Chapter 10 -- Evidence -- Objectives and Nature

Question 1

Section 10.1: Nature, Sufficiency, and Appropriateness

What is the primary purpose of audit procedures?

Answer 1

• To gather evidence used by the auditor in drawing the conclusions on which the auditor’s opinion is based
• It includes the information contained in the accounting records and sources of information other than accounting records

Question 2

Section 10.1: Nature, Sufficiency, and Appropriateness

What is the best way to test for unrecorded entries in the general ledger?

Answer 2

Vouching from the ledger to the source documentation

Question 3

Section 10.1: Nature, Sufficiency, and Appropriateness

What is the most effective technique that provides an auditor with the most assurance about the effectiveness of the operation of a control?

Answer 3

Observation of client personnel

Question 4

Section 10.1: Nature, Sufficiency, and Appropriateness

What are non-accounting sources of evidence that the auditor may use in an audit?

Answer 4

• Minutes of meetings
• External confirmations
• Analysts’ reports
• Comparable data about competitors
• Information obtained by the auditor from inquiries, observation, inspection, recalculation, reperformance, and analytical procedures

Question 5

Section 10.1: Nature, Sufficiency, and Appropriateness

What are substantive procedures?

Answer 5

• Substantive procedures are used to detect material misstatements at the relevant assertion level.
• They include tests of details and substantive analytical procedures.

Question 6

Section 10.1: Nature, Sufficiency, and Appropriateness

What terms identify audit evidence?

Answer 6

• Sufficient
• Appropriate
• Persuasiveness

Question 7

Section 10.1: Nature, Sufficiency, and Appropriateness

What is the strongest criticism of the reliability of audit evidence that the auditor physically observes?

Answer 7

• The auditor may not be qualified to evaluate the items they are observing
• The auditor typically uses the work of an auditor’s specialist.
• Observation does not verify the cost or ownership of assets.
• Observation is best suited to verifying the existence of an asset

Question 8

Section 10.1: Nature, Sufficiency, and Appropriateness

What is the reason to test of occurrence?

Answer 8

• To detect overstatements that may have been made
• Occurrence is performed by vouching

Question 9

Section 10.1: Nature, Sufficiency, and Appropriateness

What is not a valid reason for an auditor to omit a procedure?

Answer 9

• Difficulty and cost involved in testing a particular item
• Difficulty and expense of obtaining audit evidence about an account balance is a valid basis for omitting the test

Question 10

Section 10.2: External Confirmations

Why are negative confirmations not used more often?

Answer 10

• Unreturned negative confirmation requests rarely provide significant evidence about assertions other than certain aspects of existence.
• Unreturned negative confirmations do not provide explicit evidence that the intended parties received the requests and verified the information provided.

Question 11

Section 10.2: External Confirmations

When should negative confirmations be used?

Answer 11

• When the acceptable audit risk is high
• A small number of accounts may be in dispute
• When many small balances are involved
• The assessed risk of material misstatement is low
• A very low exception rate is expected
• The auditor has no reason to believe that the recipients of the requests are unlikely to consider them
• The auditor has obtained sufficient appropriate evidence about the effectiveness of relevant controls

Question 12

Section 10.2: External Confirmations

When should an auditor consider confirming a large, complex transaction?

Answer 12

• The assessed RMM is high
• The auditor should consider confirming the terms of the transaction with the third parties in addition to examining documents

Question 13

Section 10.2: External Confirmations

What two assertions are used when performing external confirmations?

Answer 13

• Rights and Obligations
• Existence

Question 14

Section 10.3: Audit Documentation

What is one of the requirements for audit documentation?

Answer 14

• Significant audit findings or issues to be documented include findings that could result in modification of the report.
• The primary source of evidence should be documented at the time the procedures are performed.
• Oral explanation should not be the primary source of evidence.

Question 15

Section 10.3: Audit Documentation

What audit documentation is required under PCAOB standards?

Answer 15

Audit documentation should:
* Demonstrate that the engagement complied with PCAOB standards
* Support the basis for conclusions about all relevant assertions
* Demonstrate that the accounting records agree or reconcile with the financial statements.

Question 16

Section 10.3: Audit Documentation

What factors most likely affects an auditor’s judgment about the nature and extent of the auditor’s audit documentation?

Answer 16

• Risks of material misstatement
• Extent of judgment involved in performing the work and evaluating the results
• Nature of the auditing procedures
• Significance of the evidence obtained
• Nature and extent of exceptions identified
• Need to document a conclusion or the basis for a conclusion not readily determinable from other documentation of the work
• Size and complexity of the entity
• Audit methods.

Question 17

Section 10.3: Audit Documentation

Why do the income statement accounts have less significance when reviewing a predecessor auditor’s documenation?

Answer 17

They do not have beginning balances because the income statement accounts are closed every year to the retained earnings account.

Question 18

Section 10.3: Audit Documentation

What are lead schedules in audit documentation?

Answer 18

• Lead schedules are summaries of detailed schedules.
• To create these summaries, general ledger information is needed.
• A lead schedule contains the detailed accounts from the general ledger making up the line item total.

Question 19

Section 10.3: Audit Documentation

What is the purpose of audit documentation?

Answer 19

Audit documentation should be designed to meet the cicumstances of the engagement, and should provide:
* A sufficient and appropriate record of the basis for the auditor’s report
* Evidence that the audit was planned and performed in accordance with GAAS

Question 20

Section 10.4: The Computer as an Audit Tool

What is specialized audit software?

Answer 20

• Specialized audit software is written to fulfill a specific set of audit tasks.
• The purposes and users of the software are well defined before the software is written.

Question 21

Section 10.4: The Computer as an Audit Tool

Why do auditor’s develop specialized software?

Answer 21

• Unavailability of alternative software
• Functional limitations of alternative software
• Efficiency considerations
• Increased understanding of systems
• Opportunity for easy implementation
• Increased auditor independence and prestige

Question 22

Section 10.4: The Computer as an Audit Tool

What are the two requirements crucial to achieving audit efficiency and effectiveness with a personal computer?

Answer 22

• The appropriate audit tasks for personal computer applications
• The appropriate software to perform the selected audit tasks

Question 23

Section 10.4: The Computer as an Audit Tool

What is the purpose of using generalized audit software?

Answer 23

Generalized audit software is useful for both tests of controls and substantive procedures.

Question 24

Section 10.4: The Computer as an Audit Tool

What audit tasks are peformed when using generalized audit software?

Answer 24

• Sampling and selecting items
• Testing extensions, footings, and calculations
• Examining records
• Summarizing and sorting data
• Performing analytical procedures.