Assignment
1. Which of the following types of documentary evidence should the auditor consider to be the most reliable?
a. A sales invoice issued by the client and supported by a delivery receipt from an outside trucker.
b. Confirmation of an account payable balance mailed by and returned directly to the auditor.
c. A check, issued by the company and bearing the payee's endorsement, that is included with the bank statements mailed directly to the auditor.
d. An audit schedule prepared by the client's controller and reviewed by the client's treasurer.
2. The most reliable type of audit evidence that an auditor can obtain is
a. Physical examination by the auditor.
b. Calculations by the auditor from company records.
c. Confirmations received directly from third parties.
d. External documents.
3. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
a. Vendor's invoice.
b. Bank statement obtained from the client.
c. Computations made by the auditor.
d. Pre-numbered sales invoices.
4. Which of the following is the least persuasive documentation in support of an auditor's opinion?
a. Schedules of details of physical inventory counts conducted by the client.
b. Notation of inferences drawn from ratios and trends.
c. Notation of appraisers' conclusions documented in the auditor's files.
d. Lists of negative confirmation requests for which no response was received by the auditor.
Please write a sentence or two that responds to the following seven (7) questions concerning the reliability of evidence:
5. Why is confirmation normally more reliable evidence than asking the client?
6. When would a confirmation NOT be highly reliable?
7. Under what circumstances is the physical observation of inventory considered relatively unreliable evidence?
8. Why is a re-performance test used?
9. What are one example of relatively reliable documentation and one example of less reliable documentation? .
10. When does the qualification and experience of the client's representative make a significant difference in the reliability of the evidence?
11. When would analytical procedures be used? Please provide one example of an analytical procedure.
The following three questions pertain to client acceptance. Choose the best response.
12. In assessing whether to accept a client for an audit engagement, a CPA should consider
Client Business Risk Acceptable Audit Risk
a. Yes Yes
b. Yes No
c. No Yes
d. No No
13. When approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining whether
a. The predecessor's work should be used.
b. The company follows the policy of rotating its auditors.
c. In the predecessor's opinion internal control of the company has been satisfactory.
d. The engagement should be accepted.
14. What is the responsibility of a successor auditor with respect to communicating with the predecessor auditor in connection with a prospective new audit client?
a. The successor auditor has no responsibility to contact the predecessor auditor.
b. The successor auditor should obtain permission from the prospective client to contact the predecessor auditor.
c. The successor auditor should contact the predecessor regardless of whether the prospective client authorizes contact.
d. The successor auditor need not contact the predecessor if the successor is aware of all available relevant facts.
The following questions deal with materiality. Choose the best response.
15. Which one of the following statements is correct concerning the concept of materiality?
a. Materiality is determined by reference to guidelines established by the AICPA.
b. Materiality depends only on the dollar amount of an item relative to other items in the financial statements.
c. Materiality depends on the nature of an item rather than the dollar amount.
d. Materiality is a matter of professional judgement.
The following three questions concern materiality and risk. Choose the best response.
16. Edison Corporation has a few large accounts receivable that total $1,400,000. Victor Corporation has a great number of small accounts receivable that also total $1,400,000. The importance of a misstatement in any one account is therefore greater for Edison than for Victor. This is an example of the auditor's concept of
a. Materiality.
b. Comparative analysis.
c. Reasonable assurance.
d. Relative risk.
17. Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion?
a. Auditor judgment.
b. Materiality.
c. Inherent risk.
d. Reasonable assurance.
18. Which of the following best describes the element of inherent risk that underlies the application of generally accepted auditing standards, specifically the standards of field work and reporting?
a. Cash audit work may have to be carried out in a more conclusive manner than inventory audit work.
b. Intercompany transactions are usually subject to less detailed scrutiny than arm's length transactions with outside parties.
c. Inventories may require more attention by the auditor on an engagement for a merchandising enterprise than on an engagement for a public utility.
d. The scope of the audit need not be expanded if misstatements that arouse suspicion of fraud are of relatively insignificant amounts.
The remaining questions deal with tests of controls. Choose the best response.
19. Which of the following statements about tests of controls is most accurate?
a. Auditing procedures cannot concurrently provide both evidence of the effectiveness of internal control procedures and evidence required for substantive tests.
b. Tests of controls include observations of the proper segregation of duties.
c. Tests of controls provide direct evidence about monetary misstatements in transactions.
d. Tests of controls ordinarily should be performed as of the balance sheet date or during the period subsequent to that date.
20. Which of the following would be least likely to be included in an auditor's tests of controls?
a. Documentation.
b. Observation.
c. Inquiry.
d. Confirmation
21. The two phases of the auditor's involvement with internal control are sometimes called "understanding and assessment" and "tests of controls." In the tests of controls phase, the auditor attempts to obtain
a. A reasonable degree of assurance that the client's internal controls are operating effectively on a consistent basis throughout the year.
b. Sufficient, competent evidential matter to afford a reasonable basis for the auditor's opinion.
c. Assurances that informative disclosures in the financial statements are reasonably adequate.
d. Knowledge and understanding of the client's prescribed procedures and methods.
22. Which of the following is ordinarily considered a test of control audit procedure?
a. Sending confirmation letters to banks.
b. Counting and listing cash on hand.
c. Examining signatures on checks.
d. Preparing reconciliations of bank accounts as of the balance sheet date.
23. A factory foreman at Stevens Company discharged an hourly worker but did not notify the payroll department. The foreman then forged the worker's signature on time cards and work tickets and, when giving out the checks, diverted the payroll checks drawn from the discharged worker to his own use. The most effective procedure for preventing this activity is to
a. Require written authorization for all employees added to or removed from the payroll.
b. Have a paymaster who has no other payroll responsibility distribute the payroll checks.
c. Have someone other than persons who prepare or distribute the payroll obtain custody of unclaimed payroll checks.
d. From time to time, rotate persons distributing the payroll.
24. The CPA reviews Peter Company's payroll procedures. An example of an internal control deficiency is to assign to a department supervisor the responsibility for
a. Distributing payroll checks to subordinate employees.
b. Reviewing and approving time reports for subordinates.
c. Interviewing applicants for subordinate positions before hiring is done by the personnel department.
d. Initiating requests for salary adjustments for subordinate employees.
25. Effective internal control over the purchasing of raw materials should usually include all of the following procedures except
a. Systematic reporting of product changes that will affect raw materials.
b. Determining the need for the raw materials prior to preparing the purchase order.
c. Obtaining third-party, written quality and quantity reports prior to payment for the raw materials.
d. Obtaining financial approval prior to making a commitment.
26. Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a COD basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over.
a. Purchase requisitions
b. Cash receipts.
c. Perpetual inventory records.
d. Purchase orders.