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21
24) When the auditor scans the sales journal looking for large and unusual transactions, he is
gathering what type of evidence?
A) inspection
B) recalculation
C) physical examination
D) analytical procedures
25) You are auditing the company's purchasing process for goods and services. You are
primarily concerned with the company not recording all purchase transactions. Which audit
procedure below would be the most effective audit procedure in this case?
A) vouching from the accounts payable account to the vendor invoices
B) tracing vendor invoices to recorded amounts in the accounts payable account
C) confirmation accounts payable recorded amounts
D) reconciling the accounts payable subsidiary ledger to the accounts payable account
26) Which of the following discoveries through the use of analytical procedures would most
likely indicate a relatively high risk of financial failure?
A) a decline in gross margin percentages
B) an increase in the balance in fixed assets
C) an increase in the ratio of allowance for uncollectible accounts to gross accounts receivable,
while at the same time accounts receivable turnover also decreased
D) a higher than normal ratio of long-term debt to net worth as well as a lower than average ratio
of profits to total assets
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27) Which of the following statements is correct regarding the costs involved in obtaining
evidence?
A)
Physical examination is usually the
least expensive type of audit
evidence
Cost of obtaining evidence may be a
factor in deciding whether to
obtain that evidence
Yes
Yes
B)
Physical examination is usually the
least expensive type of audit
evidence
Cost of obtaining evidence may be a
factor in deciding whether to
obtain that evidence
No
No
C)
Physical examination is usually the
least expensive type of audit
evidence
Cost of obtaining evidence may be a
factor in deciding whether to
obtain that evidence
Yes
No
D)
Physical examination is usually the
least expensive type of audit
evidence
Cost of obtaining evidence may be a
factor in deciding whether to
obtain that evidence
No
Yes
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28) One purpose of performing analytical procedures in the planning phase of an audit is to
assess the client's financial condition. Explain how the assessment of a client's financial
condition can affect the auditor's decisions concerning evidence accumulation in later phases of
the audit.
24
29) Define the following terms commonly used in audit procedures:
1. examine
2. scan
3. compute
4. foot
5. compare
6. count
7. vouch
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30) Below are 12 audit procedures. Classify each procedure according to the following types of
audit evidence: (1) physical examination, (2) confirmation, (3) documentation, (4) observation,
(5) inquiry of the client, (6) reperformance, and (7) analytical procedure.
Type of Evidence
Audit Procedures
1. Watch client employees count inventory to determine
whether company procedures are being followed.
2. Count inventory items and record the amount in the audit
files.
3. Trace postings from the sales journal to the general
ledger accounts.
4. Calculate the ratio of cost of goods sold to sales as a test
of overall reasonableness of gross margin relative to the
preceding year.
5. Obtain information about the client's internal controls by
asking questions of client personnel.
6. Trace column totals from the cash disbursements journal
to the general ledger.
7. Examine a piece of equipment to make sure a recent
purchase of equipment was actually received and is in
operation.
8. Review the total of repairs and maintenance for each
month to determine whether any month's total was
unusually large.
9. Compare vendor names and amounts on purchase
invoices with entries in the purchases journal.
10. Foot entries in the sales journal to determine whether
they were correctly totaled by the client.
11. Make a surprise count of petty cash to verify that the
amount of the petty cash fund is intact.
12. Obtain a written statement from the client's bank stating
the client's year-end balance on deposit.
31) Match nine of the terms (a-k) with the definitions provided below (1-9):
a. foot
b. compute
c. scan
d. inquire
e. count
f. trace
g. reperform
h. read
i. examine
j. observe
k. compare
________ 1. a calculation done by the auditor independent of the client
________ 2. addition of a column of numbers to determine if the total is the same as the client's
________ 3. a comparison of information in two different locations
________ 4. a use of the senses to assess certain activities
________ 5. following details of transactions from original documents to journals
________ 6. a less detailed examination of a document or record to determine if there is
something unusual warranting further investigation
________ 7. obtaining information from the client in response to specific questions
________ 8. a determination of assets on hand at a given time
________ 9. an examination of written information to determine facts pertinent to the audit
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32) Match five of the terms (a-h) with the definitions provided below (1-5):
a. audit documentation
b. audit procedures
c. audit objectives
d. analytical procedures
e. budgets
f. reliability of evidence
g. sufficiency of evidence
h. persuasiveness of evidence
________ 1. use of comparisons and relationships to assess the reasonableness of account
balances
________ 2. detailed instructions for the collection of a type of audit evidence
________ 3. the degree to which evidence can be considered believable or trustworthy
________ 4. contains all the information that the auditor considers necessary to conduct an
adequate audit and to provide support for the audit report
________ 5. this is determined by the amount of evidence obtained
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33) Below are 10 documents typically examined during an audit. Classify each document as
either internal or external.
Type of Document
Documents
1. canceled checks for payments of accounts payable
2. payroll time cards
3. duplicate sales invoices
4. vendors' invoices
5. bank statements
6. minutes of the board of directors' meetings
7. signed lease agreements
8. notes receivable
9. subsidiary accounts receivable records
10. remittance advices
34) Distinguish between internal documentation and external documentation as types of audit
evidence. Give two examples of each. Which type is considered more reliable?
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35) Confirmations are among the most expensive type of evidence to obtain.
36) Whenever practical and reasonable, the confirmation of accounts receivable is required of
CPAs.
37) Inquiries of clients and recalculations normally have a low cost associated with them.
38) When analytical procedures reveal unusual fluctuations in an account balance, the auditor
will probably perform fewer tests of details for that account and increase the tests of controls
related to the account.
39) The type of audit evidence known as inquiry requires the auditor to obtain oral or written
information from the client in response to questions.
40) Auditor judgment is the primary determinant in determining the amount of evidence
gathered.
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41) Analytical procedures must be used in the planning and completion phases of the audit.
42) Confirmations are ordinarily used to verify account balances, but may be used to verify
transactions.
43) Accounts receivable confirmations must be controlled by the client from the time they are
prepared until the time they are returned to the auditor.
44) Cost is never an adequate justification for omitting a necessary procedure or not gathering an
adequate sample size.
45) When the auditor foots the journals and the subsidiary ledgers, it is considered
reperformance.
46) Inspection consists of looking at a process or procedure being performed by others.
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47) A canceled check written by the client, made payable to a local supplier and drawn on the
client's bank account is one type of internal document.
7.5 Learning Objective 7-5
1) Analytical procedures are so important that they are required during the
A) planning and test of control phases.
B) planning and completion phases.
C) test of control and completion phases.
D) planning, test of control, and completion phases.
2) A benefit obtained from using industry averages is that it provides a(n)
A) benchmark to compare the company's results.
B) indication where errors exist in the statements.
C) benchmark to be used in evaluating a client's budgets.
D) comparison of "what is" with "what should be."
3) Industry comparisons can be used as
A) an aid to understanding the client's business.
B) an indicator of errors.
C) an indicator of fraud.
D) an aid to internal controls.
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4) Analytical procedures
A) performed during the audit planning phase generally use aggregate data.
B) are never performed during the testing phase of an audit.
C) are declining in importance as a type of audit evidence.
D) performed during the audit planning stage help the auditor take a final objective look at the
audited financial statements.
5) Analytical procedures performed during the planning phase of the audit
A) are used as a substantive test in support of account balances.
B) are used to assist in determining the nature, extent, and timing of audit procedures
C) are used to detect fraud.
D) are mandatory only for public companies.
6) Analytical procedures performed during the completion stage of the audit
A) help the auditor understand the client's business and industry.
B) are typically performed by a senior partner with extensive knowledge of the client's business.
C) help the auditor identify significant matters requiring special attention later in the
engagement.
D) all of the above
7) Substantive analytical procedures performed during the testing phase of the audit
A) are required under generally accepted auditing standards.
B) are always done independently from other audit procedures.
C) are used as a substantive test in support of account balances.
D) do not need to be documented in the working papers.
