Audit Evidence

Quiz 1
MULTIPLE CHOICE:

1. The permanent file section of the working papers that is kept for each audit client
most likely contains
a. Review notes pertaining to questions and comments regarding the audit
work performed.
b. A schedule of time spent on the engagement by each individual auditor.
c. Correspondence with the client's legal counsel concerning pending
litigation.
d. Narrative descriptions of the client's internal control policies and
procedures

2. Of the following procedures, which is not considered part of “obtaining an

understanding of the client’s environment?”
a. Examining trade publications to gain a better understanding of the client's
industry.
b. Confirming customer accounts receivable for existence and valuation.
c. Touring the client's manufacturing and warehousing
facilities to gain a clearer understanding of
operations.
d. Studying the internal controls over cash receipts and disbursements.

3. If working papers are to have the characteristics that will ensure that they
achieve their primary purposes, which of the following is the most important?
a. Working papers must be of standard format and standard
content.
b. Working papers must be properly indexed and cross-
referenced to the draft audit report.
c. Working papers must provide sufficient, competent, and useful
information to support the audit report.
d. Working papers must be arranged in logical order
following the audit program sequence.

4. Which of the following is not an example of analytical evidence?

a. Compared inventory turnover by major class with the prior year on a
monthly and quarterly basis.
b. Compared gross profit percentages by major product classes with the
prior year.
c. Examined invoices for plant asset additions to determine whether the
client had erroneously recorded ordinary repairs as plant assets.

36
 d. Examined monthly performance reports and investigated significant
variations from budgeted amounts.

5. Choose the best illustration of objective audit evidence from the following
a. The paid invoice file containing invoices matched with receiving reports
and purchase orders.
b. Management's assertion that payment procedures require matching of
invoice with receiving report and purchase order.
c. Clerical staff assurances that management policy regarding
payment of invoices--matching of invoice with receiving report and
purchase order--is always followed.
d. The treasurer's statement of not remembering any
exceptions in which an invoice was submitted for
payment that was not accompanied by a matching
receiving report and purchase order.

6. An initial (first-time) audit requires more audit time to complete than a recurring
audit. One of the reasons for this is that
a. New auditors are usually assigned to an initial audit.
b. Predecessor auditors need to be consulted.
c. The client's business, industry, and internal control are unfamiliar to the
auditor and need to be carefully studied.
d. A larger proportion of customer accounts receivable need to be confirmed
on an initial audit.

7. Which of the following is a basic tool used by the auditor to control the audit
work and review the progress of the audit?
a. Time and expense summary.
b. Engagement letter.
c. Progress flowchart.
d. Audit program.

8. An auditor wants to develop an audit test to evaluate the reasonableness of

the quantity of scrap material resulting from a certain production process
compared to industry standards. Which would be the most competent type
of evidence available to satisfy this objective?
a. Documentary. b. Hearsay.
c. Physical. d. Analytical.

9. As part of audit planning, CPAs should design audit programs for each
individual audit and should include audit steps and procedures to
a. Detect and eliminate fraud.
b. Increase the amount of management information
available.
 c. Provide assurances that the objectives of the audit are met.
d. Ensure that only material items are audited.

10. Of the following audit procedures, which best supports the valuation objective?
a. Performing a lower of cost or market test of the client's inventories.
b. Reviewing a contingent liability footnote for proper
wording.
c. Searching for unrecorded liabilities.
d. Observing the client's year-end physical inventory taking.

11. An assumption underlying analytical procedures is that

a. These procedures cannot replace tests of balances and
transactions.
b. Statistical tests of financial information may lead to the discovery
of material errors in the financial statements.
c. The study of financial ratios is an acceptable alternative to
the investigation of unusual fluctuations.
d. Relationships among data may reasonably be expected to exist
and continue in the absence of known conditions to the
contrary.

12. An auditor is examining accounts receivable. What is the most

competent type of evidence in this situation?
a. Interviewing the personnel who record accounts
receivable.
b. Verifying that postings to the receivable account from
journals have been made.
c. Receipt by the auditor of a positive confirmation.
d. No response received for a request for a negative
confirmation.

13. With respect to the auditor's planning of a year-end examination, which

of the following statements is always true?
a. An engagement should not be accepted after the fiscal year-end.
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should not be told of the specific audit
procedures that will be performed.
d. It is an acceptable practice to carry out substantial parts of the
examination at interim dates.

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

a. Physical evidence.
b. Confirmation evidence.
c. Documentary evidence.
 d. Analytical evidence.

15. Which of the following statements about working papers is correct?

a. Working papers are not permitted to be used as a reference source
by the client.
b. The auditor should document the understanding of the client's internal
control obtained to plan the audit
c. Working papers may be regarded as a substitute for the client's
accounting records.
d. When reporting on comparative financial statements, the independent
auditor may discard working papers after two years.

16. Which of the following factors is most important in determining the competence
of audit evidence?
a. The reliability of the evidence in meeting the audit objective.
b. The objectivity of the auditor gathering the evidence.
c. The quantity of the evidence obtained.
d. The independence of the source of evidence.

17. The procedures specifically outlined in an audit program are primarily

designed to
a. Protect the auditor in the event of litigation.
b. Detect errors or fraud.
c. Test internal evidence.
d. Gather evidence.

18. When reviewing audit working papers, the primary

responsibility of an audit supervisor is to determine that:
a. Each worksheet is properly identified with a descriptive heading.
b. Working papers are properly referenced and kept in logical groupings.
c. Standard departmental procedures are adhered to with regard to
work paper preparation and technique.
d. Working papers adequately support the audit findings, conclusions,
and report.

19. Auditors apply analytical procedures to the client's

operations in order to identify
a. Improper separation of accounting and other financial duties.
b. Weaknesses of a material nature in the client's internal control.
c. Unusual transactions.
d. Noncompliance with prescribed control procedures.
20. Which of the following workpapers would one normally expect to find in the
permanent file?
a. A copy of a long-term bond indenture.
b. The working trial balance.
c. An analysis of additions and disposals relating to marketable securities.
d. A workpaper analyzing customer replies to confirmation requests.

21. The in-charge auditor decides that work papers are complete
a. When satisfied that the audit objectives have been met and
the working papers support the conclusions.
b. When working papers make reference to the steps
outlined in the audit program.
c. Only after the auditor who prepared the working papers has signed and
dated them.
d. When proper cross-references to other working papers are
noted.

22. Of the following procedures, which does not produce analytical evidence?
a. Compare revenue, cost of sales, and gross profit with the prior year and
investigate significant variations.
b. Examine monthly performance reports and investigate significant revenue
and expense variances.
c. Confirm customers' accounts receivable and clear all material exceptions.
d. Compare sales trends and profit margins with industry averages and
investigate significant differences.

23. Audit evidence can come in different forms with different degrees of
persuasiveness. Which of the following is the least persuasive type of
evidence?
a. Documents mailed by outsiders to the auditor.
b. Correspondence between the auditor and vendors.
c. Sales invoices inspected by the auditor.
d. Computations made by the auditor.

24. Analytical procedures are

a. Substantive tests designed to evaluate a system of internal control.
b. Tests of control procedures designed to evaluate the validity of
management's representation letter.
c. Substantive tests designed to evaluate the
reasonableness of financial information.
d. Tests of control procedures designed to detect errors in reported
financial information.
25. Which of the following statements relating to the
competence of evidential matter is always true?
a. Evidential matter gathered by an auditor from
outside an enterprise is reliable.
b. Accounting data developed under satisfactory conditions of internal
control are more relevant than data developed under
unsatisfactory internal control conditions.
c. Oral representations made by management are not valid evidence.
d. Evidence gathered by auditors must be both valid and relevant to
be considered competent.

26. An auditor test counted a batch of inventory. This is an example of

what kind of evidence?
a. Analytical. b. Documentary.
c. Physical. d. Hearsay.

27. In evaluating the reasonableness of advertising expense, which of the

following would be the best evidence?
a. Oral evidence obtained through discussions with company marketing
executives and representatives of the advertising agency retained.
b. Documentary evidence obtained by vouching charges to the
account and by retracing charges from source documents
to the account.
c. Analytical evidence developed by comparing the ratio of
advertising expenses to sales with historical data for
the company and industry.
d. Arithmetical evidence developed by re-computing charges submitted by
the advertising agency and paid by the company.

28. Which of the following is not a consideration in the development of audit

programs?
a. Internal control over the recording of plant asset additions and repairs and
maintenance expenditures is found to be weak.
b. The client constructed a major addition to its central manufacturing facility
during the year under audit.
c. The client is a private university located in the Midwest.
d. The client's board or directors is elected by the
stockholders at the annual meeting.
29. 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
a. Kept on the client's premises so that the client can have access to them
for reference purposes.
b. The primary support for the financial statements being examined.
c. Considered as a part of the client's accounting records that are retained
by the auditor.
d. Designed to meet the circumstances and the auditor's needs on
each engagement.

30. The main advantage of properly indexed working papers is to

a. Reduce the size of the file.
b. Better organize the working papers.
c. Allow division of labor within the audit team.
d. Facilitate the efficient use of audit staff.

END