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Roque Quick Auditing Theory Chapter 7pdf PDF Free
Roque Quick Auditing Theory Chapter 7pdf PDF Free
CHAPTER 7
Audit Objectives,
Procedures,
Evidence, and
Documentation
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controls manuals
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• information obtained by the auditor from such audit
procedures as inquiry, observation, and inspection
• other information developed by, or available to, the
auditor to reach conclusions through valid reasoning
PSA 500 states, "The quantity of audit evi dence needed is af-
fected by the risk of misstatement (the higher the assessed
risks, the more audit evidence is likely to be required) and
also by the quality of such audit evid ence (the higher the
quality, the less may be required)."
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15. The following are assertions about present ation and disclo-
sure, except
A. Occurrence and rights and obligations
B. Accuracy and valuation
C. Classification and understandability
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D. Existence
B large
ecause most income statement elements represent 1+
volumes of transactions, the auditor's focus is on the proP
dit Objectives, Procedl)res, Evidence, and Documentation 461
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7 Audit Objectives, Procedures, Evidence, and Documentation 463
ctlApiER
ANALYTICAL PROCEDURES
REVENUE/RECEIPT CYCLE
. . 1·n the au·
33. The following are the auditor's principal obJect1ves
dit of revenues, except h entitY at
A. To determine whether all cash owned by t e e sheet.
the balance sheet date is included on the bal~n~n record·
B. To determine whether earned revenue has e
ed and recorded revenue has been earned. d in the in·
c. To determine whether revenues are repo~e ed
come statement at the appropriate amoun · 1y c1assifi '
. re proper ts in·
o. To determine whether revenues a . tatenien 1 ·al
described, and disclosed in the financial ~ ble fina11C1
eluding notes, in conformity with a~ appltca
reporting framework.
7
AUdit Objectives, Procedures, Evidence, and Documentation 471
cH-AprE~
rnining whether all cash owned by the entity at the end
. oet~~ reporting period is included on the statement of fi-
of t ·al position is not part of the audit of sales and other
nan~ues. A separate audit program is ordinarily prepared
rev~he audit of cash, including bank balances .
. for
uditors are often concerned with t.he possibility of over-
34. At tement of sales and receivables. However, management
5
:y also have reasons for understating these balances.
~hich of the following would explain understatement of
sales and receivables?
r. To avoid paying taxes.
n. To windowdress the financial statements.
m. To meet budgets and forecasts.
A. I only
s. II only
c. I and Ill only
D. I, II, and III
a
476 CPA EXAMINATION REVIEWER: AUDITING THEORY
"'T"he auditor finds a sit. uation in whic;h one person has the
11
42. ability
' to collect rece1v~ bl es, make deposits, issue credit
rnemos, and record receipt of payments. Ttie auditor sus-
pects the individu~I may be stealing cash receipts. Which of
the following audit procedures would be most effective in
discovering fraud in this scenario? .
A. Perform a detailed review of debits to sales discounts,
sales returns and allowances, or other debit accounts,
excluding cash posted to the cash receipts journal.
s. Take a sample of bank deposits and trace the detail in
each bank deposit back to the entry in the cash receipts
journal.
c. Send negative confirmations to all outstanding accounts
receivable customers.
D. Send positive confirmations to a random selection of cus-
tomers.
43. Which of the following most likely would give the most as-
surance concerning the valuation and allocation assertion of
accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on
shipping documents.
B. Inquiring about receivables pledged under loan agree·
ments.
C. Assessing the allowance for bad debts for reasonable-
ness.
D. Comparing receivable turnover ratios with industry statis-
tics for reasonableness.
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494 CPA EXAMINATION REVIEWER: AUDITING THEORY
Answer D is incorrect b
not be increased b ecause the allowance balance need
are expected to be ~~~use_ of slo"." collections if the accounts
ectible as m prior periods.
62. All of the following are
to verify the valuation ~xamples of substantive procedures
the f net accounts receivable, except
A_. Comparison of th
records. e allowance for bad debts with past
B. Recomputation of th
e allowance for bad debts.
I .
7 AUdit Objectives, Procedures, Evidence, and Documentation 495
ct·t.APTER
63. The most likely reason for the auditor to be concerned about
the valuation of cash is that
A. The proof of cash cannot be reconciled.
B. The client uses a checking account.
c. Both currency and negotiable securities are on nand.
D. The client has foreign currency accounts.
.
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64. When counting cash on hand, the auditor must exercise con-
trol over all cash and other negotiable assets to prevent
A. Theft
B. Deposits in transit
C. Substitution
D. Irregular endorsement
EXPENDITURE/DISBURSEMENT CYCLE
Answer D · · aya·
bl e are not isproperl
incorrect because the risk that accounts P · I
h financ1a
stateme . Y presented and disclosed in t e ·allY
underst nttsd1s not as high as the risk that they are mater!
ae .
-
504
CPA EXAMINATION REVIEWER: AUDITING THEORY
. . . . describes
A supplier bills the buyer through an mvo1ce thatd terrnine
the item(s), amount due, and payment te~ms. To b~lled was
whether all merchandise for which the client was. to the
received, the auditor should trace vendors' invoice5
related receiving reports.
R 7 Audit Objectives, Procedures, Evidence, and Doc~mentation 505
cH.ApTE
ll5 :1 80. Which of the following audit procedures is least likely to de-
)(ti ) tect an unrecorded· liability?
~ - A. Reading the minutes of meetings of the board of direc-
~ ·'l tors.
r~ :l B. Analysis and recomputation of interest expense.
~[ C. Analysis and recomputation of depreciation expense.
ti: D. Mailing of bank confirmation forms.
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508 CPA EXAMINATION REVIEWER: AUDITING THEORY
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the balance sheet date to determine whether the related
payables apply to prior period .
.\
The auditor's search for unrecorded liabilities includes the
following audit procedures:
Examining cash disbursements made subsequent to
• the balance sheet date and comparing them with
recorded accounts payable as at year-end.
Sending confirmations to vendors, including those
,.
• having zero balances.
Reconciling payable balances with vendor_s' docu-
•
mentation.
Answer A is incor;~. because reconciling vendors' state-
ments to the file of receiving reports to identify items :e-
ceived just prior to the balance sheet date does not provide
audit evidence about whethe-r the items have been recorded.
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CPA EXAMINAnON REV/EWE~: AUDITING THEORY
PRODUCTION CYCLE
A. I and IV only
8. II and III only
C. II, III, and IV only
D. I, II, 1II, and IV
90. According to PSA 501, when inventories are under the cus-
tody and control of a third party, the auditor would ordinarily
obtain direct confirmation from the third party as to the
quantities and conditiqn of inventories held on behalf of the
entity. Which of the following would the auditor also con-
sider?
Answer C js , incorrect
. t because
. the auditor sho uId ven'fy
rnanagemen t s presen at1on and disclosure assertion.
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518 CPA EXAM/NAT/ON REVIEWER: AUDITING THEORY
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B. Completeness
C. Rights and obligations
D. Existence
101. PSA 501 states that when inventory is material to the finan-
cial statements, the auditor should obtain sufficient appro-
priate audit evidence regarding its existence and condition
by attendance at physical inventory counting unless imprac-
ticable. Which of the following statements concerning this
audit procedure is incorrect?
A. Regardless of the inventory system operated by the cli-
ent, an annual physical count must be made of each
524 CPA EXAMINATION REVIEWER: AUDITING THEORY
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INVESTING CYCLE
120. The auditor can best verify a client's bond sinking fund
transactions and year-end balance by
A. Confirmation with the bond trustee.
5
B. Confirmation with individual holders of retired bon? · the
C. Examination and count of the bonds retired during
year. bl and
D. Recomputation of interest expense, interest paya e,
amortization of bond discount or premium.
f an inde·
If the bond sinking fund is under the custody 0 . and
005
pendent bond trustee .. the sinking fund tran~act:hiS trus·
year-end balance can be confirmed directly with
tee.
Audit Objectives, Procedures, Evidence, and Documentation 54 1
cHAprER
1
C and D are incorrect because the procedures
we rs B' ' .
Ans ··bed do not directly relate to the verification of bond
d.esCI I . d
k' g fund transactions an year-end balance.
sin in
the audit of property, plant, and equipment, the auditor.
121· 1 ~ to do all of the following except to
triesAssess the adequacy of rep 1acement funds.
A. Obtain an understanding of internal control.
~: Determine the extent of property abandoned during the
year.
Judge the reasonableness of the depreciation.
D.
The auditor is not required to assess the adequacy of the cli-
ent's replacement funds. A financial statement audit does
not include evaluation of the soundness of the client's busi-
ness practices or financial prospects.
If ex nt bY
~enses are to be reported in the income staterne . te
function th d' ropna
' e au 1tor should determine if apP JeS,
a~l~unts of depreciation have been inducted in cost of sa
se mg expenses, and administrative expenses.
...cR 1 AUdit Objectives, Procedures, Evidence · and 0ocumentation
cHAP'.. 5 45
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546 CPA EXAM/NATION REVIEWER: AUDITING THEORY
talized during the year may reveal that an expense had been
erroneously capitalized.
Answer Dis incorrect because the auditor will not detect the
misstatement by merely discussing the company's capitali-
zation policies with the company's controller.
FINANCING CYCLE
A· y~
Confirm the existence of individual bondholders at
end. ~
B p rf · /Tl a"
· ~ orm analytical procedures on the bond premiu
. discount accounts.
fER 7 Audit Objectives, Procedures, Evidence, and Documentation 551
ctiAP
d.en~~· These transactions are usually few but may 1 ~vo ui·
significant amounts. Hence the audit of shareholders eq
ty · ' hose
requires a small amount of a udit time compared t~ t
accounts that are affected by high volumes of transacuons.
Audit Objectives, Procedures, Evidence, and Documentation 553
~~f\
1
rs A, 8, and Care incorrect because the audit of reve-
p.nswessets, an d 1·ia b·1· · ·11 d. ·
l it1es w1 or manly require more audit
nue, a
tiJtle·
n audit of shareholders' equity, an auditor is most con-
136· ~r~ed that . .
Share capital transactions are properly authorized.
~: All changes in t~e shareholders' equity accounts are
monitored by an independent transfer agent and regis-
trar.
C. Share splits are charged to retained earnings at par or
stated value.
o. Dividends declared during the year were approved by
the shareholders.
139. When a clien~ company does not maintain its own share rec-
ords, the auditor should obtain written confirmation from the
transfer agent and registrar concerning
A. The number of shares issued and outstanding.
s. Restrictions on the payment of dividends.
c. The number of shares subject to agreements to repur-
chase.
o. Guarantees of preference share liquidation value.
An entity engages an independent stock registrar to pre-
vent improper issuances of shares, particularly over-
issuances.
HUMAN RESOURCES
An swer C is
· incorrect
· because payroll journal entn·es are.
prepared for cumulative amounts, not for individual ern
ployees.
An D· · k are not
~wer ls incorrect because unclaimed paychec s tbe
malled but maintained by the treasurer until claimed bY
employees involved.
1 Audit Objectives, Procedures, Evidence, and Documentation 559
cHAf'TER
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562 CPA EXAMINATION REVIEWER: AUDITING THEORY
DOCUMENTATION
154. Working papers that record the procedures used by the au- ,
ditor to gather audit evidence should be
A. Destroyed when the audited entity ceases to be a client.
B. Considered the primary support for the financial state-
ments being audited .
C. Viewed as the connecting link between the books of ac-
counts and the financial statements.
D. Designed to meet the circumstances of the particular en-
gagement.
156. Which of the following factors would least likely affect the
form, content, and extent of an auditor's working papers?
A. The content of the representation letter.
B. The identified risks of material misstatement.
C. The audit methodology and tools used.
D. The significance of the audit evidence obtained.
161. The audit working paper theit reflects the major components
of an amount reported in the financial statements is the
A. Supporting schedule
B. Interbank transfer schedule
C. Lead schedule
D. Carryforward schedule
. d
A lead schedule (also called top schedule) classifies an
summarizes similar or related items contained on the sup-
porting schedules. It reflects the components of an amoun~
reported as a line item on the face of the financial state
·tern
ments. For example, the lead schedule for the line 1 . 1
"cash and cash equivalents" on the statement of financia_
position might consist of petty cash fund cash in bank (sav
ings account), cash in bank (current acc~unt), and a three·
month time deposit.
. . d Jes re· I
Answer A is incorrect because supporting sche u for
fleet details of amounts aggregated in the lead schedule,
example, a bank reconciliation schedule for cash in bank·
7 Audit Objectives, Procedures, Evidence, and Documentation 573
C~pfER
a. workpaper
C. Audit file
(). Audit memorandum
170. The completion of the assembly of the final audit file after
the date of the auditor's report does not ordinarily involve
A. The performance of new audit procedures or the drawing
of new conclusions.
B. Sorting, collating and cross-referencing working papers.
C. Deleting or discarding superseded documentation.
D. Signing off on completion checklists relating to the file
assembly process.
TRUE OR FALSE
The more effective the internal control system, the more as-
9· surance it provides the auditor about the reliability of finan-
cial reporting by the client.
10. A schedule listing account balances for the current and pre-
vious years, and columns for adjusting and reclassifying en-
tries p·roposed by the auditors to arrive at the final amount
that will appear in the financial statement, is referred to as a
lead schedule.
4
Informa~ion obtained i~directly from independent outside
2 · 50urces is more. persuasive than the auditor's direct personal
knowledge obtained through observation and inspection.
TRUE OR FALSE