Podcast
Questions and Answers
What type of information does specialized journal information include?
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?
What is the required form of audit documentation?
Which account balance assertion is the auditor most concerned about verifying if a company's primary motivation is to avoid paying income taxes?
Which account balance assertion is the auditor most concerned about verifying if a company's primary motivation is to avoid paying income taxes?
Which transaction assertion is the auditor most concerned with if the audit client is under pressure to meet an earnings target?
Which transaction assertion is the auditor most concerned with if the audit client is under pressure to meet an earnings target?
Signup and view all the answers
What audit procedure is likely to be used when auditing purchases to address unrecorded transactions?
What audit procedure is likely to be used when auditing purchases to address unrecorded transactions?
Signup and view all the answers
Which statement is not valid concerning audit evidence?
Which statement is not valid concerning audit evidence?
Signup and view all the answers
Which statement concerning audit evidence is correct?
Which statement concerning audit evidence is correct?
Signup and view all the answers
What does the permanent audit file usually include?
What does the permanent audit file usually include?
Signup and view all the answers
What does the current audit file usually include?
What does the current audit file usually include?
Signup and view all the answers
What should all audit documentation headings include?
What should all audit documentation headings include?
Signup and view all the answers
To whom do the audit working papers belong?
To whom do the audit working papers belong?
Signup and view all the answers
Which procedures are designed to detect possible material monetary errors in financial statements?
Which procedures are designed to detect possible material monetary errors in financial statements?
Signup and view all the answers
An auditor's decision to apply analytical procedures usually depends on what?
An auditor's decision to apply analytical procedures usually depends on what?
Signup and view all the answers
Which nonfinancial information would an auditor consider during analytical procedures in the planning phase?
Which nonfinancial information would an auditor consider during analytical procedures in the planning phase?
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?
What would the auditor expect the year-end balance in the accrued commissions payable account to be if agents' sales were $10 million?
Signup and view all the answers
What should an auditor expect from revenue in a not-for-profit organization with increasing subscribers?
What should an auditor expect from revenue in a not-for-profit organization with increasing subscribers?
Signup and view all the answers
What do analytical procedures indicate if they show unexpected account relationships?
What do analytical procedures indicate if they show unexpected account relationships?
Signup and view all the answers
Which is not a typical analytical procedure?
Which is not a typical analytical procedure?
Signup and view all the answers
What classification do analytical procedures fall under primarily?
What classification do analytical procedures fall under primarily?
Signup and view all the answers
How are abnormal fluctuations in gross profit identified in the audit planning phase?
How are abnormal fluctuations in gross profit identified in the audit planning phase?
Signup and view all the answers
An example of an analytical procedure is the comparison of what?
An example of an analytical procedure is the comparison of what?
Signup and view all the answers
What should analytical procedures in audit planning focus on?
What should analytical procedures in audit planning focus on?
Signup and view all the answers
When are analytical procedures required?
When are analytical procedures required?
Signup and view all the answers
If the gross profit percentage has declined significantly, the auditor should what?
If the gross profit percentage has declined significantly, the auditor should what?
Signup and view all the answers
Which statement does the auditor emphasize during the examination of the financial statements?
Which statement does the auditor emphasize during the examination of the financial statements?
Signup and view all the answers
If significant fluctuations in financial statements occur and management can't explain them, the auditor should what?
If significant fluctuations in financial statements occur and management can't explain them, the auditor should what?
Signup and view all the answers
Which ratios are most predictable for analytical procedures as substantive procedures?
Which ratios are most predictable for analytical procedures as substantive procedures?
Signup and view all the answers
Information to develop estimates through analytical procedures can be obtained from all except:
Information to develop estimates through analytical procedures can be obtained from all except:
Signup and view all the answers
What would most likely satisfy the auditor regarding a doubled accounts receivable balance?
What would most likely satisfy the auditor regarding a doubled accounts receivable balance?
Signup and view all the answers
Which would be least likely comparable between similar corporations in the same industry?
Which would be least likely comparable between similar corporations in the same industry?
Signup and view all the answers
Which ratio would an engagement partner most likely calculate during the overall review stage of an audit?
Which ratio would an engagement partner most likely calculate during the overall review stage of an audit?
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.
Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements.
Signup and view all the answers
The auditor gathers audit evidence to test management's assertions.
The auditor gathers audit evidence to test management's assertions.
Signup and view all the answers
Management assertions fall into four main categories.
Management assertions fall into four main categories.
Signup and view all the answers
The classification assertion refers to transactions and events being recorded in the correct accounting period.
The classification assertion refers to transactions and events being recorded in the correct accounting period.
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.
The completeness assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded.
Signup and view all the answers
The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period.
The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period.
Signup and view all the answers
Audit procedures are designed to test management assertions.
Audit procedures are designed to test management assertions.
Signup and view all the answers
The relevance of audit evidence or specific audit procedures depends on the assertion being tested.
The relevance of audit evidence or specific audit procedures depends on the assertion being tested.
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.
The auditor must use his or her professional judgment to determine the amount of audit evidence to be gathered.
Signup and view all the answers
The sufficiency of evidence refers to the quality of audit evidence.
The sufficiency of evidence refers to the quality of audit evidence.
Signup and view all the answers
A confirmation is used to:
A confirmation is used to:
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?
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?
Signup and view all the answers
Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must:
Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must:
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?
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?
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?
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?
Signup and view all the answers
Which assertions may be tested for the 'account balances' category of management assertions?
Which assertions may be tested for the 'account balances' category of management assertions?
Signup and view all the answers
Which assertions may be tested for the 'transactions and events' category of management assertions?
Which assertions may be tested for the 'transactions and events' category of management assertions?
Signup and view all the answers
Which assertions may be tested for the 'presentation and disclosure' category of management assertions?
Which assertions may be tested for the 'presentation and disclosure' category of management assertions?
Signup and view all the answers
Tracing is used primarily to test which of the following assertions about classes of transactions?
Tracing is used primarily to test which of the following assertions about classes of transactions?
Signup and view all the answers
Vouching is used primarily to test which of the following assertions about classes of transactions?
Vouching is used primarily to test which of the following assertions about classes of transactions?
Signup and view all the answers
In designing written audit programs, an auditor should plan specific audit procedures to test:
In designing written audit programs, an auditor should plan specific audit procedures to test:
Signup and view all the answers
Footing is an example of:
Footing is an example of:
Signup and view all the answers
In determining whether transactions have been recorded, the direction of the audit testing should start from the:
In determining whether transactions have been recorded, the direction of the audit testing should start from the:
Signup and view all the answers
To test for unsupported entries in the ledger, the direction of audit testing should start from the:
To test for unsupported entries in the ledger, the direction of audit testing should start from the:
Signup and view all the answers
Which of the following presumptions does not relate to the appropriateness of audit evidence?
Which of the following presumptions does not relate to the appropriateness of audit evidence?
Signup and view all the answers
Of the following, which is the least persuasive type of audit evidence?
Of the following, which is the least persuasive type of audit evidence?
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:
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:
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?
Which of the following shows the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance?
Signup and view all the answers
The permanent (continuing) file of an auditor's working papers most likely would include copies of the:
The permanent (continuing) file of an auditor's working papers most likely would include copies of the:
Signup and view all the answers
An example of audit evidence with a medium level of reliability is:
An example of audit evidence with a medium level of reliability is:
Signup and view all the answers
Audit documentation prepared on audits of public entities is the property of the:
Audit documentation prepared on audits of public entities is the property of the:
Signup and view all the answers
All of the following are typically in the current file except:
All of the following are typically in the current file except:
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?
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?
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?
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?
Signup and view all the answers
Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?
Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?
Signup and view all the answers
Which of the following best describes the primary purpose of audit procedures?
Which of the following best describes the primary purpose of audit procedures?
Signup and view all the answers
Procedures specifically outlined in an audit program are designed primarily to:
Procedures specifically outlined in an audit program are designed primarily to:
Signup and view all the answers
Which statement concerning audit evidence is not valid?
Which statement concerning audit evidence is not valid?
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:
Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the:
Signup and view all the answers
Of the following, the most reliable type of evidence typically is:
Of the following, the most reliable type of evidence typically is:
Signup and view all the answers
Which of the following presumptions is correct about the reliability of audit evidence?
Which of the following presumptions is correct about the reliability of audit evidence?
Signup and view all the answers
Which of the following types of documentary evidence should the auditor consider to be the most reliable?
Which of the following types of documentary evidence should the auditor consider to be the most reliable?
Signup and view all the answers
Which of the following is the least persuasive documentation in support of an auditor's opinion?
Which of the following is the least persuasive documentation in support of an auditor's opinion?
Signup and view all the answers
Which of the following statements is generally correct about the appropriateness of audit evidence?
Which of the following statements is generally correct about the appropriateness of audit evidence?
Signup and view all the answers
Which of the following types of audit evidence is the most persuasive?
Which of the following types of audit evidence is the most persuasive?
Signup and view all the answers
Following are several statements regarding accounting records or audit documentation. Which of the statements is correct?
Following are several statements regarding accounting records or audit documentation. Which of the statements is correct?
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:
Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that:
Signup and view all the answers
Audit documents that record the procedures used by the auditor to gather evidence should be:
Audit documents that record the procedures used by the auditor to gather evidence should be:
Signup and view all the answers
In creating lead schedules for an audit engagement, what financial information is needed to begin?
In creating lead schedules for an audit engagement, what financial information is needed to begin?
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.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
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.
