Audit Quiz 10.1

The sufficiency and appropriateness of audit evidence is a matter of professional judgment. bc: The auditor exercises professional judgment when forming a conclusion about whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level. Sufficiency measures the quantity of audit evidence. Appropriateness measures its quality (relevance and reliability). To form this conclusion, the auditor considers all relevant evidence, regardless of whether it corroborates or contradicts the assertions in the statements.

Detect material misstatements at the relevant assertion level. bc: Substantive procedures are (1) tests of the details of transaction classes, balances, and disclosures and (2) substantive analytical procedures. They are performed to detect material misstatements at the relevant assertion level. The auditor performs substantive procedures as a response to the related assessment of the RMMs (AU-C 330).

Auditor judgment. bc: Professional judgment involves applying relevant knowledge and experience to the facts and circumstances of an audit. The auditor exercises judgment to (1) interpret ethical requirements and GAAS and (2) make informed decisions, for example, about the sufficiency and appropriateness of audit evidence. The auditor also plans and performs the audit with professional skepticism. This is an attitude that includes (1) a questioning mind, (2) being alert to possible misstatements, and (3) a critical assessment of audit evidence (AU-C 500). Thus, judgment is required to select the specific auditing procedures needed to obtain that evidence.

Suspense debits that management believes will benefit future operations. bc: Although the auditor must evaluate relevant assertions about all accounts, the greatest risks are overstated assets and understated liabilities. The unverified suspense debits represent assets that may not exist.

A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion. bc: Audit evidence consists of accounting records (initial entries and supporting records, such as ledgers, worksheets, and spreadsheets) and other information (minutes of meetings, confirmations, information obtained by inquiry, etc.). But accounting records alone do not provide sufficient appropriate evidence as a basis for an opinion on the financial statements.

Original source documents. bc: Determining whether transactions have been recorded is a test of the completeness assertion. Thus, beginning with the original source documents and tracing the transactions to the appropriate accounting records determines whether they were recorded.

Perform tests several times during the year, rather than only at year end. bc: Accounting records and other evidence may be available only in electronic form. For example, if EDI is used, purchase, shipping, billing, cash receipt, and cash payment transactions often occur by exchange of electronic messages instead of source documents. In an image processing system, documents are scanned and converted into electronic form for storage purposes, and the source documents may not be retained. Thus, electronic evidence may exist at a given moment in time, but it may not be retrievable after a specified period if files are changed and no backups exist. Consequently, the auditor should consider the time during which information is available to determine the nature, timing, and extent of substantive tests and tests of controls. For example, the auditor may change the timing of audit tests by performing them several times during the year instead of only at year end.

Shipping documents and receiving reports. bc: Shipping documents and receiving reports are a result of the operations of the client. As goods are shipped to customers, a shipping document is prepared by the client. As goods are received from vendors, a receiving report is prepared by the client.

Bank statements obtained from the client. bc: Evidence from independent sources outside the entity provides greater assurance of reliability for purposes of an audit than evidence secured or prepared solely within the entity. Although the bank statements are in the possession of the client, they originated outside of the client and, relative to the other responses, they are the most persuasive.

An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost. bc: Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. However, the need for (1) reporting to be timely and (2) maintaining a balance between benefit and cost are inherent limitations of the audit. Thus, for the opinion to be relevant, it must be formed within a reasonable period of time.

Confirmations of accounts receivable. bc: Audit evidence is all information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes (1) the accounting records underlying the financial statements and (2) other information. Sources of information other than accounting records include (1) minutes of meetings; (2) external confirmations; (3) analysts' reports; (4) comparable data about competitors; and (5) information obtained by the auditor from (a) inquiries (e.g., management's written representations), (b) observation, (c) inspection, (d) recalculation, (e) reperformance, and (f) analytical procedures.

Prenumbered purchase order forms. bc: When documentation, such as purchase order forms, is prepared solely by client personnel, its persuasiveness will be less than that prepared by the auditor or an independent party. Ordinarily, the most reliable documentation is created outside the entity and has never been within the client's control.

The auditor should not perform a procedure that provides persuasive evidence rather than conclusive evidence. bc: In most cases, evidence that is obtained to enable an auditor to draw reasonable conclusions on which to base the opinion is necessarily persuasive rather than conclusive. The cost of obtaining conclusive evidence may outweigh the benefits. But the difficulty, time, or cost is not in itself a valid reason (1) to omit an audit procedure for which no alternative exists or (2) to be satisfied with less than persuasive evidence (AU-C 200).

Effective internal control provides more assurance about the reliability of audit evidence. bc: The more effective the internal control, the more reliable the evidence generated internally by the entity, e.g., the accounting records and financial statements.

Difficulty and cost involved in testing a particular item. bc: The costs and benefits of obtaining evidence should have a rational relationship. However, the difficulty, time, or cost required to perform a procedure is not in itself a valid reason for its omission if no alternative is available. Such matters also do not justify being satisfied with audit evidence that is less than persuasive (AU-C 500).

The report of an auditor's specialist regarding the valuation of a collection of paintings held as an investment provides greater assurance than the auditor's physical observation of the paintings. bc: Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or another medium; and (5) consists of original documents. Preference for the report of an auditor's specialist over the auditor's physical observation of works of art is acceptable because the auditor is not expected to have such expertise. Physical observation provides evidence of the existence of assets but often does not verify their value, ownership, cost, or condition. Consequently, the generalization in favor of the auditor's direct knowledge is overcome in this case.

Inspection of bank statements obtained directly from the client's financial institution. bc: When documentation is prepared solely by client personnel, its reliability is less than that prepared by the auditor or an independent party. Ordinarily, the most reliable documentation is created outside the entity and has never been within the client's control, e.g., statements obtained from the bank, letters from attorneys, and letters from insurance brokers.

Minutes of meetings bc: Audit evidence is all information used by the auditor to draw the conclusions on which the auditor's opinion is based. It consists of (1) accounting records and (2) sources of information other than accounting records. Accounting records by themselves do not provide sufficient appropriate evidence. They include initial entries (manual or electronic) and supporting records. Examples are (1) checks, (2) electronic funds transfers (EFTs), (3) invoices, (4) contracts, (5) the general and subsidiary ledgers, (6) journal entries and other adjustments of the statements, (7) worksheets, (8) spreadsheets, (9) reconciliations, (10) cost allocations, (11) computations, and (12) disclosures. Sources of information other than accounting records include (1) minutes of meetings; (2) external confirmations; (3) analysts' reports; (4) comparable data about competitors; and (5) information obtained by the auditor from (a) inquiries (e.g., management's written representations), (b) observation, (c) inspection, (d) recalculation, (e) reperformance, and (f) analytical procedures.

The more effective internal control, the more assurance it provides about the reliability of the accounting data and financial statements. bc: Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents (AU-C 500).

Obtaining and evaluating audit evidence. bc: According to AU-C 500, Audit Evidence, most of the auditor's work in forming an opinion on financial statements consists of obtaining and evaluating audit evidence. Audit evidence is the information used by the auditor in drawing the conclusions on which the auditor's opinion is based. It includes the information contained in the accounting records and sources of information other than accounting records.

Transactions. bc: The audit of the income statement focuses on the propriety of handling transactions because most income statement accounts represent large volumes of transactions. The audit of the balance sheet concentrates on verification of account balances.

The auditor may not be qualified to evaluate the items (s)he is observing. bc: The auditor may not be qualified to evaluate the quality or condition of the items observed, e.g., the quality of diamonds or the quantity of oil reserves. In such cases, the reliability of the evidence obtained is doubtful, and the auditor typically uses the work of an auditor's specialist. Moreover, observation does not verify the cost or ownership of assets. Ordinarily, observation is best suited to verifying the existence of an asset.

Ledger entries bc: To discover unsupported entries in the ledger, a sample of entries should be selected to determine whether any entry lacks proper support. The direction of testing is from the ledger entries to the books of original entry, then to the source documents.

"I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence." bc: Most evidence on which the auditor bases the opinion is persuasive, not conclusive, because of the inherent limitations of the audit: (1) the nature of financial reporting (e.g., use of accounting estimates dependent on forecasts), (2) the nature of audit procedures (e.g., the possibility of fraud involving collusion or the failure of management to provide all the information requested), and (3) the need to perform the audit (a) within a reasonable period of time and (b) to achieve a balance between benefit and cost. However, the difficulty, time, or cost of obtaining evidence is not a valid reason for (1) omitting an audit procedure for which no alternative exists or (2) being satisfied with evidence that is less than persuasive (AU-C 200).

To gather evidence. bc: According to AU-C 500, Audit Evidence, most of the auditor's work in forming an opinion on financial statements consists of obtaining and evaluating audit evidence. Audit evidence is the information used by the auditor in drawing the conclusions on which the auditor's opinion is based. It includes the information contained in the accounting records and sources of information other than accounting records.

Examination of documentary support. bc: The auditor ordinarily should perform certain auditing procedures, such as external confirmation of receivables (AU-C 505), observation of inventory (AU-C 501), and analytical procedures (AU-C 520), instead of relying completely on documentary evidence.

A recalculation of bad debt expense bc: Subject to exceptions, the presumption is that the independent auditor's direct personal knowledge, obtained through physical examination, observation, computation, and inspection, is more reliable than information obtained indirectly.

Perform tests several times during the year, rather than only at year end. bc: Accounting records and other evidence may be available only in electronic form. For example, when the Internet is used, transactions often occur by exchange of electronic messages instead of source documents. Electronic evidence may exist at a given moment in time, but it may not be retrievable after a specified period if files are changed and no backups exist. Consequently, the auditor should consider requesting retention of some information or performing procedures when information is available (AU-C 500). For example, the auditor may change the timing of audit procedures by performing them several times during the year instead of only at year end.

Whether the data were developed under a system with adequate controls. bc: Reliability is affected by the source of the data and the conditions under which the data were generated. Data are considered more reliable when developed under effective internal control.

Obtain additional evidence regarding the valuation of inventory. bc: If the audit evidence is not sufficient and appropriate, the auditor should perform other procedures, such as tests of details or analytical procedures.

Completeness. bc: Tracing the details of test counts to the final inventory schedule assures the auditor that items in the observed physical inventory are included in the inventory records.

No Yes bc: The proper approval of credit provides assurance that the account receivable is collectible. Thus, it is related to the valuation assertion that accounts receivable are recorded at net realizable value.

Confirmation of account information from third parties. bc: Audit evidence should be sufficient and appropriate. Appropriate evidence is reliable and relevant. Ordinarily, evidence obtained from independent sources (e.g., from external confirmation of account information) is usually reliable (AU-C 500).

Consider the increased risk that period-end misstatements will not be detected. bc: Certain factors should be considered before substantive procedures are performed at interim dates. For example, the auditor should consider the risk that period-end misstatements are not detected by performing appropriate substantive procedures or a combination of tests of controls and substantive procedures to cover the remaining period.

Evidence obtained from independent sources. bc: Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. Thus, evidence obtained from independent sources outside the entity typically is more reliable than evidence from sources inside the organization.

Inquiry and inspection of records. bc: Inquiry is seeking information from knowledgeable persons. The controller, who is usually the chief accounting officer, is such a person. Inspection of records or documents is the examination of records or documents, whether internal or external, in paper, electronic, or other media. The auditor's verification of the reconciliation and the controller's review are procedures requiring inspection of the underlying records or documents.

Appropriate. bc: AU-C 500, Audit Evidence, requires the auditor to obtain sufficient appropriate audit evidence on which to base the opinion. Appropriate evidence is relevant and reliable in supporting conclusions on which the opinion is based.

Observation of client personnel. bc: Evidence about the effectiveness of the operation of a control obtained directly, such as by observation of client personnel, is more reliable than evidence obtained indirectly, such as through inquiry. Thus, evidence obtained by the auditor's own observation of a client employee's application of a control most likely provides greater assurance than an inquiry about the application of the control. Moreover, mere inquiry without corroboration ordinarily will not provide sufficient appropriate evidence to support a conclusion about the effectiveness of the operation of the control.

Relies on persuasive rather than conclusive evidence in the majority of cases. bc: To be appropriate, audit evidence should be relevant and reliable. Also, because of the inherent limitations of the audit, most audit evidence is persuasive rather than conclusive. However, although the cost of obtaining evidence and its usefulness should be rationally related, the matter of difficulty, time, or cost is not in itself a valid basis for (1) omitting a procedure when no alternative exists or (2) being satisfied with less than persuasive evidence.

Sampling method employed by the auditor to obtain a sample of such evidence. bc: Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. The sample selection method does not affect the appropriateness of evidence as long as the sample is representative of the population.

Authorized by a responsible official. bc:Documents generated externally by independent sources are more reliable than those produced by the auditee. However, the reliability of internal evidence is enhanced if it is subject to effective control. Accordingly, authorization by an appropriate party lends credibility to a document because it increases the probability that the underlying transaction is valid.

It is most persuasive about the performance of a process but is limited to the moment in time at which the observation takes place. bc: Observation consists of looking at a process or procedure being performed by others. It provides audit evidence about the process or procedure but is limited to that moment in time by the fact that the act of being observed may affect how the process or procedure is performed.

Prenumbered receiving reports completed by the client's employees. bc: The reliability of information used as audit evidence is affected by (1) its source, (2) its nature, and (3) how it is obtained. These circumstances include controls over its preparation and maintenance. Evidence is generally more reliable when it is (1) obtained from knowledgeable independent sources outside the entity, (2) generated internally by the entity under effective internal control, (3) obtained directly by the auditor, (4) in documentary form (in any medium), and (5) represented by original documents (rather than photocopies). Thus, prenumbered receiving reports completed by the client's employees tend to be less reliable than such externally produced documents as receivable confirmations, bank statements, and tax bills

Obtaining a current value appraisal of the collateral. bc: The auditor can test the valuation of the collateral by obtaining an external current value appraisal.

Consider the reliability of information to be used as audit evidence. bc: Professional skepticism should be maintained in considering the risk of material misstatement due to fraud. When the auditor exercises professional skepticism with respect to the risks of material misstatement due to fraud, the auditor should consider the reliability of information to be used as audit evidence.

An inspection. bc: Inspection is the examination of records or documents, whether internal or external, in paper, electronic, or other media. The auditor performs inspection of documents to verify proper authorization of transactions.

Examination of evidence. bc: To express an opinion, the practitioner must gather sufficient evidence to reduce attestation risk to an acceptably low level.

Professional judgment. bc: The auditor's professional judgment must determine the necessary audit plans and the specific audit procedures that will gather sufficient appropriate evidence to reduce audit risk to an acceptably low level and enable the auditor to draw reasonable conclusions on which to base the opinion.

Preparation of the summary of unadjusted differences. bc: The summary of unadjusted differences is a record of all of the misstatements identified during the course of an audit. It is not the source of corroborating evidence.