Professional Documents
Culture Documents
MULTIPLE CHOICE:
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
ANSWER: D
ANSWER: B
3. If working papers are to have the characteristics that will ensure 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.
ANSWER: C
36
Chapter 4 Audit Evidence and Audit Programs 37
ANSWER: C
5. Choose the best illustration of objective audit evidence from the following
a. The paid invoice file containing invoices matched with receiving reports and
purchase orders.
b. Management's assertion that payment procedures require matching of invoice
with receiving report and purchase order. c.
Clerical staff assurances that management policy regarding payment of
invoices--matching of invoice with receiving report and purchase order--is always
followed.
d. The treasurer's statement of not remembering any exceptions in
which an invoice was submitted for payment that was not accompanied by a
matching receiving report and purchase order.
ANSWER: A
6. 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.
ANSWER: C
7. Which of the following is a basic tool used by the auditor to control the audit work
and review the progress of the audit?
a. Time and expense summary.
b. Engagement letter.
c. Progress flowchart.
d. Audit program.
ANSWER: D
ANSWER: D
9. As part of audit planning, CPAs should design audit programs for each individual
audit and should include audit steps and procedures to
a. Detect and eliminate fraud.
b. Increase the amount of management information available.
c. Provide assurances that the objectives of the audit are met.
d. Ensure that only material items are audited.
ANSWER: C
10. Of the following audit procedures, which best supports the valuation objective?
a. Performing a lower of cost or market test of the client's inventories.
b. Reviewing a contingent liability footnote for proper
wording.
c. Searching for unrecorded liabilities.
d. Observing the client's year-end physical inventory taking.
ANSWER: A
ANSWER: D
12. 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.
ANSWER: C
13. With respect to the auditor's planning of a year-end examination, which of the
following statements is always true?
a. An engagement should not be accepted after the fiscal year-end.
b. An inventory count must be observed at the balance sheet date.
Chapter 4 Audit Evidence and Audit Programs 39
c. The client's audit committee should not be told of the specific audit
procedures that will be performed. d. It is an acceptable practice to carry out
substantial parts of the examination at interim dates.
ANSWER: D
ANSWER: B
ANSWER: B
ANSWER: A
17. 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.
ANSWER: D
ANSWER: D
ANSWER: C
20. 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.
ANSWER: A
21. The in-charge auditor decides that work papers are complete
a. When satisfied that the audit objectives have been met and the
working papers support the conclusions. b. When working papers make
reference to the steps outlined in the audit program.
c. Only after the auditor who prepared the working papers has signed and dated
them.
d. When proper cross-references to other working papers are noted.
ANSWER: A
22. Of the following procedures, which does not produce analytical evidence?
a. Compare revenue, cost of sales, and gross profit with the prior year and
investigate significant variations.
b. Examine monthly performance reports and investigate significant revenue and
expense variances.
c. Confirm customers' accounts receivable and clear all material exceptions.
d. Compare sales trends and profit margins with industry averages and investigate
significant differences.
ANSWER: C
Chapter 4 Audit Evidence and Audit Programs 41
23. Audit evidence can come in different forms with different degrees of
persuasiveness. Which of the following is the least persuasive type of evidence?
a. Documents mailed by outsiders to the auditor. b.
Correspondence between the auditor and vendors. c. Sales invoices
inspected by the auditor.
d. Computations made by the auditor.
ANSWER: C
ANSWER: C
ANSWER: D
26. An auditor test counted a batch of inventory. This is an example of what kind
of evidence?
a. Analytical. b. Documentary.
c. Physical. d. Hearsay.
ANSWER: C
ANSWER: C
28. Which of the following is not a consideration in the development of audit programs?
a. Internal control over the recording of plant asset additions and repairs and
maintenance expenditures is found to be weak.
b. The client constructed a major addition to its central manufacturing facility
during the year under audit.
c. The client is a private university located in the Midwest.
d. The client's board or directors is elected by the
stockholders at the annual meeting.
ANSWER: D
29. Audit working papers are used to record the results of the auditor's evidence-
gathering procedures. When preparing working papers, the auditor should remember
that working papers should be
a. Kept on the client's premises so that the client can have access to them for
reference purposes.
b. The primary support for the financial statements being examined.
c. Considered as a part of the client's accounting records that are retained by the
auditor.
d. Designed to meet the circumstances and the auditor's needs on each
engagement.
ANSWER: D
ANSWER: B
ANSWER: C
ANSWER: C
ANSWER: A
ANSWER: B
35. A CPA, in performing an independent audit, would most likely use recalculation as a
substantive test for which of the following expense-related accounts?
a. Purchases of supplies.
b. Interest expense.
c. Advertising expense.
d. Repairs and maintenance expense.
ANSWER: B
44 Chapter 4 Audit Evidence and Audit Programs
ANSWER: D
37. Which of the following is not an appropriate auditing procedure supporting fairness of
financial presentation?
a. Inspecting plant asset additions for existence.
b. Recalculating accrued interest on notes payable.
c. Examining invoices in support of legal fees recorded during the fiscal year.
d. Reviewing the client's production quality control program.
ANSWER: D
ANSWER: D
39. Which of the following is responsible for the fairness of the representations
made in financial statements?
a. Client's management.
b. Independent auditor.
c. Audit committee.
d. AICPA.
ANSWER: A
ANSWER: B
ANSWER: B
42. During the working paper review, an audit supervisor finds that the
auditor's reported findings are not adequately cross-referenced to supporting
documentation. The supervisor will most likely instruct the auditor to
a. Prepare a working paper to indicate that the full scope of the audit was carried
out.
b. Familiarize him/herself with the sequence of working papers so that he(she)
will be able to answer questions about the conclusions stated in the report.
c. Eliminate any cross-references to other working papers
since the system is unclear.
d. Provide a workpaper indexing system that shows the relationship between
findings, conclusions, and the related facts.
ANSWER: D
43. Which of the following would be the most relevant form of evidence to evaluate
the reasonableness of account balances?
a. Analytical. b. Documentary.
c. Physical. d. Hearsay.
ANSWER: A
44. Generally, what source of evidence should most impact audit conclusions?
a. External b. Inquiry.
c. Oral. d. Informal.
ANSWER: A
ANSWER: B
46. During an audit of the accounts receivable function, you found that the
accounts receivable turnover rate had fallen from 7.3 to 4.3 over the last three years. What is
the most likely cause of the decrease in the turnover rate?
a. An increase in the discount offered for early payment. b. A more liberal credit
policy.
c. A change from net 30 to net 25.
d. Greater cash sales.
ANSWER: B
47. Which of the following is generally included or shown in the auditor's working
papers?
a. The procedures used by the auditor to verify the personal financial status of
members of the client's management team.
b. Analyses that are designed to be a part of, or a substitute for, the client's
accounting records. c. Excerpts from authoritative pronouncements that support
the underlying generally accepted accounting principles used in preparing the
financial statements.
d. The manner in which exceptions and unusual matters disclosed by the
auditor's procedures were resolved or treated.
ANSWER: D
48. To test for unsupported entries in the ledger, the direction of audit testing
should be from the
a. Ledger entries.
b. Journal entries.
c. Externally generated documents.
d. Original source documents.
ANSWER: A
49. Which of the following does not describe one of the functions of
audit workpapers?
a. Facilitates third-party reviews.
b. Aids in the planning, performance, and review of audits.
c. Provides the principal evidential support for the auditor's report.
d. Aids in the professional development of the operating staff.
ANSWER: D
50. The principal reason for developing a written audit program is to help
assure that the
Chapter 4 Audit Evidence and Audit Programs 47
ANSWER: B
ANSWER: A
ANSWER: D
ANSWER: D
ANSWER: D
48 Chapter 4 Audit Evidence and Audit Programs
ANSWER: B
COMPLETION:
56. Audit programs can be developed only after the auditor has completed the audit
_______________ process.
ANSWER: PLANNING
57. An auditor who gathers increased quantities of evidence for larger account balances is
observing the standard relating to of audit evidence.
ANSWER: SUFFICIENCY
58. An auditor who gathers increased amounts of external evidence under conditions of weak
internal control is observing the standard of of audit evidence.
59. In performing substantive audit tests, focusing on the existence or occurrence objective
helps locate misstatements due to while the completeness objective directs audit
attention to misstatements due to .
60. Evidence consisting of everything that can be counted, examined, observed, or inspected
is referred to as _____________ evidence.
ANSWER: PHYSICAL
61. The audit trail consists of that stream of evidence that enables the auditor to trace a
transaction or event forward from its inception to the appropriate ledger account, or
conversely, vouch a transaction backward from the ledger
account to the inception of the transaction or event. For the audit trail to exist, transactions
must be .
ANSWER: DOCUMENTED
Chapter 4 Audit Evidence and Audit Programs 49
62. Analytical evidence may be the best form of evidence supporting the objective, in
that auditors' suspicions concerning errors of omission are often first aroused by the
application of analytical procedures.
ANSWER: COMPLETENESS
ANSWER: MATHEMATICAL
64. A group of related transactions affecting essentially the same set of general ledger
accounts is referred to as a _________________ .
65. The focal point of the current file is the ____________ _______________
______________ often referred to as a table of contents.
MATCHING:
66. For each of the listed auditing procedures, indicate, by letter, the type of evidence it
represents.
a. Physical evidence
b. Confirmation evidence
c. Documentary evidence
d. Analytical evidence
e. Mathematical evidence
f. Hearsay evidence
____ 10.Examined securities purportedly owned by the client and held by local
brokers
SOLUTION:
1. e
2. c
3. a
4. d
5. d
6. b
7. f
8. e
9. b
10. a
11. d
a. Existence or occurrence
b. Completeness
c. Rights and obligations
d. Valuation or allocation
e. Presentation and disclosure
SOLUTION:
1. a,d
2. d
3. e
4. b
5. b,c
6. a,c,d
7. d
8. e
9. a
10. b
PROBLEM/ESSAY
68. For each of the following ledger accounts, give an example of substance underlying the
account balance:
52 Chapter 4 Audit Evidence and Audit Programs
1. Cash in bank
2. Sales revenue
3. Inventories
4. Accounts payable
5. Notes payable
6. Capital stock
7. Marketable securities
8. Operating expenses
9. Wages and salaries expense
10. Property, plant, and equipment
SOLUTION:
69. Audit evidence must be sufficient and competent. To be competent, the evidence must
be both valid and relevant.
Required:
SOLUTION:
a. Sufficient audit evidence is evidence that is adequate to support the auditor’s
opinion on the financial statements. A matter of audit judgment, sufficiency is usually based on
materiality and the adequacy of existing internal control.
b. Validity of audit evidence is a function of three qualities:
1) The independence and competence of the source of
Chapter 4 Audit Evidence and Audit Programs 53
70. The following operating data has been provided to Erica Chavez by her audit client,
Grimes Hardware. Sales commissions
average 6 percent of sales:
Required:
a. Complete the vertical and horizontal analysis by calculating the correct percentages.
b. Why are both vertical and horizontal analysis important inputs to analytical
procedures?
SOLUTION:
a.
b. Trend analysis (the “Change” column) examines changes in data over time. Given the
assumption that past trends may be expected to continue into the future, significant changes
warrant further investigation. Vertical analysis (the first two percentage columns), by expressing
all components as percentages of a common base (sales in this case), permits the auditors to
compare percentages with previously developed auditor expectations. If, for example, the
auditor has previously determined that commissions average 6% of sales, he/she may wish to
investigate the lower rate reflected in 2003 results.
c. If sales commissions are accurate and represent 6 percent of sales, the sales base
must be overstated in order to produce a commission rate of only 5 percent. Sales may have
been fabricated, or 2004 sales may have been recorded in 2003. The material decline in cost of
sales as a percentage of sales suggests that recorded sales transactions were not accompanied by
cost of sales entries.
71. The following financial data have been extracted from the records of Blackwell
Wholesale Tires:
2003 2002
Required:
Based on the above data, in which areas do you recommend concentrating audit resources for the
2003 audit? Support your answer by citing the relevant data.
SOLUTION:
2003 2002
Inventory and accounts receivable appear to warrant emphasis for Blackwell Wholesale
Tires. Although the gross margin has not changed materially in 2003 relative to 2002 and
approximates the industry average for both years, inventory turnover has declined significantly
and is well below the industry average (1.25 v. 2.5). This suggests the possibility of inflated
inventory quantities, incorrect inventory prices, obsolete inventory, or some combination of
these. Accounts receivable turnover for 2002 was approximately equal to the industry average;
but for 2003 turnover has declined to approximately 7 times versus 11 times for the industry.
Given payment terms of 2/10;n/30, one would expect a turnover between 11 and 12 times, or
approximately 30 days sales in accounts receivable. A turnover of 7 times equates with
approximately 50 days sales in accounts receivable. Failure to properly investigate customer
credit, or weak collection procedures, or inflated accounts receivable are possible explanations
for the decline in turnover. Although the current ratio appears adequate when compared with the
preceding year and with the industry average, the quick ratio (current assets minus inventory
divided by current liabilities) has declined from 1.16 in 2002 to .84 in 2003. This suggests a
short-term liquidity problem, especially if inventories are overstated and/or customer accounts
receivable are delinquent.
56 Chapter 4 Audit Evidence and Audit Programs
TRAMWAY ENTERPRISES
Bank Reconciliation
12/31/2003
SOLUTION: