Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 7 Audit Evidence
7.1 Learning Objective 7-1
1) Which of the following is an accurate statement regarding audit evidence?
A) Responses to the auditor’s questions by client employees is considered highly persuasive
evidence.
B) Audit evidence should provide an absolute level of assurance.
C) The auditor uses evidence to determine whether the statements are fairly presented.
D) All evidence must be highly persuasive.
2) All evidence must have the same level of persuasiveness.
3) Auditors use evidence to help them draw conclusions.
7.2 Learning Objective 7-2
1) Auditors must make decisions regarding what evidence to gather and how much to
accumulate. Which of the following is a decision that must be made by auditors related to
evidence?
A)
Sample size
Timing of audit procedures
Yes
Yes
B)
Sample size
Timing of audit procedures
No
No
C)
Sample size
Timing of audit procedures
Yes
No
D)
Sample size
Timing of audit procedures
No
Yes
2) When can audit procedures be performed?
A)
Prior to the fiscal year-end
of the client
Subsequent to the fiscal year-
end of the client
Yes
Yes
B)
Prior to the fiscal year-end
of the client
Subsequent to the fiscal year-
end of the client
No
No
C)
Prior to the fiscal year-end
of the client
Subsequent to the fiscal year-
end of the client
Yes
No
D)
Prior to the fiscal year-end
of the client
Subsequent to the fiscal year-
end of the client
No
Yes
3) A(n) ________ is the detailed instruction that explains the audit evidence to be obtained
during the audit.
A) audit objective
B) audit procedure
C) audit assertion
D) audit program
4) Which of the following is not one of the four decisions about what evidence to gather and
how much of it to accumulate?
A) which audit procedures to use
B) which accounts must agree to the general ledger
C) when to perform the procedures
D) what sample size to select for a given procedure
5) When making audit evidence decisions,
A) the auditor decides which items in the population to test before determining the sample size.
B) the sample size for any given procedure must remain constant from audit to audit.
C) audit engagement software can assist the auditor in making evidence decisions.
D) the auditor is required to use the sample sizes that are determined by the PCAOB.
6) An audit program is the list of audit procedures for an audit area or an entire audit.
7.3 Learning Objective 7-3
1) Audit evidence has two primary qualities for the auditor; relevance and reliability. Given the
choices below, which provides the auditor with the most reliable audit evidence?
A) general ledger account balances
B) confirmation of accounts receivable balance received from a customer
C) internal memo explaining the issuance of a credit memo
D) copy of month-end adjusting entries
2) Which of the following is not a characteristic of the reliability of evidence?
A) effectiveness of client internal controls
B) education of auditor
C) independence of information provider
D) timeliness
3) The auditor must gather sufficient and appropriate evidence during the course of the audit.
Sufficient evidence must
A) be well documented and cross-referenced in the audit documents.
B) be based on sources that are external to company.
C) provide evidence that prove or disprove an audit objective/assertion.
D) be persuasive enough to enable the auditor to issue an audit report.
4) Audit evidence obtained directly by the auditor will not be reliable if
A) the auditor lacks the competence to evaluate the evidence.
B) it is provided by the client’s attorney.
C) the client denies its veracity.
D) it is impossible for the auditor to obtain additional corroboratory evidence.
5) Appropriateness of evidence is a measure of the
A) quantity of evidence.
B) quality of evidence.
C) sufficiency of evidence.
D) meaning of evidence.
6) Which of the following statements regarding the relevance of evidence is correct?
A) To be relevant, evidence must pertain to the audit objective of the evidence.
B) To be relevant, evidence must be persuasive.
C) To be relevant, evidence must relate to multiple audit objectives.
D) To be relevant, evidence must be derived from a system including effective internal controls.
7) Two determinants of the persuasiveness of evidence are
A) competence and sufficiency.
B) relevance and reliability.
C) appropriateness and sufficiency.
D) independence and effectiveness.
8) The two characteristics of the appropriateness of evidence are
A) relevance and timeliness.
B) relevance and accuracy.
C) relevance and reliability.
D) reliability and accuracy.
9) Which of the following forms of evidence would be least persuasive in forming the auditor’s
opinion about marketable securities and other investments held by the company?
A) responses to auditor’s questions by the president and controller regarding the investments
account
B) correspondence with a stockbroker regarding the quantity of client’s investments held in street
name by the broker
C) minutes of the board of directors authorizing the purchase of stock as an investment
D) the auditor’s count of marketable securities
10) Which of the following statements is not correct?
A) It is possible to vary the sample size from one unit to 100% of the items in the population.
B) Cost is an adequate justification for not gathering an adequate sample size.
C) The decision of how many items to test must be made by the auditor for each audit procedure.
D) The sample size for any given procedure is likely to vary from audit to audit.
11) For audit evidence to be compelling to the auditor it must be sufficient and appropriate.
Which statement below is not correct regarding the appropriateness of audit evidence?
A) The more effective the internal control system, the more assurance it provides the auditor
about the reliability of financial reporting by the client.
B) An auditor’s opinion, to be economically useful and profitable to the auditing firm needs to be
formed within a reasonable time and based on evidence obtained that assures profits for the
auditing firm.
C) Evidence obtained from independent sources outside the entity is generally more reliable than
evidence secured solely within the entity.
D) The independent auditor’s direct personal knowledge, obtained through inquiry, observation
and inspection, is generally more persuasive than information obtained indirectly.
12) Which of the following is a correct statement regarding audit evidence?
A) A large sample of evidence provided by an independent party is always considered persuasive
evidence.
B) A small sample of only one or two pieces of highly appropriate evidence is always considered
persuasive evidence.
C) The auditor must obtain a sufficient amount of relevant and reliable evidence to form an
opinion on the fairness of the financial statements.
D) Evidence is usually more reliable for balance sheet accounts when it is obtained within six
months of the balance sheet date.
13) Which of the following is the most objective type of evidence?
A) a letter written by the client’s attorney discussing the likely outcome of outstanding lawsuits
B) the physical count of securities and cash
C) inquiries of the credit manager about the collectability of noncurrent accounts receivable
D) observation of cobwebs on some inventory bins
14) Which items affect the sufficiency of evidence when choosing a sample?
A)
Selecting items with a high
likelihood of misstatement
The randomness of the items
selected
Yes
Yes
B)
Selecting items with a high
likelihood of misstatement
The randomness of the items
selected
No
No
C)
Selecting items with a high
likelihood of misstatement
The randomness of the items
selected
Yes
No
D)
Selecting items with a high
likelihood of misstatement
The randomness of the items
selected
No
Yes
15) Determine which of the following is most correct statement regarding the reliability of audit
evidence.
A) Information that is indirectly obtained from external sources is the most reliable audit
evidence.
B) Reliability of audit evidence is dependent upon the evidence being subjective.
C) Reliability of evidence refers to the amount of evidence obtained.
D) If internal controls are effective, evidence obtained is more reliable than when the controls are
not effective.
16) Evidence is generally considered appropriate when
A) it has been obtained by random selection.
B) there is enough of it to afford a reasonable basis for an opinion on financial statements.
C) it is relevant to the audit objective being tested.
D) it consists of written statements made by managers of the company under audit.
17) Given the economic and time constraints in which auditors can collect evidence regarding
management assertions about the financial statements, the auditor normally gathers evidence that
is
A) irrefutable.
B) conclusive.
C) persuasive.
D) completely convincing.
18) Which of the following statements is not a correct statement regarding audit evidence?
A) Evidence obtained from an independent source outside the client organization is more reliable
than that obtained from within.
B) Documentary evidence is more reliable when it is received by the auditor indirectly rather
than directly.
C) Documents that originate outside the company are considered more reliable than those that
originate within the client’s organization.
D) External evidence, such as communications from banks, is generally regarded as more
reliable than answers obtained from inquiries of the client.
19) Evidence is usually more persuasive for balance sheet accounts when it is obtained
A) as close to the balance sheet date as possible.
B) only from transactions occurring on the balance sheet date.
C) from various times throughout the client’s year.
D) from the time period when transactions in that account were most numerous during the fiscal
period.
20) Which of the following statements is true?
A) Evidence must be relevant to all of the audit objectives.
B) If evidence is subjective, it cannot be reliable.
C) Evidence obtained directly by the auditor may not be reliable if the auditor lacks the
qualifications to evaluate the evidence.
D) The persuasiveness of evidence can be evaluated after considering its sufficiency.
21) Which of the following statements relating to the competence of evidential matter is always
true?
A) Evidence from outside an enterprise is always reliable.
B) Accounting data developed under satisfactory conditions of internal control is not reliable.
C) Oral representations made by management are not reliable evidence.
D) Evidence must be both reliable and relevant to be considered appropriate.
22) Discuss three of the following characteristics of relevant evidence.
1. Independence of provider
2. Effectiveness of client’s internal controls
3. Auditor’s direct knowledge
4. Qualification of individuals providing the information
5. Degree of objectivity
6. Timeliness
23) Why is the appropriateness of audit evidence obtained by the auditor important in forming an
audit opinion? Describe the qualities information should have to be considered appropriate by
the auditor.
24) The reliability of evidence refers to the degree to which evidence is considered believable or
trustworthy. There are six factors that affect the reliability of audit evidence. One factor is the
independence of the provider; i.e., evidence obtained from a source outside the client company is
more reliable than that obtained within. Identify and discuss any two of the remaining five
factors.
25) Audit evidence to support an opinion about the fairness of a client’s financial statements
consists entirely of written information.
26) The relevance of audit evidence depends on the audit objective being tested.
27) Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an
audit objective.
28) Objective evidence is more reliable, and hence more persuasive, than subjective evidence.
29) The two most important factors when determining the appropriate sample size in an audit are
the auditor’s expectation of misstatements and the objectivity of the evidence.
7.4 Learning Objective 7-4
1) Calculating the gross margin for the current audit year as a percent of sales and comparing it
with previous years is what type of evidence?
A) physical examination
B) analytical procedures
C) observation
D) inquiry
2) When the auditor uses supporting evidence for amounts posted to account balances with
documentary evidence, that process is called
A) inquiry.
B) confirmation.
C) vouching.
D) physical examination.
3) An example of an external document that provides reliable information for the auditor is: a(n)
A) employees’ time report.
B) bank statement.
C) purchase order for company purchases.
D) carbon copies of a check.
4) An example of a document the auditor receives from the client, but which was prepared by
someone outside the client’s organization is a
A) confirmation.
B) sales invoice.
C) vendor invoice.
D) bank reconciliation.
5) The evaluations of financial information through analysis of plausible relationships among
financial and nonfinancial data is the definition of
A) analytical procedures.
B) tests of transactions.
C) tests of balances.
D) auditing.
6) Audit procedures can result in significant, unexpected differences. The auditor should
investigate further if
A)
Significant differences are
not expected but do exist
Significant differences are
expected but do not exist
Yes
Yes
B)
Significant differences are
not expected but do exist
Significant differences are
expected but do not exist
No
No
C)
Significant differences are
not expected but do exist
Significant differences are
expected but do not exist
Yes
No
D)
Significant differences are
not expected but do exist
Significant differences are
expected but do not exist
No
Yes
7) When the auditor uses tracing as an audit procedure for tests of transactions, she is primarily
concerned with which audit objective?
A) occurrence
B) completeness
C) cutoff
D) classification
8) When the auditor uses the audit procedure vouching she is primarily concerned with which of
the following audit objectives when testing classes of transactions?
A) occurrence
B) completeness
C) authorization
D) classification
9) When auditors use documentation to support recorded transactions and amounts, the process is
usually called
A) tracing.
B) confirmations.
C) vouching.
D) reperformance.
10) Analytical procedures must be used during which phase(s) of the audit?
A)
Test of Controls
Planning
Completion
Yes
Yes
Yes
B)
Test of Controls
Planning
Completion
No
Yes
Yes
C)
Test of Controls
Planning
Completion
Yes
No
No
D)
Test of Controls
Planning
Completion
No
No
No
11) Auditors may decide to replace tests of details with analytical procedures when possible
because the
A) analytical procedures are more reliable.
B) analytical procedures are considerably less expensive.
C) analytical procedures are more persuasive.
D) tests of details are more difficult to interpret.
12) Factors that determine the auditor’s willingness to accept a document as reliable evidence
include
A) whether it is internal or external.
B) whether it was created and processed under conditions of effective internal control.
C) whether it is an original document or a photocopy.
D) all of the above.
13) “Physical examination” is the inspection or count by the auditor of items such as
A) cash, inventory, and payroll timecards.
B) cash, inventory, canceled checks, and sales documents.
C) cash, inventory, canceled checks, and tangible fixed assets.
D) cash, inventory, securities, notes receivable, and tangible fixed assets.
14) The primary purpose of audit procedures is to
A) detect all errors or fraudulent activities as well as illegal activities.
B) comply with auditing standards promulgated by the PCAOB for publicly held clients.
C) gather corroborative audit evidence about management’s assertions regarding the client’s
financial statements.
D) determine the amount of errors in the balance sheet accounts in order to adjust the accounts to
actual.
15) ________ generally provide the most reliable evidence.
A) Confirmations
B) Recalculations
C) Reperformances
D) Observations
16) When practical and reasonable, U.S. auditing standards require the confirmation of
A) individual transactions between organizations, such as sales transactions.
B) accounts receivable.
C) fixed asset additions.
D) payroll expenses.
17) To be considered reliable evidence, confirmations must be controlled by
A) the client’s employee responsible for accounts receivable.
B) the external auditor.
C) the client’s internal audit department.
D) the client’s controller or CFO.
18) Indicate whether confirmation of accounts receivable and accounts payable, provided they
each are significant accounts, is required or optional.
A)
Accounts Receivable
Accounts Payable
Required
Required
B)
Accounts Receivable
Accounts Payable
Required
Optional
C)
Accounts Receivable
Accounts Payable
Optional
Required
D)
Accounts Receivable
Accounts Payable
Optional
Optional
19) Physical examination
A) is a direct means of verifying that an asset really exists.
B) is sufficient evidence to verify that the existing assets are owned by the client.
C) can be used for both tangible assets and documents.
D) is not generally a reliable type of audit evidence.
20) Which of the following is not a correct combination of terms and related type of audit
evidence?
A) inquire — inquiries of client
B) count — physical examination
C) recompute — recalculation
D) read — documentation
21) Which of the following is a correct statement regarding confirmations?
A) Confirmations can be in oral or written form.
B) Electronic confirmations are not acceptable under generally accepted auditing standards.
C) Confirmations are generally used in the audit of fixed asset additions.
D) Auditors consider alternative evidence available when determining if confirmations should be
used.
22) The auditor is concerned that a client is failing to bill customers for shipments. An audit
procedure that would gather relevant evidence would be to
A) select a sample of duplicate sales invoices and trace each to related shipping documents.
B) trace a sample of shipping documents to related duplicate sales invoices.
C) trace a sample of Sales Journal entries to the Accounts Receivable subsidiary ledger.
D) compare the total of the Schedule of Accounts Receivable with the balance of the Accounts
Receivable account in the general ledger.
23) ________ is the auditor’s examination of the client’s documents and records to substantiate
that the information is included in the financial statements.
A) Inspection
B) Recalculation
C) Observation
D) Verification