Audit Evidence Moroney Ch.5 Complete Test Bank - Auditing Canada 4e | Test Bank with Answers by Robyn Moroney. DOCX document preview.
CHAPTER 5
AUDIT EVIDENCE
CHAPTER LEARNING OBJECTIVES
1. Explain the audit assertions.
When preparing the financial statements, management will make assertions about each account and related disclosures in the notes. Auditors use these assertions to assess the risk of material misstatement and design audit procedures. The assertions used when testing transactions
and events and related disclosures, including income statement items, are occurrence, completeness, accuracy, cut-off, classification, and presentation. The assertions used when testing balance sheet items and related disclosures are existence, rights and obligations, completeness, and accuracy, valuation and allocation, classification and presentation.
2. Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
The different types of audit evidence include external confirmations, documentary evidence, representations, verbal evidence, computational evidence, physical evidence, and electronic evidence. External confirmations are sent directly by an auditor to a third party. Documentary evidence may be generated internally by the client or externally by third parties. Representation letters are requested from a client’s lawyers or management. Verbal evidence is the discussions between the auditor and client personnel or third parties. Computational evidence is gathered when an auditor checks the mathematical accuracy of figures included in the financial statements. Physical evidence involves the inspection of tangible assets. Electronic evidence includes data held on a client’s computer, files sent by email to the auditor, and items scanned and faxed.
Sufficiency refers to the quantity of evidence gathered. Appropriateness refers to the relevance and reliability of audit evidence gathered.
3. Determine the persuasiveness of audit evidence.
The persuasiveness of evidence used to corroborate the details included in a client’s accounts varies. Internally generated evidence held by the client is the least persuasive, as the client can alter or hide this evidence. Externally generated evidence held by the client is more persuasive, as it is created by an independent third party. Externally generated evidence sent directly to the auditor is the most persuasive, as the client does not handle this evidence.
4. Explain the issues to consider when using the work of an expert.
When an auditor decides to use the work of an expert, the report produced by the expert forms part of the evidence used by an auditor when forming their audit opinion. An expert is someone with the skills, knowledge, and experience required to help an auditor. The auditor determines the scope of the work to be carried out, and assesses the capability of the expert, the objectivity of the expert, and the expert’s report.
5. Explain the issues to consider when using the work of another auditor.
An auditor may need to use the work of another auditor when their client operates in a number of locations, has divisions or subsidiaries spread around the country or the globe, or has significant assets in other places. When this is the case, the principal auditor may need to rely on evidence provided by another auditor for certain components of the client’s financial statements.
6. Describe the evidence-gathering procedures most often used by auditors.
An auditor will inspect records, documentation, and tangible assets. They will observe client staff undertaking various procedures. An auditor will make inquiries of client personnel and third parties.
Confirmations are sent to third parties, including banks, lawyers, lenders, and debtors. An auditor will recalculate numbers appearing in client files and records to check mathematical accuracy. They will re-perform some processes used by the client to check the effectiveness of internal controls and the validity of amounts estimated by client personnel. Analytical procedures are used throughout the audit to appraise the relationships between financial and non-financial information.
7. Explain how auditors arrive at a conclusion based upon the evidence gathered.
The final audit procedure is to assess the evidence gathered throughout the audit and draw a conclusion on the fair presentation of a client’s financial statements.
8. Describe how auditors document the details of evidence gathered in working papers.
Audit evidence is documented in an auditor’s working papers. Audit working papers include the client’s name, the period under audit, a title describing the contents of the working paper, a file reference indicating where the working paper fits in the audit file, the initials of the preparer of the working paper together with the date the working paper was prepared, the initials of the reviewer(s) of the working paper together with the date(s) the working paper was reviewed, and cross-referencing between working papers indicating where further work and evidence are summarized elsewhere. Working papers are stored in either the permanent file or the current file. The permanent file includes client information and documentation that apply to more than one audit. The current file includes client information and documentation that apply to the current audit.
TRUE-FALSE STATEMENTS
1. When preparing the financial statements, auditors make assertions about each account and the related disclosures.
Difficulty: Easy
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
2. The cut-off assertion means that the entity holds or controls the rights to assets and liabilities
are the obligations of the entity.
Difficulty: Easy
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
3. Audit evidence is the information that an auditor uses when arriving at their opinion on the fair
presentation of their client's financial statements.
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
4. Negative confirmations ask the recipient to reply only if they disagree with the information provided.
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
5. Internally generated evidence is considered the most persuasive when the source of the evidence is considered to be reliable, trustworthy, and independent of the client.
Difficulty: Easy
Learning Objective: Determine the persuasiveness of audit evidence.
Section Reference: 5.3 Persuasiveness of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
6. Correspondence with the client's lawyers is an example of externally generated evidence sent directly to the auditor.
Difficulty: Easy
Learning Objective: Determine the persuasiveness of audit evidence.
Section Reference: 5.3 Persuasiveness of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
7. The greater the risk of material misstatement of the item under consideration, the more likely
an auditor will turn to an expert for their advice.
Difficulty: Easy
Learning Objective: Explain the issues to consider when using the work of an expert.
Section Reference: 5.4 Using the work of an expert
CPA Competency: Audit and Assurance
AACSB: Analytic
8. An expert is expected to be less objective if they are not associated with the client.
Difficulty: Easy
Learning Objective: Explain the issues to consider when using the work of an expert.
Section Reference: 5.4 Using the work of an expert
CPA Competency: Audit and Assurance
AACSB: Analytic
9. A component auditor is an auditor who, at the request of the group engagement team,
performs work on financial information related to a component for the group audit.
Difficulty: Easy
Learning Objective: Explain the issues to consider when using the work of an expert.
Section Reference: 5.4 Using the work of an expert
CPA Competency: Audit and Assurance
AACSB: Analytic
10. The component partner sets out the work to be conducted by the group engagement
partner.
Difficulty: Easy
Learning Objective: Explain the issues to consider when using the work of another auditor.
Section Reference: 5.5 Using the work of another auditor
CPA Competency: Audit and Assurance
AACSB: Analytic
11. Observation is an evidence-gathering procedure that involves checking the mathematical
accuracy of client records.
Difficulty: Easy
Learning Objective: Describe the evidence-gathering procedures most often used by auditors.
Section Reference: 5.6 Evidence-gathering procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
12. Analytical procedures involve an evaluation of financial information by studying plausible
relationships among both financial and non-financial data.
Difficulty: Easy
Learning Objective: Describe the evidence-gathering procedures most often used by auditors.
Section Reference: 5.6 Evidence-gathering procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
13. The decision of what constitutes sufficient appropriate audit evidence is a matter for
professional judgement.
Difficulty: Easy
Learning Objective: Explain how auditors arrive at a conclusion based upon the evidence gathered.
Section Reference: 5.7 Drawing conclusions
CPA Competency: Audit and Assurance
AACSB: Analytic
14. The permanent file includes client information and documentation that apply to more than
one audit.
Difficulty: Easy
Learning Objective: Describe how auditors document the details of evidence gathered in working papers.
Section Reference: 5.8 Documentation—audit working papers
CPA Competency: Audit and Assurance
AACSB: Analytic
15. The permanent file includes detailed descriptions of evidence gathered for a particular
year's audit.
Difficulty: Easy
Learning Objective: Describe how auditors document the details of evidence gathered in working papers.
Section Reference: 5.8 Documentation—audit working papers
CPA Competency: Audit and Assurance
AACSB: Analytic
MULTIPLE CHOICE QUESTIONS
16. Omar Gallardo, the audit manager, was explaining to his new audit team how management
assertions work when assessing the risk of material misstatements. He made two statements to
his audit team:
- Auditors use assertions for account balances and related disclosures.
- Auditors use assertions for transactions and related disclosures.
Which of these statements were true?
a) (i) only
b) (ii) only
c) both (i) and (ii)
d) neither (i) nor (ii)
Difficulty: Easy
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
17. Olga Chevalier, CPA was reviewing account balance assertions for Athabasca
Oil Sands. Which one of the following would not be an account balance assertion?
a) completeness
b) rights and obligations
c) accuracy, valuation, and allocation
d) occurrence
Difficulty: Medium
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
18. Delaney Humphrey was explaining the importance of documentary evidence. Which
assertion was she referring to when she obtained details of the price paid for inventory and
traced it to the supplier’s invoice to verify the amount recorded?
a) completeness
b) accuracy
c) classification
d) cut-off
Difficulty: Medium
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
19. Lilia Hussey made two statements to Sami Moneymaker about cut-off procedures:
- Testing cut-off transactions is particularly important for transactions close to year end.
- Cut-off procedures help determine whether transactions have been recorded in the correct accounting period.
Which of these statements were true?
a) (i) only
b) (ii) only
c) both (i) and (ii)
d) neither (i) nor (ii)
Difficulty: Easy
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
20. Lucy Wong’s work at Axcan Pharma consisted of reading lease agreements to ensure that
leases were disclosed accurately in the notes to the financial statements. Which assertion was
she fulfilling?
a) completeness
b) persuasiveness
c) accuracy
d) presentation
Difficulty: Medium
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
21. Which of the following is not an assertion used for transactions and events?
a) cut-off
b) existence
c) classification
d) occurrence
Difficulty: Easy
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
22. When testing for accuracy, an auditor searches for evidence
a) to verify that a recorded transaction or event took place and relates to the entity.
b) that all disclosures that should have been included in the financial statements have been included.
c) that transactions and events have been recorded at appropriate amounts.
d) to verify that recorded assets are owned by the entity.
Difficulty: Easy
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
23. Completeness is an assertion used
a) when testing balance sheet items.
b) for transactions and events.
c) that relates to disclosure.
d) all of the answers are correct
Difficulty: Easy
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
24. Which assertion do auditors test when they test for the adequacy of the allowance for doubtful accounts?
a) accuracy, valuation, and allocation
b) rights and obligations
c) classification
d) occurrence
Difficulty: Medium
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
25. The first stage when an auditor considers the use of an expert is
a) assessing the objectivity of the expert.
b) assessing the need to use an expert.
c) assessing the expert's report.
d) determining the scope of the work to be carried out.
Difficulty: Easy
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
26. Mike Noseworthy, CPA was excited to see his audit manager and blurted out
(i) “It is our responsibility as auditors to arrive at an audit opinion by gathering sufficient appropriate evidence.”
(ii) “Appropriateness is the quantity and sufficiency is the quality of audit evidence gathered.”
Which of these statements were true?
a) (i) only
b) (ii) only
c) both (i) and (ii)
d) neither (i) nor (ii)
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
27. Iqbal Saleem was training junior audit staff and mentioned the importance of third party
documentation. Which of the following are not external confirmations?
a) supplier invoices
b) bank confirmations
c) payable confirmations
d) receivable confirmations
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
28. Irvin Schatz, CPA had his client Brown Boveri, send out a legal letter to their lawyers. The
legal letter would have contained requests for
a) the lawyer’s opinion on the client’s legal matters.
b) legal matters that the lawyer is in disagreement with the client.
c) both a and b
d) none of the above
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
29. Nicholas Doulas, the partner-in-charge of the Fairfax Financial Holdings audit, wrote a
management representation letter. It would have included
a) written details of verbal representations made by management during the audit.
b) a representation that there have been no material frauds and errors.
c) both a and b
d) none of the above
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
30. Abe Freed, a struggling public accountant was being coached by his father. His father told
him that he was using a poor form of evidence as a basis for his conclusions. What type of
evidence was he referring to?
a) computational evidence
b) verbal evidence
c) physical evidence through inspection
d) external confirmations
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
31. Evan Contador was reviewing ways of obtaining electronic evidence at Enbridge Inc. He
was considering the different sources of evidence that might qualify and be defined as electronic
evidence. Which elements are considered electronic evidence?
a) physical evidence gathered through inspection
b) computational evidence
c) files sent via email to the auditor
d) confirmations from suppliers
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
32. Marianne Gilespie, the senior auditor at Manulife Financial was sorting out several sources
of internally generated evidence. Which one of the following would not qualify as internally generated evidence?
a) minutes of meetings
b) journals and ledgers
c) the annual operating plan presented to the Board of Directors
d) bank confirmations
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
33. External confirmations can be sent to
a) third parties holding the client's inventory.
b) the client's audit committee.
c) the client's lawyers.
d) both a and c
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
34. Which of the following statements regarding a legal representation letter is incorrect?
a) The letter can include a request to provide details of any legal matters that the lawyer is in disagreement with the client.
b) The letter is sent by the auditor to its lawyers asking them to complete the letter and send it directly to the client.
c) The letter is sent by the client to its lawyers asking them to complete the letter and send it directly to the auditor.
d) The letter can include any legal matters involving the client.
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
35. Which of the following forms of evidence is used when gaining an understanding of the
client and its internal control systems?
a) verbal
b) computational
c) physical
d) external confirmations
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
36. Internally generated evidence held by the client includes
a) bank statements.
b) correspondence with the client's lawyers.
c) copies of invoices sent to customers.
d) expert valuations.
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
37. An auditor verifies amounts recorded in their client's records using
a) electronic evidence.
b) verbal evidence.
c) confirmations.
d) all of the answers are correct
Difficulty: Easy
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
38. Fran Zora has been auditing Manitoba Telecom Services for the past five years. She has
gathered a lot of externally generated evidence because of its persuasiveness and reliability as
evidence. Which one of the following evidences lacks trustworthiness and independence from the client?
a) purchase requisitions
b) bank confirmations
c) correspondence with the client’s lawyers
d) receivable confirmations
Difficulty: Easy
Learning Objective: Determine the persuasiveness of audit evidence.
Section Reference: 5.3 Persuasiveness of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
39. When there is a significant risk that an account will be misstated and the client's system of
internal controls is not considered effective at reducing that risk,
a) less high-quality evidence is gathered when conducting substantive tests.
b) detection risk is set as high.
c) detection risk is set as low.
d) only control testing is required.
Difficulty: Medium
Learning Objective: Determine the persuasiveness of audit evidence.
Section Reference: 5.3 Persuasiveness of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
40. Which broad category of corroborating evidence is the least persuasive to an auditor?
a) externally generated evidence sent directly to the auditor
b) internally generated evidence
c) externally generated evidence held by the client
d) original documents
Difficulty: Easy
Learning Objective: Determine the persuasiveness of audit evidence.
Section Reference: 5.3 Persuasiveness of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
41. The auditor searches for evidence to
a) ensure the absence of fraud.
b) maintain their independence.
c) prove that management representations are not accurate.
d) prove that recorded amounts are accurate.
Difficulty: Easy
Learning Objective: Determine the persuasiveness of audit evidence.
Section Reference: 5.3 Persuasiveness of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
42. Which of the following is not a category of corroborating evidence?
a) externally generated evidence sent directly to the auditor
b) internally generated evidence
c) externally generated evidence held by the client
d) client control testing evidence
Difficulty: Easy
Learning Objective: Determine the persuasiveness of audit evidence.
Section Reference: 5.3 Persuasiveness of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
43. Which of the following provides the least reliable audit evidence?
a) internally generated audit evidence
b) original documents
c) externally generated documentary evidence held by the client
d) externally generated evidence held by the auditor
Difficulty: Easy
Learning Objective: Determine the persuasiveness of audit evidence.
Section Reference: 5.3 Persuasiveness of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
44. When an auditor uses the work of an expert, who has the responsibility for arriving at an
overall conclusion regarding the fair presentation of a client's financial statements?
a) the auditor
b) the expert
c) the client's management
d) the client's audit committee
Difficulty: Easy
Learning Objective: Explain the issues to consider when using the work of an expert.
Section Reference: 5.4 Using the work of an expert
CPA Competency: Audit and Assurance
AACSB: Analytic
45. Which of the following is an example of a situation where an auditor may use the work of an
expert?
a) a geologist engaged to evaluate the quantity and quality of mineral deposits
b) an actuary engaged to verify insurance premiums
c) both a and b
d) none of the above
Difficulty: Easy
Learning Objective: Explain the issues to consider when using the work of an expert.
Section Reference: 5.4 Using the work of an expert
CPA Competency: Audit and Assurance
AACSB: Analytic
46. Assessing an expert's report involves the auditor
a) setting the nature, timing, and extent of work to be completed by the expert.
b) assessing the consistency of information included in the expert's report with their understanding of the client.
c) evaluating the expert's qualifications as a member of a relevant professional body.
d) deciding that they do not have the expertise necessary to test and evaluate the accuracy of reported information.
Difficulty: Easy
Learning Objective: Explain the issues to consider when using the work of an expert.
Section Reference: 5.4 Using the work of an expert
CPA Competency: Audit and Assurance
AACSB: Analytic
47. The services of an expert may be engaged
a) to check the accuracy of the auditor’s valuation of an account.
b) when the auditor does not have the required skills and knowledge to assess the validity of an account.
c) to provide an opinion on the fair presentation of the financial statements.
d) to provide assistance to the auditor to prove the validity of an account.
Difficulty: Easy
Learning Objective: Explain the issues to consider when using the work of an expert.
Section Reference: 5.4 Using the work of an expert
CPA Competency: Audit and Assurance
AACSB: Analytic
48. Steven Marinaro, CPA is performing complex calculations to help him determine reserves in
the Alberta Oil Sands. Which of the following evidence-gathering procedures will Steve use when using the work of another auditor?
a) recalculation
b) observation
c) confirmations
d) all of the answers are correct
Difficulty: Medium
Learning Objective: Explain the issues to consider when using the work of another auditor.
Section Reference: 5.5 Using the work of another auditor
CPA Competency: Audit and Assurance
AACSB: Analytic
49. The auditor may use the work of another auditor
a) when there is insufficient time to complete the audit engagement.
b) when the client operates from a number of locations.
c) to assist in forming an opinion in circumstances where there are large volumes of audit evidence.
d) when the auditor is not independent
Difficulty: Easy
Learning Objective: Explain the issues to consider when using the work of another auditor.
Section Reference: 5.5 Using the work of another auditor
CPA Competency: Audit and Assurance
AACSB: Analytic
50. The group engagement partner is
a) requested by the component auditor to perform certain audit work on behalf of the group engagement team.
b) not responsible for providing an opinion on the fair presentation of the client's financial statements.
c) not the auditor responsible for signing the audit report.
d) the auditor responsible for signing the audit report.
Difficulty: Medium
Learning Objective: Explain the issues to consider when using the work of another auditor.
Section Reference: 5.5 Using the work of another auditor
CPA Competency: Audit and Assurance
AACSB: Analytic
51. Which of the following statements regarding using the work of another auditor is correct?
a) The group engagement partner will spend more time reviewing the component auditor's work when the component is at risk of material misstatement.
b) The group engagement partner will spend more time reviewing the component auditor's work if the component auditor has a good reputation.
c) The group engagement partner will spend less time reviewing the component auditor's work when the component is at risk of material misstatement.
d) The component auditor sets out the work to be conducted by the group engagement partner.
Difficulty: Easy
Learning Objective: Explain the issues to consider when using the work of another auditor.
Section Reference: 5.5 Using the work of another auditor
CPA Competency: Audit and Assurance
AACSB: Analytic
52. If the component auditor cannot access sufficient evidence, the engagement partner will
a) consider issuing an adverse audit opinion.
b) always issue an unqualified audit opinion.
c) consider issuing a modified audit opinion due to a scope limitation.
d) only add an emphasis of matter paragraph to the clean audit report.
Difficulty: Easy
Learning Objective: Explain the issues to consider when using the work of another auditor.
Section Reference: 5.5 Using the work of another auditor
CPA Competency: Audit and Assurance
AACSB: Analytic
53. Auditors use a re-performance procedure
a) only when testing controls.
b) only during the risk assessment phase.
c) only when conducting substantive testing.
d) when testing controls and when conducting substantive testing.
Difficulty: Easy
Learning Objective: Describe the evidence-gathering procedures most often used by auditors.
Section Reference: 5.6 Evidence-gathering procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
54. Observation involves an auditor
a) asking questions to gain an understanding of various matters throughout the audit.
b) watching a procedure being carried out by another party.
c) checking the mathematical accuracy of client records.
d) redoing processes conducted by the client.
Difficulty: Easy
Learning Objective: Describe the evidence-gathering procedures most often used by auditors.
Section Reference: 5.6 Evidence-gathering procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
55. Why do auditors inspect records and documents?
a) to check the dates of transactions
b) for evidence that management have authorized significant purchases
c) to check that a transaction occurred
d) all of the answers are correct
Difficulty: Easy
Learning Objective: Describe the evidence-gathering procedures most often used by auditors.
Section Reference: 5.6 Evidence-gathering procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
56. Which of the following is not a method of collecting audit evidence?
a) observation
b) inquiry
c) disclosure
d) analytical procedures
Difficulty: Easy
Learning Objective: Describe the evidence-gathering procedures most often used by auditors.
Section Reference: 5.6 Evidence-gathering procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
57. An audit gathering procedure undertaken by an auditor to verify the balance of inventory on hand is
a) observation.
b) inquiry.
c) re-performance.
d) analytical procedures.
Difficulty: Easy
Learning Objective: Describe the evidence-gathering procedures most often used by auditors.
Section Reference: 5.6 Evidence-gathering procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
58. What type of audit evidence is used when the auditor calculates the expected balance in the allowance for doubtful accounts?
a) re-calculation
b) analytical procedures
c) re-performance
d) inquiry
Difficulty: Easy
Learning Objective: Describe the evidence-gathering procedures most often used by auditors.
Section Reference: 5.6 Evidence-gathering procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
59. If an auditor believes that the audit client’s internal controls are effective, the approach she/he would take in the conduct of the audit is
a) to place emphasis on testing account balances.
b) to place her/his focus on tests of controls and further tests of transactions and balances.
c) a substantive approach.
d) to only test controls.
Difficulty: Easy
Learning Objective: Explain how auditors arrive at a conclusion based upon the evidence gathered.
Section Reference: 5.7 Drawing conclusions
CPA Competency: Audit and Assurance
AACSB: Analytic
60. If an auditor decides that a client has internal controls that can reduce the likelihood of
material misstatement for an identified risk, the auditor will
a) test those controls.
b) qualify the audit report.
c) adopt a substantive approach.
d) not test those controls.
Difficulty: Easy
Learning Objective: Explain how auditors arrive at a conclusion based upon the evidence gathered.
Section Reference: 5.7 Drawing conclusions
CPA Competency: Audit and Assurance
AACSB: Analytic
61. An audit working paper generally includes
a) the client's name.
b) cross-referencing between working papers.
c) a file reference.
d) all of the answers are correct
Difficulty: Easy
Learning Objective: Describe how auditors document the details of evidence gathered in working papers.
Section Reference: 5.8 Documentation—audit working papers
CPA Competency: Audit and Assurance
AACSB: Analytic
62. Which of the following would not be included in an auditor's permanent file?
a) the client's organizational chart
b) copies of long-term contracts
c) copies of accounts receivable confirmation letters
d) prior years' audit reports
Difficulty: Easy
Learning Objective: Describe how auditors document the details of evidence gathered in working papers.
Section Reference: 5.8 Documentation—audit working papers
CPA Competency: Audit and Assurance
AACSB: Analytic
63. During the risk response phase of the audit, an auditor will document
a) details of audit tests undertaken.
b) their understanding of their client.
c) related parties identified.
d) analytical procedures used to aid in risk identification.
Difficulty: Easy
Learning Objective: Describe how auditors document the details of evidence gathered in working papers.
Section Reference: 5.8 Documentation—audit working papers
CPA Competency: Audit and Assurance
AACSB: Analytic
64. Which statement regarding audit working papers is correct?
a) Working papers are used to document some of the details of each audit.
b) Working papers may be in paper or electronic format.
c) Working papers provide only the conclusion of the auditor, not all of the evidence of the work completed.
d) All working papers from the year’s audit are kept in the permanent file.
Difficulty: Easy
Learning Objective: Describe how auditors document the details of evidence gathered in working papers.
Section Reference: 5.8 Documentation—audit working papers
CPA Competency: Audit and Assurance
AACSB: Analytic
65. The current file of the auditor’s working papers does not include
a) management letters detailing weaknesses in internal controls identified in the previous audit.
b) extracts from the Board of Directors meetings.
c) documentation of testing of subsequent events.
d) details of the audit process.
Difficulty: Easy
Learning Objective: Describe how auditors document the details of evidence gathered in working papers.
Section Reference: 5.8 Documentation—audit working papers
CPA Competency: Audit and Assurance
AACSB: Analytic
SHORT ANSWER QUESTIONS
66. Identify and explain the key assertions used for transactions and events, including income statement items, for an accounting period.
Difficulty: Medium
Learning Objective: Explain the audit assertions.
Section Reference: 5.1 Assertions
CPA Competency: Audit and Assurance
AACSB: Analytic
67. Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Paula Faconi has just completed a risk assessment and has identified key risk factors at Darwin Industries. When asked by one of her staff members “What’s next?”, she replies: “Now that we have identified the risks, its time to perform some planning in order to obtain sufficient appropriate audit evidence.”
b) Roni Khali was assigned to the Inglis Glass Company audit. She was ensuring that when recognizing revenues, all transactions and events that should have been recorded have been recorded. She was testing the occurrence assertion.
c) Harvey Jarvis, the group partner was reviewing the work of Jacob Barnes on the Bazzle Gold account. Jacob asked Harvey for an explanation on how audit risk would affect his work. Harvey answered: “Audit risk affects the quantity and quality of evidence gathering.”
d) Benoit Chausson, CPA made the following true statement: “The appropriateness of audit evidence refers to its relevance and reliability.” He then added:
- “Reliable information is logically connected to an assertion”
- “Relevant information reflects the true state of the information”
Difficulty: Medium
Learning Objective: Explain the audit assertions.
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Learning Objective: Describe the evidence-gathering procedures most often used by auditors.
Section Reference: 5.1 Assertions
Section Reference: 5.2 Types of audit evidence
Section Reference: 5.6 Evidence-gathering procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
68. Describe the purpose and examples of external confirmations.
Difficulty: Medium
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
69. Explain the three broad categories of corroborating evidence.
Difficulty: Medium
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
70. Describe the major evidence-gathering procedures most often used by auditors.
Difficulty: Medium
Learning Objective: Describe the evidence-gathering procedures most often used by auditors.
Section Reference: 5.6 Evidence-gathering procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
71. Explain the purpose of working papers and the difference between the permanent file and current file.
Difficulty: Medium
Learning Objective: Describe how auditors document the details of evidence gathered in working papers.
Section Reference: 5.8 Documentation—audit working papers
CPA Competency: Audit and Assurance
AACSB: Analytic
ESSAY QUESTIONS
72. Audit evidence is the information that an auditor uses when arriving at their opinion on the fair presentation of their client's financial statements. Why is evidence so important to a financial statement audit?
Difficulty: Medium
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
73. CAS 501 Audit Evidence - Specific Considerations for Specific Items requires an auditor to gather sufficient appropriate audit evidence regarding any legal matters involving their client. How can auditors gather such evidence and what impact can legal matters have on the client's financial statements?
Difficulty: Medium
Learning Objective: Identify and describe different types of audit evidence and assess sufficient appropriate audit evidence.
Section Reference: 5.2 Types of audit evidence
CPA Competency: Audit and Assurance
AACSB: Analytic
74. CAS 620 Using the Work of an Auditor's Expert provides guidelines for auditors when using the work of an expert. Identify examples of situations where auditors may use experts and evaluate the benefits and risks associated in each situation.
Difficulty: Medium
Learning Objective: Explain the issues to consider when using the work of an expert.
Section Reference: 5.4 Using the work of an expert
CPA Competency: Audit and Assurance
AACSB: Analytic
CASE QUESTION
75. Nazim Kali, the auditor-in-charge of Valo, a Brazilian mining company, was reviewing the expert’s report on the valuation of reserves for the world’s largest bauxite deposits. The mining plans of Valo have met with strong criticism from scientists, environmentalists, and the Brazilian population.
The bauxite operations had required the use of local auditors of another international public accounting firm. The group engagement partner, Lori Lake, met with Nazim to discuss the reliance their firm would be placing on the component auditors. She was concerned that the component auditor’s conclusions were not based on adequate evidence. The bauxite operations being audited by the component auditors are a material part of the consolidated statements of Valo.
Required:
a) What role does Nazim have in assessing the expert’s report on the bauxite deposits?
b) What role does Nazim and his firm have before they make a decision to use the work of another auditor?
c) What is the engagement partner’s role once her firm has assigned the work to a component auditor?
Difficulty: Medium
Learning Objective: Explain the issues to consider when using the work of an expert.
Learning Objective: Explain the issues to consider when using the work of another auditor.
Section Reference: 5.4 Using the work of an expert
Section Reference: 5.5 Using the work of another auditor
CPA Competency: Audit and Assurance
AACSB: Analytic
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