Deck 5: Audit Evidence

Question 1

Most auditors prefer to replace tests of details with analytical procedures whenever possible because:

A) the tests of details are more difficult to interpret.
B) the analytical procedures are more reliable.
C) the analytical procedures are more persuasive.
D) the tests of details are more expensive.

Answer 1

D

Question 2

Which of the following forms of evidence is LEAST reliable?

A) Positive confirmation of customer's balance
B) A letter from the client's solicitor stating that there are no known lawsuits pending against the client
C) Client's file copy of a purchase requisition
D) Monthly bank statement

Answer 2

C

Question 3

Which of the following is NOT audit evidence?

A) Written confirmations from accounts receivable
B) Collecting a sample of 200 sales invoices
C) Cancelled cheques
D) Comparison of prices of an invoice to an approved price list

Answer 3

B

Question 4

Evidence is usually more persuasive for balance sheet accounts when it is obtained:

A) as close to the balance sheet date as possible.
B) from the time period when transactions in that account were most numerous during the financial period.
C) from various times throughout the client's year.
D) only from transactions occurring on the balance sheet date.

Question 5

A common comparison occurs when the auditor calculates the expected balance and compared it with the actual balance. The auditor's expected account balance may be determined by:

A) inquiry of client.
B) using industry standards.
C) relating it to some other balance sheet or income statement account or accounts.
D) using ABS data.

Question 6

Physical examination of assets is NOT a sufficient form of evidence when the auditor wants to determine the:

A) ownership of the asset.
B) condition or quality of the asset.
C) existence of the asset.
D) quantity and description of the asset.

Question 7

Those procedures specifically outlined in an audit program are primarily designed to:

A) prevent litigation.
B) gather evidence.
C) detect errors or irregularities.
D) test internal systems.

Question 8

When the auditor is gathering evidence, if the source of the evidence is independent of the client, the auditor will conclude that the evidence is:

A) reliable.
B) not reliable unless the provider is qualified to provide the evidence.
C) not reliable.
D) reliable if the provider has no reason to be biased.

Question 9

An auditor would be LEAST likely to use confirmations in connection with the examination of:

A) long- term debt.
B) shareholders' equity.
C) property, plant and equipment.
D) inventories.

Question 10

A document that the auditor receives from the client, but which was prepared by someone outside the client's organisation, is:

A) an internal document.
B) an inquiry.
C) an external document.
D) a confirmation.

Question 11

Which of the following discoveries, when discovered through the use of analytical procedures, would indicate a relatively high risk of financial failure?

A) An increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at the same time accounts receivable turnover also decreased
B) A higher than normal ratio of long- term debt to net worth as well as a lower than average ratio of profits to total assets
C) An increase in the balance in fixed assets
D) A decline in gross margin percentages

Question 12

For a given audit procedure, the evidence obtained from a sample of 200 would ordinarily be:

A) more sufficient than from a sample of one hundred.
B) less competent than from a sample of one hundred.
C) more competent than from a sample of one hundred.
D) less sufficient than from a sample of one hundred.

Question 13

The evidence used by auditors has which feature?

A) A high level of assurance is required from the evidence.
B) The evidence is used to determine whether statements are fairly presented.
C) Various types of audit evidence is used.
D) All of the above

Question 14

An audit program is:

A) the list of analytical procedures to be performed.
B) the list of audit procedures for an audit area or an entire audit.
C) a computer program to assist the audit.
D) all of the above

Question 15

Appropriateness of audit evidence can be improved by:

A) selecting more relevant audit procedures.
B) selecting different population items.
C) selecting a larger sample size.
D) all of the above

Question 16

'The detailed description of the results of the four evidence decisions for a specific audit' is called an:

A) audit procedure.
B) audit program.
C) audit guide.
D) audit plan.

Question 17

One feature common to all computer- based audit software is:

A) DOS- based command systems.
B) the inclusion of an industry database to facilitate analytical review procedures.
C) the ability to input a client's general ledger into the auditor's computer system.
D) the ability to input auditor's software into a client's computer system.

Question 18

'Evaluations of financial information made through analysis of plausible relationships among both financial and nonfinancial data' is a definition of:

A) tests of transactions.
B) analytical procedures.
C) tests of balances.
D) auditing.

Question 19

Which type of audit evidence can the auditor use in support of the existence of inventory audit objective?

A) Direct confirmation with vendor
B) Examine invoice from vendor
C) Physical examination
D) Examine title for ownership of asset

Question 20

Which of the following is NOT one of the major types of analytical procedures?

A) Compare client with prior year
B) Compare client with budget
C) Compare client with ASIC averages
D) Compare client with industry average

Question 21

Which of the following statements is NOT true? 'The evidence- gathering technique of inquiry:

A) is the auditor's principal method of evaluating the client's internal control.'
B) requires the gathering of corroborative evidence.'
C) cannot be regarded as conclusive.'
D) does not provide evidence from an independent source.'

Question 22

When an analytical procedure reveals no unusual fluctuations, the implication is that:

A) the possibility of a material error or irregularity is minimised.
B) there are no material irregularities.
C) there are no material errors or irregularities.
D) there are no material errors.

Question 23

The two determinants of the persuasiveness of evidence are: 1. appropriateness.
2) sufficiency.
3) materiality.
4) independence.

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) 2 and 4

Question 24

The audit program usually states all four of the choices below, but it always includes the:

A) sample sizes.
B) timing of the tests.
C) audit procedures.
D) particular items to select.

Question 25

Which of the following types of evidence is rarely sufficient by itself to provide reliable evidence to satisfy any audit objective?

A) Analytical procedures
B) Inquiries of client
C) Observation
D) All of the above

Question 26

When the current year's unaudited trial balance is compared to the prior year's audited trial balance:

A) discrepancies become apparent.
B) irregularities become apparent.
C) changes become apparent.
D) errors become apparent.

Question 27

Which of the following statements is correct?

A) Since the auditor performs the analytical procedures, these will be competent evidence even if internal controls provide inaccurate data.
B) Both physical examination and mechanical accuracy are likely to be highly reliable if the internal control structure is ineffective.
C) The effectiveness of the client's internal control has a significant effect on the competence of most types of evidence.
D) Specific type of evidence is sufficient by itself to provide reliable evidence to satisfy any audit objective.

Question 28

Reliability of evidence relates to:

A) the amount of evidence obtained.
B) the degree to which evidence can be considered believable or worthy of trust.
C) the relevance of the evidence.
D) all of the above

Question 29

Confirmations are a highly regarded and often- used type of evidence because they:

A) cause no inconvenience for the auditor or third party.
B) are inexpensive.
C) come from an independent source.
D) all of the above

Question 30

For analytical review procedures, the most common statistical technique used is:

A) batching.
B) mean and standard deviation calculations.
C) summarisation.
D) regression analysis.

Question 31

An audit program:

A) usually includes sample sizes, items to select and the timing of the tests.
B) normally there is one for each component of the audit.
C) always includes a list of the audit procedures.
D) all of the above

Question 32

In determining the quantity and quality of evidence to gather, the auditor will be satisfied when the evidence is:

A) irrefutable.
B) conclusive.
C) highly persuasive.
D) completely convincing.

Question 33

The most important difference between the 'quick' and 'current' ratios, in assessing an entity's short- term debt paying ability is:

A) the inclusion of current receivables in one and not the other.
B) the inclusion of inventory in one and not the other.
C) the inclusion of prepayments in one and not the other.
D) the inclusion of cash at bank in one and not the other.

Question 34

Which type of audit evidence can the auditor use in support of the accuracy of accounts receivable audit objective?

A) Examination of title for ownership of asset
B) Examination of invoice from vendor
C) Physical examination
D) Direct confirmation with customer

Question 35

Which of the following statements is NOT correct?

A) Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively.
B) Analytical procedures use comparisons and relationships to determine which account balances are in error.
C) In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable.
D) For certain immaterial accounts, analytical procedures may be the only evidence needed.

Question 36

The distinction between physical examination of assets and examination of documents is dependent on the item being examined. If the object being examined has no inherent value, the evidence is called:

A) physical examination.
B) documentation.
C) observation.
D) confirmation.

Question 37

Rank the reliability of the following items of audit evidence: 1. Schedules of details of physical inventory counts conducted by the client
2) Auditor's notation of inferences drawn from ratios and trends
3) Copies of bank statements held by the client
4) Copies of bank statements obtained directly from the bank

A) 2, 3, 4, 1
B) 3, 4, 2, 1
C) 4, 2, 3, 1
D) 4, 1, 2, 3

Question 38

An important benefit of industry comparisons is as:

A) an indicator of errors.
B) an aid to understanding the client's business.
C) an indicator of irregularities.
D) a least- cost indicator for audit procedures.

Question 39

Rank the reliability of the following items of audit evidence: 1. A sales invoice issued by the company
2) Confirmation of an account receivable balance mailed by and returned directly to the auditor
3) Minutes of a board meeting
4) A copy of a signed lease agreement

A) 2, 3, 4, 1
B) 3, 4, 2, 1
C) 2, 4, 1, 3
D) 4, 3, 2, 1

Question 40

An example of vouching would be to:

A) trace from receiving reports to the acquisitions journal.
B) trace from cancelled cheques to the cash disbursement journal.
C) trace from the acquisitions journal to supporting vendors' invoices.
D) trace from duplicate bank deposit slips to the cash receipts journal.

Question 41

Which of the following is NOT a consideration in determining which evidence to accumulate?

A) Timing
B) Audit procedures
C) Sample size
D) Objectivity

Question 42

ASA 500 requires the auditor to obtain:

A) appropriately qualified evidence to support the opinion issued.
B) sufficiently appropriate evidence to support the opinion issued.
C) required appropriate evidence to support the opinion issued.
D) sufficiently qualified evidence to support the opinion issued.

Question 43

Physical examination is the inspection or count by the auditor of items such as:

A) cash, inventory, cancelled cheques and sales documents.
B) cash or inventory only.
C) cash, inventory, securities, notes receivable and tangible fixed assets.
D) cash, inventory, cancelled cheques and tangible fixed assets.

Question 44

Which of the statements regarding persuasiveness of audit evidence is correct?

A) A large sample of evidence that is relevant but not objective is not persuasive.
B) The auditor must measure the degree to which evidence is either appropriate or sufficient.
C) A small sample of a small number of highly appropriate evidence is persuasive.
D) A large sample of evidence from an independent source is always persuasive.

Question 45

A benefit obtained from comparing client's data with industry averages is that it provides:

A) a benchmark to be used in evaluating client's budgets.
B) an indication of the likelihood of financial failure.
C) a comparison of 'what is' with 'what should be'.
D) an indication where errors exist in the statements.

Question 46

The most common analytical procedure to assess liquidity is the:

A) inventory turnover ratio.
B) quick ratio.
C) debt to equity ratio.
D) net profit margin.

Question 47

Audit procedures are normally performed:

A) to justify the conclusions auditors have otherwise reached.
B) to enable auditors to collect evidence at some time during the audit.
C) to defend auditors in the event of a lawsuit.
D) to satisfy the requirements of the Corporations Act.

Question 48

Which one of the following forms of evidence would be most reliable?

A) An insurance policy in the client's file
B) The file copy of a sales invoice
C) The file copy of a purchase requisition
D) The file copy of a receiving room report

Question 49

Unusual fluctuations occur when:

A) fluctuations or relationships are inconsistent with other relevant information.
B) fluctuations or relationships differ from expected values by a significant amount.
C) significant differences are expected and do exist.
D) either A or B is true.

Question 50

Traditionally, confirmations are used to verify:

A) individual transactions between organisations, such as sales transactions.
B) fixed asset additions.
C) bank balances and accounts receivables.
D) all of the above

Question 51

Which of the following statements is NOT correct?

A) The decision of how many items to test must be made by the auditor for each audit procedure.
B) It is possible to vary the sample size from one unit to 100% of the items in the population.
C) The decision of how many items to test will not be influenced by the increased costs of performing the additional tests.
D) The sample size for any given procedure is likely to vary from audit to audit.

Question 52

The evidence used by auditors is different from that used in cases of law in that:

A) the judge and jury evaluate the evidence.
B) the nature of the conclusion is to decide guilt or innocence.
C) the only evidence relied on is direct evidence and testimony by witnesses.
D) all of the above

Question 53

Which one of the following is not a liquidity activity ratio?

A) inventory turnover ratio
B) time interest earned ratio
C) days to collect receivables ratio
D) days to sell inventory ratio

Question 54

Analytical procedures are referred to as 'attention- direction' when they highlight:

A) areas of improvement.
B) errors.
C) irregularities.
D) areas that need more detailed procedures.

Question 55

Which one of the following forms of evidence would be LEAST persuasive in forming the auditor's opinion?

A) Responses to auditor's questions by the president and controller regarding the investments account
B) Minutes of the board of directors authorising the purchase of shares as an investment
C) The auditor's count of marketable securities
D) Correspondence with a stockbroker regarding the quantity of client's investments held by the broker

Question 56

If most companies in the industry use FIFO inventory valuation and straight- line depreciation, and the audit client uses weighted average and double- declining balance, comparisons of client and industry data:

A) will enable the auditor to spot irregularities but not errors.
B) will be a meaningful highlight of the result of these differences in accounting methods.
C) will enable the auditor to spot errors but not irregularities.
D) may not be meaningful.

Question 57

When the auditor examines the client's documents and records to substantiate the information in the financial statements, it is commonly referred to as:

A) confirmation.
B) vouching.
C) inquiry.
D) physical examination.

Question 58

Appropriateness of audit evidence relates to:

A) persuasiveness of evidence.
B) the independence of the provider of the evidence.
C) the relevance and reliability of the audit evidence.
D) the tests of transactions and balances selected.

Question 59

Evidence obtained directly by the auditor will NOT be reliable if:

A) it is impossible for the auditor to obtain additional corroborative evidence.
B) the client denies its veracity.
C) the auditor lacks the qualifications to evaluate the evidence.
D) it is provided by the client's solicitor.

Question 60

Which one of the following is NOT one of the characteristics of reliable evidence?

A) Degree of objectivity
B) Independence of the provider
C) Effectiveness of the clients' internal controls
D) Size of the sample

Question 61

Negative confirmations of accounts receivable are less effective than positive confirmations of accounts receivable because when using negative confirmations:

A) a majority of recipients usually lacks the willingness to respond objectively.
B) the auditor cannot infer that all nonrespondents have verified their account information.
C) some recipients may report incorrect balances that require extensive follow- up.
D) they do not produce evidential matter that is statistically quantifiable.

Question 62

Distinguish between internal documentation and external documentation as types of audit evidence. Give two examples of each. Which type is considered more reliable?

Question 63

An example of internal documents is:

A) employees' time reports.
B) bills of lading for purchases.
C) bank statements.
D) cancelled cheques.

Question 64

The auditor is concerned that a client is failing to bill customers for shipments. An audit procedure that would gather relevant evidence would be to:

A) trace a sample of shipping documents to related duplicate sales invoices.
B) trace a sample of Sales Journal entries to the Accounts Receivable subsidiary ledger.
C) select a sample of duplicate sales invoices and trace each to related shipping documents.
D) compare the total of the Schedule of Accounts Receivable with the balance of the Accounts Receivable account in the general ledger.

Question 65

Most auditors would consider samples to be insufficient if they contain only the:

A) largest dollar items from a population, even though these items make up a large portion of the total population.
B) items that are representative of the population.
C) items with a high likelihood of misstatement.
D) largest dollar items from the population.

Question 66

Evidence obtained directly by the auditor is more competent than information obtained indirectly. Which of the following is NOT an example of the auditor's direct knowledge?

A) Inquiry
B) Computation
C) Physical examination
D) Observation

Question 67

What audit procedures are used to evaluate the client's going concern assumption?

Question 68

The Auditing and Assurance Standards Board has concluded that analytical procedures are so important that they are required during:

A) planning and completion phases.
B) planning and testing phases.
C) planning, testing and completion phases.
D) testing and completion phases.

Question 69

Match five of the terms (a- i) with the definitions provided below (1- 5):
a. Audit programs
b. Audit procedures
c. Analytical procedures
d. Budgets
e. Reliability of evidence
f. Persuasiveness of evidence
g. Sufficiency of evidence
1. Use of comparisons and relationships to assess the reasonableness of account balances.
2. Detailed instructions for the collection of a type of audit evidence.
3. Written records of the client's expectations for the period.
4. List of audit procedures for the collection of evidence.
5. The degree to which the auditor is convinced that the evidence supports the audit opinion.

Question 70

The timing of audit procedures depends on:

A) when audit staff is available.
B) when the auditor believes the audit evidence will be most effective.
C) when the client needs the audit to be completed.
D) all of the above

Question 71

Factors effecting the persuasiveness of an audit sample size and items to select relate to:

A) proper selection of the items in the sample.
B) sufficiency of the evidence.
C) adequate sample size.
D) all of the above

Question 72

ASA 500 requires auditors to accumulate sufficient appropriate evidence to support the opinion issued. Because of the nature of audit evidence, it is:

A) unlikely the auditor will be completely convinced that the opinion is correct.
B) likely that the auditor would change his or her mind about the opinion if he or she took the time to gather additional evidence.
C) unlikely the auditor will arrive at a conclusion.
D) likely the auditor will be completely convinced that the opinion is correct.

Question 73

When an auditor calculates the gross margin as a percent of sales and compares it with previous periods, this type of evidence is called:

A) analytical procedures.
B) observation.
C) physical examination.
D) inquiry.

Question 74

An auditor has determined that the appropriate sample size for a particular audit procedure is 50. Which of the following methods can the auditor use to select the 50 items?

A) Select the 50 items with the largest dollar amounts.
B) Select the 50 items randomly.
C) Select one week and examine the first 50 items.
D) Any combination of the above three methods.

Question 75

The primary purpose of performing analytical procedures in the testing phase of an audit is to:

A) assess the going concern assumption.
B) indicate possible misstatements (attention directing).
C) help the auditor obtain an understanding of the client's industry and business.
D) reduce detailed tests.

Question 76

When making decisions about evidence for a given audit, the auditor's goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified, and to do so:

A) no matter what the cost involved in obtaining such evidence.
B) at any cost because the costs are billed to the client.
C) at the lowest possible cost.
D) only if the cost is reasonable.

Question 77

Which type of audit evidence can the auditor use in support of the ownership of noncurrent assets audit objective?

A) Examine title for ownership of asset
B) Examine invoice from vendor
C) Physical examination
D) Direct confirmation with vendor

Question 78

The evidence used by auditors is different from that used by scientists in that:

A) the party evaluating the evidence is a scientist.
B) scientists use results of repeated experiments.
C) the certainty of conclusions drawn from the evidence can vary.
D) all of the above

Question 79

Not accumulating the appropriate evidence has the effect of:

A) the auditor being found negligent in his or her audit.
B) a failure to use evidence in performing the audit.
C) a failure to meet the standards expected of the profession.
D) all of the above

Question 80

The following question is based on the Appendix. Financial ratios can be categorised as measures of the client's:
· short- term debt- paying ability;
· liquidity activity;
· ability to meet long- term debt obligations; and
· profitability ratios.
Identify one financial ratio for each of the four categories above. State the ratio's name, its numerator and its denominator.