Audit Evidence Full Test Bank Chapter 5

Chapter 5

Audit Evidence

Question Type: True or False

It is management’s responsibility to ensure that financial statements are fairly and truthfully presented.

A. True

B. False

Examples of assertions include: accuracy, cutoff and valuation and allocation.

A. True

B. False

Sufficient audit evidence relates to the quantity of audit evidence gathered.

A. True

B. False

Reliability relates to the source of the evidence and the nature of the evidence.

A. True

B. False

Audit risk affects the quantity and quality of evidence gathered by an auditor during the risk response phase.

A. True

B. False

Inspection of documents can only be used as a test of controls.

A. True

B. False

Inquiry involves asking verbal questions only.

A. True

B. False

A specialist is an individual or an organization with expertise in a field other than accounting or auditing.

A. True

B. False

The permanent file includes client information and documentation that applies to the most recent year’s audit.

A. True

B. False

The current file includes extracts from the minutes of meetings, such as the board of directors’ meetings, which pertain to the current audit.

A. True

B. False

Question Type: Multiple choice

Which assertion is common to both (i) classes of transactions and events for the period under audit and (ii) account balances at the period-end?

A. Classification

B. Completeness

C. Rights and obligation

D. Valuation and allocation

What do you call a statement or representation, explicit or implied, made by management regarding the recognition, measurement, presentation, and disclosure of items included in the financial statements and notes?

A. assertion

B. inspection

C. tracing

D. vouching

When reporting inventory, management claims that the items exist, are owned by the entity, represent a complete list of the inventory owned, and are valued appropriately. These are examples of _______.

A. Assertions

B. Accounting records

C. Negative confirmation

D. Positive confirmation

Auditors who are searching for evidence that assets, liabilities, and equity items have been recorded at appropriate amounts and allocated to the correct general ledger accounts consider ________.

A. existence

B. classification

C. valuation and allocation

D. rights and obligations

Auditors gathering evidence to verify that recorded assets are owned by the entity and recorded liabilities represent commitments of the entity consider ________.

A. Rights and obligations

B. Completeness

C. Occurrence

D. Valuation and allocation

What term signifies assertions that have a reasonable possibility of containing a material misstatement that would cause the financial statements to be materially misstated?

A. Relevant assertions

B. Rights and obligations

C. Valuation and allocation

D. Accuracy and valuation

In the context of assertions about classes of transactions and events for the period under audit, auditors considering occurrence gather evidence to verify that _______.

A. a recorded transaction or event, such as a revenue or an expense item, actually took place and relates to the entity

B. all transactions have been recorded and the financial statements are not understated or overstated because transactions have been omitted

C. transactions and events have been recorded at appropriate amounts

D. transactions and events have been recorded in the proper accounts

What do auditors do when considering rights and obligations?

A. Gather evidence to verify that recorded assets are owned by the entity and recorded liabilities represent commitments of the entity.

B. Search for evidence to verify that asset, liability, and equity items on the balance sheet actually exist.

C. Search for assets, liabilities, and equity items to ensure they have been recorded.

D. Search for evidence that assets, liabilities, and equity items have been recorded at appropriate amounts.

Which of the following is a listing of details of the audit procedures to be used when testing controls and when conducting detailed substantive audit procedures?

A. Audit data analytics

B. Accounting records

C. Analytical procedures

D. Audit program

What do auditors do when considering existence?

A. Search for evidence to verify that asset, liability, and equity items on the balance sheet actually exist.

B. Gather evidence to verify recorded assets are owned by the entity and recorded liabilities represent commitments of the entity.

C. Search for assets, liabilities, and equity items to ensure they have been recorded.

D. Search for evidence that assets, liabilities, and equity items have been recorded at appropriate amounts.

Auditors gathering evidence that transactions and events have been recorded at appropriate amounts consider _______.

A. accuracy

B. occurrence

C. completeness

D. classification

When considering classification, auditors gather evidence that transactions and events have been recorded _______.

A. in the proper accounts

B. in the correct accounting period

C. at appropriate amounts

D. alongside equity interests

Management assertions are best defined as ________.

A. sometimes being present in the financial statements, and sometimes not.

B. optional items for the auditor to check

C. representations by management, explicit and implicit, contained within the financial statements.

D. management communications with an attorney

With regard to management assertions, it is true to say that ________.

A. all assertions apply to all accounts and balances

B. only some assertions apply to accounts and their balances

C. none of the assertions apply to accounts and their balances

D. management should be consulted to determine which assertions apply to which accounts.

The responsibility of ensuring sufficient appropriate audit evidence is gathered to arrive at an opinion is ________.

A. the responsibility of the auditor

B. the responsibility of management

C. a joint responsibility between management and the auditor

D. a function of internal control

.

The completeness assertion relates to ________.

A. all transactions and events that should have been recorded have been recorded

B. all payroll accounting records are complete and accounted for

C. all entries are recorded in the correct period

D. all accounts are valued at their correct amounts

The management assertion of classification deals with ________.

A. ensuring vacancies are posted to appropriated classified ads

B. transactions and events have been recorded in the proper accounts.

C. classifying between the appropriate financial statements

D. current versus non-current only

The accuracy and valuation assertion relates to ________.

A. financial and other information is disclosed fairly and in appropriate amounts

B. ensuring records of ownership of assets is accurate

C. the auditor’s charges for fees and services provided

D. all disclosures having been properly made

The cutoff assertion deals with ________.

A. ensuring accounts are appropriately valued

B. ensuring amounts are recorded in the correct accounts

C. transactions and events have been recorded in the correct accounting period

D. ensuring that assets, liabilities and equity interests exist.

When testing for the ___________ assertion, auditors gather evidence that all transactions have been recorded and the financial statements are not understated or overstated.

A. completeness

B. cutoff

C. valuation and allocation

D. disclosure

When testing for the ________ assertion, auditors gather evidence that transactions and events have been recorded at appropriate amounts.

A. cutoff

B. accuracy

C. existence

D. completeness

When testing for the ________ assertion, auditors search for evidence that transactions have been recorded in the correct accounting period.

A. rights and obligations

B. valuation and accuracy

C. cutoff

D. existence

When testing for the ________ assertion, auditors gather evidence that transactions and events have been recorded in the proper accounts.

A. classification

B. existence

C. rights and obligations

D. presentation and disclosure

When testing for the ________ assertion, auditors search for evidence to verify that asset, liability and equity items on the balance sheet actually exist.

A. presentation and disclosure

B. existence

C. occurrence

D. valuation and accuracy

When testing for the ________ assertion, auditors gather evidence to verify recorded assets are owned by the entity and recorded liabilities represent commitments of the entity.

A. existence

B. valuation and accuracy

C. rights and obligations

D. occurrence

When testing for the ________ assertion, auditors search for assets, liabilities and equity items to ensure they have been recorded.

A. cutoff

B. valuation and accuracy

C. completeness

D. presentation and disclosure

When testing for the ________ assertion, auditors search for evidence that assets, liabilities and equity items have been recorded at appropriate amounts and allocated to the correct general ledger accounts.

A. presentation and disclosure

B. valuation and allocation

C. existence

D. occurrence

When testing for the ________ assertion, auditors ensure that all items included in the financial statements are appropriately presented and disclosures are clearly expressed.

A. classification and understandability

B. cutoff

C. presentation and disclosure

D. occurrence

The sufficiency of audit evidence refers to the _______.

A. quantity of audit evidence gathered

B. quality of audit evidence gathered

C. logical connection with the assertion being tested

D. source, form, or nature of the audit evidence

The information that auditors use when arriving at their opinion on the fair presentation of the client’s financial statements is called _______.

A. audit evidence

B. relevant assertion

C. receivable confirmation

D. working papers

Considering the risk of overstatement of receivables due to premature revenue recognition that inflates revenues and receivables, which assertion for the accounts receivable balance is typically relevant?

A. Accuracy

B. Existence

C. Completeness

D. Rights and obligations

Auditors inspecting a sample of accounts payable balances listed on the ledger and verifying that they are true payables owed by the client gather evidence in support of the _______ assertion.

A. accuracy

B. occurrence

C. completeness

D. existence

The appropriateness of audit evidence refers to the _______.

A. quality of audit evidence gathered

B. quantity of audit evidence gathered

C. logical connection with the assertion being tested

D. source, form, or nature of the audit evidence

In audit evidence, which of the following refers to the logical connection with the assertion being tested?

A. Reliability

B. Sufficiency

C. Relevance

D. Appropriateness

The procedure of auditors examining a client’s unpaid invoices file and determining if payables have been properly created for any unpaid invoices would provide evidence in support of the _______ assertion.

A. accuracy

B. occurrence

C. completeness

D. cut-off

When would auditors want to decrease the risk that their audit procedures will not detect a material misstatement?

A. When detection risk is high

B. When detection risk is low

C. When inherent risk is low

D. When control risk is low

The quality of audit evidence is determined by its ________ in providing support for the conclusions on which the auditor’s opinion is based.

A. relevance and reliability

B. accuracy and valuation

C. classification and understandability

D. occurrence and rights and obligations

The amount of evidence that an auditor must collect is a function of __________.

A. the risk of material misstatement in a relevant assertion for an account balance or class of transactions

B. prior years’ audit risk

C. a detailed assessment of the clients’ system of internal control

D. the ability of the client to provide all documentation requested by the auditor

Audit evidence will typically consist of ________.

A. all observations made by the auditor

B. all records prepared by the auditor, not including records received from external entities

C. information that supports and corroborates management’s assertions and any information that contradicts the assertions

D. information that supports the auditor’s initial assessment of audit risk

The specific procedures auditors will use to gather evidence are detailed in the ________.

A. financial statements

B. representation letter

C. audit program

D. flowchart

Relevance of audit evidence refers to ________.

A. its importance to the audit

B. its relevance to outside investors and creditors

C. its relationship to the assertion being tested

D. its relevance to the balance sheet

Reliability of audit evidence refers to ________.

A. the source of the evidence and form or nature of the evidence

B. the accuracy and reliability of the balances

C. only the specific source of the information

D. only the nature of the evidence only

Auditors communicating directly with a client’s bank regarding the existence of the client’s cash account balances at year-end would be an example of an:

A. audit issue

B. independent source

C. internal source

D. illegal communication

When there is a low risk of material misstatement with an assertion and the client’s system of internal controls is considered effective at reducing risk, ________.

A. detection risk is set at low

B. detection risk is set at high

C. inherent risk is set to medium

D. control risk is ignored

Auditors are willing to accept a higher risk that their audit procedures may not detect a material misstatement ________.

A. when detection risk is high

B. when control risk is high

C. when detection risk is low

D. when control risk is low

Auditors would plan for audit procedures that may result in lower quality evidence and possibly a decreased quantity of evidence for that assertion ________.

A. when detection risk is high

B. when audit risk is low

C. when management risk is low

D. when control risk is high

Auditors inspecting purchase orders for proper authorization by a manager before a purchase is made would be an example of ________.

A. a test of controls

B. client communication

C. substantive procedures

D. analytical procedures

An auditors’ evaluation of financial information by studying plausible relationships among both financial and non-financial data ________.

A. is known as recalculation

B. is known as reperformance

C. is referred to as substantive testing

D. is referred to as analytical procedures

The primary assertion that is tested when using receivable confirmations is _______.

A. existence

B. occurrence

C. accuracy

D. completeness

What procedures are designed to detect material misstatements at the assertion level (namely, tests of details and substantive analytical procedures)?

A. Tests of controls

B. Substantive procedures

C. Analytical procedures

D. Risk assessment procedures

Which of the following provides evidence for the occurrence assertion?

A. Tracing

B. Visualization

C. Vouching

D. Tests of controls

Selecting source documents and working forward to follow the transaction through to recording in the journal and ledger is called _______.

A. tracing

B. vouching

C. inquiring

D. observing

Positive confirmations ask recipients to reply ________.

A. in all circumstances. If a response cannot be obtained, auditors must obtain alternative evidence to determine if the balance exists.

B. only if they disagree with the information provided. If a recipient does not respond, it is assumed that he/she agrees with the information provided

C. in all circumstances. If a recipient does not respond, it is assumed that he/she agrees with the information provided

D. only if they disagree with the information provided. If a response cannot be obtained, auditors assume that the receivable does not exist

Receivable confirmations provide very little evidence regarding the _______ assertion.

A. accuracy

B. rights and obligation

C. occurrence

D. completeness

Positive confirmation is correspondence sent directly by an auditor to a third party, who must respond _________.

A. in all circumstances

B. only if it disagrees with the information provided

C. only if it agrees with the information provided

D. in circumstances where the client disagrees with the auditor

Auditors spend a considerable amount of total audit time on the process of obtaining and evaluating audit evidence in support of management assertions, which is sourced primarily from the client’s ________.

A. working papers

B. accounting records

C. internal auditors

D. audit data analytics

Which of the following helps discover and analyze patterns, identify anomalies, and extract other useful information in data underlying the subject matter of an audit?

A. Tests of Control

B. ADA

C. XBRL

D. GAAP

Among methods used by auditors in gathering evidence, what are tests of control?

A. Methods used to determine the operating effectiveness of the client’s controls in preventing, or detecting and correcting, material misstatements at the assertion level.

B. Methods designed to detect material misstatements at the assertion level.

C. Methods used to gain an understanding of a client and its industry for the purpose of identifying risk of material misstatement.

D. Methods used in the evaluation of financial information by studying plausible relationships among both financial and non-financial data.

If an auditor has determined that inherent risk for accounts receivable is high and wishes to verify the balance as accurate, the best corroborating evidence would be ________.

A. a phone call to the client

B. a negative confirmation sent to the entity in question

C. a positive confirmation sent to the entity in question

D. inspection of supporting documents relating to the receivables transactions

When an auditor selects transactions from the sales journal or ledger and then examines the underlying source documents, such as a shipping document and an invoice to the customer, this is known as ________.

A. tracing

B. vouching

C. examination

D. inspection of records

When auditors start with the underlying source documents and work forward to follow the transaction through to recording in the journal and ledger, this is referred to as ________.

A. audit procedures

B. substantive procedures

C. tracing

D. vouching

A common audit procedure that involves watching a process or procedure being carried out by client personnel or another party is known as ________.

A. inspection

B. observation

C. recalculation

D. reperformance

When an auditor asks questions verbally or in written form of knowledgeable individuals internal to the client, this is referred to as ________.

A. confirmation

B. attestation

C. affirmation

D. inquiry

A type of analytical procedure in which auditors use their professional judgment to review accounting data to identify unusual or significant items that may be an indication of a material misstatement ________.

A. is referred to as scanning

B. is known as substantive testing

C. is known as an audit review

D. is no longer allowed under Sarbanes-Oxley.

Performing numerical accuracy tests for foreign currency translation, payroll taxes, interest on loans outstanding, and depreciation calculations ________.

A. is the role of the internal audit function

B. is the responsibility of management

C. is referred to as recalculation

D. is unnecessary if the client is assessed as having low control risk

Using ADA software typically makes the audit _______.

A. more comprehensive but less efficient.

B. less comprehensive and less efficient.

C. less comprehensive but more efficient.

D. more comprehensive and more efficient.

According to Brazel’s research, responses from financial statement auditors in the U.S. who were surveyed about their experiences with IT auditors indicated that they believe IT auditors’ _______ levels vary in practice.

A. competence

B. capability

C. objectivity

D. participation

In the PCAOB standard, the term “other auditors” refers to ________.

A. component auditors

B. principal auditors

C. the group engagement team

D. the group engagement partner

Who among the following is generally the most experienced in an audit team?

A. Partner

B. Manager

C. Senior/in-charge

D. Staff/associates

In general, reliance on an IT specialist is appropriate when the financial statement auditor complies with the conditions of AU-C ________.

A. 610

B. 620

C. 600

D. 500

Which of the following is an individual or organization with expertise in a field other than accounting or auditing whose work in that field is used by the auditors to assist in obtaining sufficient appropriate evidence?

A. Component auditor

B. Internal auditor

C. Specialist

D. Group engagement partner

In cases wherein specialists are hired, the responsibility for arriving at an overall conclusion regarding fair presentation of a client’s financial statements rests with the _______.

A. auditors

B. specialists

C. clients

D. government

What do auditors consider when determining the extent to which the internal auditors’ work will affect the auditors’ procedures?

A. The materiality of the account balance or transaction, the risk of material misstatement of the assertions, and the amount of subjectivity involved in evaluating the evidence gathered.

B. Only the materiality of the account balance or transaction and the risk of material misstatement of the assertions.

C. Only the risk of material misstatement of the assertions related to the account balance, transaction, or disclosure and the amount of subjectivity involved in evaluating evidence gathered.

D. Only the amount of subjectivity involved in evaluating the evidence gathered.

The extent of review of the component auditor’s work depends on a number of factors. The group engagement partner will spend more time if the component auditor ________.

A. has a good reputation

B. is dealing with a component that is material

C. has done audit work for the group engagement partner in the past

D. is auditing statements that are at low risk of material misstatement

The PCAOB standard corresponding to an independent auditor’s report when work of a component auditor is used is ________.

A. AS 1205 Part of the Work Performed by Other Independent Auditors

B. AS 2110 Identifying and Assessing the Risks of Material Misstatement

C. AS 2605 Consideration of the Internal Audit Function

D. AS 1210 Using the Work of a Specialist

With respect to relying on the work of the internal audit function, external auditors should ____________.

A. always be willing to accept work completed and documentation provided

B. never be willing to accept work completed by the internal audit function

C. impartially assess the objectivity, competence and processes of the internal audit function

D. always assign junior members of the audit team to assist the internal audit function

An auditor’s request for information about the amount of cash held in the bank and details of any loans is referred to as a ________.

A. bank confirmation

B. financial confirmation

C. negative confirmation

D. audit confirmation

The primary assertion being tested when using receivable confirmations is ________.

A. completeness

B. valuation and accuracy

C. existence

D. rights and obligations

An individual or an organization with expertise in a field other than accounting or auditing whose work in that field is used by the auditors to assist in obtaining sufficient appropriate audit evidence ________.

A. is commonly known as an outside consultant

B. is typically referred to as a specialist

C. is not to be relied upon by the auditor

D. should report to management, not the auditor

Employees of the client that perform assurance and consulting activities designed to evaluate and improve the effectiveness of the entity’s governance, risk management, and internal control processes ________.

A. should be expected to assist the auditor with the audit

B. are known as internal auditors

C. are referred to as specialists

D. will provide evidence to the auditor which should always be considered reliable

Examples of evidence indicating the competency of the internal audit function could be ________.

A. professional certification in a relevant field

B. high turnover of internal audit employees

C. low salaries compared to the industry average

D. little or no training provided to new employees

Financial information of more than one entity, or component ________.

A. are known as parent-subsidiary statements

B. are not allowed under GAAP

C. are referred to as group financial statements

D. should be audited by the internal audit function instead

An entity or business activity that is required by the applicable financial reporting framework to prepare financial information that will be included in group financial statements ________.

A. is known as a component

B. is referred to as a subsidiary

C. should send separate financial information directly to the auditor

D. should be audited by the internal audit function

At the front of every audit file is the client’s _______ supporting the financial statements.

A. trial balance

B. prior year audit file

C. key performance indicators

D. relevant assertions

AU-C 230 Audit Documentation and AS 1215 Audit Documentation require auditors to document each stage of the audit in their _______ to provide a record of work completed and evidence gathered in forming their audit opinion.

A. Bank confirmations

B. Audit data analytics

C. Group financial statements

D. Working papers

Which of the following includes client information and documentation that applies to multiple audits?

A. Permanent file

B. Lead schedules

C. Bank confirmations

D. Current file

Which of the following are included in the permanent file and not in the current file?

A. Debt covenants

B. All testing and evidence gathered in preparation of the audit report

C. Correspondence with other auditors and specialists

D. Extracts from the minutes of meetings

Which of the following is true of the permanent file?

A. It includes details of key personnel and an organizational chart.

B. In the first year of a continuing audit, it offers no information for future audits.

C. The information included in it is checked and updated at the end of each annual audit.

D. It makes no reference to the client’s primary accounting policies and methodologies.

Which of the following summarizes the detail included in a specific account on the financial statements?

A. Vouching

B. Assertion

C. Lead schedule

D. Bank confirmation

The auditing procedure of observation ________.

A. only provides evidence of a process at the time auditors observe it being carried out

B. is less reliable than auditing associated ledger accounts

C. should be performed only once during the audit for each account

D. should be conducted by the internal audit function to save time

An auditor has just prepared and sent a letter to management detailing weaknesses in internal control. A copy of this letter should be ________.

A. sent to the client’s attorney

B. placed in the permanent file

C. placed in the temporary file, and removed when the client corrects the deficiencies

D. filed with the Securities and Exchange Commission

Current year working papers for an audit client should contain ________.

A. a copy of the lead schedule

B. a copy of the working papers

C. copies of the lead schedule and working papers

D. neither copies of the lead schedules nor working papers.

Ultimate responsibility for audit decisions, supervision of the team members, and the issuance of the final audit report rests with _______.

A. management

B. the audit partner

C. the audit manager

D. the audit committee

A detailed record of work completed, and evidence gathered in forming the audit opinion ________.

A. is contained in the working papers

B. is referred to as the audit plan

C. should be submitted by the auditor to management for approval

D. is confidential and should not be shared with client personnel

Auditors document details of tests undertaken ________.

A. in the audit planning phase

B. once the audit is completed

C. during the risk response phase

D. during risk assessment

Client information and documentation that applies to multiple audits should be________.

A. stored in the current file

B. stored in the permanent file

C. destroyed upon completion of the audit

D. returned to the client upon completion of the audit

The permanent file should include ________.

A. details of all members of the internal audit function

B. details of the client’s board of directors and its subcommittees

C. details of all committees at the client’s place of business

D. all related party transactions

A client’s primary accounting methodologies and significant accounting policies ________.

A. should be stored in the current file

B. should be stored in the permanent file

C. should be re-examined by the auditor once the audit report has been published

D. is confidential, and should not be shared with the auditor

Letters to management that detail weaknesses in internal controls identified by the auditors in previous years should be ________.

A. included in the permanent file

B. included in the current file

C. destroyed if management corrects the weaknesses

D. sent directly to the management’s attorney for review

As audit work is performed and the auditor amasses client information and documentation that apply to the current year’s audit, ________.

A. this should be placed in the current file

B. this should be retained in the permanent file

C. copies of all information should be placed in both the current and permanent files

D. it should be destroyed after seven days to protect client confidentiality

Extracts from the minutes of meetings that pertain to the current audit ________.

A. should never be copied by the auditor

B. should be added to the current file

C. should immediately be copied and placed in the permanent file

D. are confidential, and should not be shared with the auditor

With respect to an auditor’s working papers, a lead schedule ________.

A. summarizes the detail included in a certain account

B. details who will be responsible for what parts of the audit

C. should be sent to the client before acceptance of the audit

D. should be prepared by the partner in charge of the audit

Documentation contained in the working papers for a client ________.

A. will be the same for each client within a particular industry

B. will contain a few minor variations between different clients

C. will vary by client

D. should be shared with the client and appropriate changes made

A document containing details of the period under audit, and the initials of preparers and reviewers is referred to as ________.

A. an audit working paper

B. an audit plan

C. a management representation letter

D. a positive confirmation

If an audit partner reviewing an engagement was attempting to locate details of long-term contracts and agreements, this information would be found in ________.

A. the representation letter

B. communications with the client’s attorney

C. the permanent file

D. the current file

Question Type: Text Entry

Once risks are identified, auditors assess the risk of material misstatement at the _______ level for these significant classes of transactions and account balances.

A. relevant assertion level | account | financial statement | disclosure

_______ is the information auditors use when arriving at their opinion on the fair presentation of the client’s financial statements.

A. Opinion evidence | Audit evidence | Privileged client information | Internal audit evidence

_______ refers to the quantity of audit evidence gathered.

A. Appropriate | Timely | Sufficient | Complete

Evidence gathered from a knowledgeable source independent of the client is more _______ than evidence gathered solely from internal client sources.

A. complete | accurate | reliable | questionable

_______ involves the examination of documents and physical assets.

A. Observation | Inspection | Examination | Recording

Question Type: Short Answer

If the current year accounts receivable are larger than last year but the allowance for doubtful accounts is the same, what account should be carefully audited and why?

A. If the current year accounts receivable are larger than last year but the allowance for doubtful accounts is the same, the collectability of accounts receivable is of concern.

The allowance for doubtful accounts may be understated, and/or the bad debt expense may be understated as well.

After obtaining an understanding of the entity's internal control and assessing control risk, an auditor of a nonpublic company has decided not to perform additional tests of controls. Why would an auditor conclude that additional testing is not needed?

A. An auditor may conclude not to perform additional tests of controls if obtaining additional evidence to support a further reduction in control risk was not cost beneficial.

What are some challenges in establishing an internal control system in a small business?

Internal control challenges in small business would include:

A. Separation of functional responsibilities would be difficult because of the small number of employees.

B. The owner manager has to assume a greater role to oversee and supervise authorization, recordkeeping, and custodial functions.

C. The owner manager must be diligent, competent, and have a high degree of integrity

As per GAAS, auditors are required to obtain a sufficient understanding of an entity's internal control. Does this mean that auditors should always try to obtain enough evidence to assess control risk below the "maximum" level? Explain.

A. Auditors do not always have to obtain enough evidence to assess control risk below the 'maximum" level.

There may be occasions when the audit team chooses to test everything substantively rather than relying on internal controls to reduce substantive testing. For example, for fixed assets, there are usually a small number of very material transactions. Testing controls would not be efficient if the audit team is going to examine every transaction anyway.

Compare and contrast the various roles of the members of an audit team.

Solution: The senior and associates perform the detail testing under the supervision of the manager. The partner holds ultimate responsibility for audit decisions, supervision of the team members, and the issuance of the final audit report. Throughout the engagement as audit procedures are completed and documented, they are reviewed by an audit team member with seniority over the team member who did the work.

Describe a situation in which an auditor may wish to use the work of a specialist.

Solution: Student answers will vary. Some examples of when a specialist may be used include estimating oil and mineral reserves for inventory reporting and performing actuarial calculations for the determination of employee benefit plan liabilities. Specialists may also be used to evaluate the quality of inventory, such as taking samples of grain from a grain elevator to determine if the grain has any bacteria or other attributes that could affect its quality.

You are on the audit of Specialty Wines, Inc. and have determined a vintner is needed to assess the quality and value of wine stocks. Explain how you can assess the competence, capability, and objectivity of the specialist. Refer to the AU-C section that covers using the work of a specialist.

Solution: Student answers will vary. In general, they should touch on the following:

Competence refers to the expertise of the specialist. What are the qualifications of the specialist? Does he or she maintain a license or certification in a relevant field? How many years of experience does the specialist have in the relevant field? Capability refers to the ability of the specialist to perform the required work. For example, does the specialist have the time and resources needed to complete the work? Is the specialist located in the area or will significant travel be required? Objectivity refers to the possible effects that bias, conflicts of interest, or the influence of others may have on the professional judgement of the specialist (AU-C 620.A15).

You are the audit manager on the audit of Tutoring Services, Inc. Tutoring Services, Inc. has an internal audit department. In your evaluation of the objectivity and competence of the internal audit department, you determine the following: The internal auditors report directly to the CFO. One of the six members of the internal audit department is a Certified Internal Auditor. Five of the six members of the internal audit department have less than two years of experience. The internal audit manager often helps out with the month end closing process, in order to maximize efficiency.

Determine whether or not the audit department can be objective and competent. Provide details to support your determination.

Solution:

The internal audit department is most likely not objective nor competent based on the descriptions above.

When auditing Elegant Jewelry Designs, Blumeray, CPA was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Blumeray hired Gannet, an expert in jewel valuation, to assist in the inventory valuation. Should Blumeray refer to Gannet's work in the audit report?

The auditors' report should mention the use of the specialist only when the specialist's findings affect the auditors' conclusions.

You are the audit senior on the Pizza Now audit. You have been assigned to work with a new intern. The intern is unfamiliar with the format and composition of audit working papers. Prepare a memo for the intern that discusses the purpose of the working papers and identifies the items generally included in an audit working paper.

Solution:

Student answers will vary, but should cover the following:

AU-C 230 Audit Documentation and AS 1215 Audit Documentation require auditors to document each stage of the audit in their working papers to provide a record of work completed and evidence gathered in forming their audit opinion.

An audit working paper generally includes:

• • client name
  • period under audit
  • title describing the contents of the working paper
  • file reference indicating where the working paper fits in the audit file
  • initials identifying the preparer of the working paper together with the date the working paper was prepared
  • initials identifying the reviewer(s) of the working paper together with the date(s) the working paper was reviewed
  • cross-referencing between working papers indicating where further work and evidence is summarized elsewhere.

Working papers are used to document the details of each audit. The two main files held for each client are the permanent file and the current file.

Compare and contrast the permanent file and the current file. Provide at least three examples of the types of documentation found in each.

Solution: Student answers will vary but should contain the following:

The permanent file includes client information and documentation that applies to multiple audits. The current file is developed as audit work is performed and includes client information and documentation that apply to the current year’s audit.

The permanent file usually contains the client’s head office address, other locations, and contact details (telephone, fax and email). Key personnel are detailed, and an organizational chart is included in the permanent file. A client’s organizational chart includes details of key roles within the organization and the names of the people in those roles. The file may also include the details of the client’s bank(s) and lawyer(s). The permanent file includes copies of long-term contracts and agreements. The permanent file includes details of the client’s board of directors and its subcommittees, such as the audit committee. The file includes the minutes of significant meetings held by the client, such as its board of directors' meetings. It may include details of bonus and stock option plans for the client’s senior staff. The permanent file details a client’s primary accounting policies and methodologies. Prior financial statements and audit reports will be included in the permanent file. Details of prior analytical procedures are included and added to so auditors can observe changing trends. Flowcharts and narratives detailing a client’s system of internal controls are included in the permanent file and amended as needed during the risk assessment phase of each audit. Reports sent to the client during previous audits will be included in the permanent file.

The current file includes the details of all testing and evidence gathered in preparation of the audit report. The current file also includes correspondence between the auditors and their client, the client’s bankers, and the client’s lawyers that pertain to the current audit period. Correspondence with other auditors, specialists and relevant third parties are also included. The engagement letter is included in the current file, along with the management letter, detailing any weaknesses uncovered in the client’s system of internal control. The current file includes extracts from the minutes of meetings, such as the board of directors’ meetings, which pertain to the current audit. The file includes details of the audit planning process and the audit program. The current file also includes detailed descriptions of evidence gathered, testing conducted, and audit procedures performed. It will detail the analytical procedures, tests of controls and detailed substantive testing undertaken, as well as the conclusions drawn at the completion of testing. The current file includes testing of any subsequent events and a copy of the final audit opinion.