Auditing Confirmation Procedures Quiz

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Questions and Answers

What is the primary purpose of external confirmation procedures in auditing?

To assess the efficiency of the client's internal control system.

To obtain evidence from independent sources to support the client's assertions. (correct)

To verify the accuracy of the client's accounting records.

To identify potential fraud risks within the client's operations.

Which of the following is NOT a factor to consider when designing confirmation requests?

Prior experience on the audit or similar engagements.

Specific identified risks of material misstatement.

The method of communication.

The client's financial statements. (correct)

Which of the following is a potential benefit of using electronic communication for confirmation requests?

It provides a more reliable source of evidence than paper-based requests.

It eliminates the need for follow-up requests.

It helps to ensure the confidentiality of the confirmation request.

It can increase the response rate. (correct)

When using external confirmation procedures, why is it important to determine the appropriate confirming party?

To ensure the confirming party has a good understanding of the information requested. (D) Signup and view all the answers

Why are confirmation request often used to verify account balances and their elements?

To ensure that the client's accounting records are complete and accurate. (C) Signup and view all the answers

What is the main reason why an auditor would request confirmation of the terms of agreements or contracts between an entity and other parties?

To determine the financial impact of the agreements or contracts on the entity. (D) Signup and view all the answers

What is the significance of management's authorisation or encouragement to the confirming parties to respond to an auditor's request?

It helps to increase the response rate. (A) Signup and view all the answers

Which of the following could lead to a lower confirmation response rate?

A requirement for the confirming party’s signature on the confirmation. (C) Signup and view all the answers

What is the primary purpose of obtaining corroborating information from independent sources?

To increase the assurance obtained from internal audit evidence (D) Signup and view all the answers

Which of the following is NOT considered a method to obtain audit evidence?

Forecasting (B) Signup and view all the answers

What is the primary focus of risk assessment procedures in an audit?

To analyze potential areas of fraud or error in the financial statements (A) Signup and view all the answers

When would an auditor perform tests of controls?

Only when mandated by the audit standards (B), When assessing the risk of material misstatement (D) Signup and view all the answers

Which type of audit procedure involves confirming information obtained from external parties?

Substantive procedures (D) Signup and view all the answers

Which of the following best describes the relationship between different sources of audit evidence?

Consistent evidence from various sources provides more assurance (B) Signup and view all the answers

What are substantive analytical procedures primarily used for during an audit?

To analyze and investigate variances in financial data (D) Signup and view all the answers

Which of the following is an example of a further audit procedure?

Analytical reviews (B) Signup and view all the answers

What types of information may be relevant when testing for understatement in accounts payable?

Subsequent disbursements (A), Suppliers’ statements (D) Signup and view all the answers

Which audit procedure is designed to evaluate the effectiveness of controls at the assertion level?

Test of controls (C) Signup and view all the answers

Which of the following statements about audit evidence is correct?

Reliability can be influenced by the source and circumstances of obtaining the information. (C) Signup and view all the answers

Which of the following would NOT provide audit evidence regarding the assertion of existence?

Substantive analytical procedures (B) Signup and view all the answers

What is the primary purpose of designing substantive procedures?

To detect material misstatements at the assertion level (C) Signup and view all the answers

Which of the following is true regarding conditions relevant to the test of controls?

Identifying conditions indicating adequate performance is crucial. (C) Signup and view all the answers

Which assertion is NOT addressed when inspecting documents related to the collection of receivables after the reporting period?

Cut-off (A) Signup and view all the answers

What may affect the reliability of audit evidence from external sources?

The controls over evidence's preparation and maintenance (B) Signup and view all the answers

How do the nature of the risk and the assertion impact the design of tests of details?

Tests of details related to existence or occurrence focus on selecting items from the financial statement amount, while completeness tests focus on selecting items expected to be included in the financial statement amount. (D) Signup and view all the answers

When might the extent of substantive procedures need to be increased?

When the results from tests of controls are unsatisfactory. (B) Signup and view all the answers

What is the primary factor typically considered when determining the extent of testing for tests of details?

The sample size. (C) Signup and view all the answers

What is the purpose of external confirmation procedures in an audit?

To obtain audit evidence that may not be available internally. (A) Signup and view all the answers

Which of the following is NOT a situation where external confirmation procedures may be used?

Evaluating the effectiveness of a company's internal controls. (B) Signup and view all the answers

What type of audit evidence does external confirmation provide?

Direct confirmation from third parties. (D) Signup and view all the answers

Which of the following is NOT a common type of external confirmation?

Customer satisfaction surveys. (D) Signup and view all the answers

How can an auditor obtain evidence about the absence of a side agreement?

Requesting external confirmation. (D) Signup and view all the answers

Who should the auditor request written representations from?

Those responsible for the preparation and presentation of the financial statements. (B) Signup and view all the answers

Which of the following individuals may be requested to provide written representations in addition to management?

An actuary (B) Signup and view all the answers

In what situations might an auditor be willing to accept qualifying language in written representations from management?

When the auditor believes the representations are made to the best of the individuals' knowledge and belief. (D) Signup and view all the answers

What is the primary reason why an auditor would request written representations from management?

To obtain a formal acknowledgement of management's responsibility for the financial statements. (A) Signup and view all the answers

What is the significance of the written representations requested by the auditor from management, particularly regarding the preparation and presentation of the financial statements?

They help the auditor understand the entity's accounting policies and identify potential areas of concern. (C) Signup and view all the answers

Which of the following is NOT a typical reason why an auditor might seek written representations from management?

To obtain a detailed account of the entity's internal control system and its effectiveness. (C) Signup and view all the answers

Why is it important for the auditor to be satisfied that those providing written representations have appropriate responsibilities and knowledge of the matters included?

Because the auditor's opinion on the financial statements relies heavily on the accuracy of the information provided by management. (B) Signup and view all the answers

In the context of audit documentation, what is the primary purpose of requesting written representations from management?

To collect evidence to support the auditor's opinion on the financial statements. (B) Signup and view all the answers

Which of the following audit procedures is NOT specifically mentioned in the text as a way to identify litigation and claims that could lead to a risk of material misstatement?

Evaluating the financial stability of the entity's external legal counsel (D) Signup and view all the answers

What is the primary purpose of seeking direct communication with the entity's external legal counsel regarding litigation or claims?

To obtain an independent assessment of the potential impact of litigation on the entity's financial statements (B) Signup and view all the answers

What is the definition of 'external confirmation' in an audit?

Audit evidence obtained directly from a third party in response to the auditor's request, regardless of format (C) Signup and view all the answers

Which of the following scenarios represents an 'exception' in the context of external confirmation?

The confirming party's response differs from the information provided by the entity (D) Signup and view all the answers

What is the key characteristic of a 'positive confirmation request'?

It requires a response from the confirming party regardless of whether they agree or disagree with the information (C) Signup and view all the answers

What does a 'non-response' indicate in the context of external confirmation?

The confirming party has not provided a complete or any response to the auditor's request (B) Signup and view all the answers

In which of the following scenarios would an auditor be most likely to seek direct communication with an entity's external legal counsel?

The auditor has identified a risk of material misstatement related to litigation or claims (C) Signup and view all the answers

Which of the following statements accurately describes the relationship between external confirmation and other audit procedures?

External confirmation is a supplement to other audit procedures used to identify and assess litigation risk (A) Signup and view all the answers

Study Notes

Audit Documentation and Audit Evidence

Audit documentation is a record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached.
Audit documentation provides evidence of the auditor's basis for a conclusion and that the audit was planned and performed in accordance with Standards on Auditing (SAs).
The audit file is one or more folders (physical or electronic) containing audit documentation for a specific engagement.
The final audit file is assembled on a timely basis after the date of the auditor's report.
Audit files are usually not deleted or discarded until the retention period is over.

Specific Considerations for Selected Items

The auditor's objective in conducting an initial audit engagement is to obtain sufficient appropriate audit evidence about whether opening balances contain misstatements or have been consistently applied.
Opening balances may contain misstatements impacting the current period's financial statements.
If opening balances are misstated:
- The auditor performs additional procedures to determine the effect on the current financial statements.
- The auditor communicates misstatements with appropriate management and those charged with governance.

Audit Evidence

Audit evidence is the information used by the auditor to arrive at conclusions on which the audit opinion is based.
Audit evidence comprises information in the accounting records underlying the financial statements and other information.
Information in the accounting records includes initial entries, supporting documents (e.g., bank statements, invoices, contracts), subsidiary ledgers, journal entries, and other adjustments.
Other information supporting the related financial statements includes meeting minutes, confirmations from trade receivables/payables, internal control manuals.

Sufficiency And Appropriateness of Audit Evidence

Audit evidence is necessary to support the auditor's opinion.
Sufficiency is the quantity; appropriateness is the quality (relevance and reliability) of audit evidence.
Many factors influence the quantity of audit evidence including materiality, risk of material misstatement, size and characteristics of the population.
Appropriateness is influenced by the reliability and relevance of the source and type of evidence.

Types of Audit Evidence

Internal evidence originates within the organization (e.g., invoices, sales records).
External evidence originates outside the organization (e.g., bank confirmations, customer invoices).
Internal evidence is generally less reliable than external evidence due to potential for manipulation. External evidence is more reliable if it's from an independent source.

Written Representations

Written representations are written statements by management provided to the auditor.
They confirm certain matters or support other audit evidence.
They aren't the financial statements themselves, nor their supporting documentation.
They support, but don't replace other audit evidence.

Management Representations

The auditor requests written representation from management regarding their responsibility for the preparation of financial statements.
Written representations support other evidence related to financial statements and assertions.
The auditor assesses management's knowledge of the supporting processes used for financial reporting and the financial statement assertions.

Audit Procedures for Specific Items (e.g., Inventory)

Attendance at physical inventory counting to evaluate management's instructions, procedures, and observe the performance of counting procedures.

Audit Procedures for Litigation and Claims

Inquire of management, including internal legal counsel
Review minutes of meetings
Review legal expense accounts
Seek communication with external legal counsel

Auditor's Responsibilities for Subsequent Events

The auditor must investigate events to determine if there's a material uncertainty about the entity's ability to continue as a going concern.
If the auditor finds events after the financial statements' date would cause them to modify their report, they need to communicate those events and potential consequences.

Going Concern Assumption

Financial statements are prepared assuming the entity will continue operations for the foreseeable future.
Auditors must obtain sufficient appropriate audit evidence about whether events or conditions exist that may cause material uncertainty about the entity's ability to continue as a going concern

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Description

Test your knowledge on the essential concepts of external confirmation procedures in auditing. This quiz covers factors to consider, benefits of electronic communication, and the importance of confirming parties. Enhance your understanding of how confirmation requests can verify account balances and terms of agreements.