Which of the following best describes the primary purpose of audit procedures?

CHAPTER 4

MULTIPLE CHOICE

c 1. Of the following, which is the least persuasive type of audit evidence? a. Documents mailed by outsiders to the auditor. b. Correspondence between auditor and vendors. c. Copies of sales invoices inspected by the auditor. d. Computations made by the auditor. (AICPA ADAPTED)

c 2. Analytical procedures are a. Substantive tests designed to evaluate a system of internal control. b. Tests of controls designed to evaluate the validity of management's representation letter. c. Substantive tests designed to evaluate the reasonableness of financial information. d. Tests of controls designed to evaluate the reasonableness of financial information. (AICPA ADAPTED)

c 3. Which of the following best describes the primary purpose of audit procedures? a. To detect errors or irregularities. b. To comply with generally accepted accounting principles. c. To gather corroborative evidence. d. To verify the accuracy of account balances. (AICPA ADAPTED)

d 4. 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 irregularities. c. Test internal control structure. d. Gather evidence. (AICPA ADAPTED)

b 5. Which of the following is ordinarily designed to detect possible material dollar errors on the financial statements? a. Tests of controls. b. Analytical procedures. c. Computer controls. d. Post audit working paper review. (AICPA ADAPTED)

d 6. 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 conditions. c. Oral representations made by management are not valid. d. Evidence gathered by auditors must be both valid and relevant to be considered competent. (AICPA ADAPTED)

c 7. In the context of an audit of financial statements, substantive tests are audit procedures that a. May be eliminated under certain conditions. b. Are designed to discover significant subsequent events. c. May be either tests of transactions, direct tests of financial balances, or analytical tests. d. Will increase proportionately with the auditor's assessment of control risk. (AICPA ADAPTED)

a 8. Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion? a. Auditor judgment. b. Materiality. c. Relative risk. d. Reasonable assurance. (AICPA ADAPTED)

d 9. Which of the following factors will least affect the independent auditor's judgment as to the quantity, type, and content of the working papers desirable for a particular engagement? a. Nature of the auditor's report. b. Nature of the financial statements, schedules, or other information upon which the auditor is reporting. c. Need for supervision and review. d. Number of personnel assigned to the audit. (AICPA ADAPTED)

a 10. An auditor's working papers will generally be least likely to include documentation showing how the a. Client's schedules were prepared. b. Engagement had been planned. c. Client's internal control structure had been reviewed and evaluated. d. Unusual matters were resolved. (AICPA ADAPTED)

c 11. Which of the following is not a primary purpose of audit working papers? a. To coordinate the examination. b. To assist in preparation of the audit report. c. To support the financial statements. d. To provide evidence of the audit work performed. (AICPA ADAPTED)

b 12. The understanding between the client and the auditor as to the degree of responsibility to be assumed by each is normally set forth in a(n) a. Representation letter. b. Engagement letter. c. Management letter. d. Comfort letter. (AICPA ADAPTED)

b 13. Audit evidence takes different forms and varies in persuasiveness. Which of the following is the least persuasive type of evidence? a. Vendor's invoice. b. Bank statement obtained from the client. c. Computations made by the auditor. d. Canceled checks. (AICPA ADAPTED)

b 14. The following statements were made in a discussion of audit evidence by two independent auditors. Which statement is untrue? a. “I am seldom convinced beyond all doubt about all aspects of the financial statements being audited.” b. “I would not undertake that procedure because, at best, the results would only be persuasive and I'm looking for convincing evidence.” c. “I evaluate the degree of risk involved in deciding the kind of evidence I will gather.” d. “I evaluate the usefulness of the evidence I can obtain against the cost to obtain it.”

b 22. Using laptop computers in auditing may affect the methods used to review the work of staff assistants because a. Supervisory personnel may not have an understanding of the capabilities and limitations of computers. b. Working paper documentation may not contain readily observable details of calculations. c. The audit field work standards for supervision may differ. d. Documenting the supervisory review may require assistance of management services personnel. (AICPA ADAPTED)

c 23. Which of the following persons is not a specialist upon whose work an auditor may rely? a. Actuary. b. Appraiser. c. Internal auditor. d. Engineer. (AICPA ADAPTED)

b 24. In which of the following instances would an auditor be least likely to require the assistance of a specialist? a. Assessing the value of inventories of works of art. b. Determining the quantities of materials stored in piles. c. Determining the value of unlisted securities. d. Determining the assessed value of fixed assets. (AICPA ADAPTED)

SHORT ANSWER

1. Evidential matter consists of the accounting data that underlies management’s financial statements and the information that supports the accounting data. Please compare underlying accounting data with corroborating information.

Answer: Underlying accounting data includes records of original entry (e., journals), general and subsidiary ledgers, data files, and spreadsheets that capture the details summarized in financial statements. Corroborating information includes checks, records of electronic fund transfers, invoices, contracts, minutes of meetings, and other documents; written representations from vendors, attorneys, banks, and other third parties; and information obtained by questioning management or by observing a client’s employees at work.

1. List the two control activities that audit clients use in practice.

Answer: a. Controls that create documentation (leave an audit trail). b. Controls that do not create documentation.

1. How do tests of controls and tests of details differ from one another?

Answer: Tests of controls provide evidence about whether misstatement is likely (a means to assess control risk), and substantive tests of details provide evidence about whether misstatement actually exists (a means to control detection risk).

1. List and define the four categories of ratios used in ratio analysis.

Answer: 1. Activity ratios – measure management’s effectiveness in managing available resources, among them total assets, inventory and receivables. 2. Profitability ratios – measure management’s effectiveness in turning a profit on their investment in assets and on shareholders’ investments in the company, and can be more comprehensive than income statements. 3. Liquidity ratios – compare short-term assets to short-term liabilities, and measure management’s ability to meet current obligations. 4. Solvency ratios – measure management’s long-term financial dexterity in one of two ways: effectiveness in managing borrowed funds or in generating income on borrowed funds.

1. Describe the evidence normally included in working papers.

Answer:  Evidence that work was adequately planned, supervised, and reviewed.  Evidence that internal control was considered as a basis for planning substantive tests.  Evidence that sufficient competent evidential matter was obtained.

PROBLEMS

1. Analytical procedures allow the auditor to reach conclusions about the details in an account by testing aggregated data. Well-designed analytical procedures offer an alternative to tests of details especially in low-risk accounts.

Required: (a) List two ratios from each category of ratios: activity ratios, profitability ratios, liquidity ratios, and solvency ratios. (b) Present the method of calculating the ratios.

Answer: Student’s answers will vary but will contain ratios and calculation methods from the following list:

Ratio Method of Calculation Activity Ratios Asset Turnover Net Sales/Total Assets Inventory Turnover Cost of Sales/Average Inventory Number of Days Supply in Inventory 360 Days/ Inventory Turnover Accounts Receivable Turnover Net Sales/Average Accounts Receivable Number of Days Sales in Receivables 360 Days/Accounts Receivable Turnover Profitability Ratios Return on Assets Operating Income Before Interest and Taxes /Average Total Assets Return on Equity Operating Income Before Interest and Taxes /Average Shareholders Equity Operating Margin Operating Income Before Interest and Taxes

Which of the following describes the primary purpose of audit procedures?

What is the purpose of audit procedures?

Which of the following statements best describes the primary purpose of statements on auditing?

What is the primary objective of auditing *?