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Audit Evidence & Planning the Audit Essay


Audit Evidence & Planning the Audit

 Ch 5:  Audit Evidence and Documentation

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

a.    has no provisions.

b.    requires permanent retention.

c.    requires retention for at least seven years.

d.    requires retention for a period of four years or less.

2.    An auditor is performing an analytical procedure that involves developing common-size financial statements.  This technique is referred to as

a.    vertical analysis.

b.    horizontal analysis.

c.    cross-sectional analysis.

d.    comparison analysis.

3.    The independent auditor has set the audit risk at 5%.  He had determined inherent risk to be 100%.  Given that the auditor has now set substantive testing risk at 10%, his final assessment of control risk is

a.        5%

b.      20%

c.      50%

d.    200%

4.    Which of the following statements is generally correct about the appropriateness of 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 either valid or relevant, but need not be both.

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.

5.    An independent auditor finds that the Simmer

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Corporation occupies office space, at no charge, in an office building owned by a shareholder.  This finding indicates the existence of

a.    management fraud.

b.    related party transactions.

c.    window dressing.

d.    weak internal control.

6.    Which of the following is generally true about the sufficiency of audit evidence?

a.    The amount of evidence that is sufficient varies inversely with the appropriateness of the evidence.

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.

7.    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 a payroll during regular course of business.

c.    inventory held on consignment.
d.    granting of a patent for a special process developed by the organization.

8.    The inspection of a vendor’s invoice by the auditors is

a.    direct evidence about the occurrence of a transaction.

b.    physical evidence about the occurrence of a transaction.

c.    documentary evidence about the occurrence of a transaction.

d.    part of the client’s accounting system.

9.    (CPA, adapted)  As the acceptable level of detection risk decreases, an auditor may

a.    reduce substantive testing by relying on the assessments of inherent risk and control risk.

b.    postpone the planned timing of substantive tests from interim dates to the year-end.

c.    eliminate the assessed level of inherent risk from consideration as a planning factor.

d.    lower the assessed level of control risk from the maximum level to below the maximum.

10. (CPA, adapted)  The existence of audit risk is recognized by the statement in the auditor’s standard report that the

a.    auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

b.    financial statements are presented fairly, in all material respects, in conformity with GAAP.

c.    audit included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
d.    auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

11. (CPA, adapted)  Which of the following factors would least influence an auditor’s consideration of the reliability of data for purposes of analytical procedures?

a.    whether the data were processed in a computer system or in a manual accounting system

b.    Whether sources within the entity were independent of those who are responsible for the amount being audited

c.    Whether the data were subjected to audit testing in the current or prior year

d.    Whether the data were obtained form independent sources outside the entity or from sources within the entity

Ch 6:  Planning the Audit, Understanding the Client, Assessing Risks and Responding

1.    Tests for unrecorded assets typically involve tracing them from

a.    source documents to recorded journal entries.

b.    source documents to observations.

c.    recorded journal entries to documents.

d.    recorded journal entries to observations.

2.    The risk that the auditors’ procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as

a.    account risk.

b.    control risk.

c.    detection risk.

d.    inherent risk.

3.    Which of the following topics is not normally included in an engagement letter?

a.    The auditors’ preliminary assessment of internal control

b.    the auditors’ estimate of the fee for the service

c.    Limitations on the scope of the engagement

d.    A description of responsibility for the detection of fraud

4.    Which of the following is most likely to be an overall response to fraud risks identified is an audit?

a.    Use only certified public accountants on the engagement.

b.    place increased emphasis on the audit of objective transactions rather than on subjective transactions.

c.    Supervise members of the audit team less closely and rely more upon judgment.

d.    Use less predictable audit procedures.

5.    Determining that receivables are presented at net-realizable value is most directly related to which management assertion?

a.    Existence or occurrence

b.    Rights

c.    valuation or allocation
d.    Presentation and disclosure

6.    The first standard of field work recognizes that early appointment of the independent auditors has many advantages to the auditors and to the client.  Which of the following advantages is least likely to occur as a result of early appointment of the auditors?

a.    The auditors will be able to plan the audit work so that it may be done expeditiously.

b.    The auditors will be able to complete substantive procedures prior to year-end.

c.    The auditors will be able to better plan for the observation of the physical inventories.

d.    The auditors will be able to perform the examination more efficiently and will be finished at an early date after the year-end.

7.    An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared.  This test is performed to satisfy the audit objective of

a.    Accuracy.

b.    Completeness

c.    Control

d.    Existence

8.    When planning an audit, an auditor should

a.    Consider whether the extent of substantive tests may be reduced based on the results of the internal control questionnaire.

b.    Make preliminary judgments about materiality levels for audit purposes.

c.    Conclude whether changes in compliance with prescribed control procedures justify reliance on them.
d.    Prepare a preliminary draft of the management representation letter.

9.    (CPA, adapted)  Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s

a.    Opinion of any subsequent events occurring since the predecessor’s audit report was issued.

b.    Understanding as to the reasons for the change of auditors.

c.    Awareness of the consistency in the application of GAAP between periods.

d.    Evaluation of all matters of continuing accounting significance.

10. (CPA, adapted)  Which of the following statements reflects an auditor’s responsibility for detecting errors and fraud?

a.    An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion of management override.

b.    An auditor should plan the audit to detect errors and fraud that are caused by departures and GAAP.

c.    An auditor is not responsible for detecting errors and fraud unless the application of GASS would result in such detection.

d.    An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

11. (CPA, adapted)  Which of the following is a false statement about materiality?

a.    The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.

b.    An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatement that could be material to any one of the financial statements.

c.    Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.

d.    An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements.

12. While assessing the risks of material misstatement auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks and

a.    Assess the risk of misstatements due to illegal acts

b.    Consider the complexity of the transactions involved

c.    Consider the likelihood that the risks could result in material misstatements

d.      Determine materiality levels


Hollingsworth, A & White, F. (1999), Audit, Accountability, and Government. London, Clarendon Press

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