Which of the following is a true statement regarding documentation requirements for analytical

procedures?
When an analytical procedure is used as the principal substantive test of a significant
a. financial statement assertion, the auditor is required to document both the auditor's
expectation and the factors considered in developing that expectation.

When an analytical procedure is used during the overall review stage of the audit, the
b
auditor is required to document the auditor's expectation and any additional procedures
.
performed to investigate significant unexplained differences.

When an analytical procedure is used as the principal substantive test of a significant

c. financial statement assertion, the auditor is required to document his or her expectation
and management's concurrence with that expectation.

When an analytical procedure is used as the principal substantive test of a significant

d
financial statement assertion, the auditor is required to document the reasons analytical
.
procedures were performed instead of tests of details.
Explanation
Choice "a" is correct. When an analytical procedure is used as the principal substantive test of a
significant financial statement assertion, the auditor is required to document both the auditor's
expectation and the factors considered in developing that expectation.
Choice "d" is incorrect. There is no requirement that the auditor document the reasons analytical
procedures were performed instead of tests of details.
Choice "c" is incorrect. There is no requirement that the auditor document management's
concurrence with the expectation.
Choice "b" is incorrect. When an analytical procedure is performed during the overall review
stage, there are no specific documentation requirements. The requirement that the auditor
document the expectation and any additional procedures performed to investigate significant
unexplained differences relates to analytical procedures performed as principal substantive tests.
Which of the following comparisons would an auditor most likely make in evaluating an entity's
costs and expenses?
a.
The current year's accounts receivable with the prior year's accounts receivable.

b
The current year's payroll expense with the prior year's payroll expense.
.
c. The budgeted current year's sales with the prior year's sales.
d
The budgeted current year's warranty expense with the current year's contingent liabilities.
.
Explanation
Choice "b" is correct. The most likely analytical review procedure involving costs and expenses
would be to compare the current year's payroll expense (average amount per employee) to the
prior year, taking into consideration an average increase in wage rates. This is a very effective
technique in auditing payroll expense.
Choice "a" is incorrect. Comparing the current year's accounts receivable balance with the prior
year provides little evidence because accounts receivable may fluctuate based on timing of cash
payments, which is unpredictable.
Choice "c" is incorrect. Comparing the budgeted current year's sales with the prior year's sales
provides evidence regarding the reasonableness of the current year sales budget, but does not
provide evidence about costs and expenses.
Choice "d" is incorrect. The current year's budgeted warranty expense would likely be compared
to the current year's actual warranty expense, not to all of the contingent liabilities for the year.
An auditor may achieve audit objectives related to particular assertions by:
a.

Adhering to a system of quality control.

b.

Performing analytical procedures.

c.

Preparing audit documentation.

d.

Increasing the level of detection risk.

Explanation

Choice "b" is correct. The auditor relies on substantive tests to achieve audit objectives related to
particular assertions. Analytical procedures are one type of substantive procedure.
Choice "a" is incorrect. CPA firms performing audits are required to adhere to a system of quality
control, but adhering to such a system does not directly help the firm achieve specific audit
objectives.
Choice "c" is incorrect. Audit documentation is used to record the results of audit procedures that
have been performed to achieve audit objectives. Mere preparation of audit documentation does
not achieve audit objectives.
Choice "d" is incorrect. Increasing the level of detection risk does not enable the auditor to
achieve audit objectives related to a particular assertion.
An auditor's analytical procedures most likely would be facilitated if the entity:
a. Corrects material weaknesses in internal control before the beginning of the audit.

b. Segregates obsolete inventory before the physical inventory count.

c. Uses a standard cost system that produces variance reports.

d. Develops its data from sources solely within the entity.

Explanation
Choice "c" is correct. An auditor's analytical procedures are facilitated when an entity uses a
standard cost system with variance reports because the comparison of actual to budget will
already have been performed. In addition, it is likely that management will already be aware of
significant variations from budget and will be better able to address any questions the auditor
may have.
Choice "b" is incorrect. Segregation of obsolete inventory would not be an important factor in
determining whether analytical procedures would be effective.
Choice "a" is incorrect. Correction of internal control weaknesses prior to the beginning of the
audit would not affect analytical procedures.
Choice "d" is incorrect. Analytical procedures using data developed solely within the entity are
not as reliable as analytical procedures using data developed externally.

In auditing intangible assets, an auditor most likely would review or recompute amortization and
determine whether the amortization period is reasonable in support of management's financial
statement assertion of:
a.

Rights and obligations.

b.

Valuation and allocation.

c.

Existence.

d.

Completeness.

Explanation
Choice "b" is correct. Assertions about valuation and allocation deal with whether assets,
liabilities, and equity interests have been included in the financial statements at appropriate
amounts. Recalculation of the amortization and review of the amortization period would test the
valuation and allocation assertion.
Choice "c" is incorrect. Assertions about existence deal with whether assets, liabilities, and
equity interests exist at a given date. Evaluating amortization does not relate to this assertion.
Choice "d" is incorrect. Assertions about completeness deal with whether all assets, liabilities,
and equity interests that should be presented in the financial statements are so included.
Evaluating amortization does not relate to this assertion.
Choice "a" is incorrect. Assertions about rights and obligations deal with whether assets are the
rights of the entity and liabilities are the obligations of the entity at a given date. Evaluating
amortization does not relate to this assertion.
Which of the following would not be considered an analytical procedure?

a.

Estimating payroll expense by multiplying the number of employees by the average

hourly wage rate and the total hours worked.

b Computing accounts receivable turnover by dividing credit sales by the average net
. receivables.

c.

Projecting an error rate by comparing the results of a statistical sample with the actual
population characteristics.

d
Developing the expected current-year sales based on the sales trend of the prior five years.
.
Explanation
Choice "c" is correct. Analytical procedures involve comparison of recorded amounts, or ratios
developed from recorded amounts, to expectations developed by the auditor. Projecting an error
rate from a statistical sample does not involve such a comparison.
Choice "a" is incorrect. An analytical procedure involves comparison of an independently
developed expectation to a recorded amount. Comparing an estimate of payroll expense
(developed by multiplying the number of employees by the average hourly rate and the total
hours worked) to the recorded expense is an analytical procedure.
Choice "b" is incorrect. An analytical procedure involves comparison of an independently
developed expectation to a recorded amount. Ratio analysis is often performed in order to
compare recorded results to industry norms or to past performance, and therefore calculation of
accounts receivable turnover is likely to be an analytical procedure.
Choice "d" is incorrect. An analytical procedure involves comparison of an independently
developed expectation to a recorded amount. Comparing an estimate of sales (developed based
on a trend analysis) to the recorded amount is an analytical procedure.
Which of the following types of audit evidence generally is the most reliable?
a.

Confirmation of account information.

b.

Analytical procedures.

c.

Inquiries made of management.

d.

Review of prior-year audit procedures.

Explanation
Choice "a" is correct. Confirmations are among the most reliable types of evidence, as they
constitute external evidence sent directly to the auditor.

Choice "c" is incorrect. Inquiries provide oral evidence, which is less reliable than confirmations.
Choice "b" is incorrect. Analytical procedures provide the auditor with direct personal
knowledge, but because these procedures often are based on internal accounting data, the
evidence obtained is not as reliable as that obtained from confirmations.
Choice "d" is incorrect. Review of audit procedures from the previous year does not provide
appropriate audit evidence regarding the current year's financial statements.
An auditor compares annual revenues and expenses with similar amounts from the prior year and
investigates all changes exceeding 10%. This procedure most likely could indicate that:

a.

The annual provision for uncollectible accounts expense was inadequate because of
worsening economic conditions.

b Unrealized gains from increases in the value of available-for-sale securities were recorded
. in the income account for trading securities.

c.

Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until
early in the subsequent year.

d Notice of an increase in property tax rates was received by management, but was not
. recorded until early in the subsequent year.
Explanation
Choice "b" is correct. Unrealized gains on available-for-sale securities should properly be
recorded in other comprehensive income. If such gains were erroneously recorded in the income
account for trading securities, this might be discovered through comparison of the current year
and prior year revenues and expenses (assuming the error occurred only in the current year, and
not in the prior year).
Choice "c" is incorrect. If payroll taxes were properly accrued and recorded, there is unlikely to
be a significant change in revenues and expenses for the current year as compared to the prior
year. Payables would not be part of the comparison of revenues and expenses.
Choice "a" is incorrect. In times of worsening economic conditions, one would expect the annual
provision for uncollectible accounts to increase. Since this answer option indicates that the
provision was inadequate, it would appear that the client did not increase the provision
appropriately. Investigating changes in revenues and expenses would not be likely to identify this
error, since failing to increase the provision would likely result in there being little change
between the two years.

Choice "d" is incorrect. An increase in property tax rates should cause a corresponding increase
in accrued property tax expense; however, the question indicates that the appropriate increase
was not recorded in the current year. Investigating changes in revenues and expenses would not
be likely to identify this error, since failing to increase the expense would likely result in there
being little change between the two years.
Analytical procedures performed during an audit indicate that accounts receivable doubled since
the end of the prior year. However, the allowance for doubtful accounts as a percentage of
accounts receivable remained about the same. Which of the following client explanations would
satisfy the auditor?

a.

The client tightened its credit policy during the current year and sold considerably less
merchandise to customers with poor credit ratings.

b Internal control activities over the recording of cash receipts have been improved since
. the end of the prior year.

c.

A greater percentage of accounts receivable are listed in the "more than 120 days
overdue" category than in the prior year.

d The client opened a second retail outlet during the current year and its credit sales
. approximately equaled the older outlet.
Explanation
Choice "d" is correct. If a second, similar retail outlet were opened, one would expect sales and
accounts receivable to double. As long as the collection rates for the new outlet's receivables
were expected to be similar to those of the original outlet, the allowance for doubtful accounts as
a percentage of accounts receivable would remain the same.
Choice "c" is incorrect. If more receivables are potentially uncollectible in the current year (as
opposed to the prior year), the allowance for doubtful accounts as a percentage of receivables
should increase to reflect the greater level of estimated bad debts.
Choice "b" is incorrect. Improved control activities related to the recording of cash receipts
might result in a decrease in accounts receivable in the current year as compared to the prior
year, not an increase. In addition, improving such controls would not be likely to affect the
allowance for doubtful accounts as a percentage of receivables.
Choice "a" is incorrect. If the client sold less merchandise to customers with poor credit ratings,
the allowance for doubtful accounts as a percentage of receivables should decrease to reflect the
lower level of estimated bad debts.

Which of the following procedures would yield the most reliable evidence?
a. A scanning of trial balances.

b. A recalculation of bad debt expense.

c. An inquiry of client personnel.

d. A comparison of beginning and ending retained earnings.

Explanation
Choice "b" is correct. The auditor's direct personal knowledge (obtained through observation,
examination, inspection, or recalculation) is one of the most reliable forms of evidence.
Choice "a" is incorrect. Scanning of trial balances may indicate areas where more attention
should be focused (e.g., unusual balances, zero balances, etc.), but would seldom provide reliable
evidence in and of itself.
Choice "c" is incorrect. Inquiry of client personnel provides evidence that is not particularly
reliable, which is why it often needs to be corroborated by the auditor.
Choice "d" is incorrect. A comparison of beginning and ending retained earnings may provide
information about certain transactions and events (e.g., dividends, income, etc.), but would not in
and of itself provide evidence supporting those items.
Which of the following procedures would be most effective in reducing attestation risk?
a.

Examination of evidence.

b.

Analytical procedures.

c.

Discussion with responsible individuals.

d.

Inquiries of senior management.

Explanation

Choice "a" is correct. Evidence obtained directly by the accountant (e.g., through physical
examination) provides more persuasive evidence than evidence obtained through inquiry,
discussion, or analytical procedures, and therefore reduces attestation risk.
Choices "c", "d", and "b" are incorrect, based on the above explanation.
Which of the following factors would most likely influence an auditor's consideration of the
reliability of data when performing analytical procedures?
a. Whether the data were developed under a system with adequate controls.

b. Whether the data were processed in an online system or a batch entry system.

c. Whether the data were developed in a computerized or a manual accounting system.

d. Whether the data were prepared on the cash basis or in conformity with GAAP.
Explanation
Choice "a" is correct. Strong, effective internal controls improve the reliability of data.
Choice "c" is incorrect. The type of accounting system used does not affect the reliability of data.
Both computerized and manual accounting systems can provide reliable data, as long as there are
appropriate controls in place.
Choice "d" is incorrect. The accounting basis used does not affect the reliability of data. Reliable
data may be provided regardless of whether the cash basis or accrual basis (GAAP) is used, as
long as there are appropriate controls in place.
Choice "b" is incorrect. The type of processing system used does not affect the reliability of data.
Both online systems and batch systems can provide reliable data, as long as there are appropriate
controls in place.
An auditor's decision whether to apply analytical procedures as substantive tests usually is
determined by the:
a. Number of transactions recorded just before and just after the year end.

b. Precision and reliability of the data used to develop expectations.

c. Availability of documentary evidence that should be verified.

d. Extent of accounting estimates used in preparing the financial statements.

Explanation
Choice "b" is correct. The decision as to whether or not to use analytical procedures as
substantive tests is based in part on the availability, reliability, and precision of the data used to
develop expectations.
Choice "c" is incorrect. Verification of documentary evidence is a test of details, not an analytical
procedure.
Choice "d" is incorrect. The extent of accounting estimates used in preparing the financial
statements is not a factor that affects the auditor's decision with respect to the use of analytical
procedures as a substantive test. If there is a plausible and predictable relationship, estimated
amounts should still fall within expected ranges.
Choice "a" is incorrect. Transaction volume is not a factor that affects the auditor's decision with
respect to the use of analytical procedures as a substantive test.
Auditors try to identify predictable relationships when applying analytical procedures.
Relationships involving transactions from which of the following accounts most likely would
yield the highest level of evidence?
a.

Interest expense.

b.

Allowance for doubtful accounts.

c.

Accounts payable.

d.

Accounts receivable.

Explanation
Choice "a" is correct. Income statement accounts tend to be more predictable than balance sheet
accounts, and therefore interest expense would likely yield a higher level of evidence than the
allowance for doubtful accounts, accounts receivable, or accounts payable.

Choice "b" is incorrect. The allowance for doubtful accounts is affected by write-offs of specific
receivables, which is not particularly predictable.
Choice "d" is incorrect. Accounts receivable is affected by payments received from customers,
which is not particularly predictable.
Choice "c" is incorrect. Accounts payable is affected by payments made at the discretion of the
client, which may not be particularly predictable
Which of the following documents are examples of audit evidence generated by the client?
a. Shipping documents and receiving reports.

b. Customer purchase orders and bank statements.

c. Bills of lading and accounts receivable confirmations.

d. Vendor invoices and packing slips.

Explanation
Choice "a" is correct. Shipping documents and receiving reports are internally-generated
evidence, since they are created by the client rather than received from independent sources
outside the enterprise.
Choice "b" is incorrect. Customer purchase orders and bank statements are both external
evidence, since they are received from independent sources outside the enterprise.
Choice "d" is incorrect. Vendor invoices and packing slips are both external evidence, since they
are received from independent sources outside the enterprise.
Choice "c" is incorrect. Bills of lading and accounts receivable confirmations are both external
evidence, since they are received from independent sources outside the enterprise.
Auditors try to identify predictable relationships when using analytical procedures. Relationships
involving transactions from which of the following accounts most likely would yield the highest
level of evidence?
a.

Accounts payable.

b.

Accounts receivable.

c.

Travel and entertainment expense.

d.

Interest expense.

Explanation
Choice "d" is correct. Relationships among income statement accounts tend to be more
predictable than balance sheet accounts (accounts receivable, accounts payable) because they
represent transactions over a period of time rather than at one point in time. In addition,
relationships involving transactions subject to management discretion (travel and entertainment)
are less predictable.
Choices "b", "a", and "c" are incorrect, per the above explanation.
In determining whether transactions have been recorded, the direction of the audit testing should
be from the:
a.

General journal entries.

b.

General ledger balances.

c.

Original source documents.

d.

Adjusted trial balance.

Explanation
Choice "c" is correct. To determine whether transactions have been recorded (completeness
assertion), the auditor should trace from the source documents to the accounting records (general
ledger, trial balances, etc.).
Choices "b", "d", and "a" are incorrect. Testing from the accounting records to the source
documents provides evidence of existence or occurrence, not completeness.
Which of the following pairs of accounts would be analyzed together in the audit
documentation?

a. Notes receivable and interest income.

b. Notes payable and notes receivable.

c. Interest income and interest expense.

d. Accrued interest receivable and accrued interest payable.

Explanation
Choice "a" is correct. The auditor would most likely analyze notes receivable and its related
income statement account, interest income, together.
Choice "d" is incorrect. Accrued interest payable would be analyzed along with notes payable;
accrued interest receivable would be analyzed along with notes receivable.
Choice "b" is incorrect. Notes payable would be analyzed along with interest payable and interest
expense; notes receivable would be analyzed along with interest income.
Choice "c" is incorrect. Interest income would be analyzed with notes receivable; interest
expense would be analyzed with notes payable.
The objective of tests of details of transactions performed as substantive tests is to:

a.

Attain assurance about the reliability of the information system relevant to financial
reporting.

b
Detect material misstatements in the financial statements.
.
c. Evaluate whether management's controls operated effectively.
d
Comply with generally accepted auditing standards.
.
Explanation
Choice "b" is correct. Substantive tests are concerned with dollar amounts and consist of tests of
details of transactions and balances and analytical procedures. The objective of tests of details of

transactions performed as substantive tests is to detect material (dollar) misstatements in the

financial statements.
Choice "d" is incorrect. Tests of details of transactions (performed as substantive tests) are used
to evaluate management's assertions. While tests of details of transactions do help the auditor
comply with GAAS, such compliance is not the primary objective of the tests.
Choice "a" is incorrect. Attaining assurance about the reliability of the information system
relevant to financial reporting is an objective of tests of controls rather than of substantive tests.
Choice "c" is incorrect. Evaluation of the operating effectiveness of management controls is an
objective of tests of controls rather than of substantive tests.
Which of the following types of audit evidence is the most persuasive?
a. Bank statements obtained from the client.

b. Client work sheets supporting cost allocations.

c. Client representation letter.

d. Prenumbered client purchase order forms.

Explanation
Choice "a" is correct. When audit evidence can be obtained from independent sources outside an
entity, it provides greater assurance of reliability for the purposes of an independent audit than
does evidence secured solely within the entity. While the bank statement was obtained from the
client, it is still more persuasive than any of the other three items because it was not prepared by
the client.
Choice "d" is incorrect. Prenumbered client purchase orders are client-generated documents; as
such, they are not as persuasive as externally generated evidence received through a client.
Choice "b" is incorrect. Client work sheets supporting cost allocations are client-generated
documents; as such, they are not as persuasive as externally generated evidence received through
a client.
Choice "c" is incorrect. The client representation letter is a client-generated document; as such, it
is not as persuasive as externally generated evidence received through a client.

Analytical procedures are most appropriate when testing which of the following types of
transactions?
a.

Long-term debt transactions.

b. Acquisitions and disposals of fixed assets.

c.

Operating expense transactions.

d. Payroll and benefit liabilities.

Explanation
Choice "c" is correct. Relationships involving income statement accounts tend to be more
predictable than relationships involving only balance sheet accounts because income statement
accounts represent transactions over a period of time, whereas balance sheet accounts represent
amounts as of a point in time. As a result, analytical procedures are more appropriate for
operating expense accounts.
Choice "d" is incorrect. Payroll and benefit liabilities are generally recalculated and are a balance
sheet account.
Choice "b" is incorrect. Acquisition and disposal of fixed assets are generally vouched to
supporting documentation. Fixed assets is a balance sheet account.
Choice "a" is incorrect. Long-term debt transactions are generally vouched to supporting
documentation. Long-term debt is a balance sheet account.
Which of the following procedures would an auditor most likely perform when auditing the
statement of cash flows?

a.

Reconcile the amounts included in the statement of cash flows to the other financial
statements' amounts.

b Confirm the amounts included in the statement of cash flows with the entity's financial
. institution.
c.
Reconcile the cutoff bank statement to the proof of cash to verify the accuracy of the year-

end cash balance.

d Vouch a sample of cash receipts and disbursements for the last few days of the current
. year.
Explanation
Choice "a" is correct. To audit the statement of cash flows, the auditor reconciles the amounts on
the statement to amounts on other financial statements.
Choice "d" is incorrect. Vouching a sample of cash receipts and disbursements is a procedure
used to audit the cash balance, rather than the statement of cash flows.
Choice "c" is incorrect. Reconciling the cutoff bank statement to the proof of cash to verify the
accuracy of the year-end cash balance is a procedure used to audit the cash balance, rather than
the statement of cash flows.
Choice "b" is incorrect. Confirming cash amounts with the entity's financial institution is a
procedure used to audit the cash balance, rather than the statement of cash flows.
At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the
financial statements. With regard to the valuation of inventory, the auditor concludes that the
evidence obtained is not sufficient to support management's representations. Which of the
following actions is the auditor most likely to take?
a. Consult with the audit committee and issue a qualified opinion.

b. Obtain a statement from management supporting their inventory valuation.

c. Obtain additional evidence regarding the valuation of inventory.

d. Consult with the audit committee and issue a disclaimer of opinion.

Explanation
Choice "c" is correct. If an auditor has doubts about a material assertion (such as the valuation of
inventory), he/she should gather sufficient evidence to eliminate the doubt.
Choices "d" and "a" are incorrect. The auditor would not consult with the audit committee
regarding the sufficiency of audit evidence obtained, as this is determined based on the auditor's

own judgment. In addition, if the auditor is able to obtain additional evidence, it might be
possible to issue an unmodified opinion. Finally, even if no additional evidence is available, the
auditor will still need to decide whether a qualified opinion or a disclaimer of opinion is more
appropriate, depending on materiality.
Choice "b" is incorrect. Since management representations are in fact "statements from
management," obtaining additional statements from management would not provide additional
support.
When applying analytical procedures during an audit, which of the following is the best
approach for developing expectations?

a.

Considering the pattern of several unusual changes without trying to explain what caused
them.

b Comparing client data with client-determined expected results to reduce detailed tests of
. account balances.

c.

Identifying reasonable explanations for unexpected differences before talking to client

management.

d Considering unaudited account balances and ratios to calculate what adjusted balances
. should be.
Explanation
Choice "c" is correct. Identifying reasonable explanations for unexpected differences before
talking to client management helps the auditor in assessing if management's explanation is
reasonable. Management's explanation should always be corroborated with other evidence.
Choice "d" is incorrect. Unaudited account balances are less reliable.
Choice "a" is incorrect. Analytical procedures assume that plausible relationships among data
may reasonably be expected to exist and continue in the absence of known conditions to the
contrary. Conditions that might cause variations in these relationships include unusual events.
Expectations cannot be developed when there is no explanation of what caused a pattern of
unusual changes.
Choice "b" is incorrect. Since the data is obtained from sources within the entity, it is not as
reliable for developing expectations.

Which of the following most likely would cause an auditor to consider whether a client's
financial statements contain material misstatements?
a. The results of an analytical procedure disclose unexpected differences.
b
Audit trails of computer-generated transactions exist only for a short time.
.

c.

The chief financial officer will not sign the management representation letter until the last
day of the auditor's field work.

d Management did not disclose to the auditor that it consulted with other accountants about
. significant accounting matters.
Explanation
Choice "a" is correct. If the results of an analytical procedure disclose unexpected differences,
the auditor should consider that the financial statements may contain a material misstatement.
Choice "d" is incorrect. Management's failure to disclose to the auditor that it consulted with
other accountants about significant accounting matters would not heighten the auditor's concern
about whether the financial statements contain material misstatements.
Choice "c" is incorrect. The management representation letter is typically not signed until the last
day of the auditor's field work.
Choice "b" is incorrect. If audit trails of computer-generated transactions exist only for a short
time, the auditor should adjust the timing of his/her audit procedures accordingly, but this would
not heighten the auditor's concern about whether the financial statements contain material
misstatements.
Which of the following procedures would an auditor most likely perform in auditing the
statement of cash flows?

a.

Compare the amounts included in the statement of cash flows to similar amounts in the
prior year's statement of cash flows.

b
Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balances.
.

c.

Vouch all bank transfers for the last week of the year and first week of the subsequent
year.

d Reconcile the amounts included in the statement of cash flows to the other financial
. statements' balances and amounts.
Explanation
Choice "d" is correct. To audit the statement of cash flows, the auditor reconciles the amounts on
the statement to amounts on other financial statements.
Choice "a" is incorrect. Comparison of amounts on the cash flow statement with those of the
previous period is an analytical procedure that is not commonly used to audit the statement of
cash flows, since sources and uses of cash in the current year are not necessarily predictable
based on sources and uses from the prior year.
Choice "b" is incorrect. Reconciling the cutoff bank statement is a procedure used to audit the
cash balance, rather than the statement of cash flows.
Choice "c" is incorrect. Vouching all bank transfers is a procedure used to audit the cash balance,
rather than the statement of cash flows.
An auditor suspects that a client is fraudulently overstating revenue by recording fictitious sales.
Which of the following audit procedures would most likely be used to identify this situation?
a. Select a sample of entries in the sales journal and trace to the related sales invoices.

b. Select a sample of shipping documents and trace to the related sales invoices.

c. Select a sample of sales invoices and trace to the related shipping documents.

d. Select a sample of sales invoices and trace into the sales journal.
Explanation
Choice "c" is correct. In recording fictitious sales, the client will likely have created phony sales
invoices, but no related shipment will have occurred.
Choice "b" is incorrect. This would test for completeness of sales, by identifying items that were
shipped but not recorded.

Choices "d" and "a" are incorrect. The sales invoices and the sales journal are both internally
created documents, and both would likely reflect the fictitious sale.
Which of the following factors would most likely influence an auditor's consideration of the
reliability of data when performing analytical procedures?
a. Whether the data were prepared on the cash basis or in conformity with GAAP.

b. Whether the data were developed in a computerized or a manual accounting system.

c. Whether the data were processed in an online system or a batch entry system.

d. Whether the data were developed under a system with adequate controls.
Explanation
Choice "d" is correct. Strong, effective internal controls improve the reliability of data.
Choice "b" is incorrect. The type of accounting system used does not affect the reliability of data.
Both computerized and manual accounting systems can provide reliable data, as long as there are
appropriate controls in place.
Choice "a" is incorrect. The accounting basis used does not affect the reliability of data. Reliable
data may be provided regardless of whether the cash basis or accrual basis (GAAP) is used, as
long as there are appropriate controls in place.
Choice "c" is incorrect. The type of processing system used does not affect the reliability of data.
Both online systems and batch systems can provide reliable data, as long as there are appropriate
controls in place.
Which of the following best explains why an analytical procedure might be used as a substantive
test?

a.

To assist in planning the nature, timing, and extent of the auditing procedures to be
performed.

b
To assess the conclusions reached by staff auditors.
.

c. To achieve audit objectives in the most effective and efficient manner possible.

d To determine the adequacy of evidence gathered in response to unusual or unexpected

. balances.
Explanation
Choice "c" is correct. For some assertions, analytical procedures are more effective and efficient
at providing an appropriate level of assurance than are tests of details.
Choice "a" is incorrect. The objective of analytical procedures used in the planning stage of the
audit is to assist in planning the nature, timing, and extent of auditing procedures to be
performed.
Choices "b" and "d" are incorrect. The purpose of applying analytical procedures in the overall
review stage of the audit is to assist the auditor in assessing the conclusions reached and the
overall financial statement presentation. The overall review would also generally include
consideration of the adequacy of evidence gathered in response to unusual or unexpected
balances.
Which of the following would provide an auditor with the most reliable evidence regarding the
existence of accounts receivable?
a. An aging schedule showing the composition of the year-end accounts receivable balance.

b. A copy of the customer's sales order held by the client.

c. A copy of the invoice sent to the customer.

d. An accounts receivable confirmation received by the auditor from the client's customer.
Explanation
Choice "d" is correct. External evidence received by the auditor is considered to be highly
reliable and valid.
Choice "c" is incorrect. An invoice sent to the customer by the client is internal evidence, which
is not as reliable as external evidence.

Choice "b" is incorrect. The customer's sales order is external evidence received and held by the
client, which is not as valid as external evidence received directly by the auditor. In addition, a
sales order alone is only evidence that an order was placed, not that it was filled or that a
receivable exists.
Choice "a" is incorrect. An aging schedule is internal evidence, which is not as valid as external
evidence.
Which of the following activities is an analytical procedure an auditor would perform in the final
overall review stage of an audit to ensure that the financial statements are free from material
misstatement?
a. Reading the minutes of the board of directors' meetings for the year under audit.

b. Ensuring that a representation letter signed by management is in the file.

c. Obtaining a letter concerning potential liabilities from the client's attorney.

d. Comparing the current year's financial statements with those of the prior year.
Explanation
Choice "d" is correct. Analytical procedures performed during the overall final review stage
generally include a review of the current and prior year's financial statements.
Choice "a" is incorrect. This would not be considered an analytical procedure.
Choice "c" is incorrect. This would not be considered an analytical procedure.
Choice "b" is incorrect. This would not be considered an analytical procedure.
Which of the following procedures would an auditor most likely perform to obtain evidence
about the occurrence of subsequent events?
a. Inquire about payroll checks that were recorded before year end but cashed after year end.
b
Review tax returns prepared by management after year end.
.

c.

Determine whether inventory ordered before the year end was included in the physical
count.

d
Investigate changes in capital stock recorded after year end.
.
Explanation
Choice "d" is correct. A change in capital stock that is recorded after the year end is an example
of a subsequent event that might require disclosure in the footnotes to the financial statements.
Choice "c" is incorrect. The inventory issue would not be considered a subsequent event because
the inventory was ordered before year end.
Choice "a" is incorrect. If the payroll checks were recorded prior to year end, there is no
subsequent event issue.
Choice "b" is incorrect. Tax returns prepared after year end would not be considered a
subsequent event issue.
What type of evidence would provide the highest level of assurance in an attestation
engagement?
a. Evidence obtained indirectly.

b. Evidence obtained from multiple internal inquiries.

c. Evidence secured solely from within the entity.

d. Evidence obtained from independent sources.

Explanation
Choice "d" is correct. Audit evidence obtained from independent sources outside of the entity is
more reliable.
Choice "c" is incorrect. Audit evidence obtained from independent sources outside the entity is
more reliable that internal evidence.
Choice "a" is incorrect. Audit evidence obtained directly by the auditor (observation) is more
reliable than evidence obtained indirectly (inquiry about the application of a control).

Choice "b" is incorrect. Audit evidence obtained from independent sources outside the entity is
more reliable than internal evidence. Note that the multiple internal sources could be in
collusion.
Which of the following would not be considered an analytical procedure?

a.

Estimating the current year's expected expenses based on the prior year's expenses and the
current year's budget.

b Projecting a deviation rate by comparing the results of a statistical sample with the actual
. population characteristics.

c.

Converting dollar amounts of income statement account balances to percentages of net

sales for comparison with industry averages.

d Developing the current year's expected net sales based on the sales trend of similar
. entities within the same industry.
Explanation
Choice "b" is correct. This would not be considered an analytical procedure because there is no
comparison or conversion of an entity's financial information/data. Instead, this represents a
procedure used in statistical sampling.
Choice "c" is incorrect. Preparing a common-sized income statement and then comparing the
entity's information to a corresponding industry average represents an analytical procedure.
Choice "d" is incorrect. Using trend analysis on the sales of competing firms to develop a current
year sales forecast for an entity is considered an analytical procedure.
Choice "a" is incorrect. Using trend analysis on the entity's past expenses along with the current
year's budget to develop an estimate of entity's current expenses is a viable analytical procedure.
An auditor tests an entity's control of obtaining credit approval before shipping goods to
customers in support of management's financial statement assertion of:
a.

Valuation and allocation.

b.

Completeness.

c.

Rights and obligations.

d.

Existence.

Explanation
Choice "a" is correct. By ensuring that credit approval is obtained before goods are shipped to
customers, the auditor is testing management's assertion that accounts receivable are collectible
(valuation or allocation).
Choice "b" is incorrect. Ensuring that credit approval is obtained before goods are shipped does
not support the completeness assertion.
Choice "d" is incorrect. Ensuring that credit approval is obtained before goods are shipped does
not support the existence assertion.
Choice "c" is incorrect. Ensuring that credit approval is obtained before goods are shipped does
not support the rights and obligations assertion.
An auditor observed that a client mails monthly statements to customers. Subsequently, the
auditor reviewed evidence of follow-up on the errors reported by the customers. This test of
controls most likely was performed to support management's financial statement assertion(s) of:
Understandability and
classification

Rights and
obligations

a.

Yes

No

b.

Yes

Yes

c.

No

No

d.

No

Yes

Explanation

Choice "d" is correct. Assertions about rights and obligations deal with whether assets are the
rights of the entity and liabilities are the obligations of the entity. Errors reported by customers
might indicate receivables for which the company has no right of collection.
Choices "b" and "a" are incorrect. Assertions about classification and understandability deal with
whether financial information is appropriately presented and described, and disclosures are
clearly expressed. Follow-up of errors reported by customers would not impact the proper
presentation, description, and disclosure of accounts receivable in the financial statements.
Choice "c" is incorrect. Assertions about rights and obligations deal with whether assets are the
rights of the entity and liabilities are the obligations of the entity. Errors reported by customers
might indicate receivables for which the company has no right of collection.
Which of the following types of audit evidence provides the least assurance of reliability?
a. Prior months' bank statements obtained from the client.

b. Receivable confirmations received from the client's customers.

c. Municipal property tax bills prepared in the client's name.

d. Prenumbered receiving reports completed by the client's employees.

Explanation
Choice "d" is correct. Prenumbered receiving reports completed by the client's employees are
considered internal evidence and are the least reliable of the items listed.
Choice "b" is incorrect. Receivable confirmations received from client's customers, which are
considered external evidence, are more reliable than internal evidence.
Choice "a" is incorrect. Prior months' bank statements obtained from the client, which are
considered external evidence, are more reliable than internal evidence.
Choice "c" is incorrect. Municipal property tax bills prepared in the client's name, which are
considered external evidence, are more reliable than internal evidence.
Which of the following would be considered an analytical procedure?
a. Reconciling physical counts to perpetual records and general ledger balances.

b. Testing purchasing, shipping, and receiving cutoff activities.

c. Projecting the deviation rate of a statistical sample to the population.

d. Comparing inventory balances to recent sales activities.

Explanation
Choice "d" is correct. Comparing relationships among data, such as inventory balances to recent
sales activities, represents an analytical procedure.
Choice "b" is incorrect. Testing purchasing, shipping, and receiving cutoff activities represents a
test of details procedure.
Choice "c" is incorrect. Projecting the deviation rate of a statistical sample to the population is
used to evaluate sample results.
Choice "a" is incorrect. Reconciling physical counts to perpetual records and general ledger
balances represents a test of details procedure.
Which of the following is a management assertion regarding account balances at the period end?
a. Transactions and events that have been recorded have occurred and pertain to the entity.
b
The entity holds or controls the rights to assets, and liabilities are obligations of the entity.
.

c.

Amounts and other data related to transactions and events have been recorded
appropriately.

d
Transactions and events have been recorded in the proper accounts.
.
Explanation
Choice "b" is correct. "The entity holds or controls the rights to assets" and "liabilities are
obligations of the entity" are management assertions that relate to the rights and obligation
assertion about account balances at period end.

Choice "a" is incorrect. Transactions and events that have been recorded have occurred and
pertain to the entity are statements that relate to the existence and occurrence assertion about
transactions and events.
Choice "d" is incorrect. The statement "transactions and events have been recorded in the proper
accounts" relates to the understandability and classification assertion about transactions and
events.
Choice "c" is incorrect. Amounts and other data related to transactions and events have been
recorded appropriately is a statement that relates to the valuation, allocation and accuracy
assertion about transactions and events.
PCAOB standards state that the relevance of audit evidences depends on all but which of the
following?
a. Whether the audit procedure is designed to directly test an assertion.

b. The auditor's risk assessment.

c. Whether the audit procedure is designed to test for an understatement or overstatement.

d. The timing of the audit procedure.

Explanation
Choice "b" is correct. The auditor's risk assessment affects the nature, extent, and timing of audit
procedures, but does not determine the relevance of audit evidence.
Choice "a" is incorrect. The relevance of audit evidence depends in part on whether the audit
procedure is designed to directly test an assertion. If the audit procedures is designed to directly
test an assertion and the evidence doesn't tell us anything about that assertion, then the evidence
would not be relevant.
Choice "c" is incorrect. The relevance of audit evidence depends in part on whether the audit
procedure is designed to test for an understatement or overstatement.
Choice "d" is incorrect. The relevance of audit evidence depends in part on the timing of the
audit procedure.