Auditing Chapter 7

Effectiveness of client internal controls.

Education of auditor.

Independence of information provider.

Timeliness.

Qualification of individual providing information.

Auditor’s direct knowledge.

Degree of subjectivity.

Degree of objectivity.

The auditor lacks the qualifications to evaluate the evidence.

It is provided by the client’s attorney.

The client denies its veracity.

The client denies its veracity.

Quantity of evidence.

Quality of evidence.

Sufficiency of evidence.

Meaning of evidence.

Physical examination.

Analytical procedures.

Observation.

Inquiry

Yes Yes

No No

Yes No

No Yes

To be relevant, evidence must pertain to the audit objective of the evidence.

To be relevant, evidence must be persuasive.

To be relevant, evidence must relate to multiple audit objectives.

To be relevant, evidence must be derived from a system including effective internal controls.

Competence and sufficiency.

Relevance and reliability.

Appropriateness and sufficiency.

Independence and effectiveness.

1, 2, 3.

3, 2, 1.

2, 3, 1.

3, 1, 2.

Inquiry

Confirmation

Vouching

Physical examination.

Employees’ time reports.

Bank statements.

Purchase order for company purchases.

Carbon copies of checks.

Confirmation

Sales invoice.

Vendor invoice.

Bank reconciliation.

Analytical procedures.

Tests of transactions.

Tests of balances.

Auditing

Yes No No Yes Yes No No Yes Yes No No Yes Yes Yes

No No

Yes No

No Yes

Understand the client’s industry.

Assess the client’s ability to continue as a going concern.

Evaluate internal controls.

Reduce detailed audit tests.

Cannot be regarded as conclusive.”

Requires the gathering of corroborative evidence.”

Is the auditor’s principal method of evaluating the client’s internal control.”

Does not provide evidence from an independent source.”

Which of the following forms of evidence would be least persuasive in forming the auditor’s opinion?

Correspondence with a stockbroker regarding the quantity of client’s investments held in street name by the broker.

Minutes of the board of directors authorizing the purchase of stock as an investment.

The auditor’s count of marketable securities.

Yes Yes Yes

No Yes Yes

Yes No No

No No No

It is possible to vary the sample size from one unit to 100% of the items in the population.

It is possible to vary the sample size from one unit to 100% of the items in the population.

The decision of how many items to test must be made by the auditor for each audit procedure.

The sample size for any given procedure is likely to vary from audit to audit.

Analytical procedures are more reliable.

Tests of details are more expensive.

Analytical procedures are more persuasive.

Tests of details are more difficult to interpret.

Persuasiveness of evidence is partially determined by the reliability of evidence.

The quantity of evidence obtained determines its sufficiency.

The auditor need not consider the independence of an information source when obtaining evidence.

Evidence obtained directly by the auditor is ordinarily more reliable than evidence obtained from other sources.

A letter written by the client’s attorney discussing the likely outcome of outstanding lawsuits.

The physical count of securities and cash.

Inquiries of the credit manager about the collectability of noncurrent accounts receivable.

Observation of cobwebs on some inventory bins.

Documentation includes examining client records such as general ledgers and supporting journals.

Internal documents are documents that are generated within the company and used to communicate with external parties

External documents are documents that are generated outside of the company and are used to communicate the results of a transaction.

External documents are considered more reliable than internal documents.

No matter the cost involved in obtaining such evidence.

At any cost because the costs are billed to the client.

At the lowest possible total cost.

At the cost suggested in the engagement letter.

Cash, inventory, and payroll timecards.

Cash, inventory, canceled checks, and sales documents.

Cash, inventory, canceled checks, and tangible fixed assets.

Cash, inventory, securities, notes receivable, and tangible fixed assets.

Yes Yes

No No

Yes No

No Yes

Trace inventory purchases from the acquisitions journal to supporting invoices.

Trace selected sales invoices to the sales journal.

Trace details of employee paychecks to the payroll journal.

All of the above are examples of vouching.

Confirmations are expensive and so are often not used.

Confirmations may inconvenience those asked to supply them, but they are widely used.

Confirmations are sometimes not reliable and so auditors use them only as necessary.

Confirmations are required for several balance sheet accounts but no income statement accounts.

Traditionally, confirmations are used to verify:

Bank balances and accounts receivable.

Fixed asset additions.

Payroll expenses.

A client employee responsible for accounts receivable.

A financial statement auditor.

A client’s internal audit department.

A client’s controller or CFO.

Required Required

Required Optional

Optional Required

Optional Optional

Planning and test of control phases.

Planning and completion phases.

Test of control and completion phases.

Planning, test of control, and completion phases.

Analytical tests emphasize a comparison of client internal controls to GAAP.

Analytical procedures are required on all audits.

Analytical procedures can be used as substantive tests.

For certain accounts with small balances, analytical procedures alone may be sufficient evidence.

Indication of the likelihood of financial problems.

Indication where errors exist in the statements.

Benchmark to be used in evaluating a client’s budgets.

Comparison of “what is” with “what should be.”

Help the auditor obtain an understanding of the client’s industry and business.

Assess the going concern assumption.

Indicate possible misstatements.

Reduce detailed tests.

Foot – reperformance.

Compare – documentation.

Vouch – documentation.

Trace – analytical procedures.

Inquire – inquiries of client.

Count – physical examination.

Recompute – documentation.

Read – documentation.

Compare client with industry averages.

Compare client with prior year.

Compare client with budget.

Compare client with SEC averages.

It has been obtained by random selection.

There is enough of it to afford a reasonable basis for an opinion on financial statements.

It has the qualities of being relevant, objective, and free from known bias.

It consists of written statements made by managers of the enterprise under audit.

Irrefutable

Conclusive

Persuasive

Completely convincing.

General audit objectives.

Specific audit objectives.

Transaction audit objectives.

Balance audit objectives.

Evidence obtained from an independent source outside the client organization is more reliable than that obtained from within.

Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly.

Documents that originate outside the company are considered more reliable than those that originate within the client’s organization.

External evidence, such as communications from banks, is generally regarded as more reliable than answers obtained from inquiries of the client.

As close to the balance sheet date as possible.

Only from transactions occurring on the balance sheet date.

From various times throughout the client’s year.

From the time period when transactions in that account were most numerous during the fiscal period.

A large sample of highly competent evidence is not persuasive unless it is relevant to the objective being tested.

A large sample of evidence that is neither competent nor timely is not persuasive.

A small sample of only one or two pieces of relevant, competent, and timely evidence lacks persuasiveness

The persuasiveness of evidence can be evaluated after considering its competence and its sufficiency.

Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively.

For certain immaterial accounts, analytical procedures may be the only evidence needed.

In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable.

Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures.

A decline in gross margin percentages.

An increase in the balance in fixed assets.

An increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at the same time accounts receivable turnover also decreased.

A higher than normal ratio of long-term debt to net worth as well as a lower than average ratio of profits to total assets.

Yes Yes

No No

Yes No

No Yes

Using industry standards.

Using Dun and Bradstreet reports.

Relating it to some other balance sheet or income statement account or accounts.

Inquiry of the client.