Far Eastern University

ACCOUNTING 1.1

Chapter 6: A FRAMEWORK FOR AUDIT EVIDENCE (IAS 500)

Audit Evidence/PSA 500(rev)-Audit Evidence

1)Which statement is incorrect regarding audit evidence?

1. Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based.
2. Audit evidence includes the information contained in the accounting records underlying the financial statements and other information.
3. Audit evidence is cumulative in nature.
4. Auditors are expected to address all information that may exist.

2. Accounting records least likely include

1. The records of initial entries and supporting records.
2. The general and subsidiary ledgers.
3. Work sheets and spreadsheets supporting cost allocations.
4. Comparable data about competitors (benchmarking)

3. Other information that the auditor may use as audit evidence least likely includes
   1. Minutes of meetings.
   2. Confirmations from third parties.
   3. Information obtained by the auditor from such audit procedures as inquiry, observation, and inspection.
   4. Adjustments to the financial statements that are not reflected in formal journal entries.

4. Which statement is correct regarding the sufficiency and appropriateness of audit evidence?
   1. Sufficiency is the measure of the quality of audit evidence.
   2. Appropriateness is the measure of the quantity of audit evidence; that is, its relevance and its reliability in providing support for, or detecting misstatements in, the classes of transactions, account balances, and disclosures and related assertions.

1. 3. The quantity of audit evidence needed is affected by the risk of misstatement (the greater the risk, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be required).
   4. Merely obtaining more audit evidence may compensate for its poor quality

5. Which of the following statements is incorrect regarding relevance of audit evidence?
   1. A given set of audit procedures may provide audit evidence that is relevant to certain assertions, but not others.
   2. The auditor often obtains audit evidence from different sources or of a different nature that is relevant to the same assertion.
   3. Obtaining audit evidence relating to a particular assertion is a substitute for obtaining audit evidence regarding another assertion.
   4. None of the above.

6. Which of the following generalizations in assessing the reliability of audit evidence is incorrect?

1. Audit evidence is more reliable when it is obtained from independent sources outside the entity.
2. Audit evidence that is generated internally is not affected by the effectiveness of the controls imposed by the entity.
3. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference.
4. Audit evidence is more reliable when it exists in documentary form.

7. Which statement is incorrect regarding audit evidence?
   1. The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.
   2. Accounting records alone do not provide sufficient audit evidence. Page 2 of 6 AT-5913
   3. The auditor uses professional judgment and exercises professional skepticism in evaluating the quantity and quality of audit evidence, and thus its sufficiency and appropriateness, to support the audit opinion.
   4. The matter of difficulty or expense involved is a valid basis for omitting an audit procedure for which there is no alternative

8. The auditor obtains audit evidence to draw reasonable conclusions on which to base the audit opinion by performing audit procedures to:

1. Obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels.
2. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.
3. Detect material misstatements at the assertion level.
4. All of the above.

9. The competence of evidence available to an auditor is least likely to be affected by
   1. The relevance of such evidence to the financial statement assertion being investigated.
   2. The relationship of the preparer of such evidence to the entity being audited.
   3. The timeliness of such audit evidence.
   4. The sampling method employed by the auditor to obtain a sample of such evidence

10. Which of the following procedures would provide the most reliable audit evidence?
    1. Inquiries of the client’s internal audit staff held in private.
    2. Inspection of prenumbered client purchase orders filed in the vouchers payable department.
    3. Analytical procedures performed by the auditor on the entity’s trial balance.
    4. Inspection of bank statements obtained directly from the client’s financial institution.

11. The most reliable form of documentary evidence are those documents that are
    1. Prenumbered
    2. Internally generated
    3. Easily duplicated
    4. Authorized by a responsible official

12. Which of the following presumptions does not relate to the competence of audit evidence?
    1. The more effective internal control, the more assurance it provides about the accounting data and financial statements.
    2. An auditor’s opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.
    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.

13. You have been assigned to audit the maintenance department of an organization. Which of the following is likely to produce the least reliable audit evidence?

1. Notes on discussions with mechanics in the maintenance operation.
2. A schedule comparing actual maintenance expenses with budgeted expenses and those of the prior period and disclosing important differences.
3. A narrative covering review of user reports on maintenance service.
4. An analysis of changes in certain maintenance department ratios

14. This consists of checking the mathematical accuracy of documents or records.
    1. Reperformance
    2. Recalculation
    3. Confirmation
    4. Inspection

15. Which of the following audit procedures is used extensively throughout the audit and often is complementary to performing other audit procedures?
    1. Inspection
    2. Observation
    3. Inquiry
    4. Confirmation

16. Which statement is incorrect regarding Inquiry?
    1. Responses to inquiries may provide the auditor with information not previously possessed or with corroborative audit evidence.
    2. Responses to inquiries might provide information that differs significantly from other information that the auditor has obtained.
    3. Responses to inquiries may provide a basis for the auditor to modify or perform additional audit procedures.
    4. Inquiry alone is sufficient to test the operating effectiveness of controls.

17. Assertion about account balances at period end which means assets, liabilities, and equity interests are included in the financial statements at appropriate amounts is
    1. Existence
    2. Rights and obligations
    3. Completeness
    4. Valuation and allocation

18. The auditor is not always required to perform
    1. Risk assessment procedures.
    2. Test of controls.
    3. Substantive procedures.
    4. Both a and c

19. Why does an auditor document audit evidence?
    1. To comply with the requirements of gathering all available evidence.
    2. To provide client reference for all account balances and correcting entries.
    3. To support audit opinion and to provide evidence that the audit was carried out in accordance with PSA.
    4. To document all records of misstatements noted in the financial statements.