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Auditing Theory > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

An __________ is the detailed instruction that explains the audit evidence to be obtained during the audit.

A

Audit procedure

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2
Q

The SEC currently requires that all public companies file audited financial statements within:

A

60 to 90 days of the company’s fiscal year-end

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3
Q

The list of audit procedures for an audit area or an entire audit is called an __________.

A

Audit program

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4
Q

Audit standards require the auditor to accumulate:

A

Sufficient appropriate evidence to support the opinion issued.

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5
Q

What are the two determinants of the persuasiveness of evidence?

A
  1. Appropriateness

2. Sufficiency

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6
Q

What are the four decisions about what evidence to gather and how much of it to accumulate?

A
  1. Which audit procedures to use
  2. What sample size to select for a given procedure
  3. Which items to select from the population
  4. When to perform the procedures
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7
Q

Appropriateness of evidence can only be improved by:

A

Selecting audit procedures that are more relevant or provide more reliable evidence.

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8
Q

Evidence must ____________________ that the auditor is testing before it can be appropriate.

A

Pertain to or be relevant to the audit objective

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9
Q

Relevance can be considered in terms of specific audit objectives, because:

A

Evidence may be relevant for one audit objective but not for a different one.

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10
Q

__________ refers to the degree to which evidence can be believable or worthy of trust.

A

Reliability of evidence

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11
Q

Reliability depends on six characteristics of reliable evidence:

A
  1. Independence of provider
  2. Effectiveness of client’s internal controls
  3. Auditor’s direct knowledge
  4. Qualifications of individuals providing the information
  5. Degree of objectivity
  6. Timeliness
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12
Q

The __________ of evidence determines its sufficiency.

A

Quantity

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13
Q

__________ is measured primarily by the sample size the auditor selects.

A

Sufficiency of evidence

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14
Q

The two most important factors in determining the appropriate sample size in audits is:

A
  1. The auditor’s expectation of misstatements

2. The effectiveness of the client’s internal controls

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15
Q

What population items contained in the samples are usually considered sufficient?

A
  1. Items with large dollar values
  2. Items with a high likelihood of misstatement
  3. Items that are representative of the population
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16
Q

The persuasiveness of evidence can only be evaluated after considering the:

A

Combination of appropriateness and sufficiency, including the effects of the factors of appropriateness and sufficiency.

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17
Q

In making decisions about evidence for a given audit, both __________ and __________ must be considered.

A

Persuasiveness; cost

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18
Q

The auditor’s goal is to obtain:

A

A sufficient amount of appropriate evidence at the lowest possible total cost.

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19
Q

What are the eight types of audit evidence?

A
  1. Physical examination
  2. Confirmation
  3. Inspection
  4. Analytical procedures
  5. Inquiries of the client
  6. Recalculation
  7. Reperformance
  8. Observation
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20
Q

Define Physical Examination

A

Physical examination is the inspection or count by the auditor of a TANGIBLE asset (i.e. Inventory, cash, verification of securities, notes receivable, and tangible fixed assets).

It is considered one of the most reliable and useful types of audit evidence.

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21
Q

Physical examination is a direct means of verify that an asset actually __________, and to a lesser extent whether the __________ assets are __________.

A

Exists (Existence objective)
Existing
Recorded (Completeness objective)

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22
Q

Define Confirmation

A

Confirmation describes the receipt of a direct written response from a third party verifying the accuracy of information that was request by the auditor.

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23
Q

Auditors decide whether or not to use confirmations depending on the:

A

Reliability needs of the situation as well as the alternative evidence available.

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24
Q

When practical and reasonable, U.S. Auditing Standards require the confirmation of a sample of __________.

A

Accounts receivable

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25
Q

To be considered reliable evidence, confirmations must be controlled by the auditor from:

A

The time they are prepared until they are returned.

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26
Q

Define Inspection

A

Inspection is the auditor’s examination of the client’s documents and records to substantiate the information that is, or should be, included in the financial statements.

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27
Q

Documents can be classified as __________ and __________.

A

Internal

External

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28
Q

Define Internal Document

A

An internal document has been prepared and used within the client’s organization and is retained without ever going to an outside party.

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29
Q

Define External Document

A

An external document has been handled by someone outside the client’s organization who is a party to the transaction being documented, but which is either currently held by the client or readily accessible.

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30
Q

__________ documents are consider more reliable evidence than __________ ones.

A

External

Internal

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31
Q

When auditor’s use documentation to support recorded transactions or amounts, the process is often called __________.

A

Vouching

32
Q

If the auditor traces from receiving reports to the acquisition journal to satisfy the completeness objective, the process is called __________.

A

Tracing

33
Q

Define Analytical Procedures

A

Analytical procedures consist of evaluations of financial information through analysis of plausible relationships among financial and non financial data.

34
Q

Analytical procedures are used extensively in practice, and are required during the:

A

Planning and completion phases on all audits.

35
Q

Significant unexpected differences between current year’s unaudited financial data and other data used in comparisons are commonly called __________.

A

Unusual fluctuations

36
Q

Define Inquiry

A

Inquiry is the obtaining of written or oral information from the client in response to questions from the auditor.

It usually cannot be regarded as conclusive because it is not from an independent source and may be biased in the client’s favor.

37
Q

Define Recalculation

A

Recalculation involves rechecking a sample of calculations made by the client.

38
Q

Define Reperformance

A

Reperformance is the auditor’s independent tests of client accounting PROCEDURES or controls that were originally done as part of the entity’s accounting and internal control system.

39
Q

Define Observation

A

Observation consists of looking at a process or procedure bending performed by others.

Observation is rarely sufficient by itself because of the risk of client personnel changing their behavior because of the auditor’s presence.

40
Q

The effectiveness of a client’s __________ has a significant influence on the reliability of most types of evidence.

A

Internal controls

41
Q

Both __________ and __________ are likely to be highly reliable if the internal controls are effective, but their use differs considerably.

A

Physical examination

Recalculation

42
Q

A specific type of evidence is __________ sufficient by itself to provide appropriate evidence to satisfy any audit objective.

A

Rarely

43
Q

The two most expensive types of evidence are __________ and __________.

A

Physical examination

Confirmation

44
Q

___________, __________, and __________ are moderately costly.

A

Inspection
Analytical procedures
Reperformance

45
Q

The three least expensive types of evidence are __________, __________, and __________.

A

Observation
Inquires of the client
Recalculation

46
Q

Auditing standards state that __________ is the record of the audit procedures performed, relevant audit evidence, and conclusions the auditor reached.

A

Audit documentation

47
Q

The overall objective of audit documentation is to:

A

Aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with auditing standards.

48
Q

Audit documentation prepared during the engagement, including schedules prepared by the client for the auditor, is the __________.

A

Property of the auditor

49
Q

The need to maintain a confidential relationship with the client is expressed in:

A

RULE 301 of the Code of Professional Conduct, which states,

“A member shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client.”

50
Q

Auditing standards require that records for audits of private companies be retained for a minimum of ___________.

A

5 years

51
Q

The Sarbanes-Oxley Act requires auditor’s of public companies to prepare and maintain audit files and other information related to any audit report in sufficient detail to support the auditor’s conclusions, for a period of:

A

Not less than 7 years

52
Q

__________ contain data of a historical or continuing nature pertinent to the current audit.

A

Permanent files

53
Q

The permanent files typically include:

A
  1. Extracts or copies of such company documents of continuing importance as the articles of incorporation, bylaws, bond indentures, and contracts.
  2. Analyses from previous years of accounts that have continuing importance to the auditor.
  3. Information related to understanding internal control and assessing control risk.
  4. The results of analytical procedures from previous years’ audits.
54
Q

The __________ include all audit documentation applicable to the year under audit.

A

Current files

55
Q

The current files typically include:

A
  1. Audit Program
  2. General Information
  3. Working Trial Balance
  4. Adjusting and Reclassification Entries
  5. Supporting Schedules
56
Q

The auditor obtains or prepares a listing of general ledger accounts and their year-end balances. This schedule is called __________.

A

Working trial balance

57
Q

Each line item on the trial balance is supported by a __________, containing the detailed accounts from the general ledger making up the line item total.

A

Lead schedule

58
Q

The largest portion of audit documentation includes the detailed __________ prepared by the client or the auditor’s in support of specific amounts on the financial statements.

A

Supporting schedule

59
Q

What are the major types of supporting schedules?

A
  1. Analysis
  2. Trial balance or list
  3. Reconciliation of amounts
  4. Tests of reasonableness
  5. Summary of procedures
  6. Examination of supporting documents
  7. Informational
  8. Outside documentation
60
Q

Define Analysis

A

Designed to show the activity in a general ledger account during the entire period under audit, tying together the beginning and ending balances.

61
Q

Define Trial balance or list

A

This type of schedule consists of the details that make up a year-end balance of a general ledger account.

62
Q

Define Reconciliation of amounts

A

A reconciliation supports a specific amount and is normally expected to tie the amount recorded in the client’s records to another source of information.

63
Q

Define Test of reasonableness

A

A test of reasonableness schedule, as the name implies, contains information that enables the auditor to evaluate whether the client’s balance appears to include a misstatement considering the circumstances in the engagement.

64
Q

Define Summary of procedures

A

Another type of schedule summarizes the results of a specific audit procedure.

65
Q

Define Examination of supporting documents

A

A number of special-purpose schedules are designed to show detailed tests performed, such documents examined during tests of controls and substantive tests of transactions.

66
Q

Define Informational

A

This type of schedule contain information as opposed to audit evidence.

67
Q

Define Outside documentation

A

Much of the content of the audit files consists of outside documentation gather by auditor’s, such as confirmation replies and copies of client agreements.

68
Q

What are tick marks?

A

Symbols used on an audit schedule that provide additional information or details of audit procedures performed.

69
Q

Which of the following types of documentary evidence should the auditor consider to be most reliable?

A) A sales invoice issued by the client and supported by a delivery receipt form an outside trucker
B) Confirmation of an account payable balance mailed by and returned directly to the auditor
C) A check, issued by the company and bearing the payee’s endorsement, that is included with the bank statements mailed directly to the auditor
D) An audit schedule prepared by the client’s controller and reviewed by the client’s treasurer

A

B) Confirmation of an account payable balance mailed by and returned directly to the auditor

70
Q

Which of the following statements concerning audit evidence is true?

A) To be appropriate, audit evidence should be either persuasive or relevant, but need not be reliable
B) The measure of quantity and quality of audit evidence lies in the auditor’s judgment
C) The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test
D) A client’s accounting records can be sufficient audit evidence to support the financial statements

A

B) The measure of quantity and quality of audit evidence lies in the auditor’s judgment

71
Q

Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?

A) Vendor’s invoice
B) Bank statement obtained from client
C) Computations made by the auditor
D) Pre Numbered sales invoices

A

D) Pre Numbered sales invoices

72
Q

Which of the following presumptions is correct about the reliability of audit evidence?

A) Information obtained indirectly from outside sources is the most reliable audit evidence
B) To be reliable, audit evidence should be convincing rather than merely persuasive
C) Reliability of audit evidence refers to the amount of corroborative evidence obtained
D) Effective internal control provides more assurance about the reliability of audit evidence

A

D) Effective internal control provides more assurance about the reliability of audit evidence

73
Q

Which of the following is NOT a primary purpose of audit documentation?

A) To coordinate the audit
B) To assist in preparation of the audit report
C) To support the financial statements
D) To provide evidence of the audit work performed

A

C) To support the financial statements

74
Q

During an audit engagement, pertinent data are compiled and included in the audit files. The audit files are considered to be

A) a client-owned record of conclusions reached by the auditor’s who performed the engagement
B) evidence supporting financial statements
C) support for the auditor’s representations as to compliance with auditing standards
D) a record to be used as a basis for the following years engagement

A

C) support for the auditor’s representations as to compliance with auditing standards

75
Q

Although the quantity, type, and content of audit documentation will vary with circumstances, audit documentation generally will include the

A) copies of those client records examined by the auditor during the course of the engagement
B) evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit
C) auditor’s comments concerning the efficiency and competence of client management personnel
D) auditing procedures followed and the testing performed in obtaining audit evidence

A

D) auditing procedures followed and the testing performed in obtaining audit evidence

Auditing Theory (6 decks)

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