Mindanao State University

ACCOUNTING 141

MODULE 8

DOCUMENTATION, FINANCIAL ASSERTIONS AND AUDIT EVIDENCE

PSA-BASED QUESTIONS

1)When reviewing audit working papers, the primary responsibility of an audit supervisor is to detemine that

1. 1. each worksheet is properly identified with a descriptive heading.
   2. working papers are properly referenced and kept in logical groupings.
   3. standard departmental procedures are adhered to with regard to working paper preparation and technique.
   4. working papers adequately support the audit findings, conclusions, and report.

2. A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor who is and the senior auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably be

1. 1. silent on the matter because it is an internal matter for the auditing firm.
   2. expanded to document that the assistant auditor is completely disassociated from responsibility for the auditor’s opinion.
   3. expenaded to document the additional work required because all disagreements of this

type will require further substantive testing.

1. 4. expanded to document the assistant auditor’s position and the manner in which the difference of opinion was resolved.

3. During the course of an audit engagement, an auditor prepares and accumulates audit working papers. The primary purpose of audit working papers is to

1. 1. aid the auditor in adequately planning his work.
   2. serve as a reference for future audt engagements.
   3. support the underlying concepts included in the preparation of the basic financial statements.
   4. support the auditor’s opinion.

4. Which of the following characteristics is most important in assuring the achievement of the primary purpose of working papers?

1. 1. Working papers must be of standard format and standard content.
   2. Working papers must be properly indexed and cross-referenced to the draft of audit report.
   3. Working papers must provide sufficient, competent, and useful information to support the

audit report.

1. 4. Working papers must be arranged in logical order following the audit program sequence.

5. The primary purpose of the auditor’s working papers is to

1. 1. provide evidence of planning and execution of audit procedures performed.
   2. serve as a means with which to prepare the financial statements.
   3. document the deficiencies in internal control with recommendations to management for

improvement.

1. 4. comply with the auditing standards of the profession.

6. What is (are) the purpose(s) of audit documentation?

1. 1. Provide a reasonable assurance that the audit is conducted in accordance with PSAs.
   2. Provide a basis for determining the appropriate audit report.
   3. Provide the supervisory personnel an opportunity to assess the suffciency of evidence

obtained duting an audit.

1. 4. Audit documentation serves all the given choices.

7. Which of the following is not a primary purpose of audit working papers?

1. 1. Coordinate the examination
   2. Assist in the preparation of the audit report
   3. Support the financial statements
   4. Provide evidence of the audit work performed

8. Which of the following conditions constitues inappropriate working paper preparation?

1. 1. All forms and memoranda used/issued by the auditee department are included in the working papers.
   2. Flowcharts are included in the working papers.
   3. The findings are cross-referenced to the supporting documnetation.
   4. Tick marks are explained in the working papers.

9. Working papers that record the procedures used by the auditor to gather evidence should be

1. 1. considered the primary support for the financial statements being audited.
   2. viewed as the connecting link between the books of accounts and the financial statements.
   3. designed to meet the circumstances of the particular engagement.
   4. destroyed when the particular audit engagement is terminated.

10. 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?

1. 1. Nature of the auditor’s report.
   2. Nature of the financial statements, schedules, or other information upon which the auditor is reporting.
   3. Need for supervision and review.

1. 4. Number of personnel assigned to the audit.

11. During an audit engagement, data are compiled and included in the audit working papers. The working papers are

1. 1. a client-owned record of conclusions reached by the auditors who performed the engagement.
   2. evidence supporting financial statements
   3. support for the auditor’s compliance with generakky accepted auditing standards.
   4. a record to be used as a basis for the following year’s engagement.

12. Which of the following is not a factor affecting the independent auditor’s judgment about the quantity, type, and content of audit working papers?

1. 1. The need for supervision and review of the work performed by assistants.
   2. The nature and condition of the client’s records and internal controls.
   3. The expertise of the client personnel and their participation in preparing the schedules.
   4. The type of financial statements, schedules, or other information on which the auditor is

reporting.

13. Which of the following factors most likely affects the auditor’s judgment about the quantity, type, and content of working papers?

1. 1. The assessed level of control risk
   2. The content of the client’s representation letter
   3. The timing of substantive tests completed prior to the balance sheet date.
   4. The usefulness of the working papers as a reference source for the client

14. 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

1. 1. kept on the client’s premises so that the client can have access to them for reference purposes.
   2. the primary support for the financial statements being examined.
   3. considered as part of the client’s accounting records that are retained by the auditor.
   4. designed to meet the circumstances and the auditor’s needs on each engagement.

15. Audit working papers are indexed by means of reference numbers. The primary purpose of indexing is to

1. 1. permit cross-referencing and simplify supervisory review.
   2. support the audit report.
   3. eliminate the need for follow-up reviews.
   4. determine that working papers adequately support the findings, conclusions, and reports.

16. The principal purpose for cross-indexing the audit working papers is to

1. 1. give the working papers a professional apperance.
   2. explain the use of tick marks.
   3. provide an explanation on the audit steps performed.
   4. provide a trail for the auditor and the reviewer.

17. Documentation may not be deleted from the working papers after the

1. 1. audit report delivery date.
   2. date of the audit report.
   3. Completion of the assembly of final audit file.
   4. final day of fieldwork.

18. The reason why the auditors accumulate evidence is to

1. 1. defend themselves in the event of a lawsuit.
   2. justify the conclusions they have otherwise reached.
   3. satisfy the requirements of the Bureau of Internal Revenue.
   4. enable them to reach conclusions about the fairness of the financial statements and issue an appropriate audit report.

19. To be competent, evidence must be all of the folowing except:

1. 1. Sufficient
   2. Reliable
   3. Relevant
   4. Unbiased

20. Which of the following is not one of the determinants of the persuasiveness of evidence?

1. 1. Competence
   2. Physical examination
   3. Relevance
   4. Sufficiency

21. In determining the sufficiency of evidential matter, which of the following would not normally be a factor?

1. 1. Cost/benefit considerations
   2. The sampling technique used
   3. Audit risk
   4. Materiality of the account

22. Which of the following statements is not true regarding the competence of audit evidence?

1. 1. Relevance is enhanced by an effective information system.
   2. To be competent, evidence must be both valid and relevant.
   3. Validity is related to the qualityof the client’s information system.
   4. Relevance must always relate to audit objectives.

23. Which of the following statements concerning evidence is correct?

1. 1. Competent evidential matter supporting management’s assertions should be convincing

rather than merely persuasive.

1. 2. Effective internal control unlikely contributes to the reliability of the evidence created within the entity.
   3. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.
   4. A client’s accounting data cannot be considered a sufficient audit evidence to support the financial statements.

24. Which of the following statements is incorrect about audit evidence?

1. 1. Evidence obtained from an independent source outside the client organization is more reliable than that obtained from within.
   2. Documentary evidence is more reliable, when it is received by the auditor derectly from an independent third party.
   3. Documents the originate outside the company are considered more reliable than those that originate within the client’s organization.
   4. External evidence, such as communications from banks, is generally regarded as more reliable than the information obtained from the client.

25. Which of the following factors is most important in determining the competence of audit evidence?

1. 1. The reliability of the evidence in meeting the audit objective
   2. The objectivity of the auditor in gathering the evidence
   3. The quantity of the evidence obtained
   4. The independence of the source of evidence

26. Which of the following pertains to the reliability of audit evidence?

1. 1. The independence of the source of evidence
   2. The experience level of the auditor who obtains the evidence
   3. Whether the audit client uses a manual or computerized accounting system
   4. The quantity of the evidence obtained

27. Which of the following is not one of the characteristics of competent evidence?

1. 1. Independence of the source of the evidence
   2. Effectiveness of internal control structure under which the internal evidence has been developed
   3. Size of the sample
   4. Degree of objectivity of the auditor

28. Which of the following presumptions does not relate to the competence of audit evidence?

1. 1. The more effective the internal control is, the more assurance it provides about the accounting data and financial statements.

1. 2. An auditor’s opinion, to be economically useful, is formed within a reasonable time and

based on evidence obtained at a reasonable cost.

1. 3. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
   4. The independent auditor’s direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.

29. Which of the following statements relating to the competence of evidential matter is always true?

1. 1. Evidential matter gathered by an auditor from outside an enterprise is reliable.
   2. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory conditions.
   3. Oral representations made by management are not valid.
   4. Evidence gathered by auditors must be both valid and relevant to be considered competent.

30. Although the validity of evidential matter is dependent on the circumstances under which it is obtained, there are three general presumptions that have some usefulness. The situations given below indicate the relative reliability that a CPA has placed on two types of evidence obtained in different situations. Which of these is an exception to one of the general presumptions?

1. 1. The CPA places more reliance on the balance in the scrap sales account at Plant A, where the CPA has made limited tests of transactions because of effective controls,

than

at Plant B, where the CPA has made extensive tests of transactions because of ineffective controls.

1. 2. The CPA places more reliance on the CPAs computation of interest payable on outstanding bonds than on the amount confirmed by the trustee.
   3. The CPA places more reliance on the report of an expert on an inventory of precious gems than on the CPA’s physical observation of the gems.
   4. The CPA places more reliance on a schedule of insurance coverage obtained from the company’s insurance agent than on one prepared by the internal audit staff.

31. Which of the following would not be a factor in determining the competence of evidential matter?

1. 1. The source of the evidence
   2. The relevance of the evidence
   3. The cost of gathering the evidence
   4. Timeliness of the evidence

32. Which of the following statements is incorrect?

1. 1. There are many ways an auditor can accumulate evidence to meet the overall audit objectives.
   2. Sufficient competent evidence must be accumulated to meet the auditor’s professional

responsibility.

1. 3. The cost of accumulating the evidence should be minimized.
   4. Gathering evidence and mnimizing costs are equally important.

33. Each of the following might, by itself, form a valid basis for an auditor of deciding to omit a test except for the:

1. 1. Difficulty and expense involved in testing a particular item
   2. Assessment of control risk at a low level
   3. Inherent risk involved
   4. Relationship between the cost of obtaining evidence and its usefulness

34. The following statements were made in a discussion of audit evidence by two independent auditors. Which of these statements is not valid?

1. 1. “I am seldom convinced beyond all doubt about all aspects of the financial statements

being audited.”

1. 2. “I would not undertake that procedure because at best the results would only be persuasive and I’m looking for convincing evidence.”
   3. “I evaluate the degree of risk involved in deciding the kind of evidence I will gather.”
   4. “I evaluate the usefulness of the evidence I can obtain against the cost to obtain it.”

35. Management assertions that are embodied in the financial statements are

1. 1. directly related to standards on auditing.
   2. directly related to financial reporting framework.
   3. indirectly related to standards on auditing.
   4. indirectly related to financial reporting framework.

36. Management assertions are

1. 1. stated in the footnotes to the financial statements.
   2. implied or expressed representations about the financial statements.
   3. explicit representations about the financial statements.
   4. provided to the auditor in the assertions letter, but are not disclosed in the financial statements.

37. As used in auditing, which of the following statements best describes “assertions”?

1. 1. Assertions are the representations of management as to the reliability of the infromation

system.

1. 2. Assetions are the auditor’s findings to be communicated in his audit report.
   3. Assertions are the representations of management as to the fairness of presentation of

the financial statements.

1. 4. Assertions are found only in the notes to the financial statements.

38. Financial statement assertions include all of the following except:

1. 1. Occurrence

1. 2. Presentation and disclosure
   3. Consistency and comparability
   4. Completeness

39. The audit objective “that all transactions and accounts that should be presented in the financial statements are included” is related to which assertion?

1. 1. Occurrence
   2. Rights and obligations
   3. Completeness
   4. Presentation and disclosure

40. The audit objective “that all footnotes have been included in the financial statements” is related most closely to which assertion?

1. 1. Existence or occurrence
   2. Rights and obligations
   3. Completeness
   4. Presentation and disclosure

41. Which of the following is a management assertion that relates to the valuation or allocation of fixed assets?

1. 1. Fixed assets are properly classified as noncurrent assets
   2. Fixed asset depreciation has been correctly calculated
   3. The client has title to the machinery and equipment
   4. Lienor encumbrance on fixed assets is appropriately disclosed in the notes to the financial statements

42. Which of the following statements about the existence and completeness objectives is incorrect?

1. 1. The existence and completeness objectives emphasize opposite audit concerns.
   2. Existence deals with overstatements and completeness deals with understatements.
   3. Existence deals with understatements and completeness deals with overstatements.
   4. The completeness objective deals with unrecorded transactions.

43. If reported sales for 2009 erroneously include sales that occurred in 2010, the assertion violated on the 2009 statements would be

1. 1. occurrence
   2. completeness
   3. presentation and disclosure
   4. rights and obligation

44. The complteness assertion would be violated if:

1. 1. fictitious sales transactions were included in accounts receivable.
   2. unbilled shipments had occurred during the period.
   3. the balance of accounts payable was overstated.
   4. disclosure in the statements of pledged receivable was inadequate.

45. The rights and obligations assertion applies to

1. 1. current liability items only.
   2. balance sheet items only.
   3. both income statement and balance sheet items.
   4. assets that are not owned by the company.

46. Which of the following is incorrect?

1. 1. It would be a violation of the completeness assertion if management would record a sale that did not take place.
   2. The completeness assertion deals with matters opposite from those of the existence/occurrence assertion.
   3. The completeness assertion is concerned with the possibility of omitting items from the

financial statements that should have been included.

1. 4. The existence/occurrence assertion is concerned with inclusion of amounts that should

not have been included.

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

1. 1. To detect errors or irregularities
   2. To comply with financial reporting standards
   3. To gather corroborative evidence
   4. To verify the accuracy of account balances

48. Physical examination of assets is not a sufficient form of evidence when the auditor wants to determine the

1. 1. existence of the asset
   2. quantity and description of the asset
   3. condition or quality of the asset
   4. ownership of the asset

49. Physical examination is not an objective means of ascertaining an asset’s

1. 1. quantity
   2. description
   3. condition or quality
   4. ownership

50. Which one of the following statements is not true? “The evidence gathering technique of observation

1. 1. is useful in most parts of the audit.”
   2. is rarely sufficient by itself.”
   3. is limited to what the auditor sees.”
   4. requires the gathering of corroborative evidence.”

51. A letter to the auditor in response to an inquiry is an example of

1. 1. physical evidence
   2. confirmation evidence
   3. documentary evidence
   4. analytical evidence

52. A CPA, who is performing an independent audit, would most likely use recalculation as a substantive test for which of the following expense-related accounts?

1. 1. Purchase of supplies
   2. Interest expense
   3. Advertising expense
   4. Repairs and maintenance expense

53. “Evaluation of financial information made by a study of plausible relationships among financial and nonfinancial data involving comparisons of recorded amounts to expectations developed by the auditor” refers to:

1. 1. auditing
   2. tests of balances
   3. tests of transactions
   4. analytical procedures

54. External auditors often confirm assertions contained in the organization’s financial statements and accounting records with third parties. Which of the following best explains why confirmation produces an evidence of high quality?

1. 1. Written assertions from knowledgeable third parties provide sufficient evidence to achieve most audit objectives.
   2. Confirmation by knowledgeable third parties is usually the most relevant evidence available.
   3. Confirmation by knowledgeable third parties is usually the least costly evidence to obtain.
   4. Confirmation by knowledgeable third parties is highly competent because of its independent source.

55. When comparing the reliability of external versus internal documents, the external documents are generally considered

1. 1. more reliable
   2. less reliable
   3. equally reliable
   4. unreliable

56. Traditionally, confirmations are used to verify

1. 1. individual transactions between organizations, such as sales transactions
   2. fixed asset addition
   3. bank balances and accounts receivable
   4. any of the given responses

57. Analytical procedures are so important that they are required during

1. 1. planning and completion phases
   2. planning and testing phases
   3. testing and completion phases
   4. planning, testing, and completion phases

58. Analytical procedures used in planning an audit should focus on

1. 1. evaluating the adequacy of evidence gathered concerning unusual balances
   2. testing individual account balances that depend on accounting estimates
   3. enhancing the auditor’s understanding of the client’s business
   4. Identifying material weaknesses in internal control

59. Analytical procedures are

1. 1. substantive tests designed to evaluate a system of internsl control.
   2. tests of controls designed to evaluate the validity of management’s representation letter.
   3. substantive tests designed to evaluate the reasonableness of financial information.
   4. tests of controls designed to evaluate the reasonableness of financial information.

60. Upon completion of all the necessary audit procedures, the auditor should combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on

1. Philippine Standards on Auditing.
2. Philippine financial reporting standards.
3. the auditor’s professional judgment.
4. the management’s representation letter.

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

1. Relationships among financial statement elements
2. Relationships between financial and relevant nonfinancial data
3. Comparison of financial data with anticipated results (e.g. budgets and forecasts)
4. Comparison of current year financial data with projections for next year’s financial resorts.

62. The objective of performing analytical procedures in planning and audit is to identify the existence of

1. unusual transactions and events,
2. noncompliance to laws that went undeleted because of internal control weaknesses.
3. related party transactions.
4. recorded transactions that were not properly authorized.

63. A major benefit provided by computerized analytical procedures is

1. the ease of doing the calculations.
2. the ease of updating the calculations.
3. the ease of correcting math calculations.
4. the ability to push the work down to lower levels of the audit staff to do the analysis.

64. When performing analytical procedures, an auditor observes that operating income has declined significantly between the preceding year and the current year, the auditor should

1. require that the decline be disclosed in the financial statements.
2. consider the possibility that the financial statements may be materially misstated.
3. inform the management that a qualified opinion on the financial statements will be necessary.
4. determine the management’s responsibility for the decline and discuss the issue with the audit committee.

65. Which of the following is ordinarily designed to detect possible material misstatements in the financial statements?

1. Tests of controls
2. Computer controls
3. Analytical procedures
4. Post audit working paper review

66. Which of the following statements is not correct?

1. Analytical procedures use comparisons and relationships to determine which account balances are in error.
2. For certain immaterial accounts, analytical procedures may be the only evidence needed.
3. In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable.
4. Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively.

67. Which of the following statements regarding analytical procedures is not correct?

1. The definition of analytical tests places of the emphasis on whether the client’s recorded data comply with PFRS.
2. Analytical procedures are required on all audits.
3. Analytical procedures are required on all review service engagements.
4. For small accounts with small balances, analytical procedures alone may be sufficient evidence.

68. An aspect of analytical procedure is referred to as “attention directing” when it highlights

1. errors.
2. irregularities.
3. areas of improvements.
4. areas that need more detailed procedures.

69. When an analytical procedure reveals no unusual fluctuations, the implication is that

1. there are no material errors or irregularities.
2. there are no material errors.
3. there are no material irregularities.
4. the possibility of a material error or irregularity is minimized.

70. Which of the following is not one of the major types of analytical procedures?

1. Compare client’s financial information with industry averages
2. Compare client’s financial information with prior year
3. Compare client’s actual data with budget
4. Compare client’s data with SEC averages

71. Analytical procedures are usually

1. less expensive to perform than tests of details.
2. more expensive to perform than tests of details.
3. just as expensive as tests of details.
4. none of them is necessarily correct.