of direct testing by the auditor can be greatly reduced and even eliminated on some accounts. However, the auditor has to test and evaluate management’s assessment process and perform enough of their own work to be able to make an independent decision in gathering sufficient competent evidential matter to support their conclusion that only a low level of residual risk remains in account balances and the financial statements.

Chapter 7: A Framework for Audit Evidence

Student: ___________________________________________________________________________

  1. Audit evidence is also referred to as an audit opinion.
    True    False

 

  1. The amount of evidence gathered is not important to an auditor since the quality of the evidence is of primary importance.
    True    False

 

  1. Based upon the risk of misstatement, the auditor uses judgment to determine which balances and transactions should be tested in the financial statements.
    True    False

 

  1. Assertions are relevant to the audit process because they are the representations of management embodied in the financial statements.
    True    False

 

  1. Assertions are not relevant to an audit because they relate to the auditor and financial statements are management’s responsibility instead of the auditor’s.
    True    False

 

  1. Presentation and disclosure assertions state that all transactions and balances are properly presented, and the company has disclosed every financial transaction and arrangement it entered into during the year in the footnotes.
    True    False

 

  1. Evidence is generally of higher quality if it involves a member of the audit team actually going out to physically observe it than if it was obtained from another source.
    True    False

 

  1. A client’s original signed purchase order is higher quality evidence than a confirmation returned from the client’s bank.
    True    False

 

  1. An auditor may test an account balance by testing the transactions that comprise the balance, by directly testing the final account balance, or a combination of both.
    True    False

 

  1. Internal documentation is more reliable to the auditor if the internal control surrounding the documentation is considered strong than if it is considered weak.
    True    False

 

  1. Documentation that is produced electronically by the client’s internal systems is not considered appropriate to the audit process.
    True    False

 

  1. Emails and faxes are documents that represent important evidence to the auditor, however, they are sometimes difficult to substantiate as authentic.
    True    False

 

  1. Test of transactions, directional testing and substantive analytical procedures are used to provide evidence about management’s assertions embedded in the financial statements.
    True    False

 

  1. Vouching recorded transactions involves taking a sample from the journal and tracing the items back to the source documents to ensure the transactions occurred.
    True    False

 

  1. Vouching is a process that helps establish that recorded transactions are valid.
    True    False

 

  1. One strategy used by auditors in testing assertions is to perform directional testing to find overstatements or understatements.
    True    False

 

  1. The direction of testing from recorded amounts toward supporting documentation provides evidence as to existence of assets and revenues.
    True    False

 

  1. The direction of testing from the source documents to recorded amounts provides evidence regarding the completeness of liabilities and expenses.
    True    False

 

  1. For an auditor to test the existence assertion of assets, testing will be performed beginning with the recorded asset and ending with the source documents.
    True    False

 

  1. Ulanda and Mudana, CPAs are performing an audit on McArnee, Inc. Ulanda selects a sample from certain source documents and traces them forward to the accounts payable ledger. The purpose of this test is to determine the possibility of understated liabilities.
    True    False

 

  1. The auditor’s concern for potential fraud in the financial statements will most likely result in increased testing for the overstatement of revenues.
    True    False

 

  1. The extent of evidence gathered during an audit is affected by the auditor’s assessment of detection risk.
    True    False

 

  1. Auditors should mail third party confirmations through the client’s mailroom.
    True    False

 

  1. The primary evidence in support of an auditor’s conclusions is the auditor’s documentation.
    True    False

 

  1. Audit documentation serves as support for the financial statements.
    True    False

 

  1. The auditor’s opinion on the financial statements taken as a whole is the single most important piece of information documenting the financial statements.
    True    False

 

  1. The primary importance of the audit program is its guidance of the overall conduct of the audit.
    True    False

 

  1. Inquiries of client personnel are not an effective means of evidence gathering by an auditor.
    True    False

 

  1. The performance of analytical procedures is often used by an auditor as a procedure to gather certain types of audit evidence.
    True    False

 

  1. An example of physical examination is the auditor’s testing of inventory by counting it to substantiate the existence assertion.
    True    False

 

  1. The auditor multiplies the quantity of inventory on the inventory ledger by the cost of the inventory to arrive at total inventory balance per product number. This is an example of recomputation by footing.
    True    False

 

  1. Some audit procedures may be performed prior to the close of the year under audit.
    True    False

 

  1. The audit program specifies what the client must do to perform the audit in accordance with generally accepted accounting procedures.
    True    False

 

  1. The auditor utilizes the same audit program and the same procedures each year for a client in order to ensure that nothing is missed in the current year audit.
    True    False

 

  1. Lead schedules are often created by auditors to combine similar accounts, such as all inventory accounts for further testing and documentation.
    True    False

 

  1. Audit planning workpapers are prepared to support the foundation of the audit and are prepared for the client to assist in their understanding of the specific audit procedures that will be performed.
    True    False

 

  1. The quality of electronic evidence depends on the controls built into the information system.
    True    False

 

  1. Recent regulation requires that audit documentation be retained for at least seven years.
    True    False

 

  1. Audit documentation should include either manual or electronic initials in order to identify the audit personnel responsible for the work and the managers and partners reviewing the work.
    True    False

 

  1. The reliability of audit evidence is a measure of the quality of the underlying evidence and is influenced by risk, potential management bias associated with the evidence, and the quality of the internal control system underlying the preparation of the evidence.
    True    False

 

  1. The client’s original signed purchase orders and invoices are a more persuasive type of evidence than evidence directly observed by the auditor.
    True    False

 

  1. Underlying accounting records consists of evidence of controls as well as supporting records such as checks, invoices, the general and subsidiary ledger and journal entries.
    True    False

 

  1. Reliable evidence usually exists more for transactions than for items making up an ending balance.
    True    False

 

  1. Analytical procedures are a type of substantive evidence.
    True    False

 

  1. Direct tests of account balances and of transactions are dual purpose tests.
    True    False

 

  1. Dual purpose tests examine both controls and the reasonableness of dollar amounts. A good example is testing a sample of purchase transactions that occurred throughout the year.
    True    False

 

  1. Testimonial evidence concerns review of publicly available information about the client.
    True    False

 

  1. In the performance of audit procedures there is a preference by auditors to focus on changes in account balances during the year if the opening balances were audited the previous year.
    True    False

 

  1. An advantage of directional testing is that it is more efficient by providing evidence on complementary sets of accounts.
    True    False

 

  1. Which one of the following statements is false?
    A. Auditing includes the process of gathering evidence to test assertions.
    B. No general audit program suits the needs for all situations.
    C. Even though all audits are different, they can all be approached in the same manner.
    D. All audits involve testing management’s assertions contained in written communications to another party and independently gathering evidence to test the relevant assertions.

 

  1. Which one of the following assertions regarding an inventory of ski equipment for Matterhorn, Inc. would be considered an incorrect statement?
    A. The inventory exists at the balance sheet date.
    B. The inventory is owned by Matterhorn.
    C. Footnote disclosures concerning inventory are not required given the objective nature of this account.
    D. The inventories are properly valued.

 

  1. Taft company only holds cash in the local currency of the country in which it operates. Which one of the following management assertions would require the least amount of audit procedures for the cash account of Taft?
    A. existence
    B. valuation
    C. completeness
    D. presentation

 

  1. Directional testing involves testing transactions or balances primarily for which type of error?
    A. overstatement
    B. understatement
    C. either overstatement or understatement
    D. neither overstatement nor understatement

 

  1. Which one of the following would be considered the most persuasive type of audit evidence?
    A. purchase orders from vendors
    B. customer accounts receivable files
    C. computerized general ledger
    D. confirmations from banks

 

  1. Which one of the following would be the most persuasive type of evidence?
    A. check register
    B. bank statement
    C. observation of assets
    D. inquiry with the in-house attorney

 

  1. Which one of the following would be the least persuasive type of evidence?
    A. Confirmations returned by bank directly to the auditor.
    B. Letters of communication from the Securities Exchange Commission.
    C. Physical examination of perpetual inventory.
    D. General ledger information.

 

  1. Management’s assertions in the financial statements are of relevance to the audit process because:
    A. they are the procedures that will be performed by the audit team.
    B. they are utilized by auditors in developing proper tests and procedures.
    C. they are direct evidence that management has prepared financial statements in accordance with generally accepted audit standards.
    D. they relate more to the audit while the financial statements belong to the auditor.

 

  1. For the financial statements to be presented in accordance with generally accepted accounting principles, the information included must:
    A. embody the appropriate assertions of management.
    B. be consistent, comparable and fully accurate.
    C. have full and adequate disclosure of all transactions.
    D. be prepared by an independent auditor.

 

  1. The process of vouching helps establish that all recorded transactions
    A. have been recorded.
    B. are complete.
    C. are valid.
    D. are presented properly.

 

  1. Footing, cross-footing, and tests of extensions are examples of which approach to gathering evidence?
    A. reprocessing
    B. recalculation
    C. vouching
    D. examination of documentation

 

  1. Reprocessing of transactions helps establish that all valid items have been recorded. Reprocessing tests which of the following assertions?
    A. occurrence.
    B. rights.
    C. existence.
    D. completeness.

 

  1. Sufficient evidence gathered by the auditor involves which of the following?
    A. The amount of evidence to be obtained.
    B. The type of evidence to be obtained.
    C. Obtaining limited evidence to achieve efficiency.
    D. The use of an audit program to obtain evidence.

 

  1. Which of the following provides the primary support of an audit?
    A. the financial statements.
    B. the audit working papers.
    C. the audit report.
    D. the confirmation documentation.

 

  1. The reliability of a client’s internal documentation is most affected by which of the following?
    A. the auditor’s independence.
    B. management’s motivation to misstate accounts.
    C. the type of audit report that will be issued.
    D. management’s ability to understand generally accepted audit standards.

 

  1. External documentation may lack reliability. Which of the following is the most probable reason for that?
    A. the external party may be competent in performing duties.
    B. the documentation may be properly understood by the client in the response.
    C. the auditor may decide not to use the documentation and replace it with other documents.
    D. the documentation may have been altered if the process is not controlled from inception.

 

  1. When may audit procedures be performed?
    I – on the balance sheet date.
    II – prior to the balance sheet date.
    III – subsequent to the balance sheet date.
    A. I only.
    B. I and III only.
    C. II only.
    D. I, II, and III.

 

  1. An auditor selects a sample of items recorded and traces them back to the supporting documentation. This is an example of which of the following?
    A. directional testing for existence.
    B. directional testing for completeness.
    C. direct testing for valuation.
    D. direct testing for rights.

 

  1. Directional testing is important to an auditor because of which of the following factors?
    A. Certain accounts are more prone to be misstated by overstatement than others.
    B. The auditor must remain organized when conducting an audit.
    C. The primary concern of the auditor is the understatement of asset and revenue accounts.
    D. It tests for existence and completeness simultaneously.

 

  1. Which of the following assertions is the primary assertion that is satisfied by physically observing the client’s count of inventory?
    A. rights.
    B. valuation.
    C. completeness.
    D. existence.

 

  1. How would an auditor most likely test the mechanical accuracy of a 6,000 page inventory report?
    A. Examine a random sample of inventory documents.
    B. Use generalized audit software to foot and recalculate.
    C. Send confirmations to vendors.
    D. Inquire of the inventory manager as to the accuracy.

 

  1. The audit team asks the client to pull a sample of vendor files and examines the invoices supporting the purchases of inventory items during the year. What is the most probable reason for the use of this evidence?
    A. Confirmation of vendors supplying inventory for existence.
    B. Analytical procedures to determine completeness of inventory.
    C. Testing for the valuation of inventory using the FIFO cost flow assumption.
    D. Reading the terms of the arrangements with vendors for disclosure.

 

  1. The extent of procedures is affected mostly by which of the following factors?
    A. the sheer volume of procedures to be applied by the auditor.
    B. the time of year in which the client takes a physical inventory in the warehouse.
    C. the auditor’s judgment that misstatements are probable in certain balances.
    D. the availability of the client’s staff at or near the balance sheet date.

 

  1. An audit program is created to specify which of the following?
    A. the type of audit opinion to be rendered based upon procedures performed.
    B. the audit procedures that will be performed every year for the client.
    C. how an auditor should think while performing audit procedures.
    D. audit objectives and procedures to be followed during the audit process.

 

  1. Which one of the following is the primary reason for documenting audit work?
    A. to prevent litigation by other parties that question the audit performance.
    B. to provide a stand-alone medium that gives audit conclusions and supports the opinion.
    C. to give the client a full reporting of all work performed on their behalf.
    D. to supply a point of reference for all auditors performing the work subsequently.

 

  1. Which one of the following original documents would most likely be found in the audit working papers?
    A. Vendor invoices
    B. Check registers
    C. Returned confirmation requests
    D. Payroll time cards

 

  1. Conclusions are typically documented by auditors in which type of work paper?
    A. audit planning memo
    B. audit program
    C. audit memoranda
    D. representation letter

 

  1. Which of the following is an example of poorly-developed audit documentation?
    A. clear communication as to how testing was performed, the results and conclusions.
    B. organization and assembly of documentation in an orderly fashion.
    C. headings that include the name and signature of the client representative that the auditor interacted with while performing testing.
    D. authenticated identification of the person responsible for completing the procedure and conclusions.

 

  1. The audit firm of Lake and South, LLP is wrapping up its audit of Brycestone, Inc. The evidence has been relatively easy to obtain except in one case. Which of the following would represent a balance or transaction that would be most difficult for Lake and South to obtain evidence?
    A. prepaid expenses
    B. cash
    C. accrued wages and salaries
    D. accrued warranties

 

  1. Which of the following is the primary source for evidence to corroborate the existence of pending litigation?
    A. vendor confirmations
    B. disclosures in financial statements
    C. management representation letters
    D. attorney confirmations

 

  1. Performance of audit procedures at an interim date causes the risk of material misstatement occurring between the interim date and the end of the year to
    A. decrease.
    B. increase.
    C. remain the same.
    D. become more difficult to ascertain.

 

  1. Shelfco, Inc. has an inventory report that is approximately 4,000 pages. The audit program requires James Morris, the staff auditor, to test the report for accuracy. What is the most efficient and effective means for James to perform the procedure?
    A. Ask the client to foot and extend the report and return the results of the test to the auditor for concluding.
    B. Foot and extend every 100th page and extrapolate the results of footing to the total of the report.
    C. Obtain an electronic copy of the file and use generalized audit software in footing and extending.
    D. Skip the procedure as the cost of footing and extending exceeds the benefit derived from the audit test.

 

  1. What is the role of a concurring partner in an audit engagement?
    A. to provide a “fresh”, quality review of the audit documentation and conclusions and its relationship to the opinion.
    B. to go back over the staff, senior and manager work and redo the more difficult areas of the audit.
    C. to work as a liaison between the audit committee and the audit team should there be disagreements.
    D. to act as an advocate of the client in order to ensure quality customer service has been given.

 

  1. Which of the following is not an estimate that requires significant auditor judgment and skepticism?
    A. Obligations for pension plans.
    B. Valuation of goodwill.
    C. Allowance for bad debt.
    D. Common stock and related additional paid-in capital.

 

  1. Empire Business Machines, Inc. (EBM) is audited by Flintstone and Sigmond Co. Empire utilizes periodic inventory and has ten locations throughout Wyoming, Utah and Idaho. The audit program of Flintstone and Sigmond requires that the following procedure be performed by the senior auditor, manager and four other auditors:
A. Haphazardly select six of the EBM locations, (two of which that were not selected in the previous audit) to be visited at 5:30 a.m. on January 1, 20XX. Do not inform EBM of the locations, but make the client aware that we could visit any one of the ten locations at 5:30 a.m. that morning.
1. Observe and count 45 product types at each location. Recount any differences with client records and statistically analyze remaining differences for possible misstatement to inventory accounts. Keep an inventory tag range/sequence control list and document the tag numbers present in the warehouse and those utilized in your count.

Procedure A-1 of Flintstone and Sigmond primarily relates to which management’s assertion?
A. existence
B. valuation
C. observation
D. rights

 

  1. Empire Business Machines, Inc. (EBM) is audited by Flintstone and Sigmond Co. Empire utilizes the FIFO cost flow assumption at the lower of cost or market for its inventory and has ten locations throughout Wyoming, Utah and Idaho. The audit program of Flintstone and Sigmond requires that the following procedures be performed by the senior auditor:
B. Using the computerized audit software supplied by Flintstone and Sigmond:
1. Statistically select a sample of inventory units and perform price tests to the FIFO cost flow assumption.
2. Perform lower of cost or market tests on the inventory sample selected above.

Procedure B-1 and B-2 of Flintstone and Sigmond primarily relates to which management’s assertion?
A. existence
B. valuation
C. rights and obligations
D. presentation and disclosure

 

  1. Directional testing creates audit efficiency by taking advantage of the double-entry bookkeeping system. Which of the following is not a primary reason for this effect?
    A. misstatement of some accounts are more likely to occur in one direction than the other.
    B. increase the persuasiveness of the evidence.
    C. provides evidence on a complementary set of accounts.
    D. some assertions are directional by nature.

 

  1. Which of the following type(s) of evidence is considered substantive evidence?
    A. tests of controls.
    B. analytical procedures.
    C. direct tests of account balances and transactions.
    D. Both B and C.

 

  1. Which of the following types of audit evidence is the most reliable?
    A. evidence from the client’s organization.
    B. evidence from a poorly controlled system.
    C. directly observable evidence.
    D. facsimiles of documents.

 

  1. Which of the following types of audit evidence is the least reliable?
    A. evidence from the client’s organization.
    B. evidence derived from a well-controlled system.
    C. evidence from independent outside sources.
    D. original documents.

 

  1. In evaluating cost of evidence, which of the following phases of the audit usually has the lowest cost?
    A. test transactions and account balances.
    B. understand client and industry.
    C. assess risk of material misstatement.
    D. Both A and B.

 

  1. Recalculations of the client’s computations would not include which of the following types of evidence?
    A. cutoff.
    B. footing.
    C. extension.
    D. cross-footing.

 

  1. Vouching of transactions deals with which of the following?
    A. testing forward.
    B. testing backward.
    C. testing at a point in time.
    D. directional testing either forward or backward.

 

  1. Reprocessing of transactions involves which of the following?
    A. testing forward.
    B. testing backward.
    C. test at a point in time.
    D. directional testing either forward or backward.

 

  1. Which of the following characteristics are not normally included in good audit documentation?
    A. initials of the person preparing and reviewing the document.
    B. an index.
    C. a cross-reference.
    D. all are included in good audit documentation.

 

  1. Dual purpose audit tests are useful as which of the following types of tests?
    A. tests of controls
    B. tests of account balances.
    C. tests of controls or tests of account balances
    D. tests of controls and tests of account balances.

 

  1. The auditor normally considers both underlying accounting data and corroborating information in the audit process. Underlying accounting data does not include which of the following items?
    A. evidence of controls.
    B. minutes of meetings.
    C. checks, invoices, and contracts.
    D. general and subsidiary ledger.

 

  1. Auditors have traditionally focused most audit procedures on the direct tests of assets and liability account balances, as opposed to examining transactions during the year, because
    A. there are usually fewer items in ending balances.
    B. more reliable evidence usually exists for ending balances.
    C. there is a preference to focus on change in account balances.
    D. both A and B.
    E. all of the above.

 

  1. Audit assertions and objectives – accounts receivableBased on management assertions implicit in the accounts receivable account, explain the audit objectives for the accounts receivable and related balances.

 

 

 

 

 

  1. Directional testingExplain the meaning of “directional testing” and identify the reasons why directional testing leads to audit efficiency. Give examples of directional testing for the existence and completeness assertions.

 

 

 

 

 

  1. Proper audit documentation

    Audit documentation serves as the primary support of an audit. Give at least six examples of the components of proper working paper documentation.

 

 

 

 

 

  1. Reliability of audit evidence

    The Auditing Standards Board established guidelines to assist auditors in evaluating the reliability of audit evidence. Discuss the criteria for the more reliable types of evidence and include an example for each.

 

 

 

 

 

  1. Sufficient appropriate evidential matter

    Discuss the source of the phrase “sufficient appropriate evidential matter is to be obtained…”
    What is the importance of obtaining sufficient appropriate evidential matter? Contrast sufficiency to competency as it relates to such audit evidence.

 

 

 

 

 

  1. Audit assertions and procedures on Cash balances

    Identify and demonstrate the audit assertions and different approaches to the obtaining audit evidence for an audit of cash balances in a financial statement audit.

 

 

 

 

 

  1. Audit procedures for accounts receivable

    In the process of gathering and evaluating evidence, documentation is derived in various forms. Rank the following types of evidence in the audit of Accounts Receivable from most persuasive to least persuasive and provide explanations for your decision.
· oral statements from management that the accounts receivable are fairly presented
· confirmations received from customers
· deposit slips subsequent to year end showing deposits by customer name
· copies of sales invoices

 

 

 

 

 

 

  1. Audit program

    Discuss the purpose of the audit program and its importance to the auditor.

 

 

 

 

 

  1. Audit standards of proper documentation

    Discuss the audit standards that must be applied to the auditor’s documentation. Give five examples the types of documentation will be found in the audit work papers.

 

 

 

 

 

  1. Audit procedures

    Discuss how each of the following procedures could be used in the audit of fixed assets, e.g., various types of equipment used in the business.
Procedure How used Assertion(s) tested
Observation
Physical examination
Inquiry
Confirmation
Examination of documents
Recomputation
Reprocessing
Vouching
Analytical
Procedures

 

 

 

 

 

 

  1. Audit procedures

    Businesses often have litigation against them that the auditor has to identify and adequately disclose. List the financial assertions that apply to Contingencies. For each assertion indicate two or three audit procedures that would address that assertion.Organize you answer as follows:
Financial statement assertion Audit procedure(s)

 

 

 

 

 

 

 

 

Chapter 7: A Framework for Audit Evidence Key

  1. Audit evidence is also referred to as an audit opinion.
    FALSE

 

  1. The amount of evidence gathered is not important to an auditor since the quality of the evidence is of primary importance.
    FALSE

 

  1. Based upon the risk of misstatement, the auditor uses judgment to determine which balances and transactions should be tested in the financial statements.
    TRUE

 

  1. Assertions are relevant to the audit process because they are the representations of management embodied in the financial statements.
    TRUE

 

  1. Assertions are not relevant to an audit because they relate to the auditor and financial statements are management’s responsibility instead of the auditor’s.
    FALSE

 

  1. Presentation and disclosure assertions state that all transactions and balances are properly presented, and the company has disclosed every financial transaction and arrangement it entered into during the year in the footnotes.
    FALSE

 

  1. Evidence is generally of higher quality if it involves a member of the audit team actually going out to physically observe it than if it was obtained from another source.
    TRUE

 

  1. A client’s original signed purchase order is higher quality evidence than a confirmation returned from the client’s bank.
    FALSE

 

  1. An auditor may test an account balance by testing the transactions that comprise the balance, by directly testing the final account balance, or a combination of both.
    TRUE

 

  1. Internal documentation is more reliable to the auditor if the internal control surrounding the documentation is considered strong than if it is considered weak.
    TRUE

 

  1. Documentation that is produced electronically by the client’s internal systems is not considered appropriate to the audit process.
    FALSE

 

  1. Emails and faxes are documents that represent important evidence to the auditor, however, they are sometimes difficult to substantiate as authentic.
    TRUE

 

  1. Test of transactions, directional testing and substantive analytical procedures are used to provide evidence about management’s assertions embedded in the financial statements.
    TRUE

 

  1. Vouching recorded transactions involves taking a sample from the journal and tracing the items back to the source documents to ensure the transactions occurred.
    TRUE

 

  1. Vouching is a process that helps establish that recorded transactions are valid.
    TRUE

 

  1. One strategy used by auditors in testing assertions is to perform directional testing to find overstatements or understatements.
    TRUE

 

  1. The direction of testing from recorded amounts toward supporting documentation provides evidence as to existence of assets and revenues.
    TRUE

 

  1. The direction of testing from the source documents to recorded amounts provides evidence regarding the completeness of liabilities and expenses.
    TRUE

 

  1. For an auditor to test the existence assertion of assets, testing will be performed beginning with the recorded asset and ending with the source documents.
    TRUE

 

  1. Ulanda and Mudana, CPAs are performing an audit on McArnee, Inc. Ulanda selects a sample from certain source documents and traces them forward to the accounts payable ledger. The purpose of this test is to determine the possibility of understated liabilities.
    TRUE

 

  1. The auditor’s concern for potential fraud in the financial statements will most likely result in increased testing for the overstatement of revenues.
    TRUE

 

  1. The extent of evidence gathered during an audit is affected by the auditor’s assessment of detection risk.
    TRUE

 

  1. Auditors should mail third party confirmations through the client’s mailroom.
    FALSE

 

  1. The primary evidence in support of an auditor’s conclusions is the auditor’s documentation.
    TRUE

 

  1. Audit documentation serves as support for the financial statements.
    FALSE

 

  1. The auditor’s opinion on the financial statements taken as a whole is the single most important piece of information documenting the financial statements.
    FALSE

 

  1. The primary importance of the audit program is its guidance of the overall conduct of the audit.
    TRUE

 

  1. Inquiries of client personnel are not an effective means of evidence gathering by an auditor.
    FALSE

 

  1. The performance of analytical procedures is often used by an auditor as a procedure to gather certain types of audit evidence.
    TRUE

 

  1. An example of physical examination is the auditor’s testing of inventory by counting it to substantiate the existence assertion.
    TRUE

 

  1. The auditor multiplies the quantity of inventory on the inventory ledger by the cost of the inventory to arrive at total inventory balance per product number. This is an example of recomputation by footing.
    FALSE

 

  1. Some audit procedures may be performed prior to the close of the year under audit.
    TRUE

 

  1. The audit program specifies what the client must do to perform the audit in accordance with generally accepted accounting procedures.
    FALSE

 

  1. The auditor utilizes the same audit program and the same procedures each year for a client in order to ensure that nothing is missed in the current year audit.
    FALSE

 

  1. Lead schedules are often created by auditors to combine similar accounts, such as all inventory accounts for further testing and documentation.
    TRUE

 

  1. Audit planning workpapers are prepared to support the foundation of the audit and are prepared for the client to assist in their understanding of the specific audit procedures that will be performed.
    FALSE

 

  1. The quality of electronic evidence depends on the controls built into the information system.
    TRUE

 

  1. Recent regulation requires that audit documentation be retained for at least seven years.
    TRUE

 

  1. Audit documentation should include either manual or electronic initials in order to identify the audit personnel responsible for the work and the managers and partners reviewing the work.
    TRUE

 

  1. The reliability of audit evidence is a measure of the quality of the underlying evidence and is influenced by risk, potential management bias associated with the evidence, and the quality of the internal control system underlying the preparation of the evidence.
    TRUE

 

  1. The client’s original signed purchase orders and invoices are a more persuasive type of evidence than evidence directly observed by the auditor.
    FALSE

 

  1. Underlying accounting records consists of evidence of controls as well as supporting records such as checks, invoices, the general and subsidiary ledger and journal entries.
    TRUE

 

  1. Reliable evidence usually exists more for transactions than for items making up an ending balance.
    FALSE

 

  1. Analytical procedures are a type of substantive evidence.
    TRUE

 

  1. Direct tests of account balances and of transactions are dual purpose tests.
    FALSE

 

  1. Dual purpose tests examine both controls and the reasonableness of dollar amounts. A good example is testing a sample of purchase transactions that occurred throughout the year.
    TRUE

 

  1. Testimonial evidence concerns review of publicly available information about the client.
    FALSE

 

  1. In the performance of audit procedures there is a preference by auditors to focus on changes in account balances during the year if the opening balances were audited the previous year.
    TRUE

 

  1. An advantage of directional testing is that it is more efficient by providing evidence on complementary sets of accounts.
    TRUE

 

  1. Which one of the following statements is false?
    A.Auditing includes the process of gathering evidence to test assertions.
    B. No general audit program suits the needs for all situations.
    C. Even though all audits are different, they can all be approached in the same manner.
    D. All audits involve testing management’s assertions contained in written communications to another party and independently gathering evidence to test the relevant assertions.

 

  1. Which one of the following assertions regarding an inventory of ski equipment for Matterhorn, Inc. would be considered an incorrect statement?
    A.The inventory exists at the balance sheet date.
    B. The inventory is owned by Matterhorn.
    C. Footnote disclosures concerning inventory are not required given the objective nature of this account.
    D. The inventories are properly valued.

 

  1. Taft company only holds cash in the local currency of the country in which it operates. Which one of the following management assertions would require the least amount of audit procedures for the cash account of Taft?
    A.existence
    B. valuation
    C. completeness
    D. presentation

 

  1. Directional testing involves testing transactions or balances primarily for which type of error?
    A.overstatement
    B. understatement
    C. either overstatement or understatement
    D. neither overstatement nor understatement

 

  1. Which one of the following would be considered the most persuasive type of audit evidence?
    A.purchase orders from vendors
    B. customer accounts receivable files
    C. computerized general ledger
    D. confirmations from banks

 

  1. Which one of the following would be the most persuasive type of evidence?
    A.check register
    B. bank statement
    C. observation of assets
    D. inquiry with the in-house attorney

 

  1. Which one of the following would be the least persuasive type of evidence?
    A.Confirmations returned by bank directly to the auditor.
    B. Letters of communication from the Securities Exchange Commission.
    C. Physical examination of perpetual inventory.
    D. General ledger information.

 

  1. Management’s assertions in the financial statements are of relevance to the audit process because:
    A.they are the procedures that will be performed by the audit team.
    B. they are utilized by auditors in developing proper tests and procedures.
    C. they are direct evidence that management has prepared financial statements in accordance with generally accepted audit standards.
    D. they relate more to the audit while the financial statements belong to the auditor.

 

  1. For the financial statements to be presented in accordance with generally accepted accounting principles, the information included must:
    A.embody the appropriate assertions of management.
    B. be consistent, comparable and fully accurate.
    C. have full and adequate disclosure of all transactions.
    D. be prepared by an independent auditor.

 

  1. The process of vouching helps establish that all recorded transactions
    A.have been recorded.
    B. are complete.
    C. are valid.
    D. are presented properly.

 

  1. Footing, cross-footing, and tests of extensions are examples of which approach to gathering evidence?
    A.reprocessing
    B. recalculation
    C. vouching
    D. examination of documentation

 

  1. Reprocessing of transactions helps establish that all valid items have been recorded. Reprocessing tests which of the following assertions?
    A.occurrence.
    B. rights.
    C. existence.
    D. completeness.

 

  1. Sufficient evidence gathered by the auditor involves which of the following?
    A.The amount of evidence to be obtained.
    B. The type of evidence to be obtained.
    C. Obtaining limited evidence to achieve efficiency.
    D. The use of an audit program to obtain evidence.

 

  1. Which of the following provides the primary support of an audit?
    A.the financial statements.
    B. the audit working papers.
    C. the audit report.
    D. the confirmation documentation.

 

  1. The reliability of a client’s internal documentation is most affected by which of the following?
    A.the auditor’s independence.
    B. management’s motivation to misstate accounts.
    C. the type of audit report that will be issued.
    D. management’s ability to understand generally accepted audit standards.

 

  1. External documentation may lack reliability. Which of the following is the most probable reason for that?
    A.the external party may be competent in performing duties.
    B. the documentation may be properly understood by the client in the response.
    C. the auditor may decide not to use the documentation and replace it with other documents.
    D. the documentation may have been altered if the process is not controlled from inception.

 

  1. When may audit procedures be performed?
    I – on the balance sheet date.
    II – prior to the balance sheet date.
    III – subsequent to the balance sheet date.
    A. I only.
    B. I and III only.
    C. II only.
    D. I, II, and III.

 

  1. An auditor selects a sample of items recorded and traces them back to the supporting documentation. This is an example of which of the following?
    A.directional testing for existence.
    B. directional testing for completeness.
    C. direct testing for valuation.
    D. direct testing for rights.

 

  1. Directional testing is important to an auditor because of which of the following factors?
    A.Certain accounts are more prone to be misstated by overstatement than others.
    B. The auditor must remain organized when conducting an audit.
    C. The primary concern of the auditor is the understatement of asset and revenue accounts.
    D. It tests for existence and completeness simultaneously.

 

  1. Which of the following assertions is the primary assertion that is satisfied by physically observing the client’s count of inventory?
    A.rights.
    B. valuation.
    C. completeness.
    D. existence.

 

  1. How would an auditor most likely test the mechanical accuracy of a 6,000 page inventory report?
    A.Examine a random sample of inventory documents.
    B. Use generalized audit software to foot and recalculate.
    C. Send confirmations to vendors.
    D. Inquire of the inventory manager as to the accuracy.

 

  1. The audit team asks the client to pull a sample of vendor files and examines the invoices supporting the purchases of inventory items during the year. What is the most probable reason for the use of this evidence?
    A.Confirmation of vendors supplying inventory for existence.
    B. Analytical procedures to determine completeness of inventory.
    C. Testing for the valuation of inventory using the FIFO cost flow assumption.
    D. Reading the terms of the arrangements with vendors for disclosure.

 

  1. The extent of procedures is affected mostly by which of the following factors?
    A.the sheer volume of procedures to be applied by the auditor.
    B. the time of year in which the client takes a physical inventory in the warehouse.
    C. the auditor’s judgment that misstatements are probable in certain balances.
    D. the availability of the client’s staff at or near the balance sheet date.

 

  1. An audit program is created to specify which of the following?
    A.the type of audit opinion to be rendered based upon procedures performed.
    B. the audit procedures that will be performed every year for the client.
    C. how an auditor should think while performing audit procedures.
    D. audit objectives and procedures to be followed during the audit process.

 

  1. Which one of the following is the primary reason for documenting audit work?
    A.to prevent litigation by other parties that question the audit performance.
    B. to provide a stand-alone medium that gives audit conclusions and supports the opinion.
    C. to give the client a full reporting of all work performed on their behalf.
    D. to supply a point of reference for all auditors performing the work subsequently.

 

  1. Which one of the following original documents would most likely be found in the audit working papers?
    A.Vendor invoices
    B. Check registers
    C. Returned confirmation requests
    D. Payroll time cards

 

  1. Conclusions are typically documented by auditors in which type of work paper?
    A.audit planning memo
    B. audit program
    C. audit memoranda
    D. representation letter

 

  1. Which of the following is an example of poorly-developed audit documentation?
    A.clear communication as to how testing was performed, the results and conclusions.
    B. organization and assembly of documentation in an orderly fashion.
    C. headings that include the name and signature of the client representative that the auditor interacted with while performing testing.
    D. authenticated identification of the person responsible for completing the procedure and conclusions.

 

  1. The audit firm of Lake and South, LLP is wrapping up its audit of Brycestone, Inc. The evidence has been relatively easy to obtain except in one case. Which of the following would represent a balance or transaction that would be most difficult for Lake and South to obtain evidence?
    A.prepaid expenses
    B. cash
    C. accrued wages and salaries
    D. accrued warranties

 

  1. Which of the following is the primary source for evidence to corroborate the existence of pending litigation?
    A.vendor confirmations
    B. disclosures in financial statements
    C. management representation letters
    D. attorney confirmations

 

  1. Performance of audit procedures at an interim date causes the risk of material misstatement occurring between the interim date and the end of the year to
    A.decrease.
    B. increase.
    C. remain the same.
    D. become more difficult to ascertain.

 

  1. Shelfco, Inc. has an inventory report that is approximately 4,000 pages. The audit program requires James Morris, the staff auditor, to test the report for accuracy. What is the most efficient and effective means for James to perform the procedure?
    A.Ask the client to foot and extend the report and return the results of the test to the auditor for concluding.
    B. Foot and extend every 100th page and extrapolate the results of footing to the total of the report.
    C. Obtain an electronic copy of the file and use generalized audit software in footing and extending.
    D. Skip the procedure as the cost of footing and extending exceeds the benefit derived from the audit test.

 

  1. What is the role of a concurring partner in an audit engagement?
    A.to provide a “fresh”, quality review of the audit documentation and conclusions and its relationship to the opinion.
    B. to go back over the staff, senior and manager work and redo the more difficult areas of the audit.
    C. to work as a liaison between the audit committee and the audit team should there be disagreements.
    D. to act as an advocate of the client in order to ensure quality customer service has been given.

 

  1. Which of the following is not an estimate that requires significant auditor judgment and skepticism?
    A.Obligations for pension plans.
    B. Valuation of goodwill.
    C. Allowance for bad debt.
    D. Common stock and related additional paid-in capital.

 

  1. Empire Business Machines, Inc. (EBM) is audited by Flintstone and Sigmond Co. Empire utilizes periodic inventory and has ten locations throughout Wyoming, Utah and Idaho. The audit program of Flintstone and Sigmond requires that the following procedure be performed by the senior auditor, manager and four other auditors:
A. Haphazardly select six of the EBM locations, (two of which that were not selected in the previous audit) to be visited at 5:30 a.m. on January 1, 20XX. Do not inform EBM of the locations, but make the client aware that we could visit any one of the ten locations at 5:30 a.m. that morning.
1. Observe and count 45 product types at each location. Recount any differences with client records and statistically analyze remaining differences for possible misstatement to inventory accounts. Keep an inventory tag range/sequence control list and document the tag numbers present in the warehouse and those utilized in your count.

Procedure A-1 of Flintstone and Sigmond primarily relates to which management’s assertion?
A. existence
B. valuation
C. observation
D. rights

 

  1. Empire Business Machines, Inc. (EBM) is audited by Flintstone and Sigmond Co. Empire utilizes the FIFO cost flow assumption at the lower of cost or market for its inventory and has ten locations throughout Wyoming, Utah and Idaho. The audit program of Flintstone and Sigmond requires that the following procedures be performed by the senior auditor:
B. Using the computerized audit software supplied by Flintstone and Sigmond:
1. Statistically select a sample of inventory units and perform price tests to the FIFO cost flow assumption.
2. Perform lower of cost or market tests on the inventory sample selected above.

Procedure B-1 and B-2 of Flintstone and Sigmond primarily relates to which management’s assertion?
A. existence
B. valuation
C. rights and obligations
D. presentation and disclosure

 

  1. Directional testing creates audit efficiency by taking advantage of the double-entry bookkeeping system. Which of the following is not a primary reason for this effect?
    A.misstatement of some accounts are more likely to occur in one direction than the other.
    B. increase the persuasiveness of the evidence.
    C. provides evidence on a complementary set of accounts.
    D. some assertions are directional by nature.

 

  1. Which of the following type(s) of evidence is considered substantive evidence?
    A.tests of controls.
    B. analytical procedures.
    C. direct tests of account balances and transactions.
    D. Both B and C.

 

  1. Which of the following types of audit evidence is the most reliable?
    A.evidence from the client’s organization.
    B. evidence from a poorly controlled system.
    C. directly observable evidence.
    D. facsimiles of documents.

 

  1. Which of the following types of audit evidence is the least reliable?
    A.evidence from the client’s organization.
    B. evidence derived from a well-controlled system.
    C. evidence from independent outside sources.
    D. original documents.

 

  1. In evaluating cost of evidence, which of the following phases of the audit usually has the lowest cost?
    A.test transactions and account balances.
    B. understand client and industry.
    C. assess risk of material misstatement.
    D. Both A and B.

 

  1. Recalculations of the client’s computations would not include which of the following types of evidence?
    A.cutoff.
    B. footing.
    C. extension.
    D. cross-footing.

 

  1. Vouching of transactions deals with which of the following?
    A.testing forward.
    B. testing backward.
    C. testing at a point in time.
    D. directional testing either forward or backward.

 

  1. Reprocessing of transactions involves which of the following?
    A.testing forward.
    B. testing backward.
    C. test at a point in time.
    D. directional testing either forward or backward.

 

  1. Which of the following characteristics are not normally included in good audit documentation?
    A.initials of the person preparing and reviewing the document.
    B. an index.
    C. a cross-reference.
    D. all are included in good audit documentation.

 

  1. Dual purpose audit tests are useful as which of the following types of tests?
    A.tests of controls
    B. tests of account balances.
    C. tests of controls or tests of account balances
    D. tests of controls and tests of account balances.

 

  1. The auditor normally considers both underlying accounting data and corroborating information in the audit process. Underlying accounting data does not include which of the following items?
    A.evidence of controls.
    B. minutes of meetings.
    C. checks, invoices, and contracts.
    D. general and subsidiary ledger.

 

  1. Auditors have traditionally focused most audit procedures on the direct tests of assets and liability account balances, as opposed to examining transactions during the year, because
    A.there are usually fewer items in ending balances.
    B. more reliable evidence usually exists for ending balances.
    C. there is a preference to focus on change in account balances.
    D. both A and B.
    E. all of the above.

 

  1. Audit assertions and objectives – accounts receivableBased on management assertions implicit in the accounts receivable account, explain the audit objectives for the accounts receivable and related balances.

The audit objectives for the audit of accounts receivable would determine that:

· Accounts receivable actually exist with valid customers. (Existence)
· The client has the right to or controls the receivables and has not pledged or factored them. (Rights)
· Accounts receivable are recorded at historical cost or invoice price. (Valuation gross)
· Accounts receivable are recorded net of any applicable sales discounts, returns or allowances. (Valuation gross)
· An allowance for doubtful accounts has been established for an estimate of dollars that will not be received on account. (Valuation net)
· All accounts receivable are recorded for the period and are not understated. (Completeness)
· Footnote disclosures discuss the collectibility of accounts receivable, pledging and factoring and any concentration of credit risk. A reconciliation of the allowance for doubtful accounts has been presented in the footnotes. (Presentation and disclosure)

 

  1. Directional testingExplain the meaning of “directional testing” and identify the reasons why directional testing leads to audit efficiency. Give examples of directional testing for the existence and completeness assertions.

Directional testing involves testing transactions or balances primarily for one type of error, either overstatement or understatement, but not for both at the same time. For example, an audit test for an understatement of Accounts Payable also tests for an understatement of Purchases. Directional testing also leads to audit efficiency for the following reasons:

· Misstatements of some accounts are more likely to occur in one direction than the other.
· Directional testing of an account balance provides evidence on a complementary set of accounts.
· Specific assertions are normally tested directionally. An example is the testing of the existence assertion for overstatements or the completeness assertions for understatements.

An example of directional testing for existence includes the sampling of assets recorded on the balance sheet, such as fixed assets and tracing those items back through the system to original source documents such as vendor invoices. This procedure tests for the possible overstatement of the fixed assets. Item(s) selected from the general ledger that are found to lack adequate supporting vendor invoices to substantiate existence are evidence of the overstatement of assets.

Testing directionally for completeness, on the other hand is just the opposite. Source documents are sampled and traced forward through the journals, ledgers and to the general ledger. An example may be vendor invoices for expenses. Invoices that are not found in the general ledger balance prove that the system is incomplete. In the example of an expense, net income would be overstated and liabilities may be understated.

 

  1. Proper audit documentation

    Audit documentation serves as the primary support of an audit. Give at least six examples of the components of proper working paper documentation.

Audit documentation serves as the primary evidence in support of the auditor’s opinion. Well prepared documentation should include:

· a heading that includes the name of the audit client, an explanatory title, and the balance sheet date.
· the initials or electronic signature of the auditor performing the audit test and the date the test was completed.
· the initials or electronic signature of the senior, manager, or partner who reviewed the working papers and the date the review was completed.
· a description of the nature of the test performed and the findings.
· an assessment of whether the test indicates the possibility of material misstatement in the account.
· manual or electronic tick marks and a legend indicating the nature of the work performed by the auditor.
· an indexing or electronic sequencing routine to identify the location and organization of working papers.
· a cross reference or electronic link to related working papers.

Many of these components are electronic in nature and are resident in a paperless audit software and storage combination. Nonetheless, such components remain vital in proper documentation of audit testing and conclusions.

 

  1. Reliability of audit evidence

    The Auditing Standards Board established guidelines to assist auditors in evaluating the reliability of audit evidence. Discuss the criteria for the more reliable types of evidence and include an example for each.

Evidence that is considered to be more reliable includes:

· Directly observable evidence such as counting inventory or observing fixed assets.
· Evidence derived from a client’s strong internal control structure such as reconciliations or the information system itself.
· Evidence from independent external sources such as confirmations from banks, customers and attorneys.

Examples provided by the students may vary and the instructor must use his or her judgment.

 

  1. Sufficient appropriate evidential matter

    Discuss the source of the phrase “sufficient appropriate evidential matter is to be obtained…”
    What is the importance of obtaining sufficient appropriate evidential matter? Contrast sufficiency to competency as it relates to such audit evidence.

The third standard of field work of the generally accepted audit standards states that “sufficient appropriate evidential matter is to be obtained” by performing various audit procedures in order to support the audit opinion regarding the financial statements under audit.

The sufficiency and competency of evidence is of critical importance to the audit as it affects the nature, timing and extent of audit testing to be performed by the audit team.

Competency of evidence includes the quality or reliability of the evidence obtained. It must be valid and relevant to management’s assertions or it is not a proper form of evidence. Typically, the competency of audit evidence can be judged by an auditor based upon the underlying internal control, the independence of outside sources and the auditor’s own knowledge of the evidence. Sufficiency deals with the amount or nature of the evidence that will be obtained such as the accounting data itself and the corroborating data.

These concepts also bear functional relationships to audit risk assessment. For instance, the less competent the evidence is, the more sufficient the evidence that must be obtained. In other words, as in the audit risk model, the higher the risk of poor internal control over evidence, the more audit work that must be performed to mitigate detection risk. This is how the risk of material misstatements existing in the financial statements and not being discovered by the auditor is reduced.

 

  1. Audit assertions and procedures on Cash balances

    Identify and demonstrate the audit assertions and different approaches to the obtaining audit evidence for an audit of cash balances in a financial statement audit.

In the performance of the audit of cash the auditor is most concerned the existence, valuation, and rights assertions. The audit of cash may use the following approaches:

· Observe the client’s handling of the petty cash fund and the control over incoming cash and cash storage. Observe the process of cash received in the mailroom, deposits to the bank and reconciliation by a separate individual.
· Physically count the petty cash, cash in drawers and cash in safes.
· Examine documents such as the bank statement.
· Make inquiries of personnel concerning the handling of daily deposits or the mail receipts.
· Confirm the bank balance with financial institutions using proper confirmation procedures.
· Recalculate the bank reconciliation computation trace the book balance to the general ledger.
· Inquire of materially aged outstanding checks and deposits in transit.
· Trace outstanding checks and deposits in transit clearing subsequent bank statements from a qualified source.
· Vouch material and unusual entries in the cash account.
· Perform an analysis of bank transfers at or near cutoff.
· Use analytical procedures to determine the reasonableness of the reported cash balance.

This response is only intended to be a sample. The instructor must evaluate the quality of the student responses.

 

  1. Audit procedures for accounts receivable

    In the process of gathering and evaluating evidence, documentation is derived in various forms. Rank the following types of evidence in the audit of Accounts Receivable from most persuasive to least persuasive and provide explanations for your decision.
· oral statements from management that the accounts receivable are fairly presented
· confirmations received from customers
· deposit slips subsequent to year end showing deposits by customer name
· copies of sales invoices

 

The ranking of these pieces of evidence on accounts receivable and the reasons for the rankings are as follows:

· Accounts receivable confirmations would be most persuasive as these forms of evidence are obtained from independent parties and sent directly to the auditor.
· Deposits subsequent to year end showing customer names would be next in line. The reason is that even though the deposit slips are generated and held internally they have had outside intervention in the hands of the banks.
· Sales invoices would rank next as they are also prepared inside the client’s office and held by the client but they have no outside intervention.
· Oral statements by management concerning the fairness of the financial statements would be least persuasive as they have no validity until we can prove their statements to be true by other means.

 

  1. Audit program

    Discuss the purpose of the audit program and its importance to the auditor.

An audit program specifies the actual procedures to be performed in gathering the required audit evidence about the assertions embodied in the client’s financial statements. Because the audit program guides the overall conduct of the audit it is the single most important piece of documentation in an audit engagement. The program is an effective means for:

· organizing and distributing audit work.
· monitoring the audit process and progress.
· reviewing for possible omission of material areas from the audit.
· recording the audit work performed.
· reviewing the completeness and persuasiveness of procedures performed.

 

  1. Audit standards of proper documentation

    Discuss the audit standards that must be applied to the auditor’s documentation. Give five examples the types of documentation will be found in the audit work papers.

Auditing standards require adequate documentation in the general standards under both planning and supervision and gaining an understanding of internal control.

The third standard of field work states that “sufficient appropriate evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.”

Pursuant to all of these requirements, audit work papers will include such items as:

1. Evidence of planning such as the planning memo, risk assessments and the audit program.
2. Evidence of the auditor’s understanding and assessment of internal control over the client organization.
3. The client’s trial balance and proposed audit adjustments.
4. Copies of certain internal and external documents such as letters of communication with the client and returned confirmations.
5. Audit memoranda documenting the testing process, auditor reasoning and conclusions.
6. Results of analytical procedures and audit testing.
7. Auditor generated analysis of account balances such as the allowance for doubtful accounts.

 

  1. Audit procedures

    Discuss how each of the following procedures could be used in the audit of fixed assets, e.g., various types of equipment used in the business.
Procedure How used Assertion(s) tested
Observation
Physical examination
Inquiry
Confirmation
Examination of documents
Recomputation
Reprocessing
Vouching
Analytical
Procedures

 

 

Procedure How used Assertion(s) tested
Observation Observe taking of inventory of assets Existence
Physical examination Inspect existence and condition of assets. Existence, Valuation
Inquiry Inquire of management of assets not recorded or that have been sold or discarded. Existence, Completeness
Confirmation Confirm details of purchase with seller of asset. Existence, Valuation, Presentation and Disclosure, Rights
Examination of documents Examine supporting documentation. Existence, Valuation, Rights
Recomputation Recompute depreciation Valuation
Reprocessing Reprocess a sample of purchase transactions Existence
Vouching Vouching a sample of recorded assets Existence, Valuation, Rights
Analytical Analysis depreciation Valuation, Completeness
Procedures expense

 

  1. Audit procedures

    Businesses often have litigation against them that the auditor has to identify and adequately disclose. List the financial assertions that apply to Contingencies. For each assertion indicate two or three audit procedures that would address that assertion.Organize you answer as follows:
Financial statement assertion Audit procedure(s)

 

 

Financial statement assertion Audit procedure(s)
Existence Inquiry of management
Send confirmation request to legal counsel
Completeness Inquiry of management
Vouch legal expenses
Review nature of legal services to determine if a liability might exist
Rights and Obligations Inquiry of management
Confirmation from legal counsel
Examine payments related to in-progress litigation
Valuation and Allocation Inquiry of management
Confirmation of legal counsel
Review court rulings
Presentation and Disclosure Inquiry of management
Confirmation of legal counsel