C audit documentation is the primary frame of

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Unformatted text preview: edures indicate that an account balance appears reasonable. d. Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures. 58. challenging a Which of the following statements is not correct? a. The effectiveness of the client’s internal control has little effect on the reliability of most types of evidence. b. Analytical procedures may be reliable even if tests of internal controls indicate control weaknesses. c. Both physical examination and mechanical accuracy are likely to be highly reliable if the internal control is effective. d. A specific type of evidence is rarely sufficient by itself to provide reliable evidence to satisfy any audit objective. 59. challenging a Audit evidence supporting the financial statements consists of the underlying accounting data and all corroborating information available to the auditor. Which of the following is an example of corroborating information? a. Minutes of meetings. b. General and subsidiary ledgers. c. Accounting manuals. d. Worksheets supporting cost allocations. 60. challenging d Which of the following discoveries through the use of analytical procedures would 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 1-120 ratio of profits to total assets. 61. challenging d Which of the following statements is correct regarding the costs involved in obtaining evidence? Physical examination is usually the least expensive type of audit evidence a. Yes b. No c. Yes d. No Cost of obtaining evidence may be a factor in deciding whether to obtain that evidence Yes No No Yes 62. challenging c A common comparison occurs when the auditor calculates the expected balance and compares it with the actual balance. The auditor’s expected account balance may be determined by: a. using industry standards. b. using Dun and Bradstreet reports. c. relating it to some other balance sheet or income statement account or accounts. d. inquiry of the client. 63. medium b Two analytical procedures available to the auditor are: • Compare current year’s balances with the preceding year. • Compare details of a particular account’s balance with the preceding year. Shortcomings of these two procedures are that: a. the first ignores effects of tests of controls and the second fails to consider possible changes in client personnel. b. the first fails to consider growth or decline in business activity and the second ignores relationships of data to other data. c. both fail to consider growth or decline in business activity and ignore relationships of data. d. it is difficult, time consuming, and, therefore, costly to perform these procedures. 64. challenging d 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 are more relevant than data developed under unsatisfactory internal control conditions. c. Oral representations made by management are not reliable evidence. d. Evidence must be both reliable and relevant to be considered appropriate. Essay Questions 65. easy 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. Answer: All things being equal, the weaker the client’s financial condition, the more assurance the auditor will require that the financial statements are free of material misstatements. As the auditor requires greater assurance, he or she can (1) perform detailed testing closer to the balance sheet date, (2) increase the extent of 1-121 detailed testing, or (3) perform more reliable procedures. In extreme cases, however, if the auditor believes the entity is not a going concern, he or she may withdraw from the engagement and perform no additional tests. 66. medium Distinguish between internal documentation and external documentation as types of audit evidence. Give two examples of each. Which type is considered more reliable? Answer: Internal documentation involves the auditor’s examination of documents that have been prepared and used within the client’s organization and are retained without ever going to an outside party. Examples would include duplicate sales invoices, employees’ time reports, and inventory receiving reports. External documentation involves the auditor’s examination of documents that have been in the hands of someone outside the client’s organization. Examples include ven...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.

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