Audit Evidence and Audit Programs

Name:

MULTIPLE CHOICE. Underline the letter of your choice. God Bless

You!

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 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.

4. Which of the following is not an example of analytical

evidence?

36
 a. Compared inventory turnover by major class with the
prior year on a monthly and quarterly basis.
b. Compared gross profit percentages by major product
classes with the prior year.
c. Examined invoices for plant asset additions to
determine whether the client had erroneously recorded
ordinary repairs as plant assets.
d. Examined monthly performance reports and investigated
significant variations from budgeted amounts.

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.

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.

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.
8. An auditor wants to develop an audit test to evaluate the
reasonableness of the quantity of scrap material resulting
from a certain production process compared to industry
standards. Which would be the most competent type of
evidence available to satisfy this objective?
a. Documentary.
b. Hearsay.
c. Physical.
d. Analytical.

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.

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.

11. An assumption underlying analytical procedures is that

a. These procedures cannot replace tests of balances and
transactions.
b. Statistical tests of financial information may lead to
the discovery of material errors in the financial
statements.
c. The study of financial ratios is an acceptable
alternative to the investigation of unusual
fluctuations.
d. Relationships among data may reasonably be expected to
exist and continue in the absence of known conditions
to the contrary.

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.

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.
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.

14. A letter to the auditor in response to an inquiry is an

example of
a. Physical evidence.
b. Confirmation evidence.
c. Documentary evidence.
d. Analytical evidence.

15. 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.

16. 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.
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.

18. 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.

19. Auditors apply analytical procedures to the client's

operations in order to identify
a. Improper separation of accounting and other financial
duties.
b. Weaknesses of a material nature in the client's
internal control.
c. Unusual transactions.
d. Noncompliance with prescribed control procedures.

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.

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.
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.

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.

24. Analytical procedures are

a. Substantive tests designed to evaluate a system of
internal control.
b. Tests of control procedures designed to evaluate the
validity of management's representation letter.
c. Substantive tests designed to evaluate the
reasonableness of financial information.
d. Tests of control procedures designed to detect errors
in reported financial information.

25. Which of the following statements relating to the

competence of evidential matter is always true?
a. Evidential matter gathered by an auditor from
outside an enterprise is reliable.
b. Accounting data developed under satisfactory conditions
of internal control are more relevant than data
developed under unsatisfactory internal control
conditions.
c. Oral representations made by management are not valid
evidence.
d. Evidence gathered by auditors must be both valid and
relevant to be considered competent.

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.

27. In evaluating the reasonableness of advertising expense,

which of the following would be the best evidence?
a. Oral evidence obtained through discussions with company
marketing executives and representatives of the
advertising agency retained.
b. Documentary evidence obtained by vouching charges to
the account and by retracing charges from source
documents to the account.
c. Analytical evidence developed by comparing the ratio of
advertising expenses to sales with historical data for
the company and industry.
d. Arithmetical evidence developed by re-computing charges
submitted by the advertising agency and paid by the
company.

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.

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.

30. The main advantage of properly indexed working papers is to

 a. Reduce the size of the file.
b. Better organize the working papers.
c. Allow division of labor within the audit team.
d. Facilitate the efficient use of audit staff.

31. Which of the following is not a typical analytical

procedure?
a. Study of relationships of financial information with
relevant nonfinancial information.
b. Comparison of financial information with similar
information regarding the industry in which the entity
operates.
c. Comparison of recorded amounts of major disbursements
with appropriate invoices.
d. Comparison of recorded amounts of major disbursements
with budgeted amounts.

32. Which of the following is an example of inferential

evidence?
a. The auditor observes the taking of the client's
physical inventory and performs test counts.
b. The auditor inspects marketable securities for
existence.
c. An auditor, who notes that customer accounts receivable
have increased significantly in the current year as a
percentage of sales, suspects that a larger proportion
of the accounts will prove uncollectible.
d. The auditor counts cash on hand at year-end.

33. Which of the following would be least likely to be

comparable between similar corporations in the same
industry line of business?
a. Earnings per share.
b. Return on total assets before interest and taxes.
c. Accounts receivable turnover.
d. Operating cycle.

34. Which of the following is not an example of confirmation

evidence?
a. Requesting the client's outside legal counsel to
evaluate the possible outcome of pending litigation.
b. Questioning the client's employees about existing
internal control policies and procedures.
c. Requesting the client's customers to verify year-end
accounts receivable balances.
 d. Requesting payees to respond in writing to the terms
contained in notes payable appearing in the client's
ledger.
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.

36. During the course of an audit engagement, an auditor

prepares and accumulates audit working papers.
The primary
purpose of the audit working papers is to
a. Aid the auditor in adequately planning his work.
b. Provide a point of reference for future audit
engagements.
c. Support the underlying concepts included in the
preparation of the basic financial statements.
d. Support the auditor's opinion.

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.

38. Sales commissions as a percentage of sales declined

significantly during the year under audit. Of the following
possible causes, the most likely is
a. Sales increased during the year.
b. The sales force was reduced at the end of the year.
c. Sales commission rates were increased at the beginning
of the year.
d. Fictitious sales were recorded at year-end to inflate
earnings. Commissions were not recorded on these
sales.

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.

40. An audit program provides proof that

a. Sufficient competent evidential matter was obtained.
b. The work was adequately planned.
c. There was compliance with generally accepted standards
of reporting.
d. There was a proper study and evaluation of internal
control.

41. Which of the following ultimately determines the specific

audit procedures necessary to provide an independent
auditor with a reasonable basis for the expression of an
opinion?
a. The audit program.
b. The auditor's judgment.
c. Generally accepted auditing standards.
d. The auditor's working papers.

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.

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.

44. Generally, what source of evidence should most impact audit

conclusions?
 a. External
b. Inquiry.
c. Oral.
d. Informal.

45. Most of the independent auditor's work in formulating an

opinion on the financial statements consists of
a. Studying and evaluating internal control.
b. Obtaining and examining evidential matter.
c. Examining cash transactions.
d. Comparing recorded accountability with assets.

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.

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.

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.

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.

50. The principal reason for developing a written audit program

is to help assure that the
a. Audit work is properly supervised.
b. Audit work is properly planned and documented.
c. Audit report contains only significant findings.
d. Work of different auditors is properly coordinated.