DE LA SALLE UNIVERSITY MANILARVR – COB DEPARTMENT OF ACCOUNTANCY REVDEVT 1ST Term AY 14-15 Auditing Theory Prof. Francis H. Villamin AT – Quizzer 10 =============================================================================== PSA 500 Redrafted “Audit Evidence” 1. All the information used by the auditor in arriving at the conclusions on which the audit opinion is based is called a. Audit information b. Audit evidence c. Accounting records d. Corroborating information 2. Audit evidence comprises I. Information that supports and corroborates management’s assertions II. Any information that contradicts management’s assertions a. I only b. II only c. Neither I nor II d. Both I and II 3. Which of the following is not an assertion relating to classes of transactions? a. Accuracy b. Consistency c. Cutoff d. Occurrence 4. Which of the following is a general principle relating to the reliability of audit evidence? a. Audit evidence obtained from inherent sources rather than directly is more reliable than evidence obtained directly by the auditor b. Audit evidence provided by copies is more reliable than that provided by facsimiles c. Audit evidence obtained from knowledge independent sources outside the client company is more reliable than audit evidence obtained from non-independent sources d. Audit evidence provided by original document is more reliable than audit evidence generated through a system of effective controls 5. Which of the following types of audit evidence is the most persuasive? a. Prenumbered client purchase order forms b. Client work sheets supporting cost allocations c. Bank statements obtained from the client d. Client representation letter 6. Which of the following presumptions is correct about the reliability of audit evidence? a. Information obtained indirectly from outside sources is the most reliable audit evidence b. To be reliable, audit evidence should be convincing rather than persuasive c. Reliability of audit evidence refers to the amount of corroborative evidence obtained d. Effective internal control provides more assurance about the reliability of audit evidence 7. Which of the following statements relating to the appropriateness of audit evidence is always true? a. Audit evidence gathered by an auditor from outside an enterprise is reliable b. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions. c. Oral representations made by management are not valid evidence d. Evidence gathered by auditors must be both valid and relevant to be considered appropriate 8. An entity’s accounting records generally include the records of initial entries and supporting records including a. Confirmations from third parties b. Information obtained by the auditor from such audit procedures as inquiry, observation, and inspection. c. Worksheets and spreadsheets supporting cost allocations. d. Other information developed by, or available to, the auditor to permit him/her to reach conclusions through valid reasoning. Risk assessment procedures II. When the evidence is competent with respect to an account is also sufficient 17. 13. Prevent litigations b. Valid and relevant d. General and subsidiary ledgers c. Minutes of meetings b. Worksheet supporting cost allocations 14. Audit evidence is information used to draw reasonable conclusions on which to base the auditor’s opinion. Both I and II 10. An independent auditor gathers evidence to a. The strongest criticism of the reliability of audit evidence that the auditor physically observes is that a. objective. Accounting manuals d. Assess and evaluate internal control c. The client may conceal its items from the auditor. Form an opinion on the financial statements d. It has been obtained from random selection. Appropriateness is the measure of the quantity of audit evidence. There is enough of it to afford reasonable basis for opinion on financial statements.AT Quizzer 10 “Audit Evidence” 2 9. evidence must be both a. 15. d. Appraise management b. which he or she is observing. c. Test internal systems d. Which of the following type of documentary audit evidence is the most reliable? a. The observation must occur at a specific time. Evidential matter supporting the financial statements consists of underlying accounting data and all corresponding information available to the auditor. d. which is often difficult to arrange. Documentary evidence calculated by the auditor from company records c. c. Gather evidence 12. The amount of evidence concerning a particular account varies directly with the materiality of the account c. The quantity of audit evidence needed is affected by its quality and the risk of misstatement. The amount of evidence that is sufficient varies inversely with the competency of the evidence b. c. Which of the following is generally not true about sufficiency of audit evidence? a. II only c. Either I or II d. Discover fraud 18. Those procedures specifically outlined in an audit program are primarily designed to a. and free from known bias. b. Internal documents . Reliable and documented c. The auditor may not be qualified to evaluate the items. Which of the following is an example of corroborating information? a. Useful and objective 16. It has the qualities of being relevant. Such evidence is too costly in relation to its reliability. b. Further audit procedures a. The amount of evidence concerning a particular account varies inversely with the inherent risk of the account d. that is. Physical examination by the auditor b. Evidential matter is generally considered competent when a. 11. The sufficiency and appropriateness of audit evidence are not interrelated. d. I only b. Detect errors or irregularities c. Timely and substantial b. its relevance and reliability. Audit evidence is obtained by performing I. It consists of written statements made by managers of enterprise under audit. To be competent. Sufficiency is the measure of the quality of audit evidence. b. Confirmations received directly from third parties d. Which of the following statements concerning audit evidence is correct? a. No Yes Yes d. All inventory owned by the client is on hand at the time of the count. Damaged goods and obsolete items have been properly accounted for. c. Estimate the peso amount of contingent liabilities. Attain assurance about the reliability of the accounting system. Notation of inferences drawn from ratios and trends c. When auditing inventories. d. The financial statement presentation of inventories is appropriate. c. These procedures cannot replace tests of balances and transactions 23. In the context of an audit of financial statements. Lists of negative confirmation requests for which the auditor received no response 20. direct tests of financial balances. An auditor will examine invoices from lawyers primarily in order to a. b. Comply with generally accepted auditing standards. which of the following would not have an effect on the amount of audit evidence gathered by the auditor? a. Test counts of inventory performed by the auditor d. c. Which of the following types of audit evidence is the least persuasive? a. substantive tests are audit procedures that a. Comparison of signatures on checks to a list of authorized signers d. May be either tests of transactions. Identify possible unasserted litigation. Theoretically. Notation of appraisers’ conclusions documented in the auditor’s working papers d. No Yes No c. b. Bank statements obtained from client c. Examine a sample of cash disbursements to test whether expenses have been properly approved b. Schedules of details of physical inventory count conducted by the client b. or analytical tests d. an auditor would least verify that a. The objective of tests of details of transactions performed as substantive tests to a. Evaluate whether management’s policies and procedures operated effectively. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary d. Assess the legal ramifications of litigation in progress. Correspondence from the client’s attorney about litigation 22. Substantiate accruals. b. d. the use of analytical procedures is required to some extent In the planning stage As a substantive test In the review stage a. Confirmation of balances of accounts receivable c.AT Quizzer 10 “Audit Evidence” 3 19. Which of the following is the least persuasive documentation in support of an auditor’s opinion? a. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations b. Yes No No 24. Detect material misstatements in the financial statements. Are designed to discover significant subsequent events c. Which of the following is the best example of a substantive test? a. The type of opinion to be issued b. claims and assessments. Yes No Yes b. The auditor’s evaluation of internal control c. 26. 28. . For all audits of financial statements made in accordance with PSAs. Flowcharting of the client’s cash receipts system 25. Prenumbered purchase order forms b. The client has used proper inventory pricing. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements c. A basic premise underlying the application of analytical procedures that a. Will increase proportionately with the auditor’s reliance on internal control 27. d. Whether the client reports to the SEC 21. The types of evidence available to the auditor d. May be eliminated under certain conditions b. A substantial number of accounts may be in dispute and the accounts receivable balances arises from sales to few major customers. Apply analytical procedures to test its reasonableness. A small number of accounts may be in dispute and the accounts receivable balances arises from sales to a few major customers. d. claims. b. b. d.AT Quizzer 10 “Audit Evidence” 4 29. Unreturned negative confirmation requests indicate that alternative procedures are necessary. 32. This situation could be the result of the client’s failure to record a. c. c. An adverse opinion. Sales returns 34. b. Letter of corroboration from the auditor’s lawyer upon review of the legal documentation. An assessment that loss of the litigation is probable. 30. d. An estimate of the peso amount of the probable loss. an auditor recorded test counts for several items and noticed that certain test counts were higher than recorded quantities in the client’s perpetual records. An expert opinion as to whether a loss is possible. 31. b. Intensify the study of internal control structure concerning the revenue cycle. . d. Increase the assessed level of detection risk for the existence assertion. 37. d. c. Separation of payroll duties is less than adequate for effective internal control. Negative confirmation requests are effective when detection risk is low. probable or remote. c. The auditor’s primary means of obtaining corroboration of management’s information concerning litigation is a: a. c. Evaluate the reasonableness of methods of allocating operating expense among segments. Purchase returns c. c. Which of the following statements is correct concerning the use of negative confirmation requests? a. A substantial number of accounts may be in dispute and the accounts receivable balances arises from sales to many customers with small balances. Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigations. 33. Confirm major segments with appropriate creditors. Purchase discounts b. d. Confirmation of related lawsuits with the claimants. Employee turnover is excessive. c. The primary reason for this request is to provide the auditor with a. Information concerning the progress of cases to date. Letter of audit inquiry to the client’s lawyer. Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmation when the auditor did not receive replies to second requests? a. or assessments. Unreturned negative confirmation requests rarely provide significant explicit evidence. d. c. d. Confirmation of claims and assessments from an officer of the court presiding over the litigation. A small number of accounts may be in dispute and the accounts receivable balances arises from sales to many customers with small balances. Which of the following is not a procedure performed by auditors on segment information? a. Which of the following is the best reason why the auditors should consider observing a client’s distribution of regular payroll checks? a. While observing a client’s annual physical inventory. The auditors did not observe the distribution of the entire payroll during the audit in the prior year. Total payroll costs are a significant part of total operating costs. b. Inspect the shipping records documenting the merchandise sold to debtors. Qualifications of the audit report. Negative confirmation requests are effective when understatements of account balances are suspended. Sales d. b. b. b. Review the cash receipts journal for the month prior to the year-end. In which of the following circumstances would the use of the negative form of accounts receivable most likely justified? a. Corroborative evidential matter. Confirmation of claims and assessments from the other parties to the litigation. A refusal by a lawyer to furnish the information related to litigation included in the letter of inquiry is likely to result in a. Evaluate reasonableness of management’s methods of compiling the information. 36. 35. Weak and the individuals receiving the confirmation requests are likely to give them adequate consideration. claims and assessments to which the lawyer has devoted substantive attention. b. and assessments? a. Confirming accounts payable. Discuss with management its policies and procedures adopted for evaluating and accounting for litigations. 39. measurement. Which of the following is an audit procedure that an auditor most likely would perform concerning litigations. d. d. b. claims and assessments? a. claims and assessments. he decided that for each customer for which a confirmation was not received that he would add all amounts shown for that customer on each validated deposit slip for the two months following the balance sheet date. b. claims. Assurances . evaluating and accounting for litigation. negative confirmation of accounts receivable is feasible if internal accounting control is a. c. Obtain from management a description and evaluation of litigation. When there is a large number of relatively small account balances. b. 41. Strong and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. Conclusions d. It is sometimes impracticable or impossible for an auditor to use normal accounts receivable confirmation procedures. d. hence. d. c. c. The deposit slip would not be received directly by the auditor as a confirmation would be. management implicitly or explicitly makes ___________ regarding the recognition. The major fallacy in the auditor’s procedures is that a. Allegations c. Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed. Confirm directly with the client’s lawyer that all litigations. d. Request the client’s lawyer to evaluate whether the client’s pending litigation. Obtaining a lawyer’s letter. Assertions b. Returns of positive confirmation requests for accounts receivable were very poor. Reviewing the minutes of board of directors’ meetings. As an alternative procedure. b. the auditor decided to check subsequent collections. 40. The auditor has satisfied himself that the client satisfactorily listed the customer name next to each check listed on the deposit slip. Checking of subsequent collections is not an accepted alternative auditing procedure for confirmation of accounts receivable. 42. claims and assessments existing at the balance sheet. Which of the following is not an audit procedure that the independent auditor would perform concerning litigation. In such situations. Review correspondence with banks. claims and assessments indicate a going-concern problem. A customer may not have made a payment during the two-month period. 44. Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed. 43. the best alternative procedure the auditor might resort to would be: a. presentation and disclosure of the various elements of financial statements and related disclosures. c. Strong and the individuals receiving the information requests are likely to give them adequate consideration. a. Examine the legal documents in the client’s lawyer’s possession concerning litigation. Performing an over-all analytical review of accounts receivable and sales on a year-to-year basis. By looking only at the deposit slip the auditor would not know if the payment was for the receivable at the balance sheet date or a subsequent transaction. b. Inquire of and discuss with management the policies and procedures adopted for identifying. Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies? a. In representing that the financial statements are presented fairly in all material respects. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date.AT Quizzer 10 “Audit Evidence” 5 38. c. Confirm directly with the client’s lawyer that all claims have been recorded in the financial statements. claims and assessments. in accordance with generally accepted accounting principles. claims and assessments have been recorded or disclosed in the financial statements. Examining subsequent receipts of year-end accounts receivable. Weak and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. d. c. completeness. except a. Other types of audit tests are more reliable b. The auditor may combine the assertions about transactions and events with the assertions about account balances. Assessed level of inherent risk to a higher amount 53. Assertions about classes of transactions include occurrence. The taking of the client’s inventory is performed at an early date 52. The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement addresses the verification of a. account balances. Rights and obligations c. Due to economic factors. Valuation and allocation d. Cutoff 47. cutoff and a. the auditor should use the assertions as described in PSA 500. There should be a one-to-one relationship between audit objectives and procedures. b. Accuracy and valuation c.. Occurrence and rights and obligations b. Timing of tests of controls by performing them at several dates rather at one time d. Classification and understandability d. Costs 51. Which of the following statements concerning audit objectives is incorrect? a. 50. and presentation and disclosure. The auditor should resolve any substantial doubt about any of management’s material financial statement assertions. Audit objectives should be developed in light of management assertions about the financial statement elements. i. The extent of testing normally applies: a. d. c. Exclusively to the number of substantive tests performed d. To both the nature of items tested and the number of tests performed 54. Rights and Obligations c. Auditors usually try to plan the audit to minimize the use of tests of details of balances because: a. The following are assertions about account balances at the period end. Classification 46. Cutoffs b. Existence 48. The client uses a natural business year d. 49. account balances. As the acceptable level of detection risk decreases.e. Selection of tests to meet audit objectives should depend upon the understanding of internal control. the assertions should always fall into three categories: assertions about classes of transactions and events. The following are assertions about presentation and disclosure. Valuation and allocation b. Other types of audit tests are less costly c. Transactions d. All three of the above are true . Exclusively to the number of items to be tested b. except a. To both the numbers of items tested and the number of tests performed c. Timing of substantive tests by performing them at an interim date rather than at year-end b. accuracy. The auditor would unlikely perform early substantive testing of account balances when: a. the fourth quarter activity this year is expected to be somewhat sluggish c. d.AT Quizzer 10 “Audit Evidence” 6 45. The completeness assertion deals only with whether all transactions and events that should have been recorded have been recorded. A number of significant deviations from control policies and procedures were detected during tests of controls b. c. Other types of audit tests require less experienced audit personnel d. Which of the following statements concerning the auditor’s use of assertions is correct? a. an auditor may change the: a. Existence d. Existence b. There should always be a separate assertion related to cutoff of transactions and events. In every audit engagement. The auditor is required to use assertions for classes of transactions. Authorizations c. Nature of substantive tests from a less effective to a more effective procedure c. and presentation and disclosures in sufficient detail to form a basis for the assessment of risks of material misstatement and the design and performance of further audit procedures. b. The management representation letter ******************* . Where the auditor has assessed control risk of a particular area at a reduced level. Eliminate the need to gather evidence in that area b. Analytical procedures c. Analytical procedures and tests of details of balances 57. Upon completion of all the necessary audit procedures. This is highly subjective process that relies heavily on: a. A sequence test b. After finishing the procedures to obtain an understanding of internal control. Substantive tests of transactions – Confirmation d. Key controls which represent material weaknesses 59. Which of the following represents an incorrect pairing of a type of audit test and evidence? a. A test of controls c.AT Quizzer 10 “Audit Evidence” 7 55. paying special attention to evidence about whether or not the control features are in operation. This is an example of: a. Test the effectiveness of the controls in that area c. Tests of controls d. A functional test 56. Analytical procedures – Ratio analysis c. Generally accepted accounting principles c. Proceed to expand the sample sizes in that area d. Ending account balances may be audited through the use of which of the following types of audit procedures? a. Tests of details of balances – Physical examination 58. Key controls that have a material effect on the financial statements b. A random sample of key controls that were reviewed c. Tests of details of balances b. A substantive test d. the auditor should perform tests of controls on: a. he will then: a. The auditor’s professional judgment d. The independent auditor selects several transactions in each functional area and traces them through the entire accounting system. Procedures to obtain an understanding of internal controls – Documentation b. Key controls upon which the auditor intends to rely and plans to assess control risk below maximum d. the auditor should combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. Generally accepted auditing standards b. Negotiate with management to determine which controls will be tested in that area 60.