Study Unit 10 - Evidence — Objectives And Nature

Question 1

Must auditors obtain conclusive audit evidence in forming audit opinions?

Answer 1

No, auditor’s typically rely on persuasive, rather than conclusive, audit evidence in for making audit opinions.

Question 2

What are some inherent limitations of audits?

Answer 2

• The nature of financial reporting (e.g., use of accounting estimates)
• The nature of audit procedures (e.g., possibility of collusion)
• The need to perform the audit
  
  • Within a reasonable period of time (time constraint)
  • To achieve a balance between benefit and cost (cost constraint)

Question 3

Define the sufficiency of audit evidence.

Answer 3

Sufficiency is the measure of the quantity of evidence.

Question 4

Define the appropriateness of audit evidence.

Answer 4

Appropriateness is the measure of the quality of evidence, which depends on (1) relevance and (2) reliability of the audit evidence.

Question 5

What are the factors affecting the reliability of audit evidence?

Answer 5

• Source of evidence
• Nature of evidence
• How the evidence is obtained

Question 6

List the three types of audit procedures used for gathering audit evidence.

Answer 6

1. Risk assessment procedures
2. Tests of controls
3. Substantive procedures

Question 7

Give examples of audit procedures used for gathering audit evidence.

Answer 7

• Inspection
• Observation
• Inquiry
• External confirmation
• Recalculation
• Reperformance
• Analytical procedures (including scanning)

Question 8

What is the direction of testing for the completeness assertion?

Answer 8

Tracing
- The auditor should trace the transaction from the source documents to the accounting records

Question 9

What is the direction of testing for the occurrence assertion?

Answer 9

Vouching
- The auditor should vouch the transactions from the accounting records to the source documents of the physical assets.

Question 10

When is audit evidence considered reliable?

Answer 10

Audit evidence is more reliable and persuasive when it is
- Obtained from independent sources
- Obtained from external sources
- Obtained directly
- In documentary form

Question 11

What are external confirmations?

Answer 11

External confirmations are direct written responses from a third party. Oran responses are not external confirmation requests.

Question 12

External confirmation requests often address assertions about

Answer 12

Account balances.

Question 13

Compare a (1) positive confirmation request, (2) negative confirmation request, and (3) blank confirmation request.

Answer 13

Type of Confirmation
Request Description

Positive Reply = agreement = confirmed

Negative Reply = disagreement = not confirmed

Blank Reply = omitted information in the confirmation filled and confirmed

Question 14

What is audit documentation usually called?

Answer 14

Working papers/workpapers

Question 15

What is included in auditor’s working papers?

Answer 15

• What work was performed (nature, extent, timing, and results of procedures)
• Who performed and reviewed the work
• When the work was performed/reviewed
• Audit evidence obtained
• Conclusions reached

Question 16

What is the purpose of audit documentation?

Answer 16

Audit documentation allows an experienced auditor to understand
- The procedures performed under GAAS or other requirements
- The results and evidence obtained
- Significant findings or issues
- Conclusions drawn
- Judgements made

Question 17

How are tickmarks used?

Answer 17

Tickmarks document work performed and issues uncovered during field work. A legend should define the tickmarks used on the working paper.

Question 18

What is a working trial balance?

Answer 18

A working trial balance ordinarily is used to record the year-end ledger balances prior to the audit. Reclassification and adjustments are accumulated on the trial balance to reflect the final audited balances.

Question 19

What are lead schedules?

Answer 19

Lead schedules are summaries of detailed schedules. For example, a cash lead schedule may summarize findings recorded on the cash in bank, petty cash, and count-of-cash-on-hand detail schedules.

Question 20

What are permanent files and current files?

Answer 20

Type Description Examples

Permanent Records with - Articles in incorporation
Files continuing - Bylaws
audit significance - Contacts

Current files Records relating - Results of procedures
current year only - Confirmations

Question 21

What is the time required for completing the assembly of the final audit file for (1) nonissuers and (2) issuers?

Answer 21

Nonissuers 60 days following the report release date

Issuers 45 days following the report release date

Question 22

Who owns the audit documentation, the audit client or the auditor?

Answer 22

Audit documentation is the property of the auditor.

Question 23

What is the required minimum retention period of audit documentation for (1) nonissuers and (2) issuers?

Answer 23

Nonissuers At least 5 years from the report release date

Issuers At least 7 years from the report release date

Question 24

Define generalized audit software (GAS).

Answer 24

GAS is software that is written to interface with many different client systems. It is useful for both tests of controls and substantive procedures.

Question 25

Give examples of the pros and cons of generalized audit software (GAS).

Answer 25

Pros
- Less computer expertise required for auditors
- Client information can be assessed without detailed knowledge of the client’s systems
- Ability to run on a variety of systems

Cons
- Modifications may be required for a specific audit
- Inability to examine items not in machine-readable form
- Some packages may process only sequential files
- Limited application

Question 26

What is artificial intelligence (IA)?

Answer 26

AI is computer software designed to perceive, reason, and understate. Business applications are AI are called expert systems.