M2 AUDIT WORKING PAPER

M2 Exercise
1. The permanent file section of the working papers that is kept for each audit client
most likely contains
a.Review notes pertaining to questions and comments regarding the audit work
performed.
b.A schedule of time spent on the engagement by each individual auditor.
c.Correspondence with the client's legal counsel concerning pending litigation.
d. Narrative descriptions of the client's internal control policies and procedures

2. Of the following procedures, which is not considered part of “obtaining an

understanding of the client’s environment?”
a. Examining trade publications to gain a better understanding of the client's
industry.
b. Confirming customer accounts receivable for existence and valuation.
c. Touring the client's manufacturing and warehousing
facilities to gain a clearer understanding of
operations.
d. Studying the internal controls over cash receipts and disbursements.

3. If working papers are to have the characteristics that willensure that they achieve
their primary purposes, which of the following is the most important?
a. Working papers must be of standard format and standard content.
b. Working papers must be properly indexed and cross-referenced to the draft
audit report.
c. Working papers must provide sufficient, competent, and useful information
to support the audit report.
d. Working papers must be arranged in logical order following the audit
program sequence.

4. An initial (first-time) audit requires more audit time to complete than a

recurring audit. One of the reasons for this is that
a. New auditors are usually assigned to an initial audit.
b. Predecessor auditors need to be consulted.
c. The client's business, industry, and internal control are unfamiliar to
the auditor and need to be carefully studied.
d. A larger proportion of customer accounts receivable need to be
confirmed on an initial audit.
5. An auditor is examining accounts receivable. What is the most competent type
of evidence in this situation?
a. Interviewing the personnel who record accounts receivable.
b. Verifying that postings to the receivable account from journals have been
made.
c. Receipt by the auditor of a positive confirmation.
d. No response received for a request for a negative confirmation.

6. Which of the following statements about working papers is correct?

a. Working papers are not permitted to be used as a reference source by
the client.
b. The auditor should document the understanding of the client's internal
control obtained to plan the audit
c. Working papers may be regarded as a substitute for the client's
accounting records.
d. When reporting on comparative financial statements, the independent
auditor may discard working papers after two years.

7. The procedures specifically outlined in an audit program are primarily designed

to
a. Protect the auditor in the event of litigation.
b. Detect errors or fraud.
c. Test internal evidence.
d. Gather evidence.

8. When reviewing audit working papers, the primary responsibility of an

audit supervisor is to determine that:
a. Each worksheet is properly identified with a descriptive heading.
b. Working papers are properly referenced and kept in logical groupings.
c. Standard departmental procedures are adhered to with regard to work
paper preparation and technique.
d. Working papers adequately support the audit findings, conclusions, and
report.

9. Which of the following factors is most important in determining the competence

of audit evidence?
a. The reliability of the evidence in meeting the audit objective.
b. The objectivity of the auditor gathering the evidence.
c. The quantity of the evidence obtained.
d. The independence of the source of evidence.

10. Which of the following workpapers would one normally expect to find in the
permanent file?
a. A copy of a long-term bond indenture.
b. The working trial balance.
c. An analysis of additions and disposals relating to marketable securities.
d. A workpaper analyzing customer replies to confirmation requests.
KEY

1. ANSWER: D
2. ANSWER: B
3. ANSWER: C
4 ANSWER: C
5 ANSWER: C
6 ANSWER: B
7 ANSWER: D
8 ANSWER: D
9 ANSWER: A
10 ANSWER: A

1.