8) Auditors compare client data with
A) industry data.
B) client-determined expected results.
C) similar prior-period data.
D) all of the above.
9) Which of the following is not a weakness of using industry averages for auditing?
A) The industry data are broad averages.
B) Different companies follow different accounting methods.
C) They can be helpful in identifying potential misstatements.
D) All of the above are weaknesses.
10) When comparing client data with similar prior-period data,
A) if there has been no significant changes in the client’s operations in the current year, much of
the detail making up the totals in the financial statements should remain unchanged.
B) comparison of details must take the form of details over time.
C) comparing totals with previous years considers growth in the business activity.
D) percent relationships fail to consider declines in the business activity.
11) Which of the following is accurate regarding the comparison of client data?
A) Since budgets are only projections, auditors can ignore the differences between budgeted and
actual results.
B) One approach to overcome the limitations of industry averages is to compare the client to one
or more benchmark firms in the industry.
C) It is impractical to relate one account balance to another balance sheet or income statement
account.
D) it is extremely difficult to get industry data for comparative purposes.
12) State the three phases of the audit where analytical procedures can be performed and
describe the specific procedures performed in each phase.
13) Substantive analytical procedures performed in all phases of the audit generally use
aggregate data to help understand where misstatements are more likely to occur.
14) There has been an increased emphasis on the use of analytical procedures during an audit.
15) The usefulness of analytical procedures as audit evidence depends significantly on
appropriate comparison data.
16) The most important benefits of industry comparisons are to aid in understanding the client’s
business and as an indication of the likelihood of financial failure.
17) One substantive analytical procedure involves the auditor calculating an expected balance for
an account and then comparing it to the actual account balance.
7.6 Learning Objective 7-6
1) Financial ratios
A) are used during the planning and final review phases of the audit.
B) can be linked to the trial balance so that calculations are automatically updated as adjustments
are made.
C) should be compared to previous years and industry averages.
D) all of the above
2) Which of the following ratios is not a measure of a company’s short-term debt paying ability?
A) accounts receivable turnover
B) cash ratio
C) current ratio
D) quick ratio
3) Which financial ratio is computed by dividing current assets by current liabilities?
A) quick ratio
B) debt to equity
C) accounts receivable turnover
D) current ratio
4) Which account is used in the current ratio but not the quick ratio?
A) marketable securities
B) accounts payable
C) accounts receivable
D) inventory
5) To determine accounts receivable turnover, net sales is divided by
A) beginning net accounts receivable.
B) average gross receivables.
C) cost of goods sold.
D) 365 days.
6) A company’s long-term solvency
A) can be measured by the gross profit percentage.
B) depends on the success of its operations and on its ability to raise capital for expansion.
C) can be measured by the days to collect receivables ratio.
D) depends on its ability to generate cash for the payment of dividends.
7) Which of the following is an accurate statement regarding a company’s ability to meet its
long-term debt obligations?
A) If the debt-to-equity ratio is too high, it may indicate that the company has used up its
borrowing capacity.
B) If the debt-to-equity ratio is too high, it may mean that available leverage is not being used to
the owners’ benefit.
C) The times interest earned ratio indicates if a company can make its principal and interest
payments.
D) The key ratios that are used to measure a long-term solvency are debt to equity, return on
assets, and times interest earned.
8) Which ratio do auditors find useful for assessing misstatements in sales, cost of goods sold,
accounts receivable, and inventory?
A) earnings per share
B) profit margin
C) gross profit percent
D) current ratio
9) Which ratio is computed by dividing operating income by net sales?
A) gross profit percent
B) profit margin
C) return on sales
D) return on assets
10) Auditors use trends in the accounts receivable turnover ratio to assess the reasonableness of
the company’s credit policies.
11) Auditors use trends in the inventory turnover ratio to identify potential inventory
obsolescence.
12) The most widely used profitability ratio is the gross profit percent.
7.7 Learning Objective 7-7
1) Which of the following best describes one of the primary objectives of audit documentation?
A) defend against claims of a deficient audit
B) provide a basis for reviewing the work of subordinates
C) provide reasonable assurance that the audit was conducted in accordance with auditing
standards
D) provide additional support of recorded amounts to the client
2) Audit documents
A) are kept by the client for easy reference for their accounting staff.
B) should be considered as a substitute for the clients accounting records.
C) are designed to facilitate the review and supervision of the work performed by the audit team
by a reviewing partner.
D) prepared during the engagement are the property of the client once the audit bill is paid.
3) Audit documentation
A) should identify the items tested when the audit procedures involve sampling of transactions or
balances.
B) does not aid in the preparation of the tax return since accounting and tax rules differ.
C) is another term for the audit program.
D) should not be given to anyone outside the audit firm, even if a subpoena has been issued.
4) Audit documentation of the evidence gathered by the auditor should meet which of the
following criteria?
A) Workpapers are prepared in sufficient detail so that they can be given to the client for future
reference.
B) The content is sufficient to provide support for the auditor’s opinion, including the auditor’s
representation as to compliance with auditing standards.
C) Audit evidence is principally gathered to determine if the client’s financial statements, as
prepared by management, can be relied upon to make managerial decisions about the firm.
D) Audit evidence as displayed in the workpapers is primarily performed to protect the auditing
firm in the case of a lawsuit by investors.
5) Audit documents are the joint property of the auditor and the audit client.
6) Auditing standards require that records for audits of private companies be retained for a
minimum of seven years.
7) The SEC requires the auditors of public companies to retain e-mail correspondence related to
the audit.
7.8 Learning Objective 7-8
1) When preparing and organizing audit files,
A) the rules established by the SEC and PCAOB must be followed.
B) a lead schedule contains the detailed accounts from the general ledger making up the line item
on the trial balance.
C) a working trial balance is considered part of the permanent file.
D) the audit program is not part of the audit files.
2) Audit documentation should possess certain characteristics. Which of the following is true
regarding those characteristics?
A)
Audit documentation should be
indexed and cross-referenced
Audit documentation should be
organized to benefit the client’s staff
Yes
Yes
B)
Audit documentation should be
indexed and cross-referenced
Audit documentation should be
organized to benefit the client’s staff
No
No
C)
Audit documentation should be
indexed and cross-referenced
Audit documentation should be
organized to benefit the client’s staff
Yes
No
D)
Audit documentation should be
indexed and cross-referenced
Audit documentation should be
organized to benefit the client’s staff
No
Yes
3) The permanent audit file would usually include the
A) client’s working trial balance.
B) summary of the risk assessment procedures performed.
C) organizational chart of the company’s employees.
D) summary of the auditors test of controls for the current years audit.
4) The permanent files included as part of audit documentation do not normally include
A) a copy of the current and prior years’ audit programs.
B) copies of articles of incorporation, bylaws and contracts.
C) information related to the understanding of internal control.
D) results of analytical procedures from prior years.
5) Supporting schedules
A) must be prepared by the auditor.
B) make up the largest portion of audit documentation.
C) must consist of either reconciliation of amounts or substantive analytical procedures.
D) all of the above
6) What type of supporting schedule is designed to show detailed tests performed, does not tie in
to the general ledger, but must state a positive or negative conclusion about the objective of the
test?
A) outside documentation
B) reconciliation of amounts
C) examination of supporting documents
D) substantive analytical procedures
7) A(n) ________ is a supporting schedule that supports a specific amount and is normally
expected to tie the amount recorded in the client’s records to another source of information.
A) reconciliation of amounts
B) analysis
C) summary of procedures
D) informational document
8) Which type of supporting schedule is designed to show the activity in a general ledger account
during the entire period under audit?
A) trial balance
B) reconciliation of amounts
C) summary of procedures
D) analysis
9) When determining sufficient and appropriate audit evidence in order to form an opinion on the
client’s financial statements the auditor compiles audit documentation to support the opinion. The
largest portion of audit documentation will include detailed supporting schedules prepared by the
client or the auditor in support of specific accounts on the financial statements. Two types of
supporting schedules are analysis and reconciliation of amounts. Discuss those two schedules
and give an example for each schedule.
10) The basis for preparing financial statements for companies is the general ledger. As soon as
possible the auditor obtains the general ledger accounts of the client and prepares a working trial
balance. Discuss the audit documentation in the current file that relates to the working trial
balance. Include a description of lead and support schedules in your answer.
11) Auditors use tick marks, which are symbols adjacent to the detail on the body of the
schedule.
12) An example of a supporting schedule is a reconciliation of amounts, which consists of the
details that make up a year-end balance.
13) Since confirmation replies and copies of client agreements are not considered schedules in
the usual sense, they are not indexed and filed.
14) An auditor can use engagement management software to facilitate tracking audit progress.