07 Rittenberg TB Ch7

Chapter 7: Audit Evidence: A Framework
TRUE/FALSE
1. Audit evidence is also known as the audit opinion.
ANS: F PTS: 1 OBJ: Overview

NAT: AACSB-Analytical skills | AICPA BB-Critical thinking
2. The amount of evidence gathered is not important to an auditor since the quality of the evidence is of
primary importance.
ANS: F PTS: 1 OBJ: Identify the Basic Sources of Audit Evidence

3. Based upon the risk of misstatement, the auditor uses judgment to determine which balances and
transactions should be tested in the financial statements.
ANS: T PTS: 1 OBJ: Identify the Basic Sources of Audit Evidence

4. Assertions are relevant to the audit process because they are the representations of management
embodied in the financial statements.
ANS: T PTS: 1
OBJ: Describe the Assertions Contained in Financial Statements
5. Assertions are not relevant to an audit because the financial statements are management's
responsibility instead of the auditor's.
ANS: F PTS: 1
6. Presentation and disclosure assertions imply that all transactions and balances are properly presented,
disclosures represent what actually happened, and the footnote disclosures are appropriate and
adequate.
ANS: T PTS: 1
7. Evidence is worth more to the audit process if it involves a member of the audit team actually going
out to physically observe it.
ANS: T PTS: 1 OBJ: Sufficiency and Reliability of Evidence

8. A client's purchase order is much better evidence than a confirmation returned from the client's bank.
ANS: F PTS: 1 OBJ: Sufficiency and Reliability of Evidence

9. An auditor may test an account balance by testing the transactions that comprise the balance, by
directly testing the final account balance, or a combination of both.

10. Internal documentation is more reliable to the auditor if the internal control surrounding the
documentation is considered strong.

11. Documentation that is produced electronically by the client's internal systems are not considered
reliable to the audit process.
ANS: F PTS: 1 OBJ: Sufficiency and Reliability of Evidence

12. Emails and faxes are documents that represent important evidence to the auditor, however, they are
difficult to substantiate as authentic.

13. Test of transactions, directional testing and analytical procedures are used to provide evidence about
management's assertions embedded in the financial statements.

14. Vouching recorded transactions involves taking a sample from the journal and tracing them back to the
source documents to ensure they occurred.
ANS: T PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests
15. Vouching is a process that helps establish that all recorded transactions are valid.
16. One strategy used by auditors in testing assertions is to perform directional testing to find
overstatements or understatements, but not both.
ANS: T PTS: 1 OBJ: Explain Directional Testing

17. The direction of testing from recorded amounts toward supporting documentation provides evidence as
to occurrence of assets and revenues.

18. The direction of testing from the source documents to recorded amounts provides evidence regarding
the completeness of liabilities and expenses.

19. For an auditor to test the existence assertion of assets, testing will be performed beginning with the
recorded asset and ending with the source documents.

20. Ulanda and Mudana, CPAs are performing an audit on McArnee, Inc. Ulanda selects a sample from
certain source documents and traces them forward to the accounts payable ledger. The purpose of this
test is to determine the possibility of understated liabilities.

21. The auditor's concern for potential fraud in the financial statements will most likely result in increased
testing for the overstatement of revenues.

22. The extent of evidence gathered during an audit is affected by the auditor's assessment of detection
risk.
23. Auditors must mail the confirmations through the client's mailroom.
ANS: F PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests
24. The primary evidence in support of an auditor's conclusions is the auditor's documentation.
ANS: T PTS: 1
OBJ: Purposes and Contents of Good Audit Documentation
25. Audit documentation serves as support for the financial statements.
ANS: F PTS: 1
26. The auditor's opinion on the financial statements taken as a whole is the single most important piece of
information documenting the financial statements.
ANS: F PTS: 1
27. The primary importance of the audit program is its guidance of the overall conduct of the audit.
ANS: T PTS: 1
28. Inquiries of client personnel are not an effective means of evidence gathering by an auditor.
29. The performance of analytical procedures is often used by an auditor as a procedure to gather certain
types of audit evidence.
30. An example of physical examination is the auditor's testing of inventory by counting it to substantiate
the existence assertion.
31. The auditor multiplies the quantity of inventory on the inventory ledger by the cost of the inventory to
arrive at total inventory balance per product number. This is an example of recomputation by footing.
32. Some audit procedures may be performed prior to the close of the year under audit.
33. The audit program specifies what the client must do to perform the audit in accordance with generally
accepted audit procedures.
ANS: F PTS: 1 OBJ: Nature and Purposes of Audit Programs

34. The auditor utilizes the same audit program and the same procedures each year for a client in order to
ensure that nothing is missed in the current year audit.
ANS: F PTS: 1 OBJ: Nature and Purposes of Audit Programs

35. Lead schedules are often created by auditors to combine similar accounts, such as all inventory
accounts for further testing and documentation.
ANS: T PTS: 1
36. Audit planning workpapers are prepared to support the foundation of the audit and are prepared for the
client to assist in their understanding of the specific audit procedures that will be performed.
ANS: F PTS: 1
37. The quality of electronic evidence depends on the controls built into the information system.

38. Recent regulation requires that audit documentation be retained for at least seven years.
ANS: T PTS: 1
39. Audit documentation should include either manual or electronic initials in order to identify the audit
personnel responsible for the work and the managers and partners reviewing the work.
ANS: T PTS: 1
40. Partners performing a concurring audit review should have no other involvement in the audit.
ANS: T PTS: 1 OBJ: Concurring Partner Reviews

41. The reliability of audit evidence means that it is relevant to the audit objective.
ANS: T PTS: 1 OBJ: Audit Evidence

42. The clients purchase orders and invoices are a more persuasive type of evidence than evidence
directly observed by the auditor.
ANS: F PTS: 1 OBJ: Audit Evidence

43. Underlying accounting records consists of evidence of controls as well as supporting records such as
checks, invoices, the general and subsidiary ledger and journal entries.

44. Reliable evidence usually exists more for transactions than for items making up an ending balance.

45. Analytical procedures are a type of substantive evidence.

46. Direct tests of account balances and of transactions is a dual purpose test.

47. Dual purpose tests examines both controls and the reasonableness of dollar amounts. A good example
is testing a sample of purchase transactions that occurred throughout the year.

48. Testimonial evidence concerns review of publicly available information about the client.

49. In the performance of audit procedures there is a preference by auditors to focus on changes in account
balances during the year if the opening balances were audited the previous year.

50. An advantage of directional testing is that it is more efficient by providing evidence on complementary
sets of accounts.

MULTIPLE CHOICE
1. Which one of the following statements is false?

a. Auditing includes the process of gathering evidence to test assertions.
b. No general audit program suits the needs for all situations.
c. Even though all audits are different, they can all be approached in the same manner.
d. All audits involve testing management's assertions contained in written communications to
another party and independently gathering evidence to test the relevant assertions.
ANS: C PTS: 1 OBJ: Overview
2. Which one of the following assertions regarding an inventory of ski equipment for Matterhorn, Inc.
would be considered an incorrect statement?
a. The inventory exists at the balance sheet date.
b. The inventory is owned by Matterhorn.
c. The footnote disclosures concerning inventory pricing, major consignments, and the like
are incomplete and inadequate.
d. The inventories are properly valued.
ANS: C PTS: 1 OBJ: Assertions Contained in Financial Statements
3. Which one of the following management assertions about the cash account of a company which only
holds the local currency of that country requires the least amount of audit procedures?
a. existence
b. valuation
c. completeness
d. presentation
ANS: B PTS: 1 OBJ: Assertions Contained in Financial Statements
4. Directional testing involves testing transactions or balances primarily for which type of error?
a. overstatement
b. understatement
c. either overstatement or understatement
d. neither overstatement nor understatement
ANS: C PTS: 1 OBJ: Directional Testing
5. Which one of the following would be considered the most persuasive type of audit evidence?
a. purchase orders from vendors
b. customer accounts receivable files
c. computerized general ledger
d. confirmations from banks
ANS: D PTS: 1 OBJ: Sufficiency and Reliability of Evidence
6. Which one of the following would be the most persuasive type of evidence?
a. check register
b. bank statement
c. observation of assets
d. inquiry with the in-house attorney
ANS: C PTS: 1 OBJ: Sufficiency and Reliability of Evidence
7. Which one of the following would be the least persuasive type of evidence?
a. Confirmations returned by bank directly to the auditor.
b. Letters of communication from the Securities Exchange Commission.
c. Physical examination of perpetual inventory.
d. General ledger in a newly developed information system.
8. Management's assertions in the financial statements are of relevance to the audit process because:
a. they are the procedures that will be performed by the audit team.
b. they are utilized by auditors in developing proper tests and procedures.
c. they are direct evidence that management has prepared financial statements in accordance
with generally accepted audit standards.
d. they relate more to the audit while the financial statements belong to the auditor.
ANS: B PTS: 1 OBJ: Sufficiency and Reliability of Evidence
9. For the financial statements to be presented in accordance with generally accepted accounting
principles, the information included must:
a. embody the appropriate assertions of management.
b. be consistent, comparable and accurate.
c. have full and adequate disclosure.
d. be approved by an auditor that has prepared an audit program.
ANS: A PTS: 1 OBJ: Assertions Contained in Financial Statements
10. The process of vouching helps establish that all recorded transactions
a. have been recorded.
b. are complete.
c. are valid.
d. are presented properly.
11. Footing, cross-footing, and tests of extensions are examples of which approach to gathering evidence?
a. reprocessing
b. recalculation
c. vouching
d. examination of documentation
12. Reprocessing of transactions helps establish that all valid items have been recorded. Reprocessing tests
the assertion of
a. occurrence.
b. rights.
c. existence.
d. completeness.
13. Which of the following represents competent audit evidence?

a. A large quantity of documentation gathered in the audit.
b. Excellent documentation of internal control gathered in the audit.
c. Quality of documentation gathered in the audit.
d. Financial statements prepared by the auditor.
14. Sufficient evidence gathered by the auditor involves which of the following?
a. The amount of evidence to be obtained.
b. The type of evidence to be obtained.
c. Obtaining no evidence to achieve efficiency.
d. The use of an audit program to obtain evidence.
ANS: A PTS: 1 OBJ: Sufficiency and Reliability of Evidence
15. The primary support of an audit is (are)
a. the financial statements.
b. the audit working papers.
c. the audit report.
d. the confirmation documentation.
ANS: B PTS: 1
16. The reliability of a client's internal documentation is most affected by:

a. the auditor's independence.
b. management's motivation to misstate accounts.
c. the type of audit report that will be issued.
d. management's ability to understand generally accepted audit standards.
17. External documentation may lack reliability, even if the auditor receives it directly. The most probable
reason for this is that:
a. the external party may be competent in performing duties.
b. the documentation may be properly understood by the client in the response.
c. the auditor may decide not to use the documentation and replace it with other documents.
d. the documentation may have been altered if the process is not controlled from inception.
18. When may audit procedures be performed?

I - on the balance sheet date.
II - prior to the balance sheet date.
III - subsequent to the balance sheet date.
a. I only.
b. I and III only.
c. II only.
d. I, II, and III.
ANS: D PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests
19. An auditor selects a sample of items recorded and traces them back to the supporting documentation.
This is an example of:
a. directional testing for existence.
b. directional testing for completeness.
c. direct testing for valuation.
d. direct testing for rights.
ANS: A PTS: 1 OBJ: Directional Testing
20. Directional testing is important to an auditor because of which of the following factors?
a. Certain accounts are more prone to be misstated by overstatement than others.
b. The auditor must remain organized when conducting an audit.
c. The primary concern of the auditor is the understatement of asset and revenue accounts.
d. It tests for existence and completeness simultaneously.
ANS: A PTS: 1 OBJ: Directional Testing
21. The primary assertion that is satisfied by physically observing the client's count of inventory is
a. rights.
b. valuation.
c. completeness.
d. existence.
ANS: D PTS: 1
OBJ: Basic Audit Procedures and the Assertion(s) each Tests
22. How would an auditor most likely test the mechanical accuracy of a 6,000 page inventory report?
a. Examine a random sample of inventory documents.
b. Use generalized audit software to foot and recalculate.
c. Send confirmations to vendors.
d. Inquire of the inventory manager as to the accuracy.
ANS: B PTS: 1
23. The audit team asks the client to pull a sample vendor files and examines the invoices supporting the
purchases of inventory items during the year. What is the most probable reason for the use of this
evidence?
a. Confirmation of vendors supplying inventory for existence.
b. Analytical procedures to determine completeness of inventory.
c. Testing for the valuation of inventory using the FIFO cost flow assumption.
d. Reading the terms of the arrangements with vendors for disclosure.
ANS: C PTS: 1
24. The extent of procedures is affected mostly by:

a. the sheer volume of procedures to be applied by the auditor.
b. the time of year in which the client takes a physical inventory in the warehouse.
c. the auditor's judgment that misstatements are probable in certain balances.
d. the availability of the client's staff at or near the balance sheet date.
ANS: C PTS: 1
25. An audit program is created to specify:

a. the type of audit opinion to be rendered based upon procedures performed.
b. the audit procedures that will be performed every year for the client.
c. how an auditor should think while performing audit procedures.
d. audit objectives and procedures to be followed during the audit process.
ANS: D PTS: 1 OBJ: Nature and Purposes of Audit Programs
26. Which one of the following is the primary reason for documenting audit work?
a. to prevent litigation by other parties that question the audit performance.
b. to provide a stand-alone medium that gives audit conclusions and supports the opinion.
c. to give the client a full reporting of all work performed on their behalf.
d. to supply a point of reference for all auditors performing the work subsequently.
ANS: B PTS: 1
27. Which one of the following original documents would most likely be found in the audit working
papers?
a. Vendor invoices
b. Check registers
c. Returned confirmation requests
d. Payroll time cards
ANS: C PTS: 1
28. Conclusions are typically documented by auditors in which type of work paper?
a. audit planning memo
b. audit program
c. audit memoranda
d. representation letter
ANS: C PTS: 1
29. Which of the following is an example of poorly-developed audit documentation?

a. clear communication as to how testing was performed, the results and conclusions.
b. organization and assembly of documentation in an orderly fashion.
c. headings that include the name of the accounting firm and the date of the last day of field
work.
d. authenticated identification of the person responsible for completing the procedure and
conclusions.
ANS: C PTS: 1
30. The audit firm of Lake and South, LLP is wrapping up its audit of Brycestone, Inc. The evidence has
been relatively easy to obtain except in one case. Which of the following would represent a balance or
transaction that would be difficult for Lake and South to obtain evidence?
a. prepaid expenses
b. cash
c. accrued wages and salaries
d. accrued warranties
ANS: D PTS: 1
OBJ: Uniqueness of Procedures for Testing Management's Estimates
31. The primary source for evidence to corroborate the existence of pending litigation is:
a. vendor confirmations
b. disclosures in financial statements
c. management representation letters
d. attorney confirmations
ANS: D PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests
32. Performance of audit procedures at an interim date causes the risk of material misstatement occurring
between the interim date and the end of the year to
a. decrease.
b. increase.
c. remain the same.
d. become more difficult to ascertain.
ANS: B PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests
33. Shelfco, Inc. has an inventory report that is approximately 4,000 pages. The audit program requires
James Morris, the staff auditor, to test the report for accuracy. What is the most efficient and effective
means for James to perform the procedure?
a. Ask the client to foot and extend the report and return the results of the test to the auditor
for concluding.
b. Foot and extend every 100th page and extrapolate the results of footing to the total of the
report.
c. Obtain an electronic copy of the file and use generalized audit software in footing and
extending.
d. Skip the procedure as the cost of footing and extending exceeds the benefit derived from
the audit test.
ANS: C PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests
34. What is the role of a concurring partner in an audit engagement?

a. to provide a "fresh", quality review of the audit documentation and conclusions and its
relationship to the opinion.
b. to go back over the staff, senior and manager work and redo the more difficult areas of the
audit.
c. to work as a liaison between the audit committee and the audit team should there be
disagreements.
d. to act as an advocate of the client in order to ensure quality customer service has been
given.
ANS: A PTS: 1 OBJ: Purpose of Concurring Partner Reviews
35. Which of the following is not an estimate that requires significant auditor judgment and skepticism?
a. Obligations for pension plans.
b. Valuation of goodwill.
c. Allowance for bad debt.
d. Common stock and related additional paid-in capital.
ANS: D PTS: 1
OBJ: Uniqueness of Procedures for Testing Management's Estimates
36. A concurring partner review should be conducted by:

a. the partner-in-charge of the audit who understands the client's business.
b. a partner from another firm who is on special assignment to review the audit.
c. the PCAOB as a part of its regulatory responsibility in conjunction with the SEC.
d. a partner not otherwise involved in the audit who understands the client's business.
ANS: D PTS: 1 OBJ: Purpose of Concurring Partner Reviews
37. Empire Business Machines, Inc. (EBM) is audited by Flintstone and Sigmond Co. Empire utilizes
periodic inventory and has ten locations throughout Wyoming, Utah and Idaho. The audit program of
Flintstone and Sigmond requires that the following procedure be performed by the senior auditor,
manager and four other auditors:
A. Haphazardly select six of the EBM locations, (two of which that were not selected in the
previous audit) to be visited at 5:30 a.m. on January 1, 20XX. Do not inform EBM of
the locations, but make the client aware that we could visit any one of the ten locations
at 5:30 a.m. that morning.
1. Observe and count 45 product types at each location. Recount any differences with
client records and statistically analyze remaining differences for possible
misstatement to inventory accounts. Keep an inventory tag range/sequence control
list and document the tag numbers present in the warehouse and those utilized in
your count.
To which of management's assertions does procedure A-1 of Flintstone and Sigmond primarily relate?
a. existence
b. valuation
c. observation
d. rights
ANS: A PTS: 1
38. Empire Business Machines, Inc. (EBM) is audited by Flintstone and Sigmond Co. Empire utilizes the
FIFO cost flow assumption at the lower of cost or market for its inventory and has ten locations
throughout Wyoming, Utah and Idaho. The audit program of Flintstone and Sigmond requires that the
following procedures be performed by the senior auditor:
B. Using the computerized audit software supplied by Flintstone and Sigmond:

1. Statistically select a sample of inventory units and perform price tests to the FIFO
cost flow assumption.
2. Perform lower of cost or market tests on the inventory sample selected above.
To which of management's assertions does procedure B-1 and B-2 of Flintstone and Sigmond
primarily relate?
a. existence and accuracy
b. valuation gross and net
c. rights and obligations
d. presentation and disclosure
ANS: B PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests
39. Directional testing creates audit efficiency by taking advantage of the double-entry bookkeeping
system. Which of the following is not a primary reason for this effect?
a. misstatement of some accounts are more likely to occur in one direction than the other.
b. increase the persuasiveness of the evidence.
c. provides evidence on a complementary set of accounts.
d. some assertions are directional by nature.
ANS: B PTS: 1 OBJ: Directional Testing
40. Which of the following type(s) of evidence is considered substantive evidence?

a. tests of controls.
b. analytical procedures.
c. direct tests of account balances and transactions.
d. Both B and C.
ANS: D PTS: 1 OBJ: Substantive testing
41. Which of the following types of audit evidence is the most reliable?
a. evidence from the clients organization.
b. evidence from a poorly controlled system.
c. directly observable evidence.
d. facsimiles of documents.
ANS: C PTS: 1 OBJ: Persuasiveness of Evidence
42. Which of the following types of audit evidence is the least reliable?
a. evidence from the clients organization.
b. evidence derived from a well-controlled system.
c. evidence from independent outside sources.
d. original documents.
ANS: A PTS: 1 OBJ: Persuasiveness of Evidence
43. In evaluating cost of evidence, which of the following phases of the audit usually has the lowest cost?
a. test transactions and account balances.
b. understand client and industry.
c. assess risk of material misstatement.
d. Both A and B.
ANS: B PTS: 1 OBJ: Cost of Evidence
44. Recalculations of the clients computations would not include which of the following types of
evidence?
a. cutoff.
b. footing.
c. extension.
d. cross-footing.
ANS: A PTS: 1 OBJ: Types of Evidence
45. Vouching of transactions deals with

a. testing forward.
b. testing backward.
c. testing at a point in time.
d. directional testing either forward or backward.
ANS: B PTS: 1 OBJ: Types of Evidence
46. Reprocessing of transactions involves

a. testing forward.
b. testing backward.
c. test at a point in time.
d. directional testing either forward or backward.
ANS: A PTS: 1 OBJ: Types of Evidence
47. Which of the following characteristics are not normally included in good audit documentation?
a. initials of the person preparing and reviewing the document.
b. an index.
c. a cross-reference.
d. all are included in good audit documentation.
ANS: D PTS: 1 OBJ: Audit documentation
48. The dual purpose audit tests are useful as

a. tests of controls
b. tests of account balances.
c. tests of controls or tests of account balances
d. tests of controls and tests of account balances.
ANS: D PTS: 1 OBJ: Types of Evidence
49. The auditor normally considers both underlying accounting data and corroborating information in the
audit process. Underlying accounting data does not include
a. evidence of controls.
b. minutes of meetings.
c. checks, invoices, and contracts.
d. general and subsidiary ledger.
ANS: B PTS: 1 OBJ: Types of Evidence
50. Auditors have traditionally focused most audit procedures on the direct tests of assets and liability
account balances, as opposed to examining transactions during the year, because
a. there are usually fewer items in ending balances.
b. more reliable evidence usually exists for ending balances.
c. there is a preference to focus on change in account balances.
d. both A and B.
e. all of the above.
ANS: E PTS: 1 OBJ: Types of Evidence
ESSAY
1. Audit assertions and objectives - accounts receivable
Based on management assertions implicit in the accounts receivable account, explain the audit
objectives for the accounts receivable and related balances.
ANS:
The audit objectives for the audit of accounts receivable would determine that:
Accounts receivable actually exist with valid customers. (Existence)
The client has the right to or controls the receivables and has not pledged or factored them.
(Rights)
Accounts receivable are recorded at historical cost or invoice price. (Valuation gross)
Accounts receivable are recorded net of any applicable sales discounts, returns or allowances.
(Valuation gross)
An allowance for doubtful accounts has been established for an estimate of dollars that will
not be received on account. (Valuation net)
All accounts receivable are recorded for the period and are not understated. (Completeness)
Footnote disclosures discuss the collectibility of accounts receivable, pledging and factoring
and any concentration of credit risk. A reconciliation of the allowance for doubtful accounts
has been presented in the footnotes. (Presentation and disclosure)
PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests

NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking
2. Directional testing
Explain the meaning of "directional testing" and identify the reasons why directional testing leads to
audit efficiency. Give examples of directional testing for the existence and completeness assertions.
ANS:
Directional testing involves testing transactions or balances primarily for one type of error,
either overstatement or understatement, but not for both at the same time. For example, an
audit test for an understatement of Accounts Payable also tests for an understatement of
Purchases. Directional testing also leads to audit efficiency for the following reasons:
Misstatements of some accounts are more likely to occur in one direction than the other.
Directional testing of an account balance provides evidence on a complementary set of accounts.
Specific assertions are normally tested directionally. An example is the testing of the existence
assertion for overstatements or the completeness assertions for understatements.
An example of directional testing for existence includes the sampling of assets recorded on the balance
sheet, such as fixed assets and tracing those items back through the system to original source
documents such as vendor invoices. This procedure tests for the possible overstatement of the fixed
assets. Item(s) selected from the general ledger that are found to lack adequate supporting vendor
invoices to substantiate existence are evidence of the overstatement of assets.
Testing directionally for completeness, on the other hand is just the opposite. Source documents are
sampled and traced forward through the journals, ledgers and to the general ledger. An example may
be vendor invoices for expenses. Invoices that are not found in the general ledger balance prove that
the system is incomplete. In the example of an expense, net income would be overstated and liabilities
may be understated.
PTS: 1 OBJ: Directional Testing

3. Proper audit documentation
Audit documentation serves as the primary support of an audit. Give at least six examples of the
components of proper working paper documentation.
ANS:
Audit documentation serves as the primary evidence in support of the auditor's opinion. Well
prepared documentation should include:
a heading that includes the name of the audit client, an explanatory title, and the balance sheet
date.
the initials or electronic signature of the auditor performing the audit test and the date the test was
completed.
the initials or electronic signature of the senior, manager, or partner who reviewed the working
papers and the date the review was completed.
a description of the nature of the test performed and the findings.
an assessment of whether the test indicates the possibility of material misstatement in the account.
manual or electronic tick marks and a legend indicating the nature of the work performed by the
auditor.
an indexing or electronic sequencing routine to identify the location and organization of working
papers.
a cross reference or electronic link to related working papers.
Many of these components are electronic in nature and are resident in a paperless audit software and
storage combination. Nonetheless, such components remain vital in proper documentation of audit
testing and conclusions.
PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation

4. Competence of audit evidence
The Auditing Standards Board established guidelines to assist auditors in evaluating the competence of
audit evidence. Discuss the criteria for the more reliable types of evidence and include an example for
each.
ANS:
Evidence that is considered to be more reliable includes:
Directly observable evidence such as counting inventory or observing fixed assets.
Evidence derived from a client's strong internal control structure such as reconciliations or the
information system itself.
Evidence from independent external sources such as confirmations from banks, customers and
attorneys.
Examples provided by the students may vary and the instructor must use his or her judgment.
PTS: 1 OBJ: Sufficiency and Reliability of Evidence
5. Sufficient appropriate evidential matter
Discuss the source of the phrase "sufficient appropriate evidential matter is to be obtained..."
What is the importance of obtaining sufficient appropriate evidential matter? Contrast sufficiency to
competency as it relates to such audit evidence.
ANS:
The third standard of field work of the generally accepted audit standards states that "sufficient
appropriate evidential matter is to be obtained" by performing various audit procedures in order to
support the audit opinion regarding the financial statements under audit.
The sufficiency and competency of evidence is of critical importance to the audit as it affects the
nature, timing and extent of audit testing to be performed by the audit team.
Competency of evidence includes the quality or reliability of the evidence obtained. It must be valid
and relevant to management's assertions or it is not a proper form of evidence. Typically, the
competency of audit evidence can be judged by an auditor based upon the underlying internal control,
the independence of outside sources and the auditor's own knowledge of the evidence. Sufficiency
deals with the amount or nature of the evidence that will be obtained such as the accounting data itself
and the corroborating data.
These concepts also bear functional relationships to audit risk assessment. For instance, the less
competent the evidence is, the more sufficient the evidence that must be obtained. In other words, as in
the audit risk model, the higher the risk of poor internal control over evidence, the more audit work
that must be performed to mitigate detection risk. This is how the risk of material misstatements
existing in the financial statements and not being discovered by the auditor is reduced.
PTS: 1 OBJ: Sufficiency and Reliability of Evidence

6. Audit procedures on Cash balances
Identify and demonstrate nine different approaches to the obtaining audit evidence for an audit of cash
balances in a financial statement audit.
ANS:
In the performance of the audit of cash the following approaches may be used:
Observe the client's handling of the petty cash fund and the control over incoming cash and
cash storage. Observe the process of cash received in the mailroom, deposits to the bank and
reconciliation by a separate individual.
Physically count the petty cash, cash in drawers and cash in safes.
Examine documents such as the bank statement.
Make inquiries of personnel concerning the handling of daily deposits or the mail receipts.
Confirm the bank balance with financial institutions using proper confirmation procedures.
Recalculate the bank reconciliation computation trace the book balance to the general ledger.
Inquire of materially aged outstanding checks and deposits in transit.
Trace outstanding checks and deposits in transit clearing subsequent bank statements from a
qualified source.
Vouch material and unusual entries in the cash account.
Perform an analysis of bank transfers at or near cutoff.
Use analytical procedures to determine the reasonableness of the reported cash balance.
This response is only intended to be a sample. The instructor must evaluate the quality of the student
responses.

7. Audit procedures for accounts receivable
In the process of gathering and evaluating evidence, documentation is derived in various forms. Rank
the following types of evidence in the audit of Accounts Receivable from most persuasive to least
persuasive and provide explanations for your decision.
oral statements from management that the accounts receivable are fairly presented
confirmations received from customers
deposit slips subsequent to year end showing deposits by customer name
copies of sales invoices
ANS:
The ranking of these pieces of evidence on accounts receivable and the reasons for the
rankings are as follows:
Accounts receivable confirmations would be most persuasive as these forms of evidence are
obtained from independent parties and sent directly to the auditor.
Deposits subsequent to year end showing customer names would be next in line. The reason is that
even though the deposit slips are generated and held internally they have had outside intervention
in the hands of the banks.
Sales invoices would rank next as they are also prepared inside the client's office and held by the
client but they have no outside intervention.
Oral statements by management concerning the fairness of the financial statements would be least
persuasive as they have no validity until we can prove their statements to be true by other means.

8. Audit program
Discuss the purpose of the audit program and its importance to the auditor.
ANS:
An audit program specifies the actual procedures to be performed in gathering the required audit
evidence about the assertions embodied in the client's financial statements. Because the audit
program guides the overall conduct of the audit it is the single most important piece of
documentation in an audit engagement. The program is an effective means for:
organizing and distributing audit work.
monitoring the audit process and progress.
reviewing for possible omission of material areas from the audit.
recording the audit work performed.
reviewing the completeness and persuasiveness of procedures performed.
PTS: 1 OBJ: Nature and Purposes of Audit Programs

9. Audit standards of proper documentation
Discuss the audit standards that must be applied to the auditor's documentation. Give five examples the
types of documentation will be found in the audit work papers.
ANS:
Auditing standards require adequate documentation in the general standards under both planning and
supervision and gaining an understanding of internal control.
The third standard of field work states that "sufficient appropriate evidential matter is to be obtained
through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an
opinion regarding the financial statements under audit."
Pursuant to all of these requirements, audit work papers will include such items as:
1. Evidence of planning such as the planning memo, risk assessments and the audit
program.
2. Evidence of the auditor's understanding and assessment of internal control over the
client organization.
3. The client's trial balance and proposed audit adjustments.
4. Copies of certain internal and external documents such as letters of communication with
the client and returned confirmations.
5. Audit memoranda documenting the testing process, auditor reasoning and conclusions.
6. Results of analytical procedures and audit testing.
7. Auditor generated analysis of account balances such as the allowance for doubtful
accounts.
PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation

10. Concurring partner review
Explain the purpose, importance and criteria of the concurring review of an audit.
ANS:
The purpose of the concurring partner review is to help ensure that the evidence documents in the
working papers adequately support the audit opinion. It is a good idea for all audits and required for
SEC engagements. It serves as a double check on the quality of the audit testing and conclusions
documented as support for the audit opinion. The concurring partner review is important to protect the
CPA and the auditing firm from lawsuits. The concurring partner review should be performed by an
audit partner having no other involvement in the audit but who understands the client's business.
PTS: 1 OBJ: Purpose of Concurring Partner Reviews

11. Audit procedures
Discuss how each of the following procedures could be used in the audit of fixed assets, e.g., various
types of equipment used in the business.
Procedure How used Assertion(s) tested

Observation
Physical examination
Inquiry
Confirmation
Examination of
documents
Recomputation
Reprocessing
Vouching
Analytical
Procedures
ANS:
Procedure How used Assertion(s) tested
Observation Observe taking of inventory of assets Existence
Physical examination Inspect existence and condition of assets. Existence, Valuation
Inquiry Inquire of management of assets not Existence, Completeness
recorded or that have been sold or
discarded.
Confirmation Confirm details of purchase with seller Existence, Valuation,
of asset. Presentation and
Disclosure, Rights
Examination of Examine supporting documentation. Existence, Valuation,
documents Rights
Recomputation Recompute depreciation Valuation
Reprocessing Reprocess a sample of purchase Existence
transactions
Vouching Vouching a sample of recorded assets Existence, Valuation,
Rights
Analytical Analysis depreciation Valuation, Completeness
Procedures expense
PTS: 1 OBJ: Audit procedures

12. Audit procedures
Businesses often have litigation against them that the auditor has to identify and adequately disclose.
List the financial assertions that apply to Contingencies. For each assertion indicate two or three audit
procedures that would address that assertion.
Organize you answer as follows:
Financial statement assertion Audit procedure(s)

ANS:
Financial statement assertion Audit procedure(s)
Existence Inquiry of management
Send confirmation request to legal counsel
Completeness Inquiry of management
Vouch legal expenses
Review nature of legal services to determine if a
liability might exist
Rights and Obligations Inquiry of management
Confirmation from legal counsel
Examine payments related to in-progress litigation
Valuation and Allocation Inquiry of management
Confirmation of legal counsel
Review court rulings
Presentation and Disclosure Inquiry of management
Confirmation of legal counsel
PTS: 1 OBJ: Audit procedures


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Chapter 7: Audit Evidence: A Framework

1. Audit evidence is also known as the audit opinion.

ANS: F PTS: 1 OBJ: Overview

ANS: F PTS: 1 OBJ: Identify the Basic Sources of Audit Evidence

ANS: T PTS: 1 OBJ: Identify the Basic Sources of Audit Evidence

ANS: T PTS: 1 OBJ: Sufficiency and Reliability of Evidence

ANS: F PTS: 1 OBJ: Sufficiency and Reliability of Evidence

ANS: T PTS: 1 OBJ: Sufficiency and Reliability of Evidence

ANS: T PTS: 1 OBJ: Sufficiency and Reliability of Evidence

ANS: F PTS: 1 OBJ: Sufficiency and Reliability of Evidence

ANS: T PTS: 1 OBJ: Sufficiency and Reliability of Evidence

ANS: T PTS: 1 OBJ: Sufficiency and Reliability of Evidence

ANS: T PTS: 1 OBJ: Explain Directional Testing

ANS: T PTS: 1 OBJ: Explain Directional Testing

ANS: T PTS: 1 OBJ: Explain Directional Testing

ANS: T PTS: 1 OBJ: Explain Directional Testing

ANS: T PTS: 1 OBJ: Explain Directional Testing

ANS: T PTS: 1 OBJ: Explain Directional Testing

25. Audit documentation serves as support for the financial statements.

ANS: F PTS: 1 OBJ: Nature and Purposes of Audit Programs

ANS: F PTS: 1 OBJ: Nature and Purposes of Audit Programs

ANS: T PTS: 1 OBJ: Sufficiency and Reliability of Evidence

ANS: T PTS: 1 OBJ: Concurring Partner Reviews

ANS: T PTS: 1 OBJ: Audit Evidence

ANS: F PTS: 1 OBJ: Audit Evidence

ANS: T PTS: 1 OBJ: Audit Evidence

ANS: F PTS: 1 OBJ: Audit Evidence

45. Analytical procedures are a type of substantive evidence.

ANS: F PTS: 1 OBJ: Audit Evidence

ANS: T PTS: 1 OBJ: Audit Evidence

ANS: F PTS: 1 OBJ: Audit Evidence

ANS: T PTS: 1 OBJ: Audit Evidence

ANS: T PTS: 1 OBJ: Audit Evidence

1. Which one of the following statements is false?

13. Which of the following represents competent audit evidence?

16. The reliability of a client's internal documentation is most affected by:

18. When may audit procedures be performed?

24. The extent of procedures is affected mostly by:

25. An audit program is created to specify:

29. Which of the following is an example of poorly-developed audit documentation?

34. What is the role of a concurring partner in an audit engagement?

36. A concurring partner review should be conducted by:

B. Using the computerized audit software supplied by Flintstone and Sigmond:

40. Which of the following type(s) of evidence is considered substantive evidence?

45. Vouching of transactions deals with

46. Reprocessing of transactions involves

48. The dual purpose audit tests are useful as

1. Audit assertions and objectives - accounts receivable

PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests

PTS: 1 OBJ: Directional Testing

3. Proper audit documentation

PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation

4. Competence of audit evidence

5. Sufficient appropriate evidential matter

PTS: 1 OBJ: Sufficiency and Reliability of Evidence

6. Audit procedures on Cash balances

PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests

7. Audit procedures for accounts receivable

PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests