Explanation choice d is correct as part of audit

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ExplanationChoice "d" is correct. As part of audit planning, the auditor should obtain an understanding of theentity's business. This understanding enables the auditor to better understand events, transactions,and practices that may affect the financial statements, to plan and perform appropriate audit tests,and to properly understand and evaluate the results of those tests.Choice "c" is incorrect. Obtaining an understanding of the entity's business would not beparticularly helpful in identifying significant deficiencies in internal control. Also, suchdeficiencies are typically identified during the fieldwork stage of the audit, while obtaining anunderstanding of the entity's business typically occurs during planning.Choice "b" is incorrect. Obtaining an understanding of the entity's business would not result in amore accurate performance of tests of controls. Accurate performance of audit tests is dependentupon factors such as existence of an appropriate audit trail, client cooperation, training andsupervision of audit staff, etc.Choice "a" is incorrect. Analytical procedures are always required in an audit, during theplanning and overall review stages.A retail entity uses electronic data interchange (EDI) in executing and recording most of itspurchase transactions. The entity's auditor recognizes that the documentation of the transactionswill be retained for only a short period of time. To compensate for this limitation, the auditormost likely would:a. Increase the sample of EDI transactions to be selected for cutoff tests.b.Perform tests several times during the year, rather than only at year-end.c. Decrease the assessed level of control risk for the existence or occurrence assertions.d.Plan to make a 100% count of the entity's inventory at or near the year-end.ExplanationChoice "b" is correct. When an entity transmits, processes, maintains, or accesses significantinformation electronically, some accounting data and source documents may be available only inelectronic form, or only at a certain point in time. The auditor would generally perform tests ofcontrols several times during the year to compensate for this limitation.Choice "a" is incorrect. Increasing the sample size related to cutoff testing will not provideevidence about transactions occurring throughout the period under audit, since cutoff testingrelates to year-end.Choice "d" is incorrect. Auditing 100% of the year-end inventory does not provide evidenceabout transactions occurring throughout the period under audit.
Choice "c" is incorrect. Failure to retain documentation for longer periods of time would notimply that control risk is reduced. If anything, this might lead to an increase in control risk,making it less likely that phony transactions would be detected after the fact.

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Term
Spring
Professor
N/A
Tags
Financial audit, internal auditor

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