10-Revdevt at Quizzer 10 Audit Evidence

DE LA SALLE UNIVERSITY MANILA RVR – 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.

AT Quizzer 10

“Audit Evidence”

2

9. Audit evidence is information used to draw reasonable conclusions on which to base the auditor’s opinion. Audit evidence is obtained by performing I. Risk assessment procedures II. Further audit procedures a. I only b. II only c. Either I or II d. Both I and II 10. Which of the following statements concerning audit evidence is correct? a. Appropriateness is the measure of the quantity of audit evidence. b. Sufficiency is the measure of the quality of audit evidence, that is, its relevance and reliability. c. The quantity of audit evidence needed is affected by its quality and the risk of misstatement. d. The sufficiency and appropriateness of audit evidence are not interrelated. 11. Those procedures specifically outlined in an audit program are primarily designed to a. Prevent litigations b. Detect errors or irregularities c. Test internal systems d. Gather evidence 12. Evidential matter is generally considered competent when a. It has the qualities of being relevant, objective, and free from known bias. b. There is enough of it to afford reasonable basis for opinion on financial statements. c. It has been obtained from random selection. d. It consists of written statements made by managers of enterprise under audit. 13. Evidential matter supporting the financial statements consists of underlying accounting data and all corresponding information available to the auditor. Which of the following is an example of corroborating information? a. Minutes of meetings b. General and subsidiary ledgers c. Accounting manuals d. Worksheet supporting cost allocations 14. The strongest criticism of the reliability of audit evidence that the auditor physically observes is that a. The client may conceal its items from the auditor. b. The auditor may not be qualified to evaluate the items, which he or she is observing. c. Such evidence is too costly in relation to its reliability. d. The observation must occur at a specific time, which is often difficult to arrange. 15. To be competent, evidence must be both a. Timely and substantial b. Reliable and documented c. Valid and relevant d. Useful and objective 16. Which of the following is generally not true about sufficiency of audit evidence? a. The amount of evidence that is sufficient varies inversely with the competency of the evidence b. The amount of evidence concerning a particular account varies directly with the materiality of the account c. The amount of evidence concerning a particular account varies inversely with the inherent risk of the account d. When the evidence is competent with respect to an account is also sufficient 17. An independent auditor gathers evidence to a. Appraise management b. Assess and evaluate internal control c. Form an opinion on the financial statements d. Discover fraud 18. Which of the following type of documentary audit evidence is the most reliable? a. Physical examination by the auditor b. Documentary evidence calculated by the auditor from company records c. Confirmations received directly from third parties d. Internal documents

AT Quizzer 10

“Audit Evidence”

3

19. Which of the following is the least persuasive documentation in support of an auditor’s opinion? a. Schedules of details of physical inventory count conducted by the client b. Notation of inferences drawn from ratios and trends c. Notation of appraisers’ conclusions documented in the auditor’s working papers d. Lists of negative confirmation requests for which the auditor received no response 20. Theoretically, which of the following would not have an effect on the amount of audit evidence gathered by the auditor? a. The type of opinion to be issued b. The auditor’s evaluation of internal control c. The types of evidence available to the auditor d. Whether the client reports to the SEC 21. Which of the following types of audit evidence is the least persuasive? a. Prenumbered purchase order forms b. Bank statements obtained from client c. Test counts of inventory performed by the auditor d. Correspondence from the client’s attorney about litigation 22. A basic premise underlying the application of analytical procedures that a. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations b. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements c. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary d. These procedures cannot replace tests of balances and transactions 23. For all audits of financial statements made in accordance with PSAs, the use of analytical procedures is required to some extent In the planning stage As a substantive test In the review stage a. Yes No Yes b. No Yes No c. No Yes Yes d. Yes No No 24. Which of the following is the best example of a substantive test? a. Examine a sample of cash disbursements to test whether expenses have been properly approved b. Confirmation of balances of accounts receivable c. Comparison of signatures on checks to a list of authorized signers d. Flowcharting of the client’s cash receipts system 25. The objective of tests of details of transactions performed as substantive tests to a. Comply with generally accepted auditing standards. b. Attain assurance about the reliability of the accounting system. c. Detect material misstatements in the financial statements. d. Evaluate whether management’s policies and procedures operated effectively. 26. In the context of an audit of financial statements, substantive tests are audit procedures that a. May be eliminated under certain conditions b. Are designed to discover significant subsequent events c. May be either tests of transactions, direct tests of financial balances, or analytical tests d. Will increase proportionately with the auditor’s reliance on internal control 27. An auditor will examine invoices from lawyers primarily in order to a. Substantiate accruals. b. Assess the legal ramifications of litigation in progress. c. Estimate the peso amount of contingent liabilities. d. Identify possible unasserted litigation, claims and assessments. 28. When auditing inventories, an auditor would least verify that a. The financial statement presentation of inventories is appropriate. b. Damaged goods and obsolete items have been properly accounted for. c. All inventory owned by the client is on hand at the time of the count. d. The client has used proper inventory pricing.

AT Quizzer 10

“Audit Evidence”

4

29. Which of the following is the best reason why the auditors should consider observing a client’s distribution of regular payroll checks? a. Separation of payroll duties is less than adequate for effective internal control. b. Total payroll costs are a significant part of total operating costs. c. The auditors did not observe the distribution of the entire payroll during the audit in the prior year. d. Employee turnover is excessive. 30. 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. Review the cash receipts journal for the month prior to the year-end. b. Intensify the study of internal control structure concerning the revenue cycle. c. Increase the assessed level of detection risk for the existence assertion. d. Inspect the shipping records documenting the merchandise sold to debtors. 31. Which of the following is not a procedure performed by auditors on segment information? a. Evaluate reasonableness of management’s methods of compiling the information. b. Apply analytical procedures to test its reasonableness. c. Confirm major segments with appropriate creditors. d. Evaluate the reasonableness of methods of allocating operating expense among segments. 32. Which of the following statements is correct concerning the use of negative confirmation requests? a. Unreturned negative confirmation requests rarely provide significant explicit evidence. b. Negative confirmation requests are effective when detection risk is low. c. Unreturned negative confirmation requests indicate that alternative procedures are necessary. d. Negative confirmation requests are effective when understatements of account balances are suspended. 33. While observing a client’s annual physical inventory, 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. This situation could be the result of the client’s failure to record a. Purchase discounts b. Purchase returns c. Sales d. Sales returns 34. The auditor’s primary means of obtaining corroboration of management’s information concerning litigation is a: a. Letter of audit inquiry to the client’s lawyer. b. Letter of corroboration from the auditor’s lawyer upon review of the legal documentation. c. Confirmation of claims and assessments from the other parties to the litigation. d. Confirmation of claims and assessments from an officer of the court presiding over the litigation. 35. Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigations, claims, or assessments. The primary reason for this request is to provide the auditor with a. An estimate of the peso amount of the probable loss. b. An expert opinion as to whether a loss is possible, probable or remote. c. Information concerning the progress of cases to date. d. Corroborative evidential matter. 36. A refusal by a lawyer to furnish the information related to litigation included in the letter of inquiry is likely to result in a. Confirmation of related lawsuits with the claimants. b. Qualifications of the audit report. c. An assessment that loss of the litigation is probable. d. An adverse opinion. 37. In which of the following circumstances would the use of the negative form of accounts receivable most likely justified? a. A substantial number of accounts may be in dispute and the accounts receivable balances arises from sales to few major customers. b. A substantial number of accounts may be in dispute and the accounts receivable balances arises from sales to many customers with small balances. c. A small number of accounts may be in dispute and the accounts receivable balances arises from sales to a few major customers. d. A small number of accounts may be in dispute and the accounts receivable balances arises from sales to many customers with small balances.

AT Quizzer 10

“Audit Evidence”

5

38. Returns of positive confirmation requests for accounts receivable were very poor. As an alternative procedure, the auditor decided to check subsequent collections. The auditor has satisfied himself that the client satisfactorily listed the customer name next to each check listed on the deposit slip; hence, 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. The major fallacy in the auditor’s procedures is that a. Checking of subsequent collections is not an accepted alternative auditing procedure for confirmation of accounts receivable. b. 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. c. The deposit slip would not be received directly by the auditor as a confirmation would be. d. A customer may not have made a payment during the two-month period. 39. It is sometimes impracticable or impossible for an auditor to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditor might resort to would be: a. Examining subsequent receipts of year-end accounts receivable. b. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date. c. 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. d. Performing an over-all analytical review of accounts receivable and sales on a year-to-year basis. 40. When there is a large number of relatively small account balances, negative confirmation of accounts receivable is feasible if internal accounting control is a. Strong and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. b. Weak and the individuals receiving the confirmation requests are likely to give them adequate consideration. c. Strong and the individuals receiving the information requests are likely to give them adequate consideration. d. Weak and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. 41. Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies? a. Obtaining a lawyer’s letter. b. Confirming accounts payable. c. Reviewing the minutes of board of directors’ meetings. d. Review correspondence with banks. 42. Which of the following is an audit procedure that an auditor most likely would perform concerning litigations, claims and assessments? a. Request the client’s lawyer to evaluate whether the client’s pending litigation, claims and assessments indicate a going-concern problem. b. Examine the legal documents in the client’s lawyer’s possession concerning litigation, claims and assessments to which the lawyer has devoted substantive attention. c. Discuss with management its policies and procedures adopted for evaluating and accounting for litigations, claims and assessments. d. Confirm directly with the client’s lawyer that all litigations, claims and assessments have been recorded or disclosed in the financial statements. 43. Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments? a. Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed. b. Confirm directly with the client’s lawyer that all claims have been recorded in the financial statements. c. Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating and accounting for litigation, claims and assessments. d. Obtain from management a description and evaluation of litigation, claims and assessments existing at the balance sheet. 44. In representing that the financial statements are presented fairly in all material respects, in accordance with generally accepted accounting principles, management implicitly or explicitly makes ___________ regarding the recognition, measurement, presentation and disclosure of the various elements of financial statements and related disclosures. a. Assertions b. Allegations c. Conclusions d. Assurances

AT Quizzer 10

“Audit Evidence”

6

45. The auditor is required to use assertions for classes of transactions, account balances, 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. Assertions about classes of transactions include occurrence, completeness, accuracy, cutoff and a. Valuation and allocation b. Rights and obligations c. Existence d. Classification 46. The following are assertions about account balances at the period end, except a. Existence b. Rights and Obligations c. Valuation and allocation d. Cutoff 47. The following are assertions about presentation and disclosure, except a. Occurrence and rights and obligations b. Accuracy and valuation c. Classification and understandability d. Existence 48. Which of the following statements concerning the auditor’s use of assertions is correct? a. The auditor may combine the assertions about transactions and events with the assertions about account balances. b. In every audit engagement, the auditor should use the assertions as described in PSA 500, i.e., the assertions should always fall into three categories: assertions about classes of transactions and events, account balances, and presentation and disclosure. c. There should always be a separate assertion related to cutoff of transactions and events. d. The completeness assertion deals only with whether all transactions and events that should have been recorded have been recorded. 49. Which of the following statements concerning audit objectives is incorrect? a. The auditor should resolve any substantial doubt about any of management’s material financial statement assertions. b. Selection of tests to meet audit objectives should depend upon the understanding of internal control. c. There should be a one-to-one relationship between audit objectives and procedures. d. Audit objectives should be developed in light of management assertions about the financial statement elements. 50. 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. Cutoffs b. Authorizations c. Transactions d. Costs 51. The auditor would unlikely perform early substantive testing of account balances when: a. A number of significant deviations from control policies and procedures were detected during tests of controls b. Due to economic factors, the fourth quarter activity this year is expected to be somewhat sluggish c. The client uses a natural business year d. The taking of the client’s inventory is performed at an early date 52. As the acceptable level of detection risk decreases, an auditor may change the: a. Timing of substantive tests by performing them at an interim date rather than at year-end b. Nature of substantive tests from a less effective to a more effective procedure c. Timing of tests of controls by performing them at several dates rather at one time d. Assessed level of inherent risk to a higher amount 53. The extent of testing normally applies: a. Exclusively to the number of items to be tested b. To both the numbers of items tested and the number of tests performed c. Exclusively to the number of substantive tests performed d. To both the nature of items tested and the number of tests performed 54. Auditors usually try to plan the audit to minimize the use of tests of details of balances because: a. Other types of audit tests are more reliable b. Other types of audit tests are less costly c. Other types of audit tests require less experienced audit personnel d. All three of the above are true

AT Quizzer 10

“Audit Evidence”

7

55. The independent auditor selects several transactions in each functional area and traces them through the entire accounting system, paying special attention to evidence about whether or not the control features are in operation. This is an example of: a. A sequence test b. A test of controls c. A substantive test d. A functional test 56. Ending account balances may be audited through the use of which of the following types of audit procedures? a. Tests of details of balances b. Analytical procedures c. Tests of controls d. Analytical procedures and tests of details of balances 57. Which of the following represents an incorrect pairing of a type of audit test and evidence? a. Procedures to obtain an understanding of internal controls – Documentation b. Analytical procedures – Ratio analysis c. Substantive tests of transactions – Confirmation d. Tests of details of balances – Physical examination 58. After finishing the procedures to obtain an understanding of internal control, the auditor should perform tests of controls on: a. Key controls that have a material effect on the financial statements b. A random sample of key controls that were reviewed c. Key controls upon which the auditor intends to rely and plans to assess control risk below maximum d. Key controls which represent material weaknesses 59. Where the auditor has assessed control risk of a particular area at a reduced level, he will then: a. Eliminate the need to gather evidence in that area b. Test the effectiveness of the controls in that area c. Proceed to expand the sample sizes in that area d. Negotiate with management to determine which controls will be tested in that area 60. Upon completion of all the necessary audit procedures, the auditor should combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is highly subjective process that relies heavily on: a. Generally accepted auditing standards b. Generally accepted accounting principles c. The auditor’s professional judgment d. The management representation letter

*******************