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Chapter 05

Audit Evidence and Documentation


True / False Questions
1. The professional standards consider calculating depreciation expense a "routine"
transaction.
True

False

2. The most reliable form of documentary evidence generally is considered to be


documents created by the client.
True

False

3. A vendor's invoice is an example of documentary evidence created by a third party


and held by the client.
True

False

4. In performing analytical procedures, the auditors may use dollar amounts, physical
quantities, or percentages.
True

False

5. The primary purpose of a letter of representations is to obtain additional evidence


about specific accounts.
True

False

6. The auditors should propose an adjusting journal entry for all material related-party
transactions.
True

False

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

False

8. Working papers of continuing audit interest usually are filed with the administrative
working papers.
True

False

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9. The use of lead schedules is designed to increase the detail of the working trial
balance.
True

False

10. Adjusting journal entries are ordinarily recorded by the client, while reclassifying
journal entries need not be recorded.
True

False

Multiple Choice Questions


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.
12.
The components of the risk of misstatement are:

Inherent Risk

Control Risk

A.

Yes

Yes

B.

Yes

Yes

C.

Yes

No

D.

No

Yes

A.
B.
C.
D.

Option A
Option B
Option C
Option D

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13. Financial statement assertions are established for classes of transactions:

Account Balances

Disclosures

A.

Yes

Yes

B.

Yes

No

C.

No

Yes

D.

No

No

A.
B.
C.
D.

Option A
Option B
Option C
Option D

14. Further audit procedures include:

Risk assessment
procedures

Tests of
controls

A.

Yes

Yes

B.

Yes

No

C.

No

Yes

D.

No

No

A.
B.
C.
D.

Option A
Option B
Option C
Option D

15. Assertions that have a meaningful bearing on whether an account balance,


transaction class, or disclosure is fairly stated are referred to as:
A.
B.
C.
D.

Appropriate assertions.
Sufficient assertions.
Relevant assertions.
Reliable assertions.

16. Which of the following is not an assertion relating to classes of transactions?


A.
B.
C.
D.

Accuracy.
Sufficiency.
Cutoff.
Classification.

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17. Audit documentation should be sufficient to allow which individual to understand the
audit work performed, the evidence obtained, and the significant conclusions?
A.
B.
C.
D.

A certified public accountant.


A partner in a CPA firm.
An experienced auditor.
The controller at the company being audited.

18. Which of the following is not considered to be an analytical procedure?


A.
B.
C.
D.

Comparisons of financial statement amounts with source documents.


Comparisons of financial statement amounts with nonfinancial data.
Comparisons of financial statement amounts with budgeted amounts.
Comparisons of financial statement amounts with comparable prior year amounts.

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 which 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.
B.
C.
D.

Test of transactions.
Analytical procedures.
Test of controls.
Test of details.

21. The inspection of a vendor's invoice by the auditors is:


A. Direct evidence about occurrence of a transaction.
B. Physical evidence about occurrence of a transaction.
C. Documentary evidence about occurrence of a transaction.
D.
Part of the client's accounting system.

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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.
B.
C.
D.

5%.
12.5%.
42.7%.
60%.

23. Analytical procedures are required at the risk assessment stage and as:
A.
B.
C.
D.

Tests of internal control.


Substantive procedures.
Procedures near the end of the audit.
Computer generated procedures.

24. During financial statement audits, auditors seek to restrict which type of risk?
A.
B.
C.
D.

Control risk.
Detection risk.
Inherent risk.
Account risk.

25. Which of the following groups are not considered a specialist by AICPA Professional
Standards?
A.
B.
C.
D.

Appraisers.
Internal auditors.
Engineers.
Geologists.

26. A 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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27. Which of the following best describes the problem with the use of published industry
averages for analytical procedures?
A.
B.
C.
D.

Lack of comparability.
Lack of sufficiency.
Lack of accuracy.
Lack of availability.

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.
31. Which of the following is not a basic procedure used in an audit?
A.
B.
C.
D.

Risk assessment procedures.


Substantive procedures.
Tests of controls.
Tests of direct evidence.

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32. Which of the following is not a financial statement assertion relating to account
balances?
A.
B.
C.
D.

Completeness.
Existence.
Rights and obligations.
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 directly 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.
34. Which of the following is true about analytical procedures?
A. Performing analytical procedures results in the most reliable form of evidence.
B. Analytical procedures are tests of controls used to evaluate the quality of a client's
internal control.
C. Analytical procedures are used for planning, but they should not be used to obtain
evidence as to the reasonableness of specific account balances.
D. Analytical procedures are used in risk assessment, as a substantive procedure for
specific accounts, and near the completion of the audit of the audited financial
statements.
35. Which of the following is a basic approach often used by auditors to evaluate the
reasonableness of accounting estimates?
A.
B.
C.
D.

Confirmation.
Observation.
Reviewing subsequent events or transactions.
Analyzing corporate organizational structure.

36. An auditor is performing an analytical procedure that involves comparing a client's


account balances over time. This technique is referred to as:
A.
B.
C.
D.

Vertical analysis.
Horizontal analysis.
Cross-sectional analysis.
Comparison analysis.

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37. An auditor is performing an analytical procedure that involves comparing a client's


ratios with other companies in the same industry. This technique is referred to as:
A.
B.
C.
D.

Vertical analysis.
Horizontal analysis.
Cross-sectional analysis.
Comparison analysis.

38. An auditor is performing an analytical procedure that involves developing commonsize financial statements. This technique is referred to as:
A.
B.
C.
D.

Vertical analysis.
Horizontal analysis.
Cross-sectional analysis.
Comparison analysis.

39. Which of the following is not a basic approach often used by auditors to evaluate the
reasonableness of accounting estimates?
A.
B.
C.
D.

Confirmation of amounts.
Review of management's process of development.
Independent development of an estimate.
Review of subsequent events.

40. The audit time budget is an example of:


A.
B.
C.
D.

A supporting schedule.
An administrative working paper.
A lead schedule.
A corroborative working paper.

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.
B.
C.
D.

Supporting schedule.
Lead schedule.
Corroborating schedule.
Reconciling schedule.

42. Which of the following is not a function of working papers?


A.
Provide support for the auditors' report.
B.
Provide support for the accounting records.
C. Aid partners in planning and conducting future audits.
D. Document staff compliance with generally accepted auditing standards.

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43. A schedule listing account balances for the current and previous years, and columns
for adjusting and reclassifying entries proposed by the auditors to arrive at the final
mount that will appear in the financial statement, is referred to as a:
A.
B.
C.
D.

Working trial balance.


Lead schedule.
Summarizing schedule.
Supporting schedule.

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 fullyear 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.
B.
C.
D.

The audit time budget.


The auditors' judgment.
Generally accepted accounting quality standards.
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.
B.
C.
D.

Performing substantive procedures.


Performing tests of controls.
Assessing control risk.
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.
B.
C.
D.

Management fraud.
Related party transactions.
Window dressing.
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.
51. An example of an analytical procedure is the comparison of:
A. Financial information with similar information regarding the industry in which the
entity operates.
B. Recorded amounts of major disbursements with appropriate invoices.
C. Results of a statistical sample with the expected characteristics of the actual
population.
D. EDP generated data with similar data generated by a manual accounting system.
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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53. Which of the following expressions is least likely to be included in a client's


representation letter?
A. No events have occurred subsequent to the balance sheet date that require
adjustment to, or disclosure in, the financial statements.
B. The company has complied with all aspects of contractual agreements that would
have a material effect on the financial statements in the event of noncompliance.
C. Management acknowledges responsibility for illegal actions committed by
employees.
D. Management has made available all financial statements, including notes.
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.
56. Which of the following is not a typical analytical procedure?
A. Study of relationships of the financial information with relevant nonfinancial
information.
B. Comparison of the financial information with similar information regarding the
industry in which the entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate
invoices.
D. Comparison of the financial information with budgeted amounts.
57. Which of the following is not a primary purpose of audit working papers?
A.
B.
C.
D.

To coordinate the examination.


To assist in preparation of the audit report.
To support the financial statements.
To provide evidence of the audit work performed.

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58. Concerning retention of working papers, the Sarbanes-Oxley Act:


A.
B.
C.
D.

Has no provisions.
Requires permanent retention.
Requires retention for at least 7 years.
Requires retention for a period of 4 or less years.

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.
65. 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:
All
Stores

Northeast

Average sales per store

$736,000

$840,000

Average cost of goods sold per store

$375,000

$420,000

Number of stores
Average square feet per store
Average sales per full-time employee

48
1,800
$137,000

$152,000

Average wage related expense per store

$98,000

$102,000

Average net profit contribution per store

$238,000

$285,000

An auditor performs analytical procedures that involve comparing the gross margins
of various divisional operations with those of other divisions and with the individual
division's performance in previous years. The auditor notes a significant increase in
the gross margin at one division. The auditor does some preliminary investigation
and also notes that there were no changes in products, production methods, or
divisional management during the year. Based on the above information, the most
likely cause of the increase in gross margin would be:
A. An increase in the number of competitors selling similar products.
B. A decrease in the number of suppliers of the material used in manufacturing the
product.
C.
An overstatement of year-end inventory.
D. An understatement of year-end accounts receivable.

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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?
I. The lower number of stores in the Mid-Central Region.
II. Sales employees are not as productive in generating sales as those in other
regions.
III. The Mid-Central Region has a lower gross margin.
A.
B.
C.
D.

I only.
II only.
II and III only.
I, II and III.

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.
69. Management has centralized purchasing and uses a model based upon previous
year's sales with adjustments for trends in the market place (e.g., the trend to more
casual shoes). A staff auditor has suggested that the centralized purchasing may be
one of the reasons for the lower level of profitability in the Mid-Central Region. Which
of the following would be the best single audit procedure to address the staff
auditor's assertion?
A. Take a sample of receiving documents at stores and trace to purchase orders to
determine the length of time between the purchase and delivery of the goods.
B. Interview store managers in the Mid-Central Region to determine their attitude
toward centralized purchasing.
C. Perform an inventory count at selected stores in the Mid-Central Region and
determine if adjustments are needed to the perpetual records.
D. Perform a product-line analysis of sales and purchases in the Mid-Central Region
and compare with other regions.

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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.
B.
C.
D.

Estimation.
Nonroutine.
Qualified.
Routine.

71. Assertions with high inherent risk are least likely to involve:
A.
B.
C.
D.

Complex calculations.
Difficult accounting issues.
Routine transactions.
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 these are incorrect in that no information may ever be deleted from audit
documentation.
73. In evaluating an entity's accounting estimates, one of the auditor's objectives is to
determine whether the estimates are
A.
B.
C.
D.

Prepared in a satisfactory control environment.


Consistent with industry guidelines.
Based on verifiable objective assumptions.
Reasonable in the circumstances.

74. In obtaining sufficient appropriate audit evidence, the work of which type or types of
specialists may be relied upon?

Client Engaged

Auditor Engaged

A.

Yes

Yes

B.

Yes

No

C.

No

Yes

D.

No

No

A.
B.
C.
D.

Option A
Option B
Option C
Option D

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75. Which of the following is most likely to be considered an analytical procedure?


A. Testing purchases at year-end to determine they were recorded in the proper
period.
B. Comparing inventory balances to recent sales activities.
C. Selecting a sample of year-end receivables for confirmation.
D. Reconciling physical counts of inventory to perpetual records.
76. An unexpected economic downturn is likely to have which effect on inventory
turnover.
A.
B.
C.
D.

Increase.
Decrease.
No effect.
Each of these replies is equally likely.

77. Which of the following is most consistent with an increase in the ratio of debt to
equity?
A. Payment of a required principal payment on long-term debt.
B. Repurchase of a portion of the company's outstanding common stock.
C. Higher than expected profits due to a decrease in cost of goods sold.
D. Payment of most accounts receivable immediately prior to year-end using a portion
of the company's cash.
78. Fraudulent sales and accounts receivables recorded at year-end (with no cost of
goods sold entry) will:
A.
B.
C.
D.

Decrease recorded net income.


Decrease the current ratio.
Increase days of sales in accounts receivable.
Increase year-end recorded inventory.

Essay Questions

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79. 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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Ty
pe
of
au
Audit
dit
Procedur
pr
es
oc
ed
ur
e
During the
physical
inventory
count, the
auditor
requested
that
Acertain
.containers
of
inventory
items be
opened to
ensure
they were
not empty.

An
al
yti
cal
1pr
.oc
ed
ur
es

During a
site visit
to a
branch
warehouse
, the
auditor
Bnoted
.unauthoriz
ed
personnel
have
access to
the
inventory.

Ex
ter
na
l
2co
.nfi
rm
ati
on

The
auditor
obtained a
copy of
the
companys
accountin
g manual
In
Cand read 3qu
.the
.iry
section on
inventory
to prepare
for the
physical
inventory
observatio
n.
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The
auditor
sent a
letter to
the
companys
outside
attorney
accompani
ed by
managem
ents
request
D
.for
informatio
n
concernin
g pending
or
threatene
d
litigation,
claims,
and
assessme
nts.

Ins
pe
cti
on
of
re
co
4rd
.s
or
do
cu
m
en
ts

The
auditing
firms
computer
assisted
audit
specialist
obtained
an
electronic
Ebilling file
.from the
company
and
checked
the
accuracy
of the
summariz
ed billings
file.

Ins
pe
cti
on
of
5ta
.ng
ibl
e
as
se
ts

FThe
.auditor
selected a
sample of
invoices
and
agreed the
vendor to
the
approved
vendor
list, as had
been

6Ob
.se
rv
ati
on

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required
by the
client's
internal
control
procedure
s.
The
auditor
scanned
the repairs
and
G
maintenan
.ce account
for
unusually
large
amounts.

Re
cal
7cul
.ati
on

Re
pe
8rfo
.rm
an
ce

5-20
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McGraw-Hill Education.

80. Analytical procedures are substantive procedures that may be used to provide
evidence about specific accounts and classes of transactions.
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?

81. Audit working papers are an integral part of an examination in accordance with
generally accepted auditing standards.
a. Describe three major functions of the audit working papers.
b. Distinguish between the permanent working paper file and the current working
paper file.

5-21
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82. The following is an audit working paper prepared by an assistant on the Williams
audit:

Prepared by ___
Reviewed by ___
Williams Inc.
Bank Confirmation-General Account
12/31/0X
Balance per Bank @ 12/31/0X
Deposit in Transit per A-1-2

$20,200.22
2,000.00

Outstanding Checks per A-1-3

(5,200.00)

Other Note Collected by Bank

(10,000.00)

Bank Service Charge


Balance per Books @ 12/31/0X

(9.50)
$8,990.69

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.
Agreed to 12/31/0X bank statement.
Agreed to general ledger.
A1
Required:

Prepare a list of review points as the preparer of this working. You may assume that
any other working papers referred to appropriate. You will receive credit for proper
points you bring up and lose credit for improper ones and omissions.

5-22
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5-23
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McGraw-Hill Education.

Chapter 05 Audit Evidence and Documentation Answer Key


True / False Questions
1.

The professional standards consider calculating depreciation expense a "routine"


transaction.
FALSE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-02 Identify and explain the components of audit risk.
Topic: Risk, Evidence, and Assertions

2.

The most reliable form of documentary evidence generally is considered to be


documents created by the client.
FALSE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Risk, Evidence, and Assertions

3.

A vendor's invoice is an example of documentary evidence created by a third party


and held by the client.
TRUE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Risk, Evidence, and Assertions

4.

In performing analytical procedures, the auditors may use dollar amounts, physical
quantities, or percentages.
TRUE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
5-24
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.

Topic: Analytical Procedures

5.

The primary purpose of a letter of representations is to obtain additional evidence


about specific accounts.
FALSE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Risk, Evidence, and Assertions

6.

The auditors should propose an adjusting journal entry for all material relatedparty transactions.
FALSE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe the considerations involved in auditing subjective areas, such as certain
financial statement items valued at fair value.
Topic: Evidence for Subjective Areas

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
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Identify and explain the components of audit risk.
Topic: Risk, Evidence, and Assertions

8.

Working papers of continuing audit interest usually are filed with the
administrative working papers.
FALSE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-09 Describe the types of working papers and the way they are organized.
Topic: Audit Documentation

5-25
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.

9.

The use of lead schedules is designed to increase the detail of the working trial
balance.
FALSE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-09 Describe the types of working papers and the way they are organized.
Topic: Audit Documentation

10.

Adjusting journal entries are ordinarily recorded by the client, while reclassifying
journal entries need not be recorded.
TRUE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-09 Describe the types of working papers and the way they are organized.
Topic: Audit Documentation

Multiple Choice Questions


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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Analytical Procedures

5-26
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.

12.
The components of the risk of misstatement are:

Inherent Risk

Control Risk

A.

Yes

Yes

B.

Yes

Yes

C.

Yes

No

D.

No

Yes

A.
B.
C.
D.

Option A
Option B
Option C
Option D
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Identify and explain the components of audit risk.
Topic: Risk, Evidence, and Assertions

13.

Financial statement assertions are established for classes of transactions:

Account Balances

Disclosures

A.

Yes

Yes

B.

Yes

No

C.

No

Yes

D.

No

No

A.
B.
C.
D.

Option A
Option B
Option C
Option D

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain the relationship between audit risk, audit evidence, and financial statement
assertions.
Topic: Risk, Evidence, and Assertions

5-27
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.

14.

Further audit procedures include:

Risk assessment
procedures

Tests of
controls

A.

Yes

Yes

B.

Yes

No

C.

No

Yes

D
.

No

No

A.
B.
C.
D.

Option A
Option B
Option C
Option D
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Audit Procedures

15.

Assertions that have a meaningful bearing on whether an account balance,


transaction class, or disclosure is fairly stated are referred to as:
A.
B.
C.
D.

Appropriate assertions.
Sufficient assertions.
Relevant assertions.
Reliable assertions.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Explain the relationship between audit risk, audit evidence, and financial statement
assertions.
Topic: Risk, Evidence, and Assertions

16.

Which of the following is not an assertion relating to classes of transactions?


A.
B.
C.
D.

Accuracy.
Sufficiency.
Cutoff.
Classification.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation

5-28
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Distinguish between the concepts of sufficient and appropriate as they apply to audit
evidence.
Topic: Risk, Evidence, and Assertions

17.

Audit documentation should be sufficient to allow which individual to understand


the audit work performed, the evidence obtained, and the significant conclusions?
A.
B.
C.
D.

A certified public accountant.


A partner in a CPA firm.
An experienced auditor.
The controller at the company being audited.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-07 Discuss the factors that affect the auditors' judgment as to the nature and extent of
audit documentation.
Source: AICPA
Topic: Audit Documentation

18.

Which of the following is not considered to be an analytical procedure?


A.
B.
C.
D.

Comparisons of financial statement amounts with source documents.


Comparisons of financial statement amounts with nonfinancial data.
Comparisons of financial statement amounts with budgeted amounts.
Comparisons of financial statement amounts with comparable prior year
amounts.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Risk, Evidence, and Assertions

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 which exist at the balance sheet date
will not be detected.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement

5-29
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McGraw-Hill Education.

Accessibility: Keyboard Navigation


Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Risk, Evidence, and Assertions

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.
B.
C.
D.

Test of transactions.
Analytical procedures.
Test of controls.
Test of details.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Audit Procedures

21.

The inspection of a vendor's invoice by the auditors is:


A.
B.
C.
D.

Direct evidence about occurrence of a transaction.


Physical evidence about occurrence of a transaction.
Documentary evidence about occurrence of a transaction.
Part of the client's accounting system.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Risk, Evidence, and Assertions

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.
B.
C.
D.

5%.
12.5%.
42.7%.
60%.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis

5-30
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.

Accessibility: Keyboard Navigation


Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Identify and explain the components of audit risk.
Topic: Risk, Evidence, and Assertions

23.

Analytical procedures are required at the risk assessment stage and as:
A.
B.
C.
D.

Tests of internal control.


Substantive procedures.
Procedures near the end of the audit.
Computer generated procedures.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Analytical Procedures

24.

During financial statement audits, auditors seek to restrict which type of risk?
A.
B.
C.
D.

Control risk.
Detection risk.
Inherent risk.
Account risk.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Identify and explain the components of audit risk.
Topic: Risk, Evidence, and Assertions

25.

Which of the following groups are not considered a specialist by AICPA Professional
Standards?
A.
B.
C.
D.

Appraisers.
Internal auditors.
Engineers.
Geologists.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Risk, Evidence, and Assertions

5-31
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McGraw-Hill Education.

26.

A CPA wishes to use a representation letter as a substitute for performing other


audit procedures. Doing so:
A.
B.
C.
D.

Violates professional standards.


Is acceptable, but should only be done when cost justified.
Is acceptable, but only for non-public clients.
Is acceptable and desirable under all conditions.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Risk, Evidence, and Assertions

27.

Which of the following best describes the problem with the use of published
industry averages for analytical procedures?
A.
B.
C.
D.

Lack of comparability.
Lack of sufficiency.
Lack of accuracy.
Lack of availability.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Analytical Procedures

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.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Describe the considerations involved in auditing subjective areas, such as certain
financial statement items valued at fair value.
Topic: Evidence for Subjective Areas

5-32
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.

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).

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Describe the considerations involved in auditing subjective areas, such as certain
financial statement items valued at fair value.
Topic: Evidence for Subjective Areas

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.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe the considerations involved in auditing subjective areas, such as certain
financial statement items valued at fair value.
Topic: Evidence for Subjective Areas

31.

Which of the following is not a basic procedure used in an audit?


A.
B.
C.
D.

Risk assessment procedures.


Substantive procedures.
Tests of controls.
Tests of direct evidence.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Audit Procedures

5-33
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.

32.

Which of the following is not a financial statement assertion relating to account


balances?
A.
B.
C.
D.

Completeness.
Existence.
Rights and obligations.
Recorded value and discounts.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Explain the relationship between audit risk, audit evidence, and financial statement
assertions.
Topic: Risk, Evidence, and Assertions

33.

Which of the following is generally true about the sufficiency of audit evidence?
A. The amount of evidence that is sufficient varies directly 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.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-03 Distinguish between the concepts of sufficient and appropriate as they apply to audit
evidence.
Topic: Risk, Evidence, and Assertions

34.

Which of the following is true about analytical procedures?


A. Performing analytical procedures results in the most reliable form of evidence.
B. Analytical procedures are tests of controls used to evaluate the quality of a
client's internal control.
C. Analytical procedures are used for planning, but they should not be used to
obtain evidence as to the reasonableness of specific account balances.
D. Analytical procedures are used in risk assessment, as a substantive procedure
for specific accounts, and near the completion of the audit of the audited
financial statements.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.

5-34
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.

Topic: Analytical Procedures

35.

Which of the following is a basic approach often used by auditors to evaluate the
reasonableness of accounting estimates?
A.
B.
C.
D.

Confirmation.
Observation.
Reviewing subsequent events or transactions.
Analyzing corporate organizational structure.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe the considerations involved in auditing subjective areas, such as certain
financial statement items valued at fair value.
Topic: Evidence for Subjective Areas

36.

An auditor is performing an analytical procedure that involves comparing a client's


account balances over time. This technique is referred to as:
A.
B.
C.
D.

Vertical analysis.
Horizontal analysis.
Cross-sectional analysis.
Comparison analysis.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Analytical Procedures

37.

An auditor is performing an analytical procedure that involves comparing a client's


ratios with other companies in the same industry. This technique is referred to as:
A.
B.
C.
D.

Vertical analysis.
Horizontal analysis.
Cross-sectional analysis.
Comparison analysis.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Analytical Procedures

5-35
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.

38.

An auditor is performing an analytical procedure that involves developing


common-size financial statements. This technique is referred to as:
A.
B.
C.
D.

Vertical analysis.
Horizontal analysis.
Cross-sectional analysis.
Comparison analysis.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Analytical Procedures

39.

Which of the following is not a basic approach often used by auditors to evaluate
the reasonableness of accounting estimates?
A.
B.
C.
D.

Confirmation of amounts.
Review of management's process of development.
Independent development of an estimate.
Review of subsequent events.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Describe the considerations involved in auditing subjective areas, such as certain
financial statement items valued at fair value.
Topic: Evidence for Subjective Areas

40.

The audit time budget is an example of:


A.
B.
C.
D.

A supporting schedule.
An administrative working paper.
A lead schedule.
A corroborative working paper.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-09 Describe the types of working papers and the way they are organized.
Topic: Audit Documentation

5-36
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McGraw-Hill Education.

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.
B.
C.
D.

Supporting schedule.
Lead schedule.
Corroborating schedule.
Reconciling schedule.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-09 Describe the types of working papers and the way they are organized.
Topic: Audit Documentation

42.

Which of the following is not a function of working papers?


A.
Provide support for the auditors' report.
B.
Provide support for the accounting records.
C.
Aid partners in planning and conducting future audits.
D. Document staff compliance with generally accepted auditing standards.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-06 Describe the purposes of audit documentation.
Topic: Audit Documentation

43.

A schedule listing account balances for the current and previous years, and
columns for adjusting and reclassifying entries proposed by the auditors to arrive
at the final mount that will appear in the financial statement, is referred to as a:
A.
B.
C.
D.

Working trial balance.


Lead schedule.
Summarizing schedule.
Supporting schedule.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-09 Describe the types of working papers and the way they are organized.
Topic: Audit Documentation

5-37
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McGraw-Hill Education.

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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Analytical Procedures

45.

The auditors must obtain written client representations that normally should be
signed by:
A.
B.
C.
D.

The president and the chairperson of the board.


The treasurer and the internal auditor.
The chief executive officer and the chief financial officer.
The corporate counsel and the audit committee chairperson.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Risk, Evidence, and Assertions

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.
B.
C.
D.

The audit time budget.


The auditors' judgment.
Generally accepted accounting quality standards.
The auditors' working papers.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Audit Procedures

5-38
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47.

Failure to detect material dollar errors in the financial statements is a risk which
the auditors primarily mitigate by:
A.
B.
C.
D.

Performing substantive procedures.


Performing tests of controls.
Assessing control risk.
Obtaining a client representation letter.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Audit Procedures

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.
B.
C.
D.

Management fraud.
Related party transactions.
Window dressing.
Weak internal control.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Describe the considerations involved in auditing subjective areas, such as certain
financial statement items valued at fair value.
Source: AICPA
Topic: Evidence for Subjective Areas

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.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe the considerations involved in auditing subjective areas, such as certain
financial statement items valued at fair value.
Source: AICPA
Topic: Evidence for Subjective Areas
5-39
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McGraw-Hill Education.

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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Risk, Evidence, and Assertions

51.

An example of an analytical procedure is the comparison of:


A. Financial information with similar information regarding the industry in which
the entity operates.
B. Recorded amounts of major disbursements with appropriate invoices.
C. Results of a statistical sample with the expected characteristics of the actual
population.
D. EDP generated data with similar data generated by a manual accounting
system.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Analytical Procedures

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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation

5-40
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Risk, Evidence, and Assertions

53.

Which of the following expressions is least likely to be included in a client's


representation letter?
A. No events have occurred subsequent to the balance sheet date that require
adjustment to, or disclosure in, the financial statements.
B. The company has complied with all aspects of contractual agreements that
would have a material effect on the financial statements in the event of
noncompliance.
C. Management acknowledges responsibility for illegal actions committed by
employees.
D. Management has made available all financial statements, including notes.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Risk, Evidence, and Assertions

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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Risk, Evidence, and Assertions

5-41
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McGraw-Hill Education.

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.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Distinguish between the concepts of sufficient and appropriate as they apply to audit
evidence.
Source: AICPA
Topic: Risk, Evidence, and Assertions

56.

Which of the following is not a typical analytical procedure?


A. Study of relationships of the financial information with relevant nonfinancial
information.
B. Comparison of the financial information with similar information regarding the
industry in which the entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate
invoices.
D. Comparison of the financial information with budgeted amounts.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Analytical Procedures

57.

Which of the following is not a primary purpose of audit working papers?


A.
B.
C.
D.

To coordinate the examination.


To assist in preparation of the audit report.
To support the financial statements.
To provide evidence of the audit work performed.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-06 Describe the purposes of audit documentation.
Source: AICPA
Topic: Audit Documentation

5-42
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McGraw-Hill Education.

58.

Concerning retention of working papers, the Sarbanes-Oxley Act:


A.
B.
C.
D.

Has no provisions.
Requires permanent retention.
Requires retention for at least 7 years.
Requires retention for a period of 4 or less years.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-08 Identify matters that should be included in audit working papers.
Topic: Audit Documentation

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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-06 Describe the purposes of audit documentation.
Source: AICPA
Topic: Audit Documentation

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.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-07 Discuss the factors that affect the auditors' judgment as to the nature and extent of
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McGraw-Hill Education.

audit documentation.
Source: AICPA
Topic: Audit Documentation

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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-09 Describe the types of working papers and the way they are organized.
Source: AICPA
Topic: Audit Documentation

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.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-07 Discuss the factors that affect the auditors' judgment as to the nature and extent of
audit documentation.
Source: AICPA
Topic: Audit Documentation

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.
AACSB: Analytical Thinking
AICPA: BB Industry

5-44
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McGraw-Hill Education.

AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-08 Identify matters that should be included in audit working papers.
Source: AICPA
Topic: Audit Documentation

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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Risk, Evidence, and Assertions

5-45
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65.

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:
All
Stores

Northeast

Average sales per store

$736,000

$840,000

Average cost of goods sold per store

$375,000

$420,000

Number of stores

48

Average square feet per store

1,800

Average sales per full-time employee

$137,000

$152,000

Average wage related expense per store

$98,000

$102,000

Average net profit contribution per store

$238,000

$285,000

An auditor performs analytical procedures that involve comparing the gross


margins of various divisional operations with those of other divisions and with the
individual division's performance in previous years. The auditor notes a significant
increase in the gross margin at one division. The auditor does some preliminary
investigation and also notes that there were no changes in products, production
methods, or divisional management during the year. Based on the above
information, the most likely cause of the increase in gross margin would be:
A. An increase in the number of competitors selling similar products.
B. A decrease in the number of suppliers of the material used in manufacturing
the product.
C.
An overstatement of year-end inventory.
D.
An understatement of year-end accounts receivable.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 List and describe types of audit evidence.
Source: IIA
Topic: Analytical Procedures

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?
I. The lower number of stores in the Mid-Central Region.
II. Sales employees are not as productive in generating sales as those in other
regions.
III. The Mid-Central Region has a lower gross margin.
A.
B.
C.
D.

I only.
II only.
II and III only.
I, II and III.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement

5-46
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Accessibility: Keyboard Navigation


Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Source: IIA
Topic: Analytical Procedures

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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Source: IIA
Topic: Analytical Procedures

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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Source: IIA
Topic: Analytical Procedures

5-47
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69.

Management has centralized purchasing and uses a model based upon previous
year's sales with adjustments for trends in the market place (e.g., the trend to
more casual shoes). A staff auditor has suggested that the centralized purchasing
may be one of the reasons for the lower level of profitability in the Mid-Central
Region. Which of the following would be the best single audit procedure to address
the staff auditor's assertion?
A. Take a sample of receiving documents at stores and trace to purchase orders to
determine the length of time between the purchase and delivery of the goods.
B. Interview store managers in the Mid-Central Region to determine their attitude
toward centralized purchasing.
C. Perform an inventory count at selected stores in the Mid-Central Region and
determine if adjustments are needed to the perpetual records.
D. Perform a product-line analysis of sales and purchases in the Mid-Central
Region and compare with other regions.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 List and describe types of audit evidence.
Source: IIA
Topic: Analytical Procedures

70.

What type of transactions ordinarily have high inherent risk because they involve
management judgments or assumptions in formulating accounting balances?
A.
B.
C.
D.

Estimation.
Nonroutine.
Qualified.
Routine.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Describe the considerations involved in auditing subjective areas, such as certain
financial statement items valued at fair value.
Topic: Evidence for Subjective Areas

71.

Assertions with high inherent risk are least likely to involve:


A.
B.
C.
D.

Complex calculations.
Difficult accounting issues.
Routine transactions.
Significant judgment by management.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand

5-48
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McGraw-Hill Education.

Difficulty: 2 Medium
Learning Objective: 05-02 Identify and explain the components of audit risk.
Topic: Risk, Evidence, and Assertions

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 these are incorrect in that no information may ever be deleted from audit
documentation.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-08 Identify matters that should be included in audit working papers.
Topic: Audit Documentation

73.

In evaluating an entity's accounting estimates, one of the auditor's objectives is to


determine whether the estimates are
A.
B.
C.
D.

Prepared in a satisfactory control environment.


Consistent with industry guidelines.
Based on verifiable objective assumptions.
Reasonable in the circumstances.

AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe the considerations involved in auditing subjective areas, such as certain
financial statement items valued at fair value.
Source: AICPA
Topic: Evidence for Subjective Areas

5-49
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McGraw-Hill Education.

74.

In obtaining sufficient appropriate audit evidence, the work of which type or types
of specialists may be relied upon?

Client Engaged

Auditor Engaged

A.

Yes

Yes

B.

Yes

No

C.

No

Yes

D.

No

No

A.
B.
C.
D.

Option A
Option B
Option C
Option D
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Risk, Evidence, and Assertions

75.

Which of the following is most likely to be considered an analytical procedure?


A. Testing purchases at year-end to determine they were recorded in the proper
period.
B. Comparing inventory balances to recent sales activities.
C. Selecting a sample of year-end receivables for confirmation.
D. Reconciling physical counts of inventory to perpetual records.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Risk, Evidence, and Assertions

76.

An unexpected economic downturn is likely to have which effect on inventory


turnover.
A.
B.
C.
D.

Increase.
Decrease.
No effect.
Each of these replies is equally likely.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation

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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Risk, Evidence, and Assertions

77.

Which of the following is most consistent with an increase in the ratio of debt to
equity?
A. Payment of a required principal payment on long-term debt.
B. Repurchase of a portion of the company's outstanding common stock.
C. Higher than expected profits due to a decrease in cost of goods sold.
D. Payment of most accounts receivable immediately prior to year-end using a
portion of the company's cash.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Risk, Evidence, and Assertions

78.

Fraudulent sales and accounts receivables recorded at year-end (with no cost of


goods sold entry) will:
A.
B.
C.
D.

Decrease recorded net income.


Decrease the current ratio.
Increase days of sales in accounts receivable.
Increase year-end recorded inventory.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 05-04 List and describe types of audit evidence.
Source: AICPA
Topic: Risk, Evidence, and Assertions

Essay Questions

5-51
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79.

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.

5-52
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McGraw-Hill Education.

Ty
pe
of
au
Audit
dit
Procedur
pr
es
oc
ed
ur
e
During
the
physical
inventory
count, the
auditor
requested
that
Acertain
.container
s of
inventory
items be
opened to
ensure
they were
not
empty.

An
al
yti
cal
1pr
.oc
ed
ur
es

During a
site visit
to a
branch
warehous
e, the
auditor
Bnoted
.unauthori
zed
personnel
have
access to
the
inventory.

Ex
ter
na
l
2co
.nfi
rm
ati
on

CThe
3In
.auditor
.qu
obtained iry
a copy of
the
company
s
accountin
g manual
and read
the
section on
inventory
to prepare
for the
physical
inventory
5-53
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McGraw-Hill Education.

observati
on.

5-54
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McGraw-Hill Education.

The
auditor
sent a
letter to
the
company
s outside
attorney
accompan
ied by
managem
ents
request
D
.for
informatio
n
concernin
g pending
or
threatene
d
litigation,
claims,
and
assessme
nts.

In
sp
ec
tio
n
of
re
4co
.rd
s
or
do
cu
m
en
ts

The
auditing
firms
computer
assisted
audit
specialist
obtained
an
electronic
Ebilling file
.from the
company
and
checked
the
accuracy
of the
summariz
ed billings
file.

In
sp
ec
tio
n
of
5ta
.ng
ibl
e
as
se
ts

FThe
.auditor
selected a
sample of
invoices
and
agreed
the
vendor to
the
approved
vendor
list, as

6Ob
.se
rv
ati
on

5-55
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McGraw-Hill Education.

had been
required
by the
client's
internal
control
procedure
s.
The
auditor
scanned
the
Re
repairs
cal
and
cu
G
maintena 7
.nce
.lat
io
account
n
for
unusually
large
amounts.
Re
pe
8rfo
.rm
an
ce

A. 5. Inspection of tangible assets.


B. 6. Observation.
C. 4. Inspection of records or documents.
D. 3. Inquiry.
E. 7. Recalculation.
F. 8. Reperformance.
G. 1. Analytical Procedures.

5-56
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AACSB: Analytical Thinking


AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Audit Procedures

80.

Analytical procedures are substantive procedures that may be used to provide


evidence about specific accounts and classes of transactions.
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):

Comparisons
Comparisons
Comparisons
Comparisons
Comparisons

with prior years' data.


with budgets and forecasts.
with industry statistics.
with nonfinancial data.
of predictable relationships based on past history.

b. Analytical procedures may be performed:


1. During risk assessment to identify items that require more audit attention
(required analytical procedures).
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 (required analytical
procedures).
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 List and describe types of audit evidence.
Topic: Analytical Procedures

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81.

Audit working papers are an integral part of an examination in accordance with


generally accepted auditing standards.
a. Describe three major functions of the audit working papers.
b. Distinguish between the permanent working paper file and the current working
paper file.

a. The functions of audit working papers include (only three required):

Provide a means of assigning and coordinating audit work.


Aid in review of the work.
Provide support for the auditors' report.
Document compliance with generally accepted auditing standards.
Aid in planning and conducting future audits.

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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-06 Describe the purposes of audit documentation.
Learning Objective: 05-09 Describe the types of working papers and the way they are organized.
Topic: Audit Documentation

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McGraw-Hill Education.

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McGraw-Hill Education.

82.

The following is an audit working paper prepared by an assistant on the Williams


audit:

Prepared by ___
Reviewed by ___
Williams Inc.
Bank Confirmation-General Account
12/31/0X
Balance per Bank @ 12/31/0X

$20,200.22

Deposit in Transit per A-1-2

2,000.00

Outstanding Checks per A-13

(5,200.00)

Other Note Collected by


Bank
Bank Service Charge
Balance per Books @ 12/31/0X

(10,000.00)

(9.50)
$8,990.69

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.
Agreed to 12/31/0X bank statement.
Agreed to general ledger.
A1
Required:
Prepare a list of review points as the preparer of this working. You may assume
that any other working papers referred to appropriate. You will receive credit for
proper points you bring up and lose credit for improper ones and omissions.

The working paper's deficiencies include:


"Prepared by" is not initialed ("Reviewed by" isn't either, but since we are
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.
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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 tick mark 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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
AICPA: FN Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-06 Describe the purposes of audit documentation.
Learning Objective: 05-07 Discuss the factors that affect the auditors' judgment as to the nature and extent of
audit documentation.
Learning Objective: 05-08 Identify matters that should be included in audit working papers.
Learning Objective: 05-09 Describe the types of working papers and the way they are organized.
Topic: Audit Documentation

5-61
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McGraw-Hill Education.