AT.04 Audit Evidence and Documentation Drill

Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset. Evaluate whether each of the following statements qualifies as inspection:

I. test performed on 100% of the items within a population

II. selecting items over a certain amount

III. selecting items for the total population on the basis that was expected to be representative

Choices:

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I, II and III qualify

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I and II qualify; III does not qualify

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I and II do not qualify; III qualifies

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I, II and III do not qualify

I, II and III qualify

Which of the following statements about inquiries is incorrect?

Choices:

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Inquiry is least used in audit procedures.

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Inquiry is considered least persuasive evidence.

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Inquiry is one of the least-expensive types of audit evidence.

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Inquiry is not considered as sufficient evidence alone.

Inquiry is least used in audit procedures.

Feedback: Correct. Inquiries are indeed among the least persuasive forms of audit evidence because they rely on representations rather than objective verification.

Which of the following is the best example of a substantive procedure?

Choices:

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Examining a sample of cash disbursements to test whether expenses have been properly approved.

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Confirmation of balances of accounts receivable.

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Comparison of signatures on checks to a list of authorized signers.

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Flowcharting of the client's cash receipts system.

Confirmation of balances of accounts receivable.

No deletions of audit documentation are allowed after the

Choices:

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Client's year-end.

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Documentation completion date.

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Last date of significant fieldwork.

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Report release date.

Documentation completion date.

Which of the following is not an information source for developing analytical procedures used in the audit?

Choices:

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Comparison of current year financial data with projections for next year's financial results

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Relationships among financial statement elements

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Relationships between financial and relevant non-financial data

-

Comparison of financial data with anticipated results (e.g., budgets and forecasts)

Comparison of current year financial data with projections for next year's financial results

Feedback: This choice is correct. Projections are predictions of future performance assuming one or more hypothetical scenarios or assumptions and projections are not used in developing analytical procedures

In the context of an audit of financial statements, substantive procedures are audit procedures that

Choices:

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May be eliminated under certain conditions.

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Are designed to discover significant subsequent events.

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May be either tests of transactions, direct tests of financial balances, or analytical tests.

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Will increase proportionately with the auditor's reliance on internal control.

May be either tests of transactions, direct tests of financial balances, or analytical tests.

An auditor tests whether an item of inventory is included in the company’s inventory records. The best audit procedure to perform is:

Choices:

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Tracing

-

Vouching

-

Inquiry

-

Reperformance

Tracing

Feedback: Correct. Tracing starts from the source (e.g., physical inventory) and moves to the accounting records, making it appropriate for testing completeness - whether all items that exist are recorded.

In accordance with the SEC’s rules on accrediting external auditors in the Philippines, how long should CPAs retain audit working papers?

Choices:

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10 years

-

15 years

-

5 years

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3 years

10 years

Feedback: Under PSA 230, the general retention period is 5 years, but this applies only in the absence of local regulations. Since the SEC requires 10 years, that prevails.

Analytical procedures are required during:

Choices:

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Planning and completion stage

-

Planning and testing stage

-

Testing and completion stage

-

Planning, testing, and completion stage

Planning and completion stage

Feedback: Correct. Analytical procedures are required during the planning stage (as part of risk assessment) and the completion stage (as an overall review of the financial statements).

Which of the following best describes the purpose of using Computer-Assisted Audit Techniques (CAATs)?

Choices:

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To perform audit procedures on electronic data efficiently and effectively

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To replace the judgment of the auditor in forming an audit opinion

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To eliminate the need for substantive testing in automated environments

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To restrict audit testing to manual records only

To perform audit procedures on electronic data efficiently and effectively

Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?

Choices:

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Oral representations of client

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Bank statement obtained from the client

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Pre-numbered client sales invoices

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Vendor’s invoices

Oral representations of client

Feedback: This choice is correct. Oral representations of client are considered less reliable compared to the types of evidence in other choices.

In determining whether transactions have been recorded, the direction of the audit testing should be from the

Choices:

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General ledger balances.

-

Adjusted trial balance.

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Original source documents.

-

General journal entries.

Original source documents.

The objective of tests of details of transactions performed as substantive procedures is to

Choices:

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Detect material misstatements in the financial statements.

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Evaluate whether management’s policies and procedures operated effectively.

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Identify specific financial statement assertions that satisfy the audit objectives.

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Verify that significant deficiencies in the accounting system are discovered.

Detect material misstatements in the financial statements.

Which of the following statements about inspection is least correct?

Choices:

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Inspection of documents supports existence of an asset.

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Inspection of documents aids the auditor in understanding a process.

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Inspection of assets supports the existence assertion of management.

-

Direction of inspection supports different audit objectives.

Inspection of documents supports existence of an asset.

Which of the following is not a basic procedure used in an audit?

Choices:

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Tests of direct evidence.

-

Risk assessment procedures.

-

Substantive procedures.

-

Tests of controls.

Tests of direct evidence.

Which of the following might be subjected to a recalculation procedure?

Choices:

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Verifying the accuracy of the client’s fixed asset schedule

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Verifying segregation of duties in the accounts payable department

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Understanding the credit sales process

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Studying the fluctuation of certain expenditures

Verifying the accuracy of the client’s fixed asset schedule

Which of the following statements is incorrect regarding the reliability of audit evidence?

Choices:

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Oral representation by the client management is not a valid evidence.

-

Audit evidence obtained directly by the auditor is more reliable than that one provided by the client management.

-

The effectiveness of accounting and internal control adds to the reliability of internal audit evidence.

-

While internal audit evidence is considered to be acceptable, the auditor usually prefers audit evidence from external sources.

Oral representation by the client management is not a valid evidence.

Feedback: This choice is correct. Oral representation is generally considered less reliable compared to written documentation; however, it does not necessarily mean that it is no longer a valid source of evidence.

Which of the following is an example of an accounting record?

Choices:

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Record of electronic fund transfers

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Information about competitors

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Confirmation from customers

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Auditor’s working papers

Record of electronic fund transfers

Feedback: Correct. A record of electronic fund transfers is part of the entity’s internal accounting records, used to capture transactions affecting cash accounts.

Which of the following statements about audit evidence decisions is correct?

Choices:

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The auditor decides which procedure to perform based on the audit objective of the test.

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When the auditor decides about timing, interim is always better than year-end.

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Selecting items for testing should always involve random sampling.

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The auditor always tests less than 100% of the population.

The auditor decides which procedure to perform based on the audit objective of the test.

Feedback: Correct. Audit procedures must align with the audit objectives to ensure that the evidence obtained is appropriate and sufficient for supporting audit conclusions.

What is the effect on the current ratio if the same amount is added to both current assets and current liabilities?

Choices:

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If the current ratio is initially greater than 1, adding the same amount to both current assets (numerator) and current liabilities (denominator) will result in an increase in the ratio.

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The current ratio does change, depending on its initial value.

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It would decrease only if the ratio is less than 1 to begin with.

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The effect depends on the initial ratio, not just the transaction.

If the current ratio is initially greater than 1, adding the same amount to both current assets (numerator) and current liabilities (denominator) will result in an increase in the ratio.

Which of the following best explains the difference between the current ratio and the quick ratio?

Choices:

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The quick ratio excludes inventory and other less liquid current assets.

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The current ratio excludes prepaid expenses.

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The quick ratio includes total assets instead of just current assets.

-

The current ratio is only used for long-term solvency analysis.

The quick ratio excludes inventory and other less liquid current assets.

Which of the following statements about working papers is correct?

Choices:

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The auditor should document the understanding of the client's internal control obtained to plan the audit

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Working papers should be kept indefinitely by the auditor in their files.

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Working papers may be regarded as a substitute for the client's accounting records.

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When reporting on comparative financial statements, the independent auditor may discard working papers after two years.

The auditor should document the understanding of the client's internal control obtained to plan the audit

Which of the following statements concerning audit evidence is correct?

Choices:

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The measure of the validity of audit evidence lies in the auditor’s judgment.

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To be competent, audit evidence should be either persuasive or relevant, but need not be both.

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The difficulty and expense of obtaining audit evidence concerning an account balance is valid basis for omitting the test.

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A client’s accounting data can be sufficient audit evidence to support the financial statements.

The measure of the validity of audit evidence lies in the auditor’s judgment.

Which of the following best describes the audit procedure of vouching?

Choices:

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Substantiates an item in the accounting record

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Validates completeness assertion

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Tests for potential understatement

-

Least performed in audit

Substantiates an item in the accounting record

Which of the following is most appropriately included in the audit permanent file?

Choices:

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Articles of incorporation

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General journal entries for the year

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Aged accounts receivable schedule

-

Aged accounts receivable schedule

Articles of incorporation

When the auditor independently performs a control procedure originally done by client personnel, this is called:

Choices:

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Reperformance

-

Recalculation

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Observation

-

Inquiries

Reperformance

The permanent file section of the working papers that is kept for each audit client most likely contains

Choices:

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Narrative descriptions of the client’s accounting procedures and internal accounting controls

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Review notes pertaining to questions and comments regarding the audit work performed

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A schedule of time spent on the engagement by each individual auditor

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Correspondences with the client’s legal counsel concerning pending litigation

Narrative descriptions of the client’s accounting procedures and internal accounting controls

Which of the following is not a basic procedure used in an audit?

Choices:

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Tests of direct evidence.

-

Risk assessment procedures.

-

Substantive procedures.

-

Tests of controls.

Tests of direct evidence.

What is the purpose of including the trial balance in the current file?

Choices:

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To verify the completeness of permanent file records

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To assist in planning the audit for future years

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To document the financial position during the audit year

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To summarize the client’s historical capital structure

To document the financial position during the audit year

Which of the following would most likely be found in the audit permanent file?

Choices:

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Management representation letter for the current year

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Prior years’ audit adjustments

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Board resolution on authorized signatories

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Accounts payable confirmation responses

Board resolution on authorized signatories

The least expensive types of audit evidence include the following, except:

Choices:

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Confirmation

-

Observation

-

Inquiries

-

Recalculation

Confirmation

Which one of the following would be considered the most persuasive type of audit evidence?

Choices:

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Confirmations from banks.

-

Purchase orders from customers.

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Customer accounts receivable files.

-

Computerized general ledger.

Confirmations from banks.

Which of the following is most likely to be considered a “further audit procedure?”

Choices:

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Communication with the predecessor auditor.

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Preparation of an engagement letter.

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Preparation of a flowchart of the sales function.

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Performance of tests of controls.

Performance of tests of controls.

Which of the following statements about inspection is incorrect?

Choices:

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Auditors verify the authenticity of documents they inspect.

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Documents created under a system of effective control are more reliable.

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Original documents are considered more reliable than duplicates.

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Documentary evidence is considered more reliable than oral representations.

Auditors verify the authenticity of documents they inspect.

Which of the following will be least likely found in an audit program?

Choices:

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Type of opinion to be issued

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Timing of the test to be performed

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Management assertions and audit objectives to be tested

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Man hours to complete the examination

Type of opinion to be issued

Which of the following is not an example of analytical procedures?

Choices:

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Substantiating disbursements from the accounting record.

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Comparing disbursements between current period and previous period.

-

Comparing disbursements between current period and previous period.

-

Comparing the amount of disbursement made by the company versus their competitors.

Substantiating disbursements from the accounting record.

Theoretically, which of the following would not have an effect on the amount of audit evidence gathered by the auditor?

Choices:

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Whether or not the client reports to the Securities and Exchange Commission.

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The type of opinion to be issued.

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The auditor’s evaluation of internal control.

-

The types of audit evidence available to the auditor.

Whether or not the client reports to the Securities and Exchange Commission.

An auditor's working papers, the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached, serve mainly to

Choices:

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Provide the principal support for the auditor's report.

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Satisfy the auditor's responsibilities concerning the Code of Professional Conduct.

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Monitor the effectiveness of the CPA firm's quality control procedures.

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Document the level of independence maintained by the auditor.

Provide the principal support for the auditor's report.

Each of the following might by itself, form a valid basis for an auditor to decide to omit a test, except for the

Choices:

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Difficulty and expense involved in testing a particular item.

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Relative risk involved.

-

Degree of reliance on the relevant internal controls.

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Relationship between the cost of obtaining evidence and its usefulness.

Difficulty and expense involved in testing a particular item.

Which of the following is an example of an external document?

Choices:

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Bank statement

-

Duplicate sales invoice

-

Payroll time record

-

Cost accounting report

Bank statement

Which of the following ratios is primarily used to evaluate a company’s ability to generate profit from its operations?

Choices:

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Return on sales

-

Return on equity

-

Debt-to-equity ratio

-

Quick ratio

Return on sales

Which of the following statements about observation is incorrect?

Choices:

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Auditors need to be more expert than the client for the observation to be valid.

-

Observation is used to observe the proper execution of client processes.

-

Observation is usually done together with inspection.

-

Observation is limited to the point in time the observation takes place.

Auditors need to be more expert than the client for the observation to be valid.

Which of the following documents would typically be placed in the audit current file?

Choices:

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Copy of the company’s tax identification number

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Minutes of the meeting authorizing the entity’s formation

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Bank confirmation received for the current year

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List of related parties maintained since incorporation

Bank confirmation received for the current year

Physical examination or inspection of an asset as an audit evidence applies to:

Choices:

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Notes receivable

-

Sales invoice

-

Payroll time record

-

Voucher

Notes receivable