Auditing and Assurance Services, 15e, Global Edition (Arens)

Chapter 7 Nature and Type of Audit Evidence

Learning Objective 7-1
1) All evidence must have the same level of persuasiveness.
A) True
B) alse
Ans!er" B
#) Auditors use evidence to help them dra! conclusions.
A) True
B) alse
Ans!er" A
Learning Objective 7-#
1) Auditors must ma$e decisions regarding !hat evidence to gather and ho! much to
accumulate. %hich of the follo!ing is a decision that must be made b& auditors related to
evidence'
A)
(ample si)e Timing of audit procedures
*es *es
B)
(ample si)e Timing of audit procedures
+o +o
,)
(ample si)e Timing of audit procedures
*es +o
-)
(ample si)e Timing of audit procedures
+o *es
Ans!er" A
#) Audit procedures are concerned !ith the nature. e/tent. and timing in gathering audit
evidence. %hich. of the follo!ing. is true as to the timing of audit procedures'
A)
0rior to the fiscal &ear-end
of the client
(ubse1uent to the fiscal &ear-
end of the client
*es *es
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B)
0rior to the fiscal &ear-end
of the client
(ubse1uent to the fiscal &ear-
end of the client
+o +o
,)
0rior to the fiscal &ear-end
of the client
(ubse1uent to the fiscal &ear-
end of the client
*es +o
-)
0rior to the fiscal &ear-end
of the client
(ubse1uent to the fiscal &ear-
end of the client
+o *es
Ans!er" A
6) A7n) 88888888 is the detailed instruction that e/plains the audit evidence to be obtained
during the audit.
A) audit objectives
B) audit procedure
,) audit assertion
-) audit program
Ans!er" B
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4) %hich of the follo!ing is not one of the four decisions about !hat evidence to gather and
ho! much of it to accumulate'
A) %hich audit procedures to use
B) %hich accounts must agree to the general ledger
,) %hen to perform the procedures
-) %hat sample si)e to select for a given procedure
Ans!er" B
Learning Objective 7-6
1) Audit evidence has t!o primar& 1ualities for the auditor9 relevance and reliabilit&. :iven the
choices belo!. !hich provides the auditor !ith the most reliable audit evidence'
A) :eneral ledger account balances
B) ,onfirmation of accounts receivable balance received from a customer
,) ;nternal memo e/plaining the issuance of a credit memo
-) ,op& of month-end adjusting entries
Ans!er" B
#) %hich of the follo!ing is not a characteristic of the reliabilit& of evidence'
A) 5ffectiveness of client internal controls
B) 5ducation of auditor
,) ;ndependence of information provider
-) Timeliness
Ans!er" B
6) The auditor must gather sufficient and appropriate evidence during the course of the audit.
(ufficient evidence must"
A) be !ell documented and cross-referenced in the audit documents.
B) be based on sources that are e/ternal to compan&.
,) provide evidence that prove or disprove an audit objective<assertion.
-) be persuasive enough to enable the auditor to issue an audit report.
Ans!er" -
4) Audit evidence obtained directl& b& the auditor !ill not be reliable if"
A) the auditor lac$s the competence to evaluate the evidence.
B) it is provided b& the client=s attorne&.
,) the client denies its veracit&.
-) it is impossible for the auditor to obtain additional corroborator& evidence.
Ans!er" A
>) Appropriateness of evidence is a measure of the"
A) 1uantit& of evidence.
B) 1ualit& of evidence.
,) sufficienc& of evidence.
-) meaning of evidence.
Ans!er" B
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?) %hich of the follo!ing statements regarding the relevance of evidence is correct'
A) To be relevant. evidence must pertain to the audit objective of the evidence.
B) To be relevant. evidence must be persuasive.
,) To be relevant. evidence must relate to multiple audit objectives.
-) To be relevant. evidence must be derived from a s&stem including effective internal controls.
Ans!er" A
7) T!o determinants of the persuasiveness of evidence are"
A) competence and sufficienc&.
B) relevance and reliabilit&.
,) appropriateness and sufficienc&.
-) independence and effectiveness.
Ans!er" ,
@) The t!o characteristics of the appropriateness of evidence are"
A) relevance and timeliness.
B) relevance and accurac&.
,) relevance and reliabilit&.
-) reliabilit& and accurac&.
Ans!er" ,
A) %hich of the follo!ing forms of evidence !ould be least persuasive in forming the auditor=s
opinion about mar$etable securities and other investments held b& the compan&'
A) Besponses to auditor=s 1uestions b& the president and controller regarding the investments
account
B) ,orrespondence !ith a stoc$bro$er regarding the 1uantit& of client=s investments held in
street name b& the bro$er
,) Cinutes of the board of directors authori)ing the purchase of stoc$ as an investment
-) The auditor=s count of mar$etable securities
Ans!er" A
13) %hich of the follo!ing statements is not correct'
A) ;t is possible to var& the sample si)e from one unit to 133D of the items in the population.
B) The decision of ho! man& items to test should not be influenced b& the increased costs of
performing the additional tests.
,) The decision of ho! man& items to test must be made b& the auditor for each audit procedure.
-) The sample si)e for an& given procedure is li$el& to var& from audit to audit.
Ans!er" B
11) or audit evidence to be compelling to the auditor it must be sufficient and appropriate.
%hich statement belo! is not correct regarding the appropriateness of audit evidence'
A) The more effective the internal control s&stem. the more assurance it provides the auditor
about the reliabilit& of financial reporting b& the client.
B) An auditor=s opinion. to be economicall& useful and profitable to the auditing firm needs to be
formed !ithin a reasonable time and based on evidence obtained that assures profits for the
auditing firm.
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,) 5vidence obtained from independent sources outside the entit& is generall& more reliable than
evidence secured solel& !ithin the entit&.
-) The independent auditor=s direct personal $no!ledge. obtained through in1uir&. observation
and inspection. is generall& more persuasive than information obtained indirectl&.
Ans!er" B
1#) %hich of the follo!ing is a correct statement regarding audit evidence'
A) A large sample of evidence provided b& an independent part& is al!a&s considered persuasive
evidence.
B) A small sample of onl& one or t!o pieces of highl& appropriate evidence is al!a&s considered
persuasive evidence.
,) The auditor must obtain a sufficient amount of relevant and reliable evidence to form an
opinion on the fairness of the financial statements.
-) 5vidence is usuall& more reliable for balance sheet accounts !hen it is obtained !ithin si/
months of the balance sheet date.
16) %hich of the follo!ing is the most objective t&pe of evidence'
A) A letter !ritten b& the client=s attorne& discussing the li$el& outcome of outstanding la!suits
B) The ph&sical count of securities and cash
,) ;n1uiries of the credit manager about the collectabilit& of noncurrent accounts receivable
-) Observation of cob!ebs on some inventor& bins
Ans!er" B
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14) %hich items affect the sufficienc& of evidence !hen choosing a sample'
A)
(electing items !ith a high
li$elihood of misstatement
The randomness of the items
selected
*es *es
B)
(electing items !ith a high
li$elihood of misstatement
The randomness of the items
selected
+o +o
,)
(electing items !ith a high
li$elihood of misstatement
The randomness of the items
selected
*es +o
-)
(electing items !ith a high
li$elihood of misstatement
The randomness of the items
selected
+o *es
Ans!er" ,
1>) -etermine !hich of the follo!ing is most correct regarding the reliabilit& of audit evidence.
A) ;nformation that is indirectl& obtained from e/ternal sources is the most reliable audit
evidence.
B) Beliabilit& of audit evidence is dependent upon the evidence being subjective.
,) Beliabilit& of evidence refers to the amount of evidence obtained.
-) ;f internal controls are effective. evidence obtained is more reliable than !hen the controls are
not effective.
Ans!er" -
1?) 5vidence is generall& considered appropriate !hen"
A) it has been obtained b& random selection.
B) there is enough of it to afford a reasonable basis for an opinion on financial statements.
,) it is relevant to the audit objective being tested.
-) it consists of !ritten statements made b& managers of the compan& under audit.
Ans!er" ,
17) :iven the economic and time constraints in !hich auditors can collect evidence about
management assertions about the financial statements. the auditor normall& gathers evidence that
is"
A) irrefutable.
B) conclusive.
,) persuasive.
-) completel& convincing.
Ans!er" ,
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1@) %hich of the follo!ing statements is not a correct statement regarding audit evidence'
A) 5vidence obtained from an independent source outside the client organi)ation is more reliable
than that obtained from !ithin.
B) -ocumentar& evidence is more reliable !hen it is received b& the auditor indirectl& rather
than directl&.
,) -ocuments that originate outside the compan& are considered more reliable than those that
originate !ithin the client=s organi)ation.
-) 5/ternal evidence. such as communications from ban$s. is generall& regarded as more
reliable than ans!ers obtained from in1uiries of the client.
Ans!er" B
1A) 5vidence is usuall& more persuasive for balance sheet accounts !hen it is obtained"
A) as close to the balance sheet date as possible.
B) onl& from transactions occurring on the balance sheet date.
,) from various times throughout the client=s &ear.
-) from the time period !hen transactions in that account !ere most numerous during the fiscal
period.
Ans!er" A
#3) %hich of the follo!ing statements is true'
A) 5vidence must be relevant to all of the audit objectives.
B) ;f evidence is subjective. it cannot be reliable.
,) 5vidence obtained directl& b& the auditor ma& not be reliable if the auditor lac$s the
1ualifications to evaluate the evidence.
-) The persuasiveness of evidence can be evaluated after considering its sufficienc&.
Ans!er" ,
##) -iscuss three of the follo!ing influences on the persuasiveness of evidence.
1. Belevance
#. ;ndependence of provider
6. 5ffectiveness of client=s internal controls
4. Auditor=s direct $no!ledge
>. -egree of objectivit&
?. Timeliness
Ans!er"
1. Belevance E 5vidence must pertain to the audit objective if it is to be persuasive. Belevance
must be considered in terms of specific audit objectives as evidence ma& be relevant to one
objective and not another.
#. ;ndependence of provider E 5vidence obtained from a source outside the entit& is more
reliable and persuasive than that obtained from !ithin.
6. 5ffectiveness of client=s internal controls E %hen a client=s internal controls are effective.
evidence obtained is more reliable than !hen the& are !ea$.
4. Auditor=s direct $no!ledge E 5vidence obtained directl& b& the auditor through ph&sical
e/amination. observation. computation and inspection is more competent than information
obtained indirectl&.
>. -egree of objectivit& E Objective evidence is more reliable than evidence that re1uires
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considerable judgment to determine !hether it is correct.
?. Timeliness E The timeliness of audit evidence can refer either to !hen it is accumulated or
to the period covered b& the audit. 5vidence is usuall& more reliable for balance sheet accounts
!hen it is obtained as close to the balance sheet date as possible.
#6) %h& is the appropriateness of audit evidence obtained b& the auditor important in forming an
audit opinion' -escribe the 1ualities information should have to be considered appropriate b&
the auditor.
Ans!er" Appropriateness is a measure of the 1ualit& of evidence. Audit evidence that is
considered appropriate contains the characteristics of relevance and reliabilit&. Belevant
evidence relates to the assertion being tested. Beliabilit& refers to the degree to !hich evidence
can be believable or !orth& of trust.
#4) The reliabilit& of evidence refers to the degree to !hich evidence is considered believable or
trust!orth&. There are si/ factors that affect the reliabilit& of audit evidence. One factor is the
independence of the provider9 i.e.. evidence obtained from a source outside the client compan& is
more reliable than that obtained !ithin. ;dentif& and discuss an& t!o of the remaining five
factors"
Ans!er" The remaining four factors that affect the reliabilit& of evidence are"
F Effectiveness of client's internal control. %hen a client=s internal controls are effective.
evidence obtained from the client is more reliable than !hen controls are !ea$.
F Auditor's direct knowledge. 5vidence obtained directl& b& the auditor is more reliable than
information obtained indirectl&.
F Qualifications of individuals providing the information. Although the source of the
information ma& be independent. the evidence !ill not be reliable unless the individual providing
it is 1ualified to do so. Also. evidence obtained directl& b& the auditor man& not be reliable if the
auditor lac$s the 1ualifications to evaluate the evidence.
F Degree of objectivity. Objective evidence is more reliable than evidence that re1uires
considerable judgment to determine !hether it is correct.
F Timeliness E The timeliness of audit evidence can refer either to !hen it is accumulated or
to the period covered b& the audit. 5vidence is usuall& more reliable for balance sheet accounts
!hen it is obtained as close to the balance sheet date as possible.
Learning Objective 7-4
1) ,alculating the gross margin for the current &ear under audit as a percent of sales and
comparing it !ith previous &ears is !hat t&pe of evidence'
A) 0h&sical e/amination
B) Anal&tical procedures
,) Observation
-) ;n1uir&
Ans!er" B
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#) %hen the auditor develops supporting evidence for amounts posted to account balances !ith
documentar& evidence. that process is called"
A) in1uir&.
B) confirmation.
,) vouching.
-) ph&sical e/amination.
Ans!er" ,
6) An e/ample of an e/ternal document that provides reliable information for the auditor is"
A) emplo&ees= time reports.
B) ban$ statements.
,) purchase order for compan& purchases.
-) carbon copies of chec$s.
Ans!er" B
4) An e/ample of a document the auditor receives from the client. but !hich !as prepared b&
someone outside the client=s organi)ation. is a"
A) confirmation.
B) sales invoice.
,) vendor invoice.
-) ban$ reconciliation.
Ans!er" ,
>) The evaluations of financial information through anal&sis of plausible relationships among
financial and nonfinancial data is the definition of"
A) anal&tical procedures.
B) tests of transactions.
,) tests of balances.
-) auditing.
Ans!er" A
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?) Audit procedures can result in significant. une/pected differences. The auditor should
investigate further if"
A)
(ignificant differences are
not e/pected but do e/ist
(ignificant differences are
e/pected but do not e/ist
*es *es
B)
(ignificant differences are
not e/pected but do e/ist
(ignificant differences are
e/pected but do not e/ist
+o +o
,)
(ignificant differences are
not e/pected but do e/ist
(ignificant differences are
e/pected but do not e/ist
*es +o
-)
(ignificant differences are
not e/pected but do e/ist
(ignificant differences are
e/pected but do not e/ist
+o *es
Ans!er" A
7) %hen the auditor uses tracing as an audit procedure for tests of transactions she is primaril&
concerned !ith !hich audit objective'
A) Occurrence
B) ,ompleteness
,) ,utoff
-) ,lassification
Ans!er" B
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@) %hen the auditor uses the audit procedure vouching she is primaril& concerned !ith !hich of
the follo!ing audit objectives !hen testing classes of transactions'
A) Occurrence
B) ,ompleteness
,) Authori)ation
-) ,lassification
Ans!er" A
A) %hen auditors use documentation to support recorded transactions and amounts. the process is
usuall& called"
A) tracing.
B) confirmations.
,) vouching.
-) reperformance.
Ans!er" ,
13) Anal&tical procedures must be used during !hich phase7s) of the audit'
A)
Test of ,ontrols 0lanning ,ompletion
*es *es *es
B)
Test of ,ontrols 0lanning ,ompletion
+o *es *es
,)
Test of ,ontrols 0lanning ,ompletion
*es +o +o
-)
Test of ,ontrols 0lanning ,ompletion
+o +o +o
Ans!er" B
11) Auditors ma& decide to replace tests of details !ith anal&tical procedures !hen possible
because the"
A) anal&tical procedures are more reliable.
B) anal&tical procedures are considerabl& less e/pensive.
,) anal&tical procedures are more persuasive.
-) tests of details are more difficult to interpret.
Ans!er" B
1#) %hen ma$ing decisions about evidence for a given audit. the auditor=s goal is to obtain a
sufficient amount of timel&. reliable evidence that is relevant to the information being verified. ;n
addition. the goal of audit efficienc& is to gather and evaluate the information"
A) no matter the cost involved in obtaining such evidence.
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B) even if cost is irrelevant to the auditor. because the& bill the client for costs incurred.
,) at the lo!est possible total cost.
-) at the cost suggested in the engagement letter.
Ans!er" ,
16) G0h&sical e/aminationG is the inspection or count b& the auditor of items such as"
A) cash. inventor&. and pa&roll timecards.
B) cash. inventor&. canceled chec$s. and sales documents.
,) cash. inventor&. canceled chec$s. and tangible fi/ed assets.
-) cash. inventor&. securities. notes receivable. and tangible fi/ed assets.
Ans!er" -
14) %hich of the follo!ing statements is most correct regarding the primar& purpose of audit
procedures'
A) To detect all errors or fraudulent activities as !ell as illegal activities
B) To compl& !ith auditing standards promulgated b& the 0,AOB for publicl& held clients
,) To gather corroborative audit evidence about management=s assertions regarding the client=s
financial statements
-) To determine the amount of errors in the balance sheet accounts in order to adjust the
accounts to actual
Ans!er" ,
1>) %hich of the follo!ing generall& provides the most reliable evidence'
A) ,onfirmations
B) Becalculation
,) Beperformance
-) Observations
Ans!er" A
1?) %hen practical and reasonable. H.(. auditing standards re1uire the confirmation of"
A) individual transactions bet!een organi)ations. such as sales transactions.
B) accounts receivable.
,) fi/ed asset additions.
-) pa&roll e/penses.
Ans!er" B
17) To be considered reliable evidence. confirmations must be controlled b&"
A) the client=s emplo&ee responsible for accounts receivable.
B) the e/ternal auditor.
,) the client=s internal audit department.
-) the client=s controller or ,O.
Ans!er" B
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1@) ;ndicate !hether confirmation of accounts receivable and accounts pa&able. provided the&
each are significant accounts. is re1uired or optional"
A)
Accounts Beceivable Accounts 0a&able
Be1uired Be1uired
B)
Accounts Beceivable Accounts 0a&able
Be1uired Optional
,)
Accounts Beceivable Accounts 0a&able
Optional Be1uired
-)
Accounts Beceivable Accounts 0a&able
Optional Optional
Ans!er" B
1A) The Auditing (tandards Board has concluded that anal&tical procedures are so important that
the& are re1uired during"
A) planning and test of control phases.
B) planning and completion phases.
,) test of control and completion phases.
-) planning. test of control. and completion phases.
Ans!er" B
#3) A benefit obtained from using industr& averages is that it provides a7n)"
A) benchmar$ to compare the compan&=s results.
B) indication !here errors e/ist in the statements.
,) benchmar$ to be used in evaluating a client=s budgets.
-) comparison of G!hat isG !ith G!hat should be.G
Ans!er" A
#1) 0h&sical e/amination"
A) is a direct means of verif&ing that an asset reall& e/ists.
B) is sufficient evidence to verif& that the e/isting assets are o!ned b& the client.
,) can be used for both tangible assets and documents.
-) is not generall& a reliable t&pe of audit evidence.
Ans!er" A
##) %hich of the follo!ing is not a correct combination of terms and related t&pe of audit
evidence'
A) ;n1uire E in1uiries of client
B) ,ount E ph&sical e/amination
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,) Becompute E documentation
-) Bead E documentation
Ans!er" ,
#6) %hich of the follo!ing is a correct statement regarding confirmations'
A) ,onfirmations can be in oral or !ritten form.
B) 5lectronic confirmations are not acceptable under generall& accepted auditing standards.
,) ,onfirmations are generall& used in the audit of fi/ed asset additions.
-) Auditors consider alternative evidence available !hen determining if confirmations should be
used.
Ans!er" -
#4) An important benefit of industr& comparisons is as"
A) an aid to understanding the client=s business.
B) an indicator of errors.
,) an indicator of fraud.
-) a least-cost indicator for audit procedures.
Ans!er" A
#>) The auditor is concerned that a client is failing to bill customers for shipments. An audit
procedure that !ould gather relevant evidence !ould be to"
A) select a sample of duplicate sales invoices and trace each to related shipping documents.
B) trace a sample of shipping documents to related duplicate sales invoices.
,) trace a sample of (ales Iournal entries to the Accounts Beceivable subsidiar& ledger.
-) compare the total of the (chedule of Accounts Beceivable !ith the balance of the Accounts
Beceivable account in the general ledger.
Ans!er" B
#?) 88888888 is the auditor=s e/amination of the client=s documents and records to substantiate
that the information is included in the financial statements.
A) ;nspection
B) Becalculation
,) Observation
-) Jerification
Ans!er" A
#7) One purpose of performing anal&tical procedures in the planning phase of an audit is to
assess the client=s financial condition. 5/plain ho! the assessment of a client=s financial
condition can affect the auditor=s decisions concerning evidence accumulation in later phases of
the audit.
Ans!er" Auditors must obtain $no!ledge about a client=s industr& and business as a part of
planning an audit. B& conducting anal&tical procedures in !hich the current &ear=s unaudited
information is compared !ith prior &ears= audited information or industr& data. changes are
highlighted. These changes can represent important trends or specific events. all of !hich !ill
influence audit planning.
The use of anal&tical procedures is often a useful indicator for determining !hether the client
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compan& has financial problems and if substantial doubt e/ists about the entit&=s abilit& to
continue as a going concern. ,ertain anal&tical procedures can help the auditor assess the
li$elihood of failure.
The anal&tical procedures could also indicate the presence of possible misstatements in the
financial statements if significant une/pected fluctuations occur. These items ma& !arrant
increased audit procedures. !hereas !hen the anal&tical procedures reveal no unusual
fluctuations. the possibilit& of material misstatement is minimi)ed and it is possible to perform
fe!er detailed tests on related accounts or to eliminate certain audit procedures. reduce sample
si)es. or to move the procedures farther a!a& from the balance sheet date.
#@) There are four important purposes of anal&tical procedures. ;dentif& three of these four
purposes and. for each purpose. give a specific e/ample of an anal&tical procedure that an
auditor might perform.
Ans!er" our important purposes of anal&tical procedures are"
F To help the auditor understand the client=s industr& and business. the auditor might anal&)e
recent trends in the client=s gross margin percentages to assess the effects of competition in the
industr&.
F To aid in the assessment of the client=s abilit& to continue as a going concern. the auditor
might anal&)e several of the client=s $e& ratios including the ratio of long-term debt to net !orth.
the ratio of profits to total assets. and the current ratio.
F To indicate the presence of possible misstatements in the financial statements. the auditor
might compare the current &ear=s unaudited account balances !ith the previous &ear=s audited
balances.
F To reduce the e/tent of detailed tests. the auditor might perform a simple anal&tical
procedure such as multipl&ing the client=s monthl& rent times 1# as a test of the client=s rent
e/pense account. ;f the product agrees !ith the balance in rent e/pense. no additional testing of
the account ma& be necessar&.
#A) -efine the follo!ing terms commonl& used in audit procedures"
1. 5/amine
#. (can
6. ,ompute
4. oot
>. ,ompare
?. ,ount
7. Jouch
Ans!er"
1. 5/amine E A reasonabl& detailed stud& of a specific document or record to determine
specific facts about it. ;t is the inspection or count b& the auditor of a tangible asset.
#. (can E A less detailed e/amination of a document or record to determine !hether there is
something unusual !arranting further investigation.
6. ,ompute E A calculation done b& the auditor independent of the client.
4. oot E Addition of a column of numbers to determine !hether the total is the same as the
client=s.
>. ,ompare E A comparison of information in t!o different locations.
?. ,ount E A determination of assets on hand at a given time. This is associated !ith evidence
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defined as ph&sical e/amination.
7. Jouch E The use of documents to verif& recorded transactions or amounts.
63) Belo! are 1# audit procedures. ,lassif& each procedure according to the follo!ing t&pes of
audit evidence" 71) ph&sical e/amination. 7#) confirmation. 76) documentation. 74) observation.
7>) in1uir& of the client. 7?) reperformance. and 77) anal&tical procedure.
T&pe of 5vidence Audit 0rocedures
1. %atch client emplo&ees count inventor& to determine !hether
compan& procedures are being follo!ed.
#. ,ount inventor& items and record the amount in the audit files.
6. Trace postings from the sales journal to the general ledger
accounts.
4. ,alculate the ratio of cost of goods sold to sales as a test of overall
reasonableness of gross margin relative to the preceding &ear.
>. Obtain information about the client=s internal controls b& as$ing
1uestions of client personnel.
?. Trace column totals from the cash disbursements journal to the
general ledger.
7. 5/amine a piece of e1uipment to ma$e sure a recent purchase of
e1uipment !as actuall& received and is in operation.
@. Bevie! the total of repairs and maintenance for each month to
determine !hether an& month=s total !as unusuall& large.
A. ,ompare vendor names and amounts on purchase invoices !ith
entries in the purchases journal.
13. oot entries in the sales journal to determine !hether the& !ere
correctl& totaled b& the client.
11. Ca$e a surprise count of pett& cash to verif& that the amount of
the pett& cash fund is intact.
1#. Obtain a !ritten statement from the client=s ban$ stating the
client=s &ear-end balance on deposit.
Ans!er"
1. Observation
#. 0h&sical e/amination
6. Beperformance
4. Anal&tical procedure
>. ;n1uir& of the client
?. Beperformance
7. 0h&sical e/amination
@. Anal&tical procedure
A. -ocumentation
13. Beperformance
11. 0h&sical e/amination
1#. ,onfirmation
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61) Catch nine of the terms 7a-$) !ith the definitions provided belo! 71-A)"
a. oot
b. ,ompute
c. (can
d. ;n1uire
e. ,ount
f. Trace
g. Beperform
h. Bead
i. 5/amine
j. Observe
$. ,ompare

88888888 1. A calculation done b& the auditor independent of the client.

88888888 #. Addition of a column of numbers to determine if the total is the same as the client=s.

88888888 6. A comparison of information in t!o different locations.

88888888 4. A use of the senses to assess certain activities.

88888888 >. ollo!ing details of transactions from original documents to journals.

88888888 ?. A less detailed e/amination of a document or record to determine if there is
something unusual !arranting further investigation.

88888888 7. Obtaining information from the client in response to specific 1uestions.

88888888 @. A determination of assets on hand at a given time.

88888888 A. An e/amination of !ritten information to determine facts pertinent to the audit.
Ans!er"
1. b
#. a
6. $
4. j
>. f
?. c
7. d
@. e
A. h
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6#) Catch five of the terms 7a-h) !ith the definitions provided belo! 71->)"
a. Audit documentation
b. Audit procedures
c. Audit objectives
d. Anal&tical procedures
e. Budgets
f. Beliabilit& of evidence
g. (ufficienc& of evidence
h. 0ersuasiveness of evidence
88888888 1. Hse of comparisons and relationships to assess the reasonableness of account
balances.

88888888 #. -etailed instructions for the collection of a t&pe of audit evidence.

88888888 6. The degree to !hich evidence can be considered believable or trust!orth&.

88888888 4. ,ontains all the information that the auditor considers necessar& to conduct an
ade1uate audit and to provide support for the audit report.

88888888 >. This is determined b& the amount of evidence obtained.
Ans!er"
1. d
#. b
6. f
4. a
>. g
66) Belo! are 13 documents t&picall& e/amined during an audit. ,lassif& each document as
either internal or e/ternal.
T&pe of -ocument -ocuments
1. ,anceled chec$s for pa&ments of accounts pa&able.
#. 0a&roll time cards.
6. -uplicate sales invoices.
4. Jendors= invoices.
>. Ban$ statements.
?. Cinutes of the board of directors= meetings.
7. (igned lease agreements.
@. +otes receivable.
A. (ubsidiar& accounts receivable records.
13. Bemittance advices.
Ans!er"
1. 5/ternal ?. ;nternal
#. ;nternal 7. 5/ternal
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6. ;nternal @. 5/ternal
4. 5/ternal A. ;nternal
>. 5/ternal 13. 5/ternal
64) -istinguish bet!een internal documentation and e/ternal documentation as t&pes of audit
evidence. :ive t!o e/amples of each. %hich t&pe is considered more reliable'
Ans!er" ;nternal documentation involves the auditor=s e/amination of documents that have been
prepared and used !ithin the client=s organi)ation and are retained !ithout ever going to an
outside part&. 5/amples !ould include duplicate sales invoices. emplo&ees= time reports. and
inventor& receiving reports.

5/ternal documentation involves the auditor=s e/amination of documents that have been in the
hands of someone outside the client=s organi)ation. 5/amples include vendors= invoices.
cancelled chec$s. cancelled notes pa&able. and insurance policies.
5/ternal documents are regarded as more reliable evidence than internal documents.
Learning Objective 7->
1) %hich of the follo!ing best describes one of the primar& objectives of audit documentation'
A) -efend against claims of a deficient audit.
B) 0rovide a basis for revie!ing the !or$ of subordinates.
,) 0rovide reasonable assurance that the audit !as conducted in accordance !ith auditing
standards.
-) 0rovide additional support of recorded amounts to the client.
Ans!er" ,
#) Audit documents"
A) are $ept b& the client for eas& reference for their accounting staff.
B) should be considered as a substitute for the clients accounting records.
,) are designed to facilitate the revie! and supervision of the !or$ performed b& the audit team
b& a revie!ing partner.
-) prepared during the engagement are the propert& of the client once the audit bill is paid.
Ans!er" ,
6) Audit documentation"
A) should identif& the items tested !hen the audit procedures involve sampling of transactions or
balances.
B) does not aid in the preparation of the ta/ return since accounting and ta/ rules differ.
,) is another term for the audit program.
-) should not be given to an&one outside the audit firm. even if a subpoena has been issued.
Ans!er" A
s
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4) -ue professional care. the third general standard. is concerned !ith !hat is done b& the
independent auditor and ho! !ell it is done. or e/ample. due care in the matter of audit
documentation re1uires that audit documentation of the evidence gathered b& the auditor meets
!hich of the follo!ing criteria'
A) %or$papers are prepared in sufficient detail so that the& can be given to the client for future
reference.
B) The content is sufficient to provide support for the auditor=s opinion. including the auditor=s
representation as to compliance !ith auditing standards.
,) Audit evidence is principall& gathered to determine if the client=s financial statements. as
prepared b& management. can be relied upon to ma$e managerial decisions about the firm.
-) Audit evidence as displa&ed in the !or$papers is primaril& performed to protect the auditing
firm in the case of a la!suit b& investors.
Ans!er" B
Learning Objective 7-?
1) %hen preparing and organi)ing audit files"
A) The rules established b& the (5, and 0,AOB must be follo!ed.
B) A lead schedule contains the detailed accounts from the general ledger ma$ing up the line
item on the trial balance.
,) A !or$ing trial balance is considered part of the permanent file.
-) The audit program is not part of the audit files.
Ans!er" B
#) Audit documentation should possess certain characteristics. %hich of the follo!ing is true
regarding those characteristics'
A)
Audit documentation should be
inde/ed and cross-referenced
Audit documentation should be
organi)ed to benefit the client=s staff
*es *es
B)
Audit documentation should be
inde/ed and cross-referenced
Audit documentation should be
organi)ed to benefit the client=s staff
+o +o
,)
Audit documentation should be
inde/ed and cross-referenced
Audit documentation should be
organi)ed to benefit the client=s staff
*es +o
-)
Audit documentation should be
inde/ed and cross-referenced
Audit documentation should be
organi)ed to benefit the client=s staff
+o *es
Ans!er" ,
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6) The permanent audit file !ould usuall& include the follo!ing"
A) client=s !or$ing trial balance
B) summar& of the ris$ assessment procedures performed
,) organi)ational chart of the compan&=s emplo&ees
-) summar& of the auditors test of controls for the current &ears audit
Ans!er" ,
4) The permanent files included as part of audit documentation do not normall& include"
A) a cop& of the current and prior &ears= audit programs.
B) copies of articles of incorporation. b&la!s and contracts.
,) information related to the understanding of internal control.
-) results of anal&tical procedures from prior &ears.
Ans!er" A
>) %hen determining sufficient and appropriate audit evidence in order to form an opinion on the
client=s financial statements the auditor compiles audit documentation to support the opinion. The
largest portion of audit documentation !ill include detailed supporting schedules prepared b& the
client or the auditor in support of specific accounts on the financial statements. The major t&pes
of supporting schedules include anal&sis schedules and tests of reasonableness. -iscuss those
t!o schedules and give an e/ample for each schedule.
Ans!er" Anal&sis" designed to sho! the activit& in a general ledger account during the entire
period under audit. t&ing together the beginning and ending balances. or e/ample. mar$etable
securities. propert&. plant and e1uipment. long-term debt. e1uit& accounts. Auditors are focusing
on the significance of the activit& in the account during the &ear.
Tests of Beasonableness" ,ontains information that enables the auditor to evaluate !hether the
client=s balance appears to contain a misstatement. 5/ample. depreciation e/pense. allo!ance for
uncollectibles. income ta/ provision. Tests are primaril& anal&tical procedure tests in !hich the
auditor forms an e/pectation of the balance that appears in the !or$ing trial balance.
Learning Objective 7-7
1) Audit evidence is often available onl& in electronic form. and auditors must evaluate ho! this
affects their abilit& to gather sufficient. appropriate evidence.
A) True
B) alse
Ans!er" A
#) An auditor can use engagement management soft!are to facilitate trac$ing audit progress.
A) True
B) alse
Ans!er" A
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