Audit Evidence - Concepts and Standards

Question 1

The objective of tests of details of transactions performed as substantive tests is to
A. Comply with generally accepted auditing standards.
B. Attain assurance about the reliability of the accounting system.
C. Detect material misstatements in the financial statements.
D. Evaluate whether management’s policies and procedures operated effectively

Answer 1

C

Question 2

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into
	A.  	Net sales.
	B.  	Cost of goods sold.
	C.  	Operating income.
	D.  	Gross sales

Answer 2

B

Question 3

Quick ratio

Answer 3

(Cash+AR+ST Investments)/Current liabilities

Question 4

Inventory turnover ratio

Answer 4

COGS/Avg Inventory

Question 5

Receivables turnover ratio

Answer 5

Sales/AR

Question 6

Days sales in AR

Answer 6

AR/(Sales/365)

Question 7

Gross profit ratio

Answer 7

(Sales-COGS)/Sales

Question 8

Which of the following statements concerning evidential matter is correct?
A. Competent evidence supporting management’s assertions should be convincing rather than merely persuasive.
B. An effective internal control structure contributes little to the reliability of the evidence created within the entity.
C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.
D. A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements

Answer 8

D - While the accounting records - including the general and subsidiary ledgers, the journals, and supporting worksheets - are considered to constitute evidence in support of the financial statements, accounting data, by itself, cannot be considered sufficient support for the financial statements. The auditor must test the accounting data in order to develop persuasive evidence to support the opinion.

Question 9

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?
A. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher?
B. Are purchase requisitions prenumbered and independently matched with vendor invoices?
C. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions?
D. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

Answer 9

D - The standard control for completeness is controlling prenumbered forms. A question, therefore, which would appear in an internal control questionnaire addressing completeness is “Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?”

Question 10

Which of the following procedures would be most effective in reducing attestation risk?
A. Discussion with responsible individuals.
B. Examination of evidence.
C. Inquiries of senior management.
D. Analytical procedures

Answer 10

B - Evidence that can be examined is considered more reliable than oral evidence and analytical procedures. Direct examination of evidence involves examining internal or external records, documents, or assets

Question 11

An auditor would most likely review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of
	A.  	Existence or occurrence.
	B.  	Rights and obligations.
	C.  	Valuation or allocation.
	D.  	Completeness

Answer 11

D - Reviewing the use of and accounting for prenumbered shipping documents and invoices supports management’s financial statement assertion of completeness. The numbering helps assure that transactions do not get lost and thus that all transactions are properly included

Question 12

Before applying principal substantive tests to an entity’s accounts receivable at an interim date, an auditor should:
A. Consider the likelihood of assessing the risk of incorrect rejection too low.
B. Project sampling risk at the maximum for tests covering the remaining period.
C. Ascertain that accounts receivable are immaterial to the financial statements.
D. Assess the difficulty in controlling the incremental audit risk

Answer 12

D - The auditor would consider the difficulty in controlling the incremental audit risk, i.e., the risk that material misstatements will not be detected due to the early testing at interim. This difficulty would be impacted by the effectiveness of internal controls, the presence of rapidly changing business conditions or circumstances, and the availability of relevant information.

Question 13

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?
A. When the assessed level of control risk over the sale is low.
B. When the assessed level of detection risk over the sale is high.
C. When the combined assessed level of inherent and control risk over the sale is moderate.
D. When the combined assessed level of inherent and control risk over the sale is high

Answer 13

D - The auditor would be more likely to confirm certain relevant contract terms as the risk of material misstatement increases. In this case, the risk of material misstatement is said to be “high,” which is consistent with the need to perform additional procedures to address revenue-recognition issues

Question 14

The refusal of a client’s attorney to provide information requested in an inquiry letter generally is considered
A. Grounds for an adverse opinion.
B. A limitation on the scope of the audit.
C. Reason to withdraw from the engagement.
D. Equivalent to a significant deficiency.

Answer 14

B