ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination AT-12

AUDITING (Auditing Theory) J. IRENEO  E. ARAÑAS  F. TUGAS  C. ALLAUIGAN

FURTHER AUDIT PROCEDURES – SUBSTANTIVE TESTING

PSA 500, Audit Evidence states that…
The auditor shall design and perform audit procedures that are appropriate for the purpose of
obtaining sufficient appropriate audit evidence…and shall consider the relevance and reliability of
the information to be used as audit evidence.
Audit evidence - - is all the information used by the auditor in arriving at the conclusions on which the
audit opinion is based, and includes the information contained in the accounting records underlying the
financial statements and other information obtained through audit procedures.
Audit procedures - - are specific actions performed by the auditor to gather evidence to determine if
specific audit objectives are being met. A set of audit procedures prepared to test a component of the
financial statements is referred to as an audit program.
Audit Procedures According to Purpose:
Category Description/Purpose
Risk assessment Used for obtaining an understanding of the client entity and its environment,
procedures including internal control. Risk assessment procedures are performed during the
audit planning and internal control phases of the audit.
Tests of controls Used to test the operating effectiveness of controls in preventing or detecting and
correcting material misstatements.
Substantive tests Used to detect material misstatements in account balances, classes of
transactions, and disclosures.

MEANING of SUFFICIENT, APPROPRIATE EVIDENCE

▪ Sufficient: quantity of evidence necessary to test management’s assertions
▪ Appropriate: relevant, valid, and reliable kinds of evidence necessary to test management’s
assertions
EXAMPLES OF AUDIT EVIDENCE
▪ Related to Expenditure Cycle: Purchase Requisition, Purchase Order, Receiving Report or
Warehouse Receipts, Vouchers, Debit Memos, Fund Transfer forms, Cheques,
▪ Related to Revenue Cycle: Sales order, Delivery Receipt, Sales Invoice, Official Receipt, Deposit
Slips, Credit Memos
SUFFICIENCY OF AUDIT EVIDENCE
▪ Sufficiency is the measure of the quantity of audit evidence.
▪ The quantity of audit evidence needed is affected by the assessed risk of misstatement (ie., the
greater the risk, the more audit evidence is likely to be required) and also by the quality of such
audit evidence (the higher the quality, the less may be required).

APPROPRIATENESS OF AUDIT EVIDENCE

▪ Evidence is considered appropriate when it is both relevant and reliable
▪ Relevance - The evidence must be relevant to the audit objective being tested.
▪ Reliability - Reliability refers to whether the type of evidence can be relied upon to signal
the true state of an assertion or audit objective.

CLASSIFICATION of SUBSTANTIVE TESTS PROCEDURES

▪ Tests of details
▪ Transactions
▪ Balances

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▪ Analytical tests
ANALYTICAL PROCEDURES - - Evaluations of financial information made by a study of plausible
relationships among both financial and non-financial data

USING ANALYTICAL PROCEDURES

Planning (required) Directs attention to likely misstatements
Substantive tests Supports or refutes account balances
Overall review (required) Reviews reasonableness account balances

TYPES of ANALYTICAL PROCEDURES

▪ Trend analysis
▪ Ratio analysis
▪ Profitability ratios
▪ Liquidity ratios
▪ Solvency ratios
Audit Documentation (Working Papers)
Audit documentation or working papers are the record of audit procedures performed, relevant audit
evidence obtained, and conclusions the auditor reached (terms such as “working papers” or “work papers”
are also sometimes used).

REQUIRED READINGS
• PSA 330 (Redrafted): The Auditor’s Responses to Assessed Risks
• PSA 500 (Redrafted): Audit Evidence
• PSA 501 (Redrafted): Audit Evidence – Additional Considerations on Specific Items
• PSA 505 (Revised and Redrafted): External Confirmations
• PSA 510 (Redrafted) Initial Audit Engagements - Opening Balances
• PSA 520 (Redrafted): Analytical Procedures
• PSA 540 (Revised and Redrafted): Audit of Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures

MULTIPLE CHOICE QUESTIONS:

1. Which of the following would be maintained in the permanent file?

I. Copies of documents such as the reporting company’s organization chart and long-term
contracts.
II. The audit plan and management representation letter

A. Statements 1 and 2 C. Statement 2 only

B. Statement 1 only D. Neither statement I nor II
2. Which of the following is correct concerning the timing of substantive procedures when the auditor
sets the acceptable level of detection risk as low for a certain assertion?
A. Auditor may perform interim substantive testing for the specific assertion.
B. Auditor will perform yearend substantive testing for the specific assertion.
C. Auditor may perform interim substantive testing for all assertions.
D. Auditor will perform yearend substantive testing for all assertions.

3. Which of the following statements is/are correct?

S1: Audit evidence comprises source documents and accounting records underlying the financial
statements and corroborating information from other sources.
S2: Audit evidence is obtained to form an appropriate mix of tests of control and substantive
procedures.
S3: The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion.
A. Statements 1 and 2 only C. Statements 2 and 3 only
B. Statements 1 and 3 only D. All statements are correct

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4. No deletion of audit documentation are allowed after the:
A. client’s year-end
B. documentation completion date
C. last date of significant fieldwork
D. report release date

5. Which of the following statements on reliability is incorrect? Audit evidence (that) is…
A. Generally more reliable when it exists in documentary form as compared to evidence
consisting of oral representations from the client.
B. Generally more reliable when obtained directly by the auditor as compared to audit
evidence obtained indirectly (second-hand knowledge) or by inference.
C. Generally more reliable when it is obtained from independent sources outside the entity
as compared to audit evidence obtained from within the entity.
D. Generated internally under conditions of good internal control does not meet the required
appropriateness of evidence mentioned in PSA 500.
6. Ultimately, what is sufficient appropriate audit evidence depends on:
A. The users of the financial statements under audit.
B. The professional judgment of the client’s management and those charged with governance.
C. The professional judgment of the auditor.
D. A combination of the professional judgments of the auditor and the client’s management.

7. S1 A given set of audit procedures may provide audit evidence that is relevant to certain
assertions, but not to others.
S2 The auditor often obtains audit evidence from different sources or of a different nature that is
relevant to the same assertion.
S3 Obtaining audit evidence relating to a particular assertion (for example, existence) is a
substitute for obtaining audit evidence regarding another assertion (such as ownership rights).
A. False, true, true C. True, true, false
B. True, false, true D. False, false, false

8. Which of the following factors would likely affect an auditor’s judgment about the quantity, type,
and content of the auditor’s working papers?
I. The assessed level of control risk
II. The type of audit report issued

A. Statements 1 and 2 C. Statement 2 only

B. Statement 1 only D. Neither statement I nor II

9. Management assertions drive the auditor’s quest for audit evidence. These assertions are:
A. Directly related to generally accepted auditing standards.
B. Directly related to generally accepted accounting principles.
C. Indirectly related to generally accepted auditing standards.
D. Indirectly related to generally accepted accounting principles.

10. Assertions about account balances at the period-end include completeness, which means that
A. Assets, liabilities, and equity interests exist.
B. All assets, liabilities, and equity interests should have been recorded.
C. Assets, liabilities, and equity interests are included in the financial statements at
appropriate amounts and any resulting valuation or allocation adjustments are
appropriately recorded.
D. The entity holds or controls the rights to assets, and liabilities are the obligations of the
entity.
11. The following are descriptions of assertions about classes of transactions and events for the period
under audit. Which of the following statements refer to classification?
A. All transactions and events that should have been recorded have actually been recorded.
B. Amounts and other data relating to recorded transactions and events have been recorded
appropriately.
C. Transactions and events have been recorded in the correct accounting period.
D. Transactions and events have been recorded in the proper accounts.
E. Transactions and events that have been recorded have occurred and pertain to the entity.

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12. The following are descriptions of assertions about presentation and disclosure. Which one refers
to classification and understandability?
A. All disclosures that should have been included in the financial statements have been
included.
B. Disclosed events, transactions and other matters have occurred and pertain to the entity.
C. Financial information is appropriately presented and described, and disclosures are clearly
expressed.
D. Financial and other information are disclosed fairly and at appropriate amounts.

13. Tests to determine whether the accounting transactions have been properly authorized, correctly
recorded and summarized in the journals, and correctly posted to subsidiary ledgers and the
general ledger are:
A. Tests of controls. C. Substantive tests of balances.
B. Substantive tests of transactions. D. Analytical procedures.

14. The primary emphasis in most tests of details of balances is on the:

A. Balance sheet accounts. C. Cash flow statement accounts.
B. Income statement accounts. D. All of these.

15. As required by PSA 500, the auditor’s substantive procedures should include the following:
A. Agreeing on the financial statements to the underlying accounting records.
B. Examining material journal entries and other adjustments made during the course of
preparing the financial statements.
C. Both a and b.
D. Neither a nor b.

16. Which of the following audit procedures is used extensively throughout the audit but does not, by
itself, provide sufficient appropriate evidence?
A. Inspection of records or documents. C. Inquiry.
B. Observation. D. Inspection of tangible assets.

17. Complete the statement: “The evidence-gathering technique of observation:

A. Is useful in most parts of the audit.”
B. Is rarely sufficient by itself.”
C. Is limited to what the auditor sees.”
D. Requires the gathering of corroborative evidence.”

18. Physical examination of tangible assets is not a sufficient form of evidence when the auditor wants
to determine the:
A. Existence of the asset. C. Condition or quality of the asset.
B. Quantity and description of the asset. D. Ownership of the asset.

19. Which of the following best illustrates the assertions of concern for specific accounts per PSA 501?
Inventory Litigations and Claims Segment Information
A. Completeness Existence and condition Presentation and disclosure
B. Existence and condition Completeness Presentation and disclosure
C. Presentation and disclosure Completeness Existence and condition
D. Completeness Presentation and disclosure Existence and condition

20. Communication addressed to the debtor requesting him or her to confirm whether the balance as
stated on the communication is correct or incorrect is a:
A. Management letter C. Positive confirmation
B. Negative confirmation D. None of the above

21. Confirmation is the process of obtaining a representation of information or of an existing condition

directly from a third party. Traditionally, confirmations are used to verify:
A. Individual transactions between organizations, such as sales transactions.
B. Fixed asset additions.
C. Bank balances and accounts receivable.
D. All three of the above.
22. Confirmation is most likely to be the relevant form of evidence with regard to assertions about
accounts receivable when the auditor has concerns about the receivables’
A. Valuation B. Classification C. Existence D. Completeness

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23. Negative confirmation requests may be used when:

A. The assessed levels of inherent and control risks are HIGH.
B. A small number of large balances is involved.
C. A substantial number of errors is expected.
D. The auditor has no reason to believe that respondents will disregard negative confirmation
requests.

24. Who signs the confirmation request letter prior to sending the same to the recipient?
A. The appropriate level of management. C. The CEO/CFO of the client.
B. The audit partner. D. Both management and the auditor.

25. A confirmation request letter should always be sent under the control of:
A. the client B. the auditor C. the recipient D. both a and b

26. When the recipient has accomplished the confirmation request, the replies should be:
A. Sent directly to the auditor.
B. Sent directly to the client, after which the client gives the replies to the auditor.
C. Sent directly to the auditor, with another copy of the reply going to the client.
D. Not sent back since a confirmation request does not necessitate replies.

27. Where no response is received to a positive confirmation request, the auditor should
A. Contact the recipient to elicit a response and perform alternative procedures as necessary.
B. Issue a qualified opinion or an adverse opinion, depending on the materiality involved.
C. Issue a qualified opinion or a disclaimer of opinion on the grounds of a scope limitation.
D. Contact the recipient/respondent in order to force a response from such recipient.

28. Which one of the following types of procedures will aid the auditor in obtaining evidence regarding
the mathematical accuracy of accounting records and other information?
A. Recomputation. C. Inspection.
B. Recalculation. D. Inquiry.

29. Reperformance
A. Is the process of obtaining a representation of information or of an existing condition
directly from third party. It is a specific type of inquiry.
B. Consists of checking the mathematical accuracy of documents or records.
C. Is the auditor’s independent execution of procedures or controls that were originally
performed as part of the entity’s internal control.
D. Is the evaluation of financial information made by study of plausible relationships among
both financial and non-financial data.

30. S1: When vouching, the direction of the test is from the recorded item back to the underlying
supporting documents.
S2: When tracing, the direction of the test is from the source documents to the accounting record.
A. True, true B. False, false C. True, false D. False, true

31. This involves the evaluation of financial information through a study of plausible relationships
among both financial and non-financial data.
A. Confirmation C. Analytical procedures
B. Reperformance D. Recalculation

32. After performing analytical procedures as a substantive test, the auditor noted unusual fluctuations
and relationships. Accordingly, the auditor begins with inquiries of management, followed by
A B C D
• Corroboration of management’s responses. Yes No Yes No
• Consideration of the need to apply other audit procedures Yes Yes No No

33. For initial audit engagements, the auditor should obtain sufficient appropriate evidence that:
A. The opening balances do not contain misstatements that materially affect the current
period’s financial statements.
B. The prior period’s closing balances have been correctly brought forward to the current
period or have been restated to the correct amount, if necessary;
C. Appropriate accounting policies are consistently applied or changes in accounting policies
have been properly accounted for and adequately disclosed
D. All of the above.

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34. In evaluating the reasonableness of an accounting estimate, an auditor most likely would
concentrate on key factors and assumption that are
A. Deviations from historical patterns
B. Susceptible to bias
C. Both a and b
D. Neither a nor b

35. Which of the following refers to the process of transferring money from one bank account to
another and improperly recording the transaction?
A. Kiting
B. Lapping
C. Window dressing
D. Theft

36. Which of the following balance-related audit assertions/objectives typically is assessed as having
high inherent risk for cash?
A. Existence
B. Cutoff
C. Detail tie-in
D. Presentation and disclosure

37. Which of the following is not a source of evidence for the balance per bank during the audit of
cash?
A. General ledger
B. Bank confirmation
C. Cutoff bank statement
D. Year-end bank statement

38. Which of the following is the main focus of an auditor in verifying liability balances?
A. Understated liabilities.
B. Overstated liabilities.
C. Understated or omitted liabilities.
D. Overstated or extraneous liabilities.

39. Which of the following assertions/objectives are violated if the acquisition of goods and the
resulting accounts payable are not recorded?
A. Existence
B. Completeness
C. Detail tie-in
D. Presentation and disclosure

- END -

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