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Chapter 5 - Audit Evidence and Documentation
Chapter 5 - Audit Evidence and Documentation
Audit evidence-Chapter-5-Test-Bank
Chapter 05
Audit Evidence and Documentation
2.
The most reliable form of documentary evidence generally is considered to be documents
created by the client.
FALSE
4. In performing analytical procedures, the auditors may use dollar amounts, physical
quantities, or percentages.
TRUE
6. The auditors should propose an adjusting journal entry for all material related-party
transactions.
FALSE
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7. When the risk of material misstatement for an account is high, the auditors may perform
additional substantive procedures to restrict detection risk to a lower level.
TRUE
8. Working papers of continuing audit interest usually are filed with the administrative
working papers.
FALSE
9. The use of lead schedules is designed to increase the detail of the working trial balance.
FALSE
10. Adjusting journal entries are ordinarily recorded by the client, while reclassifying journal
entries need not be recorded.
TRUE
11. To be effective, analytical procedures performed near the end of the audit should be
performed by
A. The partner performing the quality review of the audit.
B. A beginning staff accountant who has had no other work related to the engagement.
C. A manager or partner who has a comprehensive knowledge of the client's business and
industry.
D. The CPA firm's quality control manager.
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A. Option A
B. Option B
C. Option C
D. Option D
A. Option A
B. Option B
C. Option C
D. Option D
A. Option A
B. Option B
C. Option C
D. Option D
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19. An auditor plans to apply substantive tests to the details of asset and liability accounts as
of an interim date rather than as of the balance sheet date. The auditor should be aware that
this practice
A. Eliminates the use of certain statistical sampling methods that would otherwise be
available.
B. Presumes that the auditor will reperform the tests as of the balance sheet date.
C. Should be especially considered when there are rapidly changing economic conditions.
D. Potentially increases the risk that errors that exist at the balance sheet date will not be
detected.
20. An auditor compared the current-year gross margin with the prior-year gross margin to
determine if cost of sales is reasonable. What type of audit procedure was performed?
A. Test of transactions.
B. Analytical procedures.
C. Test of controls.
D. Test of details.
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22. The auditors of Smith Electronics wish to limit the audit risk of material misstatement in
the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and there
is a 40% risk that material misstatement could have bypassed the client's system of internal
control. What is the maximum detection risk the auditors should specify in their substantive
procedures of details of accounts receivable?
A. 5%.
B. 12.5%.
C. 42.7%.
D. 60%.
23. Analytical procedures are required at the risk assessment stage and as:
A. Tests of internal control.
B. Substantive procedures.
C. A part of the final overall review.
D. Computer generated procedures.
24. During financial statement audits, auditors seek to restrict which type of risk?
A. Control risk.
B. Detection risk.
C. Inherent risk.
D. Account risk.
25. Which of the following groups are not considered a specialist by AICPA Professional
Standards?
A. Appraisers.
B. Internal auditors.
C. Engineers.
D. Geologists.
26. CPA wishes to use a representation letter as a substitute for performing other audit
procedures. Doing so:
A. Violates professional standards.
B. Is acceptable, but should only be done when cost justified.
C. Is acceptable, but only for non-public clients.
D. Is acceptable and desirable under all conditions.
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28. In auditing an asset valued at fair value, which of the following potentially provides the
auditor with the strongest evidence?
A. A price for a similar asset obtained from an active market.
B. An appraisal obtained discounting future cash flows.
C. Management's judgment of the cost to purchase an equivalent asset.
D. The historical cost of the asset.
29. An auditor should expect that fair value is the price that would be received to sell an asset
in an orderly transaction between the market participants at the:
A. Acquisition date of the asset.
B. Audit report date.
C. Expected replacement date of the asset.
D. Measurement date (ordinarily the date of the financial statements).
30. Which of the following best describes the reason that auditors are concerned with the
detection of related party transactions?
A. The financial statements must often be adjusted for the effects of material related party
transactions.
B. Material related party transactions must be disclosed in the notes to the financial
statements.
C. The substance of related party transactions will differ from their form.
D. In a related party transaction one party has the ability to exercise significant influence over
the other party.
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32. Which of the following is not a financial statement assertion relating to account
balances?
A. Completeness.
B. Existence.
C. Rights and obligations.
D. Recorded value and discounts.
33. Which of the following is generally true about the sufficiency of audit evidence?
A. The amount of evidence that is sufficient varies inversely with the acceptable risk of
material misstatement.
B. The amount of evidence concerning a particular account varies inversely 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 evidence is appropriate with respect to an account it is also sufficient.
35. Which of the following is a basic approach often used by auditors to evaluate the
reasonableness of accounting estimates?
A. Confirmation.
B. Observation.
C. Reviewing subsequent events or transactions.
D. Analyzing corporate organizational structure.
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39. Which of the following is not a basic approach often used by auditors to evaluate the
reasonableness of accounting estimates?
A. Confirmation of amounts.
B. Review of management's process of development.
C. Independent development of an estimate.
D. Review of subsequent events.
41. A schedule set up to combine similar general ledger accounts, the total of which appears
on the working trial balance as a single amount, is referred to as a:
A. Supporting schedule.
B. Lead schedule.
C. Corroborating schedule.
D. Reconciling schedule.
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44. The auditors use analytical procedures during the course of an audit. The most important
phase of performing these procedures is the:
A. Vouching of all data supporting various ratios.
B. Investigation of significant variations and unusual relationships.
C. Comparison of client-computed statistics with industry data on a quarterly and full-year
basis.
D. Recalculation of industry date.
45. The auditors must obtain written client representations that normally should be signed
by:
A. The president and the chairperson of the board.
B. The treasurer and the internal auditor.
C. The chief executive officer and the chief financial officer.
D. The corporate counsel and the audit committee chairperson.
46. Which of the following ultimately determines the specific audit procedures necessary to
provide independent auditors with a reasonable basis for the expression of an opinion?
A. The audit time budget.
B. The auditors' judgment.
C. Generally accepted accounting quality standards.
D. The auditors' working papers.
47. Failure to detect material dollar errors in the financial statements is a risk which the
auditors primarily mitigate by:
A. Performing substantive procedures.
B. Performing tests of controls.
C. Assessing control risk.
D. Obtaining a client representation letter.
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48. An independent auditor finds that the Simmer Corporation occupies office space, at no
charge, in an office building owned by a shareholder. This finding indicates the existence of:
A. Management fraud.
B. Related party transactions.
C. Window dressing.
D. Weak internal control.
49. Which of the following would not necessarily be considered a related party transaction?
A. Payment of a bonus to the president.
B. Purchases from another corporation that is controlled by the corporation's chief
stockholder.
C. Loan from the corporation to a major stockholder.
D. Sale of land to the corporation by the spouse of a director.
50. The date of the management representation letter should coincide with the:
A. Date of the auditor's report.
B. Balance sheet date.
C. Date of the latest subsequent event referred to in the notes to the financial statements.
D. Date of the engagement agreement.
52. When considering the use of management's written representations as audit evidence
about the completeness assertion, an auditor should understand that such representations:
A. Complement, but do not replace, substantive procedures designed to support the assertion.
B. Constitute sufficient evidence to support the assertion when considered in combination
with a moderate assessed level of control risk.
C. Are generally sufficient audit evidence to support the assertion regardless of the assessed
level of control risk.
D. Replace the assessed level of control risk as evidence to support the assertions.
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54. Which of the following statements is generally correct about audit evidence?
A. The auditor's direct personal knowledge, obtained through observation and inspection, is
more persuasive than information obtained indirectly from independent outside sources.
B. To be appropriate, audit evidence must be sufficient.
C. Accounting data alone may be considered sufficient appropriate audit evidence to issue an
unqualified opinion on financial statements.
D. Appropriateness of audit evidence refers to the amount of corroborative evidence to be
obtained.
55. Which of the following statements relating to audit evidence is the most accurate
statement?
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. The auditor must obtain sufficient appropriate audit evidence.
57. Which of the following is not a primary purpose of audit working papers?
A. To coordinate the examination.
B. To assist in preparation of the audit report.
C. To support the financial statements.
D. To provide evidence of the audit work performed.
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59. During an audit engagement pertinent data are prepared and included in the audit working
papers. The working papers primarily are considered to be:
A. A client-owned record of conclusions reached by the auditors who performed the
engagement.
B. Evidence supporting financial statements.
C. Support for the auditors' representations as to compliance with generally accepted auditing
standards.
D. A record to be used as a basis for the following year's engagement.
60. Although the quantity, type, and content of working papers will vary with the
circumstances, the working papers generally would include the:
A. Copies of those client records examined by the auditor during the course of the
engagement.
B. Evaluation of the efficiency and competence of the audit staff assistants by the partner
responsible for the audit.
C. Auditor's comments concerning the efficiency and competence of client management
personnel.
D. Auditing procedures followed and the testing performed in obtaining audit evidence.
61. The permanent file section of the working papers that is kept for each audit client most
likely contains:
A. Review notes pertaining to questions and comments regarding the audit work performed.
B. A schedule of time spent on the engagement by each individual auditor.
C. Correspondence with the client's legal counsel concerning pending litigation.
D. Narrative descriptions of the client's accounting procedures and controls.
62. Working papers that record the procedures used by the auditor to gather evidence should
be:
A. Considered the primary support for the financial statements being examined.
B. Viewed as the connecting link between the books of account and the financial statements.
C. Designed to meet the circumstances of the particular engagement.
D. Destroyed when the audited entity ceases to be a client.
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63. In general, which of the following statements is correct with respect to ownership,
possession, or access to working papers prepared by a CPA firm in connection with an audit?
A. The working papers may be obtained by third parties where they appear to be relevant to
issues raised in litigation.
B. The working papers are subject to the privileged communication rule which, in a majority
of jurisdictions, prevents third-party access to the working papers.
C. The working papers are the property of the client after the client pays the fee.
D. The working papers must be retained by the CPA firm for a period of ten years.
64. Confirmation would be most effective in addressing the existence assertion for the:
A. Addition of a milling machine to a machine shop.
B. Payment of payroll during regular course of business.
C. Inventory held on consignment.
D. Granting of a patent for a special process developed by the organization.
In preparing for an audit of the retail footwear division of a major retail organization, the
auditor gathered the following information about the organization's stores:
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66. Management is concerned about the lower level of profitability in the Mid-Central
Region. Which of the following would be a reasonable possible explanation(s) of the lower
profitability for the Mid-Central Region?
67. Based on the previous information, which of the following preliminary conclusions can
the auditor use as a basis for further investigations?
A. Sales per store are directly related to the size of the store.
B. Sale clerks are less productive in larger size stores.
C. Gross margin is directly related to the size of the store.
D. Average square feet of store correlates with the number of stores in the district.
68. Which of the following statements is not correct regarding the auditor's further analysis?
A. The Mid-Central Region has fewer average full-time equivalent employees per store than
the other regions per store.
B. The other regions all generate higher sales per square foot than the Mid-Central Region.
C. The Mid-Central Region has the highest average wages per full-time equivalent employee.
D. The largest contributor to total corporate profits is the Southwest Region.
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70. What type of transactions ordinarily have high inherent risk because they involve
management judgments or assumptions in formulating accounting balances?
A. Estimation.
B. Nonroutine.
C. Qualified.
D. Routine.
71. Assertions with high inherent risk are least likely to involve:
A. Complex calculations.
B. Difficult accounting issues.
C. Routine transactions.
D. Significant judgment by management.
72. The date on which no information may be deleted from audit documentation is the
A. Client's year-end.
B. Documentation completion date.
C. Last date of significant fieldwork.
D. All of the above are incorrect in that no information may ever be deleted from audit
documentation.
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A. Option A
B. Option B
C. Option C
D. Option D
Matching Questions
75. For each of the audit procedures listed below select the type of audit procedure, if any,
that the auditor performed. A type of audit procedure may be selected once or not at all.
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a. Describe three major types of comparisons the auditor might make in performing analytical
procedures.
b. At what stages of the audit are analytical procedures performed and what purpose do they
serve at each stage? a. Comparisons made in performing analytical procedures include (only
three required):
1. During risk assessment to identify items that require more audit attention.
2. Throughout the audit as a substantive procedure for accounts or classes of transactions.
3. Near the end of the audit to corroborate audit evidence obtained during the audit to assist
the auditor in drawing reasonable conclusions.77. Audit working papers are an integral part of
an examination in accordance with generally accepted auditing standards.
b. The permanent file is used to organize working papers of continuing audit interest over a
number of years.
The current file contains the administrative and evidence working papers for the year under
examination.
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78. The following is an audit working paper prepared by an assistant on the Williams audit:
Column footed.
Amount agrees to amount recorded as a deposit on the bank statement and description
agrees with receipt enclosed with 12/31/0X bank statement. This note is the Wilde note
receivable that was recorded as a receipt by the client in the cash receipts journal on 1/3/0X.
The receivable was appropriately credited and properly reflected in the January cash receipts
journal. No adjustment needed as bank and books simply record this in different periods.
Г Agreed to 12/31/0X bank statement.
Agreed to general ledger.
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Required: Prepare a list of review points as the preparer of this working. You may assume
that any other working papers referred to are appropriate. You will receive credit for proper
points you bring up and lose credit for improper ones and omissions.
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"prepared by" is not initialed ("Rev. by" isn't either, but since we are still performing the
review it need not be).
Title of schedule is wrong, this is not a bank confirmation, it is a bank reconciliation.
The by Balance per Bank is incorrect for two reasons. First, the balance would not be in
the general ledger. Second, the balance per bank should be agreed to either a bank
confirmation, bank statement, or both.
The bank service charge should be added, not subtracted.
Concerning balance per books, two things are wrong. First it is not footed in that the is
missing. Second, it does not foot properly.
The tickmark Г is incorrect relating to the deposit in transit. If it was on the 12/31/0X bank
statement, it would not be a deposit in transit.
The √ description is not correct since it should be recorded as a cash receipt as of 12/31/OX
if the bank collected it prior to year-end. It is handled on the reconciliation properly, but the
final comment is wrong.
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