TBChap 005

Chapter 05
Audit Evidence and Documentation

True / False Questions
1. The professional standards consider calculating depreciation expense a "routine"
transaction.
True
False
2. The most reliable form of documentary evidence generally is considered to be

documents created by the client.
True
False
3. A vendor's invoice is an example of documentary evidence created by a third party

and held by the client.
True
False
4. In performing analytical procedures, the auditors may use dollar amounts, physical
quantities, or percentages.
True
False
5. The primary purpose of a letter of representations is to obtain additional evidence

about specific accounts.
True
False
6. The auditors should propose an adjusting journal entry for all material related-party
transactions.
True
False
7. When the risk of material misstatement for an account is high, the auditors may
perform additional substantive procedures to restrict detection risk to a lower level.
True
False
8. Working papers of continuing audit interest usually are filed with the administrative
working papers.
True
False
5-1
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McGraw-Hill Education.
9. The use of lead schedules is designed to increase the detail of the working trial
balance.
True
False
10. Adjusting journal entries are ordinarily recorded by the client, while reclassifying
journal entries need not be recorded.
True
False
Multiple Choice Questions

11. To be effective, analytical procedures performed near the end of the audit should be
performed by
A. The partner performing the quality review of the audit.
B. A beginning staff accountant who has had no other work related to the
engagement.
C. A manager or partner who has a comprehensive knowledge of the client's business
and industry.
D.
The CPA firm's quality control manager.
12.
The components of the risk of misstatement are:
Inherent Risk
Control Risk
A.
Yes
Yes
B.
Yes
Yes
C.
Yes
No
D.
No
Yes
A.
B.
C.
D.
Option A
Option B
Option C
Option D
5-2
13. Financial statement assertions are established for classes of transactions:
Account Balances
Disclosures
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
A.
B.
C.
D.
Option A
Option B
Option C
Option D
14. Further audit procedures include:
Risk assessment
procedures
Tests of
controls
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
A.
B.
C.
D.
Option A
Option B
Option C
Option D
15. Assertions that have a meaningful bearing on whether an account balance,

transaction class, or disclosure is fairly stated are referred to as:
A.
B.
C.
D.
Appropriate assertions.
Sufficient assertions.
Relevant assertions.
Reliable assertions.
16. Which of the following is not an assertion relating to classes of transactions?

A.
B.
C.
D.
Accuracy.
Sufficiency.
Cutoff.
Classification.
5-3
17. Audit documentation should be sufficient to allow which individual to understand the
audit work performed, the evidence obtained, and the significant conclusions?
A.
B.
C.
D.
A certified public accountant.

A partner in a CPA firm.
An experienced auditor.
The controller at the company being audited.
18. Which of the following is not considered to be an analytical procedure?

A.
B.
C.
D.
Comparisons of financial statement amounts with source documents.

Comparisons of financial statement amounts with nonfinancial data.
Comparisons of financial statement amounts with budgeted amounts.
Comparisons of financial statement amounts with comparable prior year amounts.
19. An auditor plans to apply substantive tests to the details of asset and liability
accounts as of an interim date rather than as of the balance sheet date. The auditor
should be aware that this practice
A. Eliminates the use of certain statistical sampling methods that would otherwise be
available.
B. Presumes that the auditor will reperform the tests as of the balance sheet date.
C. Should be especially considered when there are rapidly changing economic
conditions.
D. Potentially increases the risk that errors which exist at the balance sheet date will
not be detected.
20. An auditor compared the current-year gross margin with the prior-year gross margin
to determine if cost of sales is reasonable. What type of audit procedure was
performed?
A.
B.
C.
D.
Test of transactions.
Analytical procedures.
Test of controls.
Test of details.
21. The inspection of a vendor's invoice by the auditors is:

A. Direct evidence about occurrence of a transaction.
B. Physical evidence about occurrence of a transaction.
C. Documentary evidence about occurrence of a transaction.
D.
Part of the client's accounting system.
5-4
22. The auditors of Smith Electronics wish to limit the audit risk of material misstatement
in the test of accounts receivable to 5 percent. They believe that inherent risk is
100%, and there is a 40% risk that material misstatement could have bypassed the
client's system of internal control. What is the maximum detection risk the auditors
should specify in their substantive procedures of details of accounts receivable?
A.
B.
C.
D.
5%.
12.5%.
42.7%.
60%.
23. Analytical procedures are required at the risk assessment stage and as:
A.
B.
C.
D.
Tests of internal control.

Substantive procedures.
Procedures near the end of the audit.
Computer generated procedures.
24. During financial statement audits, auditors seek to restrict which type of risk?
A.
B.
C.
D.
Control risk.
Detection risk.
Inherent risk.
Account risk.
25. Which of the following groups are not considered a specialist by AICPA Professional
Standards?
A.
B.
C.
D.
Appraisers.
Internal auditors.
Engineers.
Geologists.
26. A CPA wishes to use a representation letter as a substitute for performing other audit
procedures. Doing so:
A.
Violates professional standards.
B. Is acceptable, but should only be done when cost justified.
C.
Is acceptable, but only for non-public clients.
D. Is acceptable and desirable under all conditions.
5-5
27. Which of the following best describes the problem with the use of published industry
averages for analytical procedures?
A.
B.
C.
D.
Lack of comparability.
Lack of sufficiency.
Lack of accuracy.
Lack of availability.
28. In auditing an asset valued at fair value, which of the following potentially provides
the auditor with the strongest evidence?
A. A price for a similar asset obtained from an active market.
B. An appraisal obtained discounting future cash flows.
C. Management's judgment of the cost to purchase an equivalent asset.
D.
The historical cost of the asset.
29. An auditor should expect that fair value is the price that would be received to sell an
asset in an orderly transaction between the market participants at the:
A.
Acquisition date of the asset.
B.
Audit report date.
C.
Expected replacement date of the asset.
D. Measurement date (ordinarily the date of the financial statements).
30. Which of the following best describes the reason that auditors are concerned with the
detection of related party transactions?
A. The financial statements must often be adjusted for the effects of material related
party transactions.
B. Material related party transactions must be disclosed in the notes to the financial
statements.
C. The substance of related party transactions will differ from their form.
D. In a related party transaction one party has the ability to exercise significant
influence over the other party.
31. Which of the following is not a basic procedure used in an audit?
A.
B.
C.
D.
Risk assessment procedures.

Tests of controls.
Tests of direct evidence.
5-6
32. Which of the following is not a financial statement assertion relating to account
balances?
A.
B.
C.
D.
Completeness.
Existence.
Rights and obligations.
Recorded value and discounts.
33. Which of the following is generally true about the sufficiency of audit evidence?
A. The amount of evidence that is sufficient varies directly with the acceptable risk of
material misstatement.
B. The amount of evidence concerning a particular account varies inversely with the
materiality of the account.
C. The amount of evidence concerning a particular account varies inversely with the
inherent risk of the account.
D. When evidence is appropriate with respect to an account it is also sufficient.
34. Which of the following is true about analytical procedures?
A. Performing analytical procedures results in the most reliable form of evidence.
B. Analytical procedures are tests of controls used to evaluate the quality of a client's
internal control.
C. Analytical procedures are used for planning, but they should not be used to obtain
evidence as to the reasonableness of specific account balances.
D. Analytical procedures are used in risk assessment, as a substantive procedure for
specific accounts, and near the completion of the audit of the audited financial
statements.
35. Which of the following is a basic approach often used by auditors to evaluate the
reasonableness of accounting estimates?
A.
B.
C.
D.
Confirmation.
Observation.
Reviewing subsequent events or transactions.
Analyzing corporate organizational structure.
36. An auditor is performing an analytical procedure that involves comparing a client's

account balances over time. This technique is referred to as:
A.
B.
C.
D.
Vertical analysis.
Horizontal analysis.
Cross-sectional analysis.
Comparison analysis.
5-7
37. An auditor is performing an analytical procedure that involves comparing a client's

ratios with other companies in the same industry. This technique is referred to as:
A.
B.
C.
D.
Vertical analysis.
38. An auditor is performing an analytical procedure that involves developing commonsize financial statements. This technique is referred to as:
A.
B.
C.
D.
Vertical analysis.
39. Which of the following is not a basic approach often used by auditors to evaluate the
A.
B.
C.
D.
Confirmation of amounts.
Review of management's process of development.
Independent development of an estimate.
Review of subsequent events.
40. The audit time budget is an example of:

A.
B.
C.
D.
A supporting schedule.
An administrative working paper.
A lead schedule.
A corroborative working paper.
41. A schedule set up to combine similar general ledger accounts, the total of which
appears on the working trial balance as a single amount, is referred to as a:
A.
B.
C.
D.
Supporting schedule.
Lead schedule.
Corroborating schedule.
Reconciling schedule.
42. Which of the following is not a function of working papers?

A.
Provide support for the auditors' report.
B.
Provide support for the accounting records.
C. Aid partners in planning and conducting future audits.
D. Document staff compliance with generally accepted auditing standards.
5-8
43. A schedule listing account balances for the current and previous years, and columns
for adjusting and reclassifying entries proposed by the auditors to arrive at the final
mount that will appear in the financial statement, is referred to as a:
A.
B.
C.
D.
Working trial balance.

Lead schedule.
Summarizing schedule.
44. The auditors use analytical procedures during the course of an audit. The most
important phase of performing these procedures is the:
A. Vouching of all data supporting various ratios.
B. Investigation of significant variations and unusual relationships.
C. Comparison of client-computed statistics with industry data on a quarterly and fullyear basis.
D.
Recalculation of industry date.
45. The auditors must obtain written client representations that normally should be
signed by:
A. The president and the chairperson of the board.
B.
The treasurer and the internal auditor.
C. The chief executive officer and the chief financial officer.
D. The corporate counsel and the audit committee chairperson.
46. Which of the following ultimately determines the specific audit procedures necessary
to provide independent auditors with a reasonable basis for the expression of an
opinion?
A.
B.
C.
D.
The audit time budget.

The auditors' judgment.
Generally accepted accounting quality standards.
The auditors' working papers.
47. Failure to detect material dollar errors in the financial statements is a risk which the
auditors primarily mitigate by:
A.
B.
C.
D.
Performing substantive procedures.

Performing tests of controls.
Assessing control risk.
Obtaining a client representation letter.
5-9
48. An independent auditor finds that the Simmer Corporation occupies office space, at
no charge, in an office building owned by a shareholder. This finding indicates the
existence of:
A.
B.
C.
D.
Management fraud.
Related party transactions.
Window dressing.
Weak internal control.
49. Which of the following would not necessarily be considered a related party
transaction?
A.
Payment of a bonus to the president.
B. Purchases from another corporation that is controlled by the corporation's chief
stockholder.
C. Loan from the corporation to a major stockholder.
D. Sale of land to the corporation by the spouse of a director.
50. The date of the management representation letter should coincide with the:
A.
Date of the auditor's report.
B.
Balance sheet date.
C. Date of the latest subsequent event referred to in the notes to the financial
statements.
D.
Date of the engagement agreement.
51. An example of an analytical procedure is the comparison of:
A. Financial information with similar information regarding the industry in which the
entity operates.
B. Recorded amounts of major disbursements with appropriate invoices.
C. Results of a statistical sample with the expected characteristics of the actual
population.
D. EDP generated data with similar data generated by a manual accounting system.
52. When considering the use of management's written representations as audit
evidence about the completeness assertion, an auditor should understand that such
representations:
A. Complement, but do not replace, substantive procedures designed to support the
assertion.
B. Constitute sufficient evidence to support the assertion when considered in
combination with a moderate assessed level of control risk.
C. Are generally sufficient audit evidence to support the assertion regardless of the
assessed level of control risk.
D. Replace the assessed level of control risk as evidence to support the assertions.
5-10
53. Which of the following expressions is least likely to be included in a client's

representation letter?
A. No events have occurred subsequent to the balance sheet date that require
adjustment to, or disclosure in, the financial statements.
B. The company has complied with all aspects of contractual agreements that would
have a material effect on the financial statements in the event of noncompliance.
C. Management acknowledges responsibility for illegal actions committed by
employees.
D. Management has made available all financial statements, including notes.
54. Which of the following statements is generally correct about audit evidence?
A. The auditor's direct personal knowledge, obtained through observation and
inspection, is more persuasive than information obtained indirectly from
independent outside sources.
B. To be appropriate, audit evidence must be sufficient.
C. Accounting data alone may be considered sufficient appropriate audit evidence to
issue an unqualified opinion on financial statements.
D. Appropriateness of audit evidence refers to the amount of corroborative evidence
to be obtained.
55. Which of the following statements relating to audit evidence is the most accurate
statement?
A. Audit evidence gathered by an auditor from outside an enterprise is 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 valid evidence.
D. The auditor must obtain sufficient appropriate audit evidence.
56. Which of the following is not a typical analytical procedure?
A. Study of relationships of the financial information with relevant nonfinancial
information.
B. Comparison of the financial information with similar information regarding the
industry in which the entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate
invoices.
D. Comparison of the financial information with budgeted amounts.
57. Which of the following is not a primary purpose of audit working papers?
A.
B.
C.
D.
To coordinate the examination.

To assist in preparation of the audit report.
To support the financial statements.
To provide evidence of the audit work performed.
5-11
58. Concerning retention of working papers, the Sarbanes-Oxley Act:

A.
B.
C.
D.
Has no provisions.
Requires permanent retention.
Requires retention for at least 7 years.
Requires retention for a period of 4 or less years.
59. During an audit engagement pertinent data are prepared and included in the audit
working papers. The working papers primarily are considered to be:
A. A client-owned record of conclusions reached by the auditors who performed the
engagement.
B.
Evidence supporting financial statements.
C. Support for the auditors' representations as to compliance with generally accepted
auditing standards.
D. A record to be used as a basis for the following year's engagement.
60. Although the quantity, type, and content of working papers will vary with the
circumstances, the working papers generally would include the:
A. Copies of those client records examined by the auditor during the course of the
engagement.
B. Evaluation of the efficiency and competence of the audit staff assistants by the
partner responsible for the audit.
C. Auditor's comments concerning the efficiency and competence of client
management personnel.
D. Auditing procedures followed and the testing performed in obtaining audit
evidence.
61. The permanent file section of the working papers that is kept for each audit client
most likely contains:
A. Review notes pertaining to questions and comments regarding the audit work
performed.
B. A schedule of time spent on the engagement by each individual auditor.
C. Correspondence with the client's legal counsel concerning pending litigation.
D. Narrative descriptions of the client's accounting procedures and controls.
62. Working papers that record the procedures used by the auditor to gather evidence
should be:
A. Considered the primary support for the financial statements being examined.
B. Viewed as the connecting link between the books of account and the financial
statements.
C. Designed to meet the circumstances of the particular engagement.
D. Destroyed when the audited entity ceases to be a client.
5-12
63. In general, which of the following statements is correct with respect to ownership,
possession, or access to working papers prepared by a CPA firm in connection with an
audit?
A. The working papers may be obtained by third parties where they appear to be
relevant to issues raised in litigation.
B. The working papers are subject to the privileged communication rule which, in a
majority of jurisdictions, prevents third-party access to the working papers.
C. The working papers are the property of the client after the client pays the fee.
D. The working papers must be retained by the CPA firm for a period of ten years.
64. Confirmation would be most effective in addressing the existence assertion for the:
A. Addition of a milling machine to a machine shop.
B. Payment of payroll during regular course of business.
C.
Inventory held on consignment.
D. Granting of a patent for a special process developed by the organization.
65. In preparing for an audit of the retail footwear division of a major retail organization,
the auditor gathered the following information about the organization's stores:
All
Stores
Northeast
Average sales per store
$736,000
$840,000
Average cost of goods sold per store
$375,000
$420,000
Number of stores
Average square feet per store
Average sales per full-time employee
48
1,800
$137,000
$152,000
Average wage related expense per store
$98,000
$102,000
Average net profit contribution per store
$238,000
$285,000
An auditor performs analytical procedures that involve comparing the gross margins
of various divisional operations with those of other divisions and with the individual
division's performance in previous years. The auditor notes a significant increase in
the gross margin at one division. The auditor does some preliminary investigation
and also notes that there were no changes in products, production methods, or
divisional management during the year. Based on the above information, the most
likely cause of the increase in gross margin would be:
A. An increase in the number of competitors selling similar products.
B. A decrease in the number of suppliers of the material used in manufacturing the
product.
C.
An overstatement of year-end inventory.
D. An understatement of year-end accounts receivable.
5-13
66. Management is concerned about the lower level of profitability in the Mid-Central
Region. Which of the following would be a reasonable possible explanation(s) of the
lower profitability for the Mid-Central Region?
I. The lower number of stores in the Mid-Central Region.
II. Sales employees are not as productive in generating sales as those in other
regions.
III. The Mid-Central Region has a lower gross margin.
A.
B.
C.
D.
I only.
II only.
II and III only.
I, II and III.
67. Based on the previous information, which of the following preliminary conclusions can
the auditor use as a basis for further investigations?
A. Sales per store are directly related to the size of the store.
B. Sale clerks are less productive in larger size stores.
C. Gross margin is directly related to the size of the store.
D. Average square feet of store correlates with the number of stores in the district.
68. Which of the following statements is not correct regarding the auditor's further
analysis?
A. The Mid-Central Region has fewer average full-time equivalent employees per
store than the other regions per store.
B. The other regions all generate higher sales per square foot than the Mid-Central
Region.
C. The Mid-Central Region has the highest average wages per full-time equivalent
employee.
D. The largest contributor to total corporate profits is the Southwest Region.
69. Management has centralized purchasing and uses a model based upon previous
year's sales with adjustments for trends in the market place (e.g., the trend to more
casual shoes). A staff auditor has suggested that the centralized purchasing may be
one of the reasons for the lower level of profitability in the Mid-Central Region. Which
of the following would be the best single audit procedure to address the staff
auditor's assertion?
A. Take a sample of receiving documents at stores and trace to purchase orders to
determine the length of time between the purchase and delivery of the goods.
B. Interview store managers in the Mid-Central Region to determine their attitude
toward centralized purchasing.
C. Perform an inventory count at selected stores in the Mid-Central Region and
determine if adjustments are needed to the perpetual records.
D. Perform a product-line analysis of sales and purchases in the Mid-Central Region
and compare with other regions.
5-14
70. What type of transactions ordinarily have high inherent risk because they involve
management judgments or assumptions in formulating accounting balances?
A.
B.
C.
D.
Estimation.
Nonroutine.
Qualified.
Routine.
71. Assertions with high inherent risk are least likely to involve:
A.
B.
C.
D.
Complex calculations.
Difficult accounting issues.
Routine transactions.
Significant judgment by management.
72. The date on which no information may be deleted from audit documentation is the
A.
Client's year-end.
B.
Documentation completion date.
C.
Last date of significant fieldwork.
D. All of these are incorrect in that no information may ever be deleted from audit
documentation.
73. In evaluating an entity's accounting estimates, one of the auditor's objectives is to
determine whether the estimates are
A.
B.
C.
D.
Prepared in a satisfactory control environment.

Consistent with industry guidelines.
Based on verifiable objective assumptions.
Reasonable in the circumstances.
74. In obtaining sufficient appropriate audit evidence, the work of which type or types of
specialists may be relied upon?
Client Engaged
Auditor Engaged
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
A.
B.
C.
D.
Option A
Option B
Option C
Option D
5-15
75. Which of the following is most likely to be considered an analytical procedure?

A. Testing purchases at year-end to determine they were recorded in the proper
period.
B. Comparing inventory balances to recent sales activities.
C. Selecting a sample of year-end receivables for confirmation.
D. Reconciling physical counts of inventory to perpetual records.
76. An unexpected economic downturn is likely to have which effect on inventory
turnover.
A.
B.
C.
D.
Increase.
Decrease.
No effect.
Each of these replies is equally likely.
77. Which of the following is most consistent with an increase in the ratio of debt to
equity?
A. Payment of a required principal payment on long-term debt.
B. Repurchase of a portion of the company's outstanding common stock.
C. Higher than expected profits due to a decrease in cost of goods sold.
D. Payment of most accounts receivable immediately prior to year-end using a portion
of the company's cash.
78. Fraudulent sales and accounts receivables recorded at year-end (with no cost of
goods sold entry) will:
A.
B.
C.
D.
Decrease recorded net income.

Decrease the current ratio.
Increase days of sales in accounts receivable.
Increase year-end recorded inventory.
Essay Questions
5-16
79. For each of the audit procedures listed below select the type of audit procedure, if
any, that the auditor performed. A type of audit procedure may be selected once or
not at all.
5-17
Ty
pe
of
au
Audit
dit
Procedur
pr
es
oc
ed
ur
e
During the
physical
inventory
count, the
auditor
requested
that
Acertain
.containers
of
inventory
items be
opened to
ensure
they were
not empty.
An
al
yti
cal
1pr
.oc
ed
ur
es
During a
site visit
to a
branch
warehouse
, the
auditor
Bnoted
.unauthoriz
ed
personnel
have
access to
the
inventory.
Ex
ter
na
l
2co
.nfi
rm
ati
on
The
auditor
obtained a
copy of
the
companys
accountin
g manual
In
Cand read 3qu
.the
.iry
section on
inventory
to prepare
for the
physical
inventory
observatio
n.
5-18
The
auditor
sent a
letter to
the
companys
outside
attorney
accompani
ed by
managem
ents
request
D
.for
informatio
n
concernin
g pending
or
threatene
d
litigation,
claims,
and
assessme
nts.
Ins
pe
cti
on
of
re
co
4rd
.s
or
do
cu
m
en
ts
The
auditing
firms
computer
assisted
audit
specialist
obtained
an
electronic
Ebilling file
.from the
company
and
checked
the
accuracy
of the
summariz
ed billings
file.
Ins
pe
cti
on
of
5ta
.ng
ibl
e
as
se
ts
FThe
.auditor
selected a
sample of
invoices
and
agreed the
vendor to
the
approved
vendor
list, as had
been
6Ob
.se
rv
ati
on
5-19
required
by the
client's
internal
control
procedure
s.
The
auditor
scanned
the repairs
and
G
maintenan
.ce account
for
unusually
large
amounts.
Re
cal
7cul
.ati
on
Re
pe
8rfo
.rm
an
ce
5-20
80. Analytical procedures are substantive procedures that may be used to provide
evidence about specific accounts and classes of transactions.
a. Describe three major types of comparisons the auditor might make in performing
analytical procedures.
b. At what stages of the audit are analytical procedures performed and what purpose
do they serve at each stage?
81. Audit working papers are an integral part of an examination in accordance with
generally accepted auditing standards.
a. Describe three major functions of the audit working papers.
b. Distinguish between the permanent working paper file and the current working
paper file.
5-21
82. The following is an audit working paper prepared by an assistant on the Williams
audit:
Prepared by ___
Reviewed by ___
Williams Inc.
Bank Confirmation-General Account
12/31/0X
Balance per Bank @ 12/31/0X
Deposit in Transit per A-1-2
$20,200.22
2,000.00
Outstanding Checks per A-1-3
(5,200.00)
Other Note Collected by Bank
(10,000.00)
Bank Service Charge

Balance per Books @ 12/31/0X
(9.50)
$8,990.69
Column footed.
Amount agrees to amount recorded as a deposit on the bank statement and
description agrees with receipt enclosed with 12/31/0X bank statement. This note is
the Wilde note receivable that was recorded as a receipt by the client in the cash
receipts journal on 1/3/0X. The receivable was appropriately credited and properly
reflected in the January cash receipts journal. No adjustment needed as bank and
books simply record this in different periods.
Agreed to 12/31/0X bank statement.
Agreed to general ledger.
A1
Required:
Prepare a list of review points as the preparer of this working. You may assume that
any other working papers referred to appropriate. You will receive credit for proper
points you bring up and lose credit for improper ones and omissions.
5-22
5-23
Chapter 05 Audit Evidence and Documentation Answer Key

True / False Questions
1.
The professional standards consider calculating depreciation expense a "routine"

transaction.
FALSE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-02 Identify and explain the components of audit risk.
Topic: Risk, Evidence, and Assertions
2.
The most reliable form of documentary evidence generally is considered to be

documents created by the client.
FALSE
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Learning Objective: 05-04 List and describe types of audit evidence.
3.
A vendor's invoice is an example of documentary evidence created by a third party

and held by the client.
TRUE
AICPA: BB Industry
Blooms: Understand
4.
In performing analytical procedures, the auditors may use dollar amounts, physical
quantities, or percentages.
TRUE
AICPA: BB Industry
Blooms: Understand
5-24
Topic: Analytical Procedures
5.
The primary purpose of a letter of representations is to obtain additional evidence

about specific accounts.
FALSE
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
6.
The auditors should propose an adjusting journal entry for all material relatedparty transactions.
FALSE
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe the considerations involved in auditing subjective areas, such as certain
financial statement items valued at fair value.
Topic: Evidence for Subjective Areas
7.
When the risk of material misstatement for an account is high, the auditors may
perform additional substantive procedures to restrict detection risk to a lower
level.
TRUE
AICPA: BB Industry
Blooms: Understand
8.
Working papers of continuing audit interest usually are filed with the
administrative working papers.
FALSE
AICPA: BB Industry
Blooms: Understand
Learning Objective: 05-09 Describe the types of working papers and the way they are organized.
Topic: Audit Documentation
5-25
9.
The use of lead schedules is designed to increase the detail of the working trial
balance.
FALSE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
10.
Adjusting journal entries are ordinarily recorded by the client, while reclassifying
journal entries need not be recorded.
TRUE
AICPA: BB Industry
Blooms: Understand
Multiple Choice Questions

11.
To be effective, analytical procedures performed near the end of the audit should
be performed by
A.
The partner performing the quality review of the audit.
B. A beginning staff accountant who has had no other work related to the
engagement.
C. A manager or partner who has a comprehensive knowledge of the client's
business and industry.
D.
The CPA firm's quality control manager.
AICPA: BB Industry
Blooms: Understand
5-26
12.
The components of the risk of misstatement are:
Inherent Risk
Control Risk
A.
Yes
Yes
B.
Yes
Yes
C.
Yes
No
D.
No
Yes
A.
B.
C.
D.
Option A
Option B
Option C
Option D
AICPA: BB Industry
Blooms: Understand
13.
Financial statement assertions are established for classes of transactions:
Account Balances
Disclosures
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
A.
B.
C.
D.
Option A
Option B
Option C
Option D

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain the relationship between audit risk, audit evidence, and financial statement
assertions.
5-27
14.
Further audit procedures include:
Risk assessment
procedures
Tests of
controls
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D
.
No
No
A.
B.
C.
D.
Option A
Option B
Option C
Option D
AICPA: BB Industry
Blooms: Understand
Topic: Audit Procedures
15.
Assertions that have a meaningful bearing on whether an account balance,

transaction class, or disclosure is fairly stated are referred to as:
A.
B.
C.
D.
Appropriate assertions.
Sufficient assertions.
Relevant assertions.
Reliable assertions.

AICPA: BB Industry
Blooms: Understand
assertions.
16.
Which of the following is not an assertion relating to classes of transactions?

A.
B.
C.
D.
Accuracy.
Sufficiency.
Cutoff.
Classification.
AICPA: BB Industry
5-28
Blooms: Understand
Learning Objective: 05-03 Distinguish between the concepts of sufficient and appropriate as they apply to audit
evidence.
17.
Audit documentation should be sufficient to allow which individual to understand

the audit work performed, the evidence obtained, and the significant conclusions?
A.
B.
C.
D.
A certified public accountant.

A partner in a CPA firm.
An experienced auditor.
The controller at the company being audited.

AICPA: BB Industry
Blooms: Understand
Learning Objective: 05-07 Discuss the factors that affect the auditors' judgment as to the nature and extent of
audit documentation.
Source: AICPA
18.
Which of the following is not considered to be an analytical procedure?

A.
B.
C.
D.
Comparisons of financial statement amounts with source documents.

Comparisons of financial statement amounts with nonfinancial data.
Comparisons of financial statement amounts with budgeted amounts.
Comparisons of financial statement amounts with comparable prior year
amounts.
AICPA: BB Industry
Blooms: Understand
19.
An auditor plans to apply substantive tests to the details of asset and liability
accounts as of an interim date rather than as of the balance sheet date. The
auditor should be aware that this practice
A. Eliminates the use of certain statistical sampling methods that would otherwise
be available.
B. Presumes that the auditor will reperform the tests as of the balance sheet date.
C. Should be especially considered when there are rapidly changing economic
conditions.
D. Potentially increases the risk that errors which exist at the balance sheet date
will not be detected.
AICPA: BB Industry
5-29

Blooms: Apply
Difficulty: 3 Hard
Source: AICPA
20.
An auditor compared the current-year gross margin with the prior-year gross
margin to determine if cost of sales is reasonable. What type of audit procedure
was performed?
A.
B.
C.
D.
Test of transactions.
Analytical procedures.
Test of controls.
Test of details.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Source: AICPA
21.
The inspection of a vendor's invoice by the auditors is:

A.
B.
C.
D.
Direct evidence about occurrence of a transaction.

Physical evidence about occurrence of a transaction.
Documentary evidence about occurrence of a transaction.
Part of the client's accounting system.
AICPA: BB Industry
Blooms: Understand
22.
The auditors of Smith Electronics wish to limit the audit risk of material
misstatement in the test of accounts receivable to 5 percent. They believe that
inherent risk is 100%, and there is a 40% risk that material misstatement could
have bypassed the client's system of internal control. What is the maximum
detection risk the auditors should specify in their substantive procedures of details
of accounts receivable?
A.
B.
C.
D.
5%.
12.5%.
42.7%.
60%.
AICPA: BB Industry
5-30

Blooms: Understand
23.
Analytical procedures are required at the risk assessment stage and as:
A.
B.
C.
D.
Tests of internal control.

Procedures near the end of the audit.
Computer generated procedures.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
24.
During financial statement audits, auditors seek to restrict which type of risk?
A.
B.
C.
D.
Control risk.
Detection risk.
Inherent risk.
Account risk.
AICPA: BB Industry
Blooms: Understand
25.
Which of the following groups are not considered a specialist by AICPA Professional
Standards?
A.
B.
C.
D.
Appraisers.
Internal auditors.
Engineers.
Geologists.
AICPA: BB Industry
Blooms: Understand
5-31
26.
A CPA wishes to use a representation letter as a substitute for performing other

audit procedures. Doing so:
A.
B.
C.
D.
Violates professional standards.

Is acceptable, but should only be done when cost justified.
Is acceptable, but only for non-public clients.
Is acceptable and desirable under all conditions.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
27.
Which of the following best describes the problem with the use of published
industry averages for analytical procedures?
A.
B.
C.
D.
Lack of comparability.
Lack of sufficiency.
Lack of accuracy.
Lack of availability.
AICPA: BB Industry
Blooms: Understand
28.
In auditing an asset valued at fair value, which of the following potentially provides
the auditor with the strongest evidence?
A. A price for a similar asset obtained from an active market.
B.
An appraisal obtained discounting future cash flows.
C. Management's judgment of the cost to purchase an equivalent asset.
D.
The historical cost of the asset.

AICPA: BB Industry
Blooms: Understand
5-32
29.
An auditor should expect that fair value is the price that would be received to sell
an asset in an orderly transaction between the market participants at the:
A.
Acquisition date of the asset.
B.
Audit report date.
C.
Expected replacement date of the asset.
D. Measurement date (ordinarily the date of the financial statements).

AICPA: BB Industry
Blooms: Understand
30.
Which of the following best describes the reason that auditors are concerned with
the detection of related party transactions?
A. The financial statements must often be adjusted for the effects of material
related party transactions.
B. Material related party transactions must be disclosed in the notes to the
financial statements.
C. The substance of related party transactions will differ from their form.
D. In a related party transaction one party has the ability to exercise significant
influence over the other party.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
31.
Which of the following is not a basic procedure used in an audit?

A.
B.
C.
D.
Risk assessment procedures.

Tests of controls.
Tests of direct evidence.
AICPA: BB Industry
Blooms: Understand
5-33
32.
Which of the following is not a financial statement assertion relating to account

balances?
A.
B.
C.
D.
Completeness.
Existence.
Rights and obligations.
Recorded value and discounts.

AICPA: BB Industry
Blooms: Understand
assertions.
33.
Which of the following is generally true about the sufficiency of audit evidence?
A. The amount of evidence that is sufficient varies directly with the acceptable risk
of material misstatement.
B. The amount of evidence concerning a particular account varies inversely with
the materiality of the account.
C. The amount of evidence concerning a particular account varies inversely with
the inherent risk of the account.
D. When evidence is appropriate with respect to an account it is also sufficient.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
evidence.
34.
Which of the following is true about analytical procedures?

A. Performing analytical procedures results in the most reliable form of evidence.
B. Analytical procedures are tests of controls used to evaluate the quality of a
client's internal control.
C. Analytical procedures are used for planning, but they should not be used to
obtain evidence as to the reasonableness of specific account balances.
D. Analytical procedures are used in risk assessment, as a substantive procedure
for specific accounts, and near the completion of the audit of the audited
financial statements.
AICPA: BB Industry
Blooms: Understand
5-34
35.
Which of the following is a basic approach often used by auditors to evaluate the
A.
B.
C.
D.
Confirmation.
Observation.
Reviewing subsequent events or transactions.
Analyzing corporate organizational structure.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
36.
An auditor is performing an analytical procedure that involves comparing a client's

account balances over time. This technique is referred to as:
A.
B.
C.
D.
Vertical analysis.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
37.
An auditor is performing an analytical procedure that involves comparing a client's

ratios with other companies in the same industry. This technique is referred to as:
A.
B.
C.
D.
Vertical analysis.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
5-35
38.
An auditor is performing an analytical procedure that involves developing

common-size financial statements. This technique is referred to as:
A.
B.
C.
D.
Vertical analysis.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
39.
Which of the following is not a basic approach often used by auditors to evaluate
the reasonableness of accounting estimates?
A.
B.
C.
D.
Confirmation of amounts.
Review of management's process of development.
Independent development of an estimate.
Review of subsequent events.

AICPA: BB Industry
Blooms: Understand
40.
The audit time budget is an example of:

A.
B.
C.
D.
A supporting schedule.
An administrative working paper.
A lead schedule.
A corroborative working paper.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
5-36
41.
A schedule set up to combine similar general ledger accounts, the total of which
appears on the working trial balance as a single amount, is referred to as a:
A.
B.
C.
D.
Lead schedule.
Corroborating schedule.
Reconciling schedule.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
42.
Which of the following is not a function of working papers?

A.
B.
Provide support for the accounting records.
C.
Aid partners in planning and conducting future audits.
D. Document staff compliance with generally accepted auditing standards.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-06 Describe the purposes of audit documentation.
43.
A schedule listing account balances for the current and previous years, and
columns for adjusting and reclassifying entries proposed by the auditors to arrive
at the final mount that will appear in the financial statement, is referred to as a:
A.
B.
C.
D.
Working trial balance.

Lead schedule.
Summarizing schedule.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
5-37
44.
The auditors use analytical procedures during the course of an audit. The most
important phase of performing these procedures is the:
A.
Vouching of all data supporting various ratios.
B. Investigation of significant variations and unusual relationships.
C. Comparison of client-computed statistics with industry data on a quarterly and
full-year basis.
D.
Recalculation of industry date.
AICPA: BB Industry
Blooms: Understand
45.
The auditors must obtain written client representations that normally should be
signed by:
A.
B.
C.
D.
The president and the chairperson of the board.

The treasurer and the internal auditor.
The chief executive officer and the chief financial officer.
The corporate counsel and the audit committee chairperson.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Source: AICPA
46.
Which of the following ultimately determines the specific audit procedures

necessary to provide independent auditors with a reasonable basis for the
expression of an opinion?
A.
B.
C.
D.
The audit time budget.

The auditors' judgment.
Generally accepted accounting quality standards.
The auditors' working papers.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Source: AICPA
5-38
47.
Failure to detect material dollar errors in the financial statements is a risk which
the auditors primarily mitigate by:
A.
B.
C.
D.
Performing substantive procedures.

Performing tests of controls.
Assessing control risk.
Obtaining a client representation letter.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Source: AICPA
48.
An independent auditor finds that the Simmer Corporation occupies office space,
at no charge, in an office building owned by a shareholder. This finding indicates
the existence of:
A.
B.
C.
D.
Management fraud.
Related party transactions.
Window dressing.
Weak internal control.

AICPA: BB Industry
Blooms: Understand
Source: AICPA
49.
Which of the following would not necessarily be considered a related party

transaction?
A.
Payment of a bonus to the president.
B. Purchases from another corporation that is controlled by the corporation's chief
stockholder.
C.
Loan from the corporation to a major stockholder.
D. Sale of land to the corporation by the spouse of a director.

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Source: AICPA
5-39
50.
The date of the management representation letter should coincide with the:
A.
Date of the auditor's report.
B.
Balance sheet date.
C. Date of the latest subsequent event referred to in the notes to the financial
statements.
D.
Date of the engagement agreement.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
51.
An example of an analytical procedure is the comparison of:

A. Financial information with similar information regarding the industry in which
the entity operates.
B. Recorded amounts of major disbursements with appropriate invoices.
C. Results of a statistical sample with the expected characteristics of the actual
population.
D. EDP generated data with similar data generated by a manual accounting
system.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
52.
When considering the use of management's written representations as audit

evidence about the completeness assertion, an auditor should understand that
such representations:
A. Complement, but do not replace, substantive procedures designed to support
the assertion.
B. Constitute sufficient evidence to support the assertion when considered in
combination with a moderate assessed level of control risk.
C. Are generally sufficient audit evidence to support the assertion regardless of
the assessed level of control risk.
D. Replace the assessed level of control risk as evidence to support the
assertions.
AICPA: BB Industry
5-40
Blooms: Understand
Source: AICPA
53.
Which of the following expressions is least likely to be included in a client's

representation letter?
A. No events have occurred subsequent to the balance sheet date that require
adjustment to, or disclosure in, the financial statements.
B. The company has complied with all aspects of contractual agreements that
would have a material effect on the financial statements in the event of
noncompliance.
C. Management acknowledges responsibility for illegal actions committed by
employees.
D. Management has made available all financial statements, including notes.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
54.
Which of the following statements is generally correct about audit evidence?

A. The auditor's direct personal knowledge, obtained through observation and
inspection, is more persuasive than information obtained indirectly from
independent outside sources.
B.
To be appropriate, audit evidence must be sufficient.
C. Accounting data alone may be considered sufficient appropriate audit evidence
to issue an unqualified opinion on financial statements.
D. Appropriateness of audit evidence refers to the amount of corroborative
evidence to be obtained.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Source: AICPA
5-41
55.
Which of the following statements relating to audit evidence is the most accurate
statement?
A. Audit evidence gathered by an auditor from outside an enterprise is 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 valid evidence.
D. The auditor must obtain sufficient appropriate audit evidence.

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
evidence.
Source: AICPA
56.
Which of the following is not a typical analytical procedure?

A. Study of relationships of the financial information with relevant nonfinancial
information.
B. Comparison of the financial information with similar information regarding the
industry in which the entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate
invoices.
D. Comparison of the financial information with budgeted amounts.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
57.
Which of the following is not a primary purpose of audit working papers?

A.
B.
C.
D.
To coordinate the examination.

To assist in preparation of the audit report.
To support the financial statements.
To provide evidence of the audit work performed.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
5-42
58.
Concerning retention of working papers, the Sarbanes-Oxley Act:

A.
B.
C.
D.
Has no provisions.
Requires permanent retention.
Requires retention for at least 7 years.
Requires retention for a period of 4 or less years.
AICPA: BB Industry
Blooms: Understand
Learning Objective: 05-08 Identify matters that should be included in audit working papers.
59.
During an audit engagement pertinent data are prepared and included in the audit
working papers. The working papers primarily are considered to be:
A. A client-owned record of conclusions reached by the auditors who performed
the engagement.
B.
Evidence supporting financial statements.
C. Support for the auditors' representations as to compliance with generally
accepted auditing standards.
D. A record to be used as a basis for the following year's engagement.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
60.
Although the quantity, type, and content of working papers will vary with the
circumstances, the working papers generally would include the:
A. Copies of those client records examined by the auditor during the course of the
engagement.
B. Evaluation of the efficiency and competence of the audit staff assistants by the
partner responsible for the audit.
C. Auditor's comments concerning the efficiency and competence of client
management personnel.
D. Auditing procedures followed and the testing performed in obtaining audit
evidence.

AICPA: BB Industry
Blooms: Understand
5-43
Source: AICPA
61.
The permanent file section of the working papers that is kept for each audit client
most likely contains:
A. Review notes pertaining to questions and comments regarding the audit work
performed.
B. A schedule of time spent on the engagement by each individual auditor.
C. Correspondence with the client's legal counsel concerning pending litigation.
D. Narrative descriptions of the client's accounting procedures and controls.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
62.
Working papers that record the procedures used by the auditor to gather evidence
should be:
A. Considered the primary support for the financial statements being examined.
B. Viewed as the connecting link between the books of account and the financial
statements.
C. Designed to meet the circumstances of the particular engagement.
D. Destroyed when the audited entity ceases to be a client.

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Source: AICPA
63.
In general, which of the following statements is correct with respect to ownership,

possession, or access to working papers prepared by a CPA firm in connection with
an audit?
A. The working papers may be obtained by third parties where they appear to be
relevant to issues raised in litigation.
B. The working papers are subject to the privileged communication rule which, in
a majority of jurisdictions, prevents third-party access to the working papers.
C. The working papers are the property of the client after the client pays the fee.
D. The working papers must be retained by the CPA firm for a period of ten years.
AICPA: BB Industry
5-44
Blooms: Remember
Difficulty: 1 Easy
Source: AICPA
64.
Confirmation would be most effective in addressing the existence assertion for

the:
A.
Addition of a milling machine to a machine shop.
B.
Payment of payroll during regular course of business.
C.
Inventory held on consignment.
D. Granting of a patent for a special process developed by the organization.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
5-45
65.
In preparing for an audit of the retail footwear division of a major retail

organization, the auditor gathered the following information about the
organization's stores:
All
Stores
Northeast
Average sales per store
$736,000
$840,000
Average cost of goods sold per store
$375,000
$420,000
Number of stores
48
Average square feet per store
1,800
Average sales per full-time employee
$137,000
$152,000
Average wage related expense per store
$98,000
$102,000
Average net profit contribution per store
$238,000
$285,000
An auditor performs analytical procedures that involve comparing the gross

margins of various divisional operations with those of other divisions and with the
individual division's performance in previous years. The auditor notes a significant
increase in the gross margin at one division. The auditor does some preliminary
investigation and also notes that there were no changes in products, production
methods, or divisional management during the year. Based on the above
information, the most likely cause of the increase in gross margin would be:
A. An increase in the number of competitors selling similar products.
B. A decrease in the number of suppliers of the material used in manufacturing
the product.
C.
An overstatement of year-end inventory.
D.
An understatement of year-end accounts receivable.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Source: IIA
66.
Management is concerned about the lower level of profitability in the Mid-Central

Region. Which of the following would be a reasonable possible explanation(s) of
the lower profitability for the Mid-Central Region?
I. The lower number of stores in the Mid-Central Region.
II. Sales employees are not as productive in generating sales as those in other
regions.
III. The Mid-Central Region has a lower gross margin.
A.
B.
C.
D.
I only.
II only.
II and III only.
I, II and III.
AICPA: BB Industry
5-46

Blooms: Understand
Source: IIA
67.
Based on the previous information, which of the following preliminary conclusions

can the auditor use as a basis for further investigations?
A. Sales per store are directly related to the size of the store.
B.
Sale clerks are less productive in larger size stores.
C. Gross margin is directly related to the size of the store.
D. Average square feet of store correlates with the number of stores in the district.
AICPA: BB Industry
Blooms: Understand
Source: IIA
68.
Which of the following statements is not correct regarding the auditor's further
analysis?
A. The Mid-Central Region has fewer average full-time equivalent employees per
store than the other regions per store.
B. The other regions all generate higher sales per square foot than the Mid-Central
Region.
C. The Mid-Central Region has the highest average wages per full-time equivalent
employee.
D. The largest contributor to total corporate profits is the Southwest Region.
AICPA: BB Industry
Blooms: Understand
Source: IIA
5-47
69.
Management has centralized purchasing and uses a model based upon previous
year's sales with adjustments for trends in the market place (e.g., the trend to
more casual shoes). A staff auditor has suggested that the centralized purchasing
may be one of the reasons for the lower level of profitability in the Mid-Central
Region. Which of the following would be the best single audit procedure to address
the staff auditor's assertion?
A. Take a sample of receiving documents at stores and trace to purchase orders to
determine the length of time between the purchase and delivery of the goods.
B. Interview store managers in the Mid-Central Region to determine their attitude
toward centralized purchasing.
C. Perform an inventory count at selected stores in the Mid-Central Region and
determine if adjustments are needed to the perpetual records.
D. Perform a product-line analysis of sales and purchases in the Mid-Central
Region and compare with other regions.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Source: IIA
70.
What type of transactions ordinarily have high inherent risk because they involve
management judgments or assumptions in formulating accounting balances?
A.
B.
C.
D.
Estimation.
Nonroutine.
Qualified.
Routine.

AICPA: BB Industry
Blooms: Understand
71.
Assertions with high inherent risk are least likely to involve:

A.
B.
C.
D.
Complex calculations.
Difficult accounting issues.
Routine transactions.
Significant judgment by management.
AICPA: BB Industry
Blooms: Understand
5-48
72.
The date on which no information may be deleted from audit documentation is the
A.
Client's year-end.
B.
Documentation completion date.
C.
Last date of significant fieldwork.
D. All of these are incorrect in that no information may ever be deleted from audit
documentation.
AICPA: BB Industry
Blooms: Understand
73.
In evaluating an entity's accounting estimates, one of the auditor's objectives is to

determine whether the estimates are
A.
B.
C.
D.
Prepared in a satisfactory control environment.

Consistent with industry guidelines.
Based on verifiable objective assumptions.
Reasonable in the circumstances.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Source: AICPA
5-49
74.
In obtaining sufficient appropriate audit evidence, the work of which type or types
of specialists may be relied upon?
Client Engaged
Auditor Engaged
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
A.
B.
C.
D.
Option A
Option B
Option C
Option D
AICPA: BB Industry
Blooms: Understand
75.
Which of the following is most likely to be considered an analytical procedure?

A. Testing purchases at year-end to determine they were recorded in the proper
period.
B. Comparing inventory balances to recent sales activities.
C. Selecting a sample of year-end receivables for confirmation.
D. Reconciling physical counts of inventory to perpetual records.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
76.
An unexpected economic downturn is likely to have which effect on inventory

turnover.
A.
B.
C.
D.
Increase.
Decrease.
No effect.
Each of these replies is equally likely.
AICPA: BB Industry
5-50
Blooms: Understand
Source: AICPA
77.
Which of the following is most consistent with an increase in the ratio of debt to
equity?
A. Payment of a required principal payment on long-term debt.
B. Repurchase of a portion of the company's outstanding common stock.
C. Higher than expected profits due to a decrease in cost of goods sold.
D. Payment of most accounts receivable immediately prior to year-end using a
portion of the company's cash.
AICPA: BB Industry
Blooms: Understand
Difficulty: 3 Hard
Source: AICPA
78.
Fraudulent sales and accounts receivables recorded at year-end (with no cost of

goods sold entry) will:
A.
B.
C.
D.
Decrease recorded net income.

Decrease the current ratio.
Increase days of sales in accounts receivable.
Increase year-end recorded inventory.
AICPA: BB Industry
Blooms: Understand
Difficulty: 3 Hard
Source: AICPA
Essay Questions
5-51
79.
For each of the audit procedures listed below select the type of audit procedure, if
any, that the auditor performed. A type of audit procedure may be selected once
or not at all.
5-52
Ty
pe
of
au
Audit
dit
Procedur
pr
es
oc
ed
ur
e
During
the
physical
inventory
count, the
auditor
requested
that
Acertain
.container
s of
inventory
items be
opened to
ensure
they were
not
empty.
An
al
yti
cal
1pr
.oc
ed
ur
es
During a
site visit
to a
branch
warehous
e, the
auditor
Bnoted
.unauthori
zed
personnel
have
access to
the
inventory.
Ex
ter
na
l
2co
.nfi
rm
ati
on
CThe
3In
.auditor
.qu
obtained iry
a copy of
the
company
s
accountin
g manual
and read
the
section on
inventory
to prepare
for the
physical
inventory
5-53
observati
on.
5-54
The
auditor
sent a
letter to
the
company
s outside
attorney
accompan
ied by
managem
ents
request
D
.for
informatio
n
concernin
g pending
or
threatene
d
litigation,
claims,
and
assessme
nts.
In
sp
ec
tio
n
of
re
4co
.rd
s
or
do
cu
m
en
ts
The
auditing
firms
computer
assisted
audit
specialist
obtained
an
electronic
Ebilling file
.from the
company
and
checked
the
accuracy
of the
summariz
ed billings
file.
In
sp
ec
tio
n
of
5ta
.ng
ibl
e
as
se
ts
FThe
.auditor
selected a
sample of
invoices
and
agreed
the
vendor to
the
approved
vendor
list, as
6Ob
.se
rv
ati
on
5-55
had been
required
by the
client's
internal
control
procedure
s.
The
auditor
scanned
the
Re
repairs
cal
and
cu
G
maintena 7
.nce
.lat
io
account
n
for
unusually
large
amounts.
Re
pe
8rfo
.rm
an
ce
A. 5. Inspection of tangible assets.

B. 6. Observation.
C. 4. Inspection of records or documents.
D. 3. Inquiry.
E. 7. Recalculation.
F. 8. Reperformance.
G. 1. Analytical Procedures.
5-56

AICPA: BB Industry
Blooms: Understand
80.
Analytical procedures are substantive procedures that may be used to provide

evidence about specific accounts and classes of transactions.
a. Describe three major types of comparisons the auditor might make in
performing analytical procedures.
b. At what stages of the audit are analytical procedures performed and what
purpose do they serve at each stage?
a. Comparisons made in performing analytical procedures include (only three

required):
Comparisons
Comparisons
Comparisons
Comparisons
Comparisons
with prior years' data.

with budgets and forecasts.
with industry statistics.
with nonfinancial data.
of predictable relationships based on past history.
b. Analytical procedures may be performed:

1. During risk assessment to identify items that require more audit attention
(required analytical procedures).
2. Throughout the audit as a substantive procedure for accounts or classes of
transactions.
3. Near the end of the audit to corroborate audit evidence obtained during the
audit to assist the auditor in drawing reasonable conclusions (required analytical
procedures).
AICPA: BB Industry
Blooms: Understand
5-57
81.
Audit working papers are an integral part of an examination in accordance with

generally accepted auditing standards.
a. Describe three major functions of the audit working papers.
b. Distinguish between the permanent working paper file and the current working
paper file.
a. The functions of audit working papers include (only three required):
Provide a means of assigning and coordinating audit work.

Aid in review of the work.
Document compliance with generally accepted auditing standards.
Aid in planning and conducting future audits.
b. The permanent file is used to organize working papers of continuing audit

interest over a number of years. The current file contains the administrative and
evidence working papers for the year under examination.
AICPA: BB Industry
Blooms: Understand
5-58
5-59
82.
The following is an audit working paper prepared by an assistant on the Williams

audit:
Prepared by ___
Reviewed by ___
Williams Inc.
Bank Confirmation-General Account
12/31/0X
Balance per Bank @ 12/31/0X
$20,200.22
Deposit in Transit per A-1-2
2,000.00
Outstanding Checks per A-13
(5,200.00)
Other Note Collected by

Bank
Bank Service Charge
Balance per Books @ 12/31/0X
(10,000.00)
(9.50)
$8,990.69
Column footed.
Amount agrees to amount recorded as a deposit on the bank statement and
description agrees with receipt enclosed with 12/31/0X bank statement. This note
is the Wilde note receivable that was recorded as a receipt by the client in the cash
receipts journal on 1/3/0X. The receivable was appropriately credited and properly
reflected in the January cash receipts journal. No adjustment needed as bank and
books simply record this in different periods.
Agreed to 12/31/0X bank statement.
Agreed to general ledger.
A1
Required:
Prepare a list of review points as the preparer of this working. You may assume
that any other working papers referred to appropriate. You will receive credit for
proper points you bring up and lose credit for improper ones and omissions.
The working paper's deficiencies include:

"Prepared by" is not initialed ("Reviewed by" isn't either, but since we are
performing the review it need not be).
Title of schedule is wrong, this is not a bank confirmation, it is a bank
reconciliation.
The by Balance per Bank is incorrect for two reasons. First, the balance would
not be in the general ledger. Second, the balance per bank should be agreed to
either a bank confirmation, bank statement, or both.
5-60
The bank service charge should be added, not subtracted.

Concerning balance per books, two things are wrong. First it is not footed in that
the is missing. Second, it does not foot properly.
The tick mark is incorrect relating to the deposit in transit. If it was on the
12/31/0X bank statement, it would not be a deposit in transit.
The description is not correct since it should be recorded as a cash receipt as
of 12/31/OX if the bank collected it prior to year-end. It is handled on the
reconciliation properly, but the final comment is wrong.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
5-61

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Chapter 05

Audit Evidence and Documentation

2. The most reliable form of documentary evidence generally is considered to be

3. A vendor's invoice is an example of documentary evidence created by a third party

5. The primary purpose of a letter of representations is to obtain additional evidence

Multiple Choice Questions

13. Financial statement assertions are established for classes of transactions:

14. Further audit procedures include:

15. Assertions that have a meaningful bearing on whether an account balance,

16. Which of the following is not an assertion relating to classes of transactions?

A certified public accountant.

18. Which of the following is not considered to be an analytical procedure?

Comparisons of financial statement amounts with source documents.

21. The inspection of a vendor's invoice by the auditors is:

Tests of internal control.

Risk assessment procedures.

36. An auditor is performing an analytical procedure that involves comparing a client's

37. An auditor is performing an analytical procedure that involves comparing a client's

40. The audit time budget is an example of:

42. Which of the following is not a function of working papers?

Working trial balance.

The audit time budget.

Performing substantive procedures.

53. Which of the following expressions is least likely to be included in a client's

To coordinate the examination.

58. Concerning retention of working papers, the Sarbanes-Oxley Act:

Average sales per store

Average cost of goods sold per store

Average wage related expense per store

Average net profit contribution per store

Prepared in a satisfactory control environment.

75. Which of the following is most likely to be considered an analytical procedure?

Decrease recorded net income.

Outstanding Checks per A-1-3

Other Note Collected by Bank

Bank Service Charge

Chapter 05 Audit Evidence and Documentation Answer Key

The professional standards consider calculating depreciation expense a "routine"

The most reliable form of documentary evidence generally is considered to be

A vendor's invoice is an example of documentary evidence created by a third party

Topic: Analytical Procedures

The primary purpose of a letter of representations is to obtain additional evidence

Multiple Choice Questions

Financial statement assertions are established for classes of transactions:

AACSB: Analytical Thinking

Further audit procedures include:

Assertions that have a meaningful bearing on whether an account balance,

AACSB: Analytical Thinking

Which of the following is not an assertion relating to classes of transactions?

Audit documentation should be sufficient to allow which individual to understand

A certified public accountant.

AACSB: Analytical Thinking

Which of the following is not considered to be an analytical procedure?

Comparisons of financial statement amounts with source documents.

Accessibility: Keyboard Navigation

The inspection of a vendor's invoice by the auditors is:

Direct evidence about occurrence of a transaction.

Accessibility: Keyboard Navigation

Tests of internal control.

A CPA wishes to use a representation letter as a substitute for performing other

Violates professional standards.

AACSB: Analytical Thinking

AACSB: Analytical Thinking