Accounting Chapter 5 Quiz
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Accounting Chapter 5 Quiz

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Questions and Answers

What type of information does specialized journal information include?

Invoice and purchase order numbers of sales and purchases.

What is the required form of audit documentation?

  • Must be in electronic form
  • May be in paper, electronic, or some other form (correct)
  • Must be in paper form only
  • Is not required, but is strongly recommended

    • Which account balance assertion is the auditor most concerned about verifying if a company's primary motivation is to avoid paying income taxes?

  • Observation
  • Existence or occurrence
  • Rights and obligations
  • Completeness (correct)

    • Which transaction assertion is the auditor most concerned with if the audit client is under pressure to meet an earnings target?

    <p>Completeness</p> Signup and view all the answers

    What audit procedure is likely to be used when auditing purchases to address unrecorded transactions?

    <p>Tracing vendor invoices to accounting records</p> Signup and view all the answers

    Which statement is not valid concerning audit evidence?

    <p>I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence.</p> Signup and view all the answers

    Which statement concerning audit evidence is correct?

    <p>A company's accounting data cannot be considered sufficient audit evidence to support the financial statements.</p> Signup and view all the answers

    What does the permanent audit file usually include?

    <p>Organizational chart</p> Signup and view all the answers

    What does the current audit file usually include?

    <p>Working trial balance</p> Signup and view all the answers

    What should all audit documentation headings include?

    <p>All of these</p> Signup and view all the answers

    To whom do the audit working papers belong?

    <p>The audit firm</p> Signup and view all the answers

    Which procedures are designed to detect possible material monetary errors in financial statements?

    <p>Analytical procedures</p> Signup and view all the answers

    An auditor's decision to apply analytical procedures usually depends on what?

    <p>Relative effectiveness and efficiency of the tests</p> Signup and view all the answers

    Which nonfinancial information would an auditor consider during analytical procedures in the planning phase?

    <p>Square footage of selling space</p> Signup and view all the answers

    What would the auditor expect the year-end balance in the accrued commissions payable account to be if agents' sales were $10 million?

    <p>$588,000</p> Signup and view all the answers

    What should an auditor expect from revenue in a not-for-profit organization with increasing subscribers?

    <p>$163,800</p> Signup and view all the answers

    What do analytical procedures indicate if they show unexpected account relationships?

    <p>Additional tests of details are required</p> Signup and view all the answers

    Which is not a typical analytical procedure?

    <p>Comparison of recorded amounts with appropriate invoices</p> Signup and view all the answers

    What classification do analytical procedures fall under primarily?

    <p>Substantive procedures</p> Signup and view all the answers

    How are abnormal fluctuations in gross profit identified in the audit planning phase?

    <p>Analytical procedures</p> Signup and view all the answers

    An example of an analytical procedure is the comparison of what?

    <p>Financial information with similar information regarding the entity's industry</p> Signup and view all the answers

    What should analytical procedures in audit planning focus on?

    <p>Areas that may represent specific risks relevant to the audit</p> Signup and view all the answers

    When are analytical procedures required?

    <p>Required for planning and overall review only</p> Signup and view all the answers

    If the gross profit percentage has declined significantly, the auditor should what?

    <p>Consider the possibility of an error in the financial statements</p> Signup and view all the answers

    Which statement does the auditor emphasize during the examination of the financial statements?

    <p>Income Statement</p> Signup and view all the answers

    If significant fluctuations in financial statements occur and management can't explain them, the auditor should what?

    <p>Perform additional audit procedures</p> Signup and view all the answers

    Which ratios are most predictable for analytical procedures as substantive procedures?

    <p>Relationships involving income statement accounts</p> Signup and view all the answers

    Information to develop estimates through analytical procedures can be obtained from all except:

    <p>Tracing transactions through the system</p> Signup and view all the answers

    What would most likely satisfy the auditor regarding a doubled accounts receivable balance?

    <p>A new retail outlet opened, balancing credit sales</p> Signup and view all the answers

    Which would be least likely comparable between similar corporations in the same industry?

    <p>Earnings per share</p> Signup and view all the answers

    Which ratio would an engagement partner most likely calculate during the overall review stage of an audit?

    <p>Total debt divided by total assets</p> Signup and view all the answers

    Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements.

    <p>False</p> Signup and view all the answers

    The auditor gathers audit evidence to test management's assertions.

    <p>True</p> Signup and view all the answers

    Management assertions fall into four main categories.

    <p>False</p> Signup and view all the answers

    The classification assertion refers to transactions and events being recorded in the correct accounting period.

    <p>False</p> Signup and view all the answers

    The completeness assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded.

    <p>True</p> Signup and view all the answers

    The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period.

    <p>True</p> Signup and view all the answers

    Audit procedures are designed to test management assertions.

    <p>True</p> Signup and view all the answers

    The relevance of audit evidence or specific audit procedures depends on the assertion being tested.

    <p>True</p> Signup and view all the answers

    The auditor must use his or her professional judgment to determine the amount of audit evidence to be gathered.

    <p>True</p> Signup and view all the answers

    The sufficiency of evidence refers to the quality of audit evidence.

    <p>False</p> Signup and view all the answers

    A confirmation is used to:

    <p>Verify a representation from a third party.</p> Signup and view all the answers

    Which of the following elements ultimately determines the amount of audit work that is necessary in the circumstances to afford a reasonable basis for an opinion?

    <p>Auditor judgment.</p> Signup and view all the answers

    Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must:

    <p>Be persuasive enough to enable the auditor to form an opinion.</p> Signup and view all the answers

    Which set of assertions is tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity's balance sheet?

    <p>Assertions about presentation and disclosure.</p> Signup and view all the answers

    In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events, and specifically, which assertion?

    <p>Occurrence.</p> Signup and view all the answers

    Which assertions may be tested for the 'account balances' category of management assertions?

    <p>Existence, rights and obligations, completeness, valuation and allocation.</p> Signup and view all the answers

    Which assertions may be tested for the 'transactions and events' category of management assertions?

    <p>Occurrence, completeness, authorization, accuracy, cutoff and classification.</p> Signup and view all the answers

    Which assertions may be tested for the 'presentation and disclosure' category of management assertions?

    <p>Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.</p> Signup and view all the answers

    Tracing is used primarily to test which of the following assertions about classes of transactions?

    <p>Completeness.</p> Signup and view all the answers

    Vouching is used primarily to test which of the following assertions about classes of transactions?

    <p>Occurrence.</p> Signup and view all the answers

    In designing written audit programs, an auditor should plan specific audit procedures to test:

    <p>Management assertions.</p> Signup and view all the answers

    Footing is an example of:

    <p>Recalculation.</p> Signup and view all the answers

    In determining whether transactions have been recorded, the direction of the audit testing should start from the:

    <p>Original source documents.</p> Signup and view all the answers

    To test for unsupported entries in the ledger, the direction of audit testing should start from the:

    <p>Ledger entries.</p> Signup and view all the answers

    Which of the following presumptions does not relate to the appropriateness of audit evidence?

    <p>An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.</p> Signup and view all the answers

    Of the following, which is the least persuasive type of audit evidence?

    <p>Copies of company sales invoices inspected by the auditor.</p> Signup and view all the answers

    The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents:

    <p>Content be sufficient to provide support for the auditor's report, including the auditor's representation as to compliance with auditing standards.</p> Signup and view all the answers

    Which of the following shows the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance?

    <p>Lead schedules.</p> Signup and view all the answers

    The permanent (continuing) file of an auditor's working papers most likely would include copies of the:

    <p>Debt agreements.</p> Signup and view all the answers

    An example of audit evidence with a medium level of reliability is:

    <p>Scanning.</p> Signup and view all the answers

    Audit documentation prepared on audits of public entities is the property of the:

    <p>Auditor.</p> Signup and view all the answers

    All of the following are typically in the current file except:

    <p>Chart of accounts.</p> Signup and view all the answers

    You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying?

    <p>Rights and obligations.</p> Signup and view all the answers

    You are auditing a manufacturing company that has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about?

    <p>Rights and obligations.</p> Signup and view all the answers

    Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?

    <p>Compare a sample of shipping documents to related sales invoices.</p> Signup and view all the answers

    Which of the following best describes the primary purpose of audit procedures?

    <p>To gather corroborative evidence about management's assertions.</p> Signup and view all the answers

    Procedures specifically outlined in an audit program are designed primarily to:

    <p>Gather evidence about management's assertions.</p> Signup and view all the answers

    Which statement concerning audit evidence is not valid?

    <p>False</p> Signup and view all the answers

    Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the:

    <p>Difficulty and expense involved in testing a particular item.</p> Signup and view all the answers

    Of the following, the most reliable type of evidence typically is:

    <p>Reperformance.</p> Signup and view all the answers

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

    <p>An effective internal control system provides more reliable audit evidence.</p> Signup and view all the answers

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

    <p>Confirmation of an account payable balance mailed by and returned directly to the auditor.</p> Signup and view all the answers

    Which of the following is the least persuasive documentation in support of an auditor's opinion?

    <p>Schedules of details of physical inventory counts conducted by the entity.</p> Signup and view all the answers

    Which of the following statements is generally correct about the appropriateness of audit evidence?

    <p>The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements.</p> Signup and view all the answers

    Which of the following types of audit evidence is the most persuasive?

    <p>Bank statements obtained from the auditee.</p> Signup and view all the answers

    Following are several statements regarding accounting records or audit documentation. Which of the statements is correct?

    <p>Accounting records belong to the auditee.</p> Signup and view all the answers

    Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that:

    <p>Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement.</p> Signup and view all the answers

    Audit documents that record the procedures used by the auditor to gather evidence should be:

    <p>Designed in an orderly fashion to facilitate the review of audit work by the senior, manager, and partner on the engagement.</p> Signup and view all the answers

    In creating lead schedules for an audit engagement, what financial information is needed to begin?

    <p>Interim financial information, such as third quarter sales, net income, and inventory and receivables balances.</p> Signup and view all the answers

    Study Notes

    Audit Evidence

    • Audit evidence encompasses a range of information types, not limited to written documentation.
    • It is crucial for testing management's assertions regarding financial statements.

    Management Assertions

    • Key categories of management assertions include existence, completeness, rights and obligations, and valuation.
    • Completeness assertion ensures all necessary transactions are recorded.
    • Cutoff assertion relates to accurate recording in the correct accounting period.

    Audit Procedures

    • Designed to assess management assertions, these procedures include testing for occurrence, completeness, and other relevant assertions.
    • The relevancy of audit evidence depends on the specific assertion being tested.

    Evidence Gathering

    • Professional judgment is essential to determine the quantity of audit evidence necessary.
    • The sufficiency of evidence is distinct from its quality, emphasizing the need for adequate evidence collection.

    Types of Assertions

    • Types of assertions tested include:
      • Account balances assertions: existence, completeness, rights, obligations, and valuation.
      • Transaction and event assertions: occurrence, completeness, accuracy, authorization, cutoff, and classification.
      • Presentation and disclosure assertions: occurrence, completeness, classification, and understandability.

    Audit Techniques

    • Tracing is mainly used to test for completeness, while vouching tests for occurrence.
    • Specific audit procedures should be planned to evaluate management assertions directly.

    Reliability of Evidence

    • Evidence from independent sources tends to be more reliable than that gathered internally.
    • Direct personal knowledge obtained through observation is considered highly persuasive.

    Documentation and Audit Files

    • Audit documentation supports auditor's opinions and must be accurate and thorough to validate compliance with auditing standards.
    • Permanent files may contain documents like debt agreements, while current files include adjusting entries and audit reports.

    Audit Assertions and Concerns

    • In auditing inventory, rights and obligations are critical assertions related to consignment merchandise.
    • Completeness is a key concern when management is motivated to avoid tax liabilities or achieve earnings targets.

    Audit Evidence Sources

    • Bank statements obtained directly from the bank are among the most persuasive evidence types.
    • Documentation should be structured to facilitate review and support overall audit findings.

    Final Insights

    • Lead schedules require general ledger information, including account numbers and balances, to support the auditing process.
    • Audit documentation can exist in various formats, ensuring adaptability in evidence collection and preservation.### Audit Evidence and Procedures
    • Validity of audit evidence: Convincing evidence is preferred over persuasive evidence when assessing management’s assertions.
    • Accounting data alone is insufficient audit evidence to support financial statements; further corroboration is required.
    • The permanent audit file typically includes the organizational chart, setting a foundation for understanding company structure.
    • Current audit file includes working trial balance, essential for confirming financial accuracy during audits.

    Documentation and Ownership

    • All audit documentation must feature a heading that includes the company name, title of the working paper, and the year-end date for clarity and organization.
    • Audit working papers are owned by the audit firm, maintaining confidentiality and proprietary rights.

    Analytical Procedures

    • Analytical procedures serve as substantive tests designed to detect significant monetary errors in financial statements.
    • Factors influencing the decision to perform analytical procedures versus tests of transactions include test effectiveness and efficiency.
    • Nonfinancial information, like selling space size, can be critical during analytical procedures in the planning phase of audits.
    • Abnormal fluctuations in financial ratios, such as gross profit percentage, should prompt further investigation and extended audit procedures.

    Revenue and Financial Analysis

    • Subscription revenue estimates for not-for-profit organizations should consider changes in subscriber counts and pricing throughout the year.
    • The auditor assesses ratios and trends primarily within the income statement to identify anomalies and validate financial performance.
    • Predictability in analytical procedures often arises from relationships involving income statement accounts, allowing for effective forecasting.

    Investigative Procedures

    • Significant discrepancies or fluctuations should lead auditors to perform additional procedures to uncover the root cause.
    • Consistent allowance percentages for accounts receivable amidst balancing increases may suggest operational growth or changes in credit standards.

    Financial Ratios

    • Ratios such as total debt divided by total assets are critical for overall balance sheet evaluations during audits.
    • Earnings per share may not always be directly comparable across firms in the same industry due to varied accounting practices and outstanding shares.

    Conclusions and Recommendations

    • Auditors must adapt their approach based on analytical outcomes, considering the need for further tests if results deviate from expected patterns.
    • Effectiveness and efficiency in audit testing are vital in ensuring accurate assessments of a company’s financial health.

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    Test your knowledge with these flashcards focused on Chapter 5 of accounting. Each card covers crucial concepts related to audit evidence and management assertions, helping you clarify misunderstandings and reinforce learning. Challenge yourself to distinguish between true and false statements.

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