Sufficient appropriate evidence Flashcards
(13 cards)
Which of the following statements is correct regarding evidence needed to support an audit opinion?
A. Evidence supporting management’s assertions should be conclusive instead of 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 cannot be 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.
D. A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.
An auditor must design procedures to obtain sufficient appropriate audit evidence on which to base an opinion on the fairness of a client’s F/S. To do this, the auditor considers both corroborating and contradicting evidence.
The client’s accounting data (eg, purchase orders, shipping documents, invoices) alone is not considered sufficient evidence because it comes directly from the client. The auditor must also gather evidence that corroborates this accounting data (eg, customer confirmations of A/R) to support the audit opinion.
(Choice A) Evidence supporting management’s assertions must be persuasive, not conclusive, because the audit provides reasonable, not absolute, assurance that no material F/S misstatements exist.
(Choice B) Effective I/C contributes greatly to the reliability of evidence created within an entity. Effective I/C results in prevention, detection, and correction of errors or fraud.
(Choice C) An auditor should consider the cost of obtaining sufficient, reliable, relevant, and persuasive audit evidence. A lower-cost alternative may provide the same audit evidence as a higher-cost audit procedure.
Things to remember:
An auditor must obtain sufficient appropriate audit evidence on which to base an opinion on the client’s F/S. A client’s accounting data (eg, invoices) alone is not considered sufficient evidence; the auditor must also gather evidence that corroborates the data (eg, customer A/R confirmations).
An auditor vouched data for a sample of employees in a payroll register to approved time card data to provide audit evidence about whether
A. Payroll accrued expense exist and is properly stated.
B. Payroll payments are made only to actual employees.
C. Payroll preparation is properly segregated from payroll approval.
D. Payroll payments are properly calculated.
A. Payroll accrued expense exist and is properly stated.
Vouching is an audit procedure where information from the books (eg, payroll register) is compared to supporting source documents (eg, time cards). Vouching provides audit evidence that information in the books exists or has occurred.
An auditor would pull data from the payroll register for a sample of employees and compare that information to approved time cards to determine whether accrued payroll expense exists as of the F/S date and is properly stated. For example, audit evidence would indicate accrued payroll expense exists and should be recorded in Year 1 when approved time cards recorded early in Year 2 indicate work performed during Year 1.
(Choice B) To obtain audit evidence that payments were made only to actual employees, the auditor would need to vouch payroll information to employee authorization information obtained from human resources.
(Choice C) To determine if proper segregation of duties exists, the auditor would identify who prepares payroll and who approves payroll payments before they are released and validate this information by observation or by testing payroll system access and authorization edits.
(Choice D) To determine if payroll payments have been properly calculated, the auditor would need to obtain more than approved time cards (eg, wage rates, salary amounts, authorized withholdings).
Things to remember:
Vouching data for a sample of employees in a payroll register to approved time card data provides audit evidence about whether payroll accrued expense exists and is properly stated.
When planning tests of details associated with long-term debt obligations, an auditor will most likely
Rely heavily on sampling long-term debt transactions
Perform analytical procedures
A. Yes Yes
B. Yes No
C. No Yes
D. No No
C. No Yes
Long-term debt (eg, notes payable, bonds payable, lease obligations) transactions tend to be infrequent, material, and well documented (eg, board of directors’ authorization, formal agreements), and are generally associated with regular payment schedules.
In this case, the auditor is planning substantive procedures (eg, tests of details), which could include sampling transactions or applying analytical procedures to determine whether the long-term debt obligation balance is materially correct. Because long-term debt transactions are infrequent, the auditor is not likely to rely heavily on sampling to achieve this goal. Instead, the auditor is more likely to performanalytical procedures to test the long-term debt amount on the F/S.
Sampling involves testing a few transactions and concluding that the test results apply to the entire population. Analytical procedures allow the auditor to base conclusions on the entire population rather than select transactions.
For example, the auditor may compare long-term debt with interest expense to determine if the ratio aligns with prior periods or audit expectations. Payment schedules may also be used to develop an expectation of the ending long-term debt liability balance (ie, beginning balance less the principal portion of each payment in the current year). Such procedures can provide sufficient appropriate audit evidence more efficiently than testing a sample of individual debt obligations.
Things to remember:
In general, long-term debt transactions are infrequent, material, well documented, and associated with set payment schedules. Therefore, an auditor will most likely use analytical procedures to efficiently test the long-term debt balance, rather than rely heavily on sampling.
When evaluating the sufficiency and appropriateness of audit evidence, an auditor should consider each of the following except
A. Management’s responses to auditor inquiries.
B. Knowledge of the client from previous engagements.
C. The results of tests of controls evaluating the effectiveness of internal controls over financial reporting.
D. The extent to which the auditor was involved in preparing the financial statements.
D. The extent to which the auditor was involved in preparing the financial statements.
An auditor’s role is to provide an opinion offering reasonable assurance about whether F/S are fairly stated. To provide reasonable assurance, the auditor must first obtain sufficientappropriateaudit evidence to support that opinion. Sufficiency refers to the amount of evidence. The appropriateness of evidence is a factor of its relevance and reliability. Before forming an opinion about the F/S, the auditor should determine whether sufficient appropriate evidence has been obtained.
In forming an opinion, the auditor should consider all the relevant and reliable evidence obtained, whether it corroborates or contradicts F/S assertions. Evidence includes the results of audit procedures (eg, tests of controls, inquiries of management) and the context in which the results are interpreted (ie, knowledge of the client from previous engagements) (Choices A, B, and C).
The extent to which the auditor was involved in preparing the F/S affects the auditor’s independence and, therefore, the decision of whether to accept the engagement. However, it is not relevant to the evaluation of the audit evidence.
Things to remember:
In forming an opinion, an auditor considers all relevant evidence, including the results of procedures (eg, control tests, inquiries) and the context in which the results are interpreted (ie, knowledge of the client). An auditor’s involvement in preparing the client’s F/S may affect the auditor’s independence but not the evaluation of audit evidence.
Which of the following statements relating to the appropriateness of audit evidence is always true?
A. Audit evidence gathered by an auditor from outside an enterprise is reliable.
B. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions.
C. Oral representations made by management are not valid evidence.
D. Evidence gathered by auditors must be both reliable and relevant to be considered appropriate.
D. Evidence gathered by auditors must be both reliable and relevant to be considered appropriate.
Before expressing an opinion on financial statements, an auditor must obtain sufficientappropriateaudit evidence to support that opinion. The appropriateness of evidence is, by definition, a factor of both relevance and reliability.
Relevance is the logical relationship between evidence and the assertion it is meant to support. For example, the fact that there are unrecorded invoices is relevant to the completeness assertion but not the existence assertion.
Reliability relates to the source, nature, and form of the evidence and the conditions under which it was developed and obtained. For example, direct evidence is more reliable than indirect evidence (eg, documentation).
(Choice A) Evidence gathered from outside an enterprise is generally more reliable than evidence from inside the enterprise, but this is not always true. For example, evidence obtained from a third party who is known to have a bias for/against the client or lacks knowledge about the assertion being audited would not be reliable.
(Choice B) Accounting data developed under satisfactory conditions of internal control are more reliable than data developed under unsatisfactory conditions but not necessarily more relevant.
(Choice C) Oral representations made by management (eg, answers to auditor’s inquiries) are generally less reliable than documentation, but they are nevertheless valid evidence.
Things to remember:
Before expressing an opinion on financial statements, an auditor must obtain sufficient appropriate audit evidence to support that opinion. Evidence gathered by auditors must be both reliable and relevant to be considered appropriate.
An auditor is recalculating depreciation on real property acquired during the year. Which of the following documents will provide the most relevant information regarding the property’s depreciable base?
A. Deed.
B. Bank confirmation of mortgage loan.
C. Closing statement.
D. Flood insurance policy.
C. Closing statement.
When auditing fixed assets that an entity maintained throughout the year, an auditor is primarily concerned with depreciation. The auditor recalculates an asset’s depreciation expense to verify allocation and valuation. To perform this calculation, the auditor must first obtain both the asset’s original value and its estimated salvage value, which are used to solve for the depreciable base.
The original asset value can be obtained from an invoice or closing statement. A closing statement is a document that records transaction details and is commonly used when a company purchases a building (ie, real property). The building’s salvage value depends on how long the company anticipates the building will last given normal use.
(Choice A) A deed documents the transfer of ownership between parties but often does not include the sales price (ie, asset cost).
(Choice B) A bank confirmation of mortgage loan would confirm the entity’s outstanding loan balance but would not provide information about the property’s cost. Real property loans rarely equal the total purchase price because creditors don’t usually finance the full amount.
(Choice D) A flood insurance policy may provide evidence of the property’s ownership but not its cost.
Things to remember:
To recalculate depreciation on an asset (eg, real property), an auditor must first determine the asset’s depreciable base. This requires obtaining the asset’s original value (from an invoice or closing statement) and its salvage value, which is usually determined within the entity.
When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor’s original invoices have been misplaced. What should the auditor do in response to this situation?
A. Increase randomly the number of items in the substantive test to increase the reliance that may be placed on the overall test.
B. Reevaluate the risk of fraud, and design alternate tests for the related transactions.
C. Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices.
D. Count the missing original documents as misstatements, and project the total amount of the error based on the size of the population and the dollar amount of the errors.
B. Reevaluate the risk of fraud, and design alternate tests for the related transactions.
Substantive testing is designed to detect material financial misstatements. Substantive tests include vouching a sample of financial information (eg, cash disbursements) to supporting information (eg, vendor invoices) to determine whether transactions occurred and were accurately recorded.
When financial information is supported by something other than original documents (eg, copies of original vendor invoices), there is a risk that the supporting information has been fraudulently altered. Therefore, the auditor must exercise professional skepticism, reevaluate the risk of fraud, and design alternate tests for the related transactions.
(Choice A) Randomly increasing the number of test items does not support increased reliance on test results. The possibility of fraud still exists and must be addressed. However, after the auditor has reevaluated the risk of fraud, an increase in test items might be an appropriate alternative.
(Choice C) Testing more payments to this particular vendor using invoice photocopies would not provide the auditor with any greater sufficient evidence that the transactions actually occurred and were correctly recorded.
(Choice D) Missing original vendor invoices increases the risk of fraud but it does not mean that transactions are actually fraudulent. Therefore, misstatements and the projected total amount of error could be overstated if the counts are based on the missing original vendor invoices.
Things to remember:
When audit substantive testing indicates an increased fraud possibility (eg, disbursements supported by photocopied vendor invoices), the auditor must reevaluate the risk of fraud and design alternative steps to determine if fraud is present.
Which of the following statements correctly defines the term reasonable assurance?
A. A substantial level of assurance to allow an auditor to detect a material misstatement.
B. A significant level of assurance to allow an auditor to detect a material misstatement.
C. An absolute level of assurance to allow an auditor to detect a material misstatement.
D. A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.
D. A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.
Information asymmetry occurs when one person is better informed than another. For example, a used car salesman has more information about the true condition of a vehicle than a buyer. As a response, the buyer may hire a trained mechanic to inspect the vehicle prior to purchasing it. The mechanic is not expected to inspect every bolt and screw because that would be too expensive and time-consuming. The mechanic can provide only a reasonable assurance that the car is in working condition.
A high level of assurance (reasonable assurance) gives users of financial information confidence to rely on financial reports. Financial auditors (like the mechanic) try to provide users of financial reports with a reasonable level of assurance about management’s financial assertions. Assertions are management claims reported on the financial statements (ie, reported revenues), like the claims of the car salesman. Investors, creditors, and other lenders are like the car buyer because they provide resources to the company based on the reported claims.
(Choices A and B) “Substantial” and “significant” are not terms used under the General Accepted Auditing Standards (GAAS). GAAS uses the terms “reasonable” or a “high level” of assurance to describe the type of assurance that auditors provide. Reasonable is a legal term that describes the level of care an ordinarily prudent person (proficient auditor) would have used under similar circumstances. In legal proceedings, auditors may argue that reasonable assurance was achieved if they acted with the same care as other proficient auditors.
(Choice C) Auditors cannot be expected to provide absolute assurance because doing so would be too costly and time-consuming.
Things to remember:
Auditors are expected to provide reasonable assurance, not absolute assurance. Reasonable assurance is a high level of assurance that gives users of financial information confidence to rely on financial statements. Absolute assurance is too costly and time-consuming to achieve.
Under which of the following circumstances should an auditor consider confirming information with an external source?
A. When a client employee shares payroll fraud perpetrated by another employee.
B. When an existing receivable results from a large, complex transaction.
C. When analytical procedures show that competitor information differs from that of the client.
D. When a building sale results in a large gain.
B. When an existing receivable results from a large, complex transaction.
An auditor must perform substantive audit procedures to obtain sufficient appropriate evidence (ie, enough reliable and relevant evidence) on which to base the resulting audit opinion. The most reliable evidence is obtained directly by the auditor (eg, by observation) or from an independent source outside the entity (eg, confirmations received directly from customers).
The auditor would consider requesting that a customer (ie, an independent external source) confirm an existing receivable resulting from a large, complex transaction. Such a confirmation, combined with other materialreceivable confirmations, provides appropriate evidence supporting the client’s reported A/R balance.
(Choice A) The auditor would not obtain evidence of payroll fraud by confirming the situation with an external source. Instead, the auditor should perform tests, based on the information received, to determine if fraud existed.
(Choice C) The auditor might compare client information with that of a competitor when performing analytical procedures to assess the risk of material misstatement. Because the situation is competitive, public information would be used, making confirmation of public information an inefficient use of audit resources.
(Choice D) Sufficient appropriate evidence supporting the reported gain on the sale of a building would be obtained by reviewing associated legal documents (ie, sales contract) and public records rather than requesting external confirmations.
Things to remember:
An existing receivable resulting from a large, complex transaction would be an appropriate situation for an auditor to consider confirmation from an external source (ie, the customer).
Which of the following factors most likely would cause an auditor to question the integrity of management?
A. Management has an aggressive attitude toward financial reporting and meeting profit goals.
B. Audit tests detect material fraud that was known to management but not disclosed to the auditor.
C. Managerial decisions are dominated by one person who is also a stockholder.
D. Weaknesses in internal control reported to the audit committee are not corrected by management.
B. Audit tests detect material fraud that was known to management but not disclosed to the auditor.
Because it is important for auditors to be seen as people of integrity, they should not associate with anyone who lacks integrity. Audit evidence includes management representations and source documents (eg, invoices) provided by management. Generally, if an auditor believes that management is likely to withhold information or provide false representations or fraudulent documents, the auditor should withdraw from the engagement.
In the context of an audit, fraud is the deliberate use of deception to misstate financial information (ie, fraudulent financial reporting) or misappropriate assets. An auditor’s discovery that management was aware of fraud and did not disclose it may indicate that management tolerates fraud and/or is attempting to deceive the auditor. In either case, the auditor is likely to question the integrity of management.
(Choices A and C) An aggressive attitude toward financial reporting and dominance of managerial decisions by one individual are risk factors for financial statement fraud, but they are only risk factors. Neither indicates that fraud is occurring nor is likely to make an auditor doubt management’s integrity.
(Choice D) Management’s decision not to correct a weakness in internal control is most likely based on their assessment of the risk presented by the weakness and the resources required to correct it.
Things to remember:
If management is aware of fraud and does not disclose it to the auditor, the auditor is likely to question management’s integrity and consider withdrawing from the engagement.
Which of the following would be considered evidence that corroborates management’s financial statement assertion regarding existence?
A. Contracts with vendors.
B. General ledger balances.
C. Accounts receivable confirmations.
D. Worksheets reflecting cost allocation calculations.
C. Accounts receivable confirmations.
Client management makes assertions regarding the financial statements (F/S). The auditor must obtain sufficient appropriate evidence to corroborate (ie, confirm) or contradict management’s assertions before expressing an opinion on the F/S.
A/R confirmations come to the auditor directly from those who owe the client company money for goods or services already provided. These confirmations provide the auditor with independent evidence that corroborates management’s assertions about the existence of the F/S A/R balance.
(Choice A) The presence of vendor contracts does not indicate actual financial transactions with the vendors. The auditor would need more evidence to corroborate the existence of any financial transactions.
(Choice B) The general ledger (G/L) supports amounts on the F/S. For the auditor to express an opinion on the F/S, evidence must corroborate that the transactions in the G/L actually occurred (ie, existed) and were recorded according to GAAP.
(Choice D) Worksheets reflecting cost allocation calculations allow the auditor to understand how costs were handled. However, the auditor must obtain evidence that corroborates the information used to determine these allocations.
Things to remember:
Auditors must obtain evidence that corroborates (confirms) management’s financial statement assertions (eg, existence of financial transactions). For example, A/R confirmations can corroborate the existence of A/R financial information.
Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count?
A. Validation of purchase transactions.
B. Verification of existence of inventory.
C. Authorization of the manufacturing orders.
D. Posting and summarization of inventory transactions.
B. Verification of existence of inventory.
Each internal control has one or more purposes or aims, referred to as its control objectives. In the case of I/C over financial reporting, control objectives relate to management’s assertions about the financial statements. When evaluating the design or operating effectiveness of controls, it is necessary to understand the management assertion(s) each control is designed to ensure.
One objective to testing controls over the physical inventory count is to verify that all inventory listed in the accounting records actually exists. By testing the controls meant to achieve that objective, the auditor is attempting to obtain sufficient appropriate audit evidence that the controls are effective and can be relied upon to provide reasonable assurance that existence assertion for inventory is true.
(Choice A) The validation of purchase transactions is about determining rights and obligations related to inventory, not its existence.
(Choice C) Authorization of manufacturing orders is an objective to ensure proper authorization for manufacturing activities, not the physical existence of inventory.
(Choice D) Posting and summarization of inventory transactions is about the accurate recording of transactions in the accounting system, not the physical existence of inventory.
Things to remember:
One objective of internal controls over the physical inventory count is to verify that all inventory listed in the accounting records exists. By testing the controls meant to achieve that objective, the auditor obtains evidence to determine if the controls are effective and can be relied upon.
Management of a nonissuer engaged an actuary to calculate the year end assets and liabilities balances of its employee pension plan. The actuary’s report provided year end balances that were consistent with the balances reported in the nonissuer’s year end balance sheet. In this situation, an auditor would most appropriately
A. Evaluate the nature and level of expertise of the actuary.
B. Recalculate the year end pension plan assets and liabilities balances using original source data.
C. Conclude that the pension plan assets and liabilities accounts are free from material misstatements.
D. Prepare an agreement with the actuary detailing the nature, scope, and objective of the work performed.
A. Evaluate the nature and level of expertise of the actuary.
Auditors must exercise professional judgment while analyzing information to be used as audit evidence. This includes information that is provided by a specialist hired by management. Management’s specialist (eg, an actuary) is an individual or entity with expertise in a field other than accounting whose work in that field assists an entity in preparing financial information (eg, pension plan assets and liabilities).
When applying professional judgment, the auditor will need to consider the competence, capabilities, and objectivity of management’s specialist. In this scenario, an auditor would evaluate the nature and level of the actuary’s expertise to determine that person’s competence.
(Choice B) Once the auditor determines management’s specialist to be competent, capable, and objective, the auditor must obtain an understanding of the specialist’s work and evaluate its appropriateness, not reperform that work.
(Choice C) Without performing additional procedures, the auditor cannot assume that the actuary’s work is free from material misstatement.
(Choice D) There is a written agreement between management and its specialist, not between the specialist and the auditor.
Things to remember:
An auditor should exercise professional judgment when evaluating management’s specialist. This should include assessing the nature and level of the specialist’s expertise.
