Chapter 7 Audit Evidence

7.1 Learning Objective 7-1

1) Which of the following is an accurate statement regarding audit evidence?

A) Responses to the auditor's questions by client employees is considered highly persuasive
evidence.
B) Audit evidence should provide an absolute level of assurance.
C) The auditor uses evidence to determine whether the statements are fairly presented.
D) All evidence must be highly persuasive.

True false questions

2) All evidence must have the same level of persuasiveness.

3) Auditors use evidence to help them draw conclusions.

7.2 Learning Objective 7-2

1) Auditors must make decisions regarding what evidence to gather and how much to
accumulate. Which of the following is a decision that must be made by auditors related to
evidence?
A)
Sample size Timing of audit procedures
Yes Yes

B)
Sample size Timing of audit procedures
No No

C)
Sample size Timing of audit procedures
Yes No

D)
Sample size Timing of audit procedures
No Yes

2) When can audit procedures be performed?

A)
Prior to the fiscal year-end Subsequent to the fiscal year-
of the client end of the client
Yes Yes

B)
Prior to the fiscal year-end Subsequent to the fiscal year-
of the client end of the client
No No

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C)
Prior to the fiscal year-end Subsequent to the fiscal year-
of the client end of the client
Yes No

D)
Prior to the fiscal year-end Subsequent to the fiscal year-
of the client end of the client
No Yes

3) A(n) ________ is the detailed instruction that explains the audit evidence to be obtained
during the audit.
A) audit objective
B) audit procedure
C) audit assertion
D) audit program

4) Which of the following is not one of the four decisions about what evidence to gather and
how much of it to accumulate?
A) which audit procedures to use
B) which accounts must agree to the general ledger
C) when to perform the procedures
D) what sample size to select for a given procedure

5) When making audit evidence decisions,

A) the auditor decides which items in the population to test before determining the sample size.
B) the sample size for any given procedure must remain constant from audit to audit.
C) audit engagement software can assist the auditor in making evidence decisions.
D) the auditor is required to use the sample sizes that are determined by the PCAOB.

True false questions

6) An audit program is the list of audit procedures for an audit area or an entire audit.

7.3 Learning Objective 7-3

1) Audit evidence has two primary qualities for the auditor; relevance and reliability. Given the
choices below, which provides the auditor with the most reliable audit evidence?
A) general ledger account balances
B) confirmation of accounts receivable balance received from a customer
C) internal memo explaining the issuance of a credit memo
D) copy of month-end adjusting entries

2) Which of the following is not a characteristic of the reliability of evidence?

A) effectiveness of client internal controls
B) education of auditor
C) independence of information provider
D) timeliness

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3) The auditor must gather sufficient and appropriate evidence during the course of the audit.
Sufficient evidence must
A) be well documented and cross-referenced in the audit documents.
B) be based on sources that are external to company.
C) provide evidence that prove or disprove an audit objective/assertion.
D) be persuasive enough to enable the auditor to issue an audit report.

4) Audit evidence obtained directly by the auditor will not be reliable if

A) the auditor lacks the competence to evaluate the evidence.
B) it is provided by the client's attorney.
C) the client denies its veracity.
D) it is impossible for the auditor to obtain additional corroboratory evidence.

5) Appropriateness of evidence is a measure of the

A) quantity of evidence.
B) quality of evidence.
C) sufficiency of evidence.
D) meaning of evidence.

6) Which of the following statements regarding the relevance of evidence is correct?

A) To be relevant, evidence must pertain to the audit objective of the evidence.
B) To be relevant, evidence must be persuasive.
C) To be relevant, evidence must relate to multiple audit objectives.
D) To be relevant, evidence must be derived from a system including effective internal controls.

7) Two determinants of the persuasiveness of evidence are

A) competence and sufficiency.
B) relevance and reliability.
C) appropriateness and sufficiency.
D) independence and effectiveness.

8) The two characteristics of the appropriateness of evidence are

A) relevance and timeliness.
B) relevance and accuracy.
C) relevance and reliability.
D) reliability and accuracy.

9) Which of the following forms of evidence would be least persuasive in forming the auditor's
opinion about marketable securities and other investments held by the company?
A) responses to auditor's questions by the president and controller regarding the investments
account
B) correspondence with a stockbroker regarding the quantity of client's investments held in street
name by the broker
C) minutes of the board of directors authorizing the purchase of stock as an investment
D) the auditor's count of marketable securities

10) Which of the following statements is not correct?

A) It is possible to vary the sample size from one unit to 100% of the items in the population.
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B) Cost is an adequate justification for not gathering an adequate sample size.
C) The decision of how many items to test must be made by the auditor for each audit procedure.
D) The sample size for any given procedure is likely to vary from audit to audit.

11) For audit evidence to be compelling to the auditor it must be sufficient and appropriate.
Which statement below is not correct regarding the appropriateness of audit evidence?
A) The more effective the internal control system, the more assurance it provides the auditor
about the reliability of financial reporting by the client.
B) An auditor's opinion, to be economically useful and profitable to the auditing firm needs to be
formed within a reasonable time and based on evidence obtained that assures profits for the
auditing firm.
C) Evidence obtained from independent sources outside the entity is generally more reliable than
evidence secured solely within the entity.
D) The independent auditor's direct personal knowledge, obtained through inquiry, observation
and inspection, is generally more persuasive than information obtained indirectly.

12) Which of the following is a correct statement regarding audit evidence?

A) A large sample of evidence provided by an independent party is always considered persuasive
evidence.
B) A small sample of only one or two pieces of highly appropriate evidence is always considered
persuasive evidence.
C) The auditor must obtain a sufficient amount of relevant and reliable evidence to form an
opinion on the fairness of the financial statements.
D) Evidence is usually more reliable for balance sheet accounts when it is obtained within six
months of the balance sheet date.

13) Which of the following is the most objective type of evidence?

A) a letter written by the client's attorney discussing the likely outcome of outstanding lawsuits
B) the physical count of securities and cash
C) inquiries of the credit manager about the collectability of noncurrent accounts receivable
D) observation of cobwebs on some inventory bins

14) Which items affect the sufficiency of evidence when choosing a sample?
A)
Selecting items with a high The randomness of the items
likelihood of misstatement selected
Yes Yes

B)
Selecting items with a high The randomness of the items
likelihood of misstatement selected
No No

C)
Selecting items with a high The randomness of the items
likelihood of misstatement selected
Yes No

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D)
Selecting items with a high The randomness of the items
likelihood of misstatement selected
No Yes

15) Determine which of the following is most correct statement regarding the reliability of audit
evidence.
A) Information that is indirectly obtained from external sources is the most reliable audit
evidence.
B) Reliability of audit evidence is dependent upon the evidence being subjective.
C) Reliability of evidence refers to the amount of evidence obtained.
D) If internal controls are effective, evidence obtained is more reliable than when the controls are
not effective.

16) Evidence is generally considered appropriate when

A) it has been obtained by random selection.
B) there is enough of it to afford a reasonable basis for an opinion on financial statements.
C) it is relevant to the audit objective being tested.
D) it consists of written statements made by managers of the company under audit.

17) Given the economic and time constraints in which auditors can collect evidence regarding
management assertions about the financial statements, the auditor normally gathers evidence that
is
A) irrefutable.
B) conclusive.
C) persuasive.
D) completely convincing.

18) Which of the following statements is not a correct statement regarding audit evidence?
A) Evidence obtained from an independent source outside the client organization is more reliable
than that obtained from within.
B) Documentary evidence is more reliable when it is received by the auditor indirectly rather
than directly.
C) Documents that originate outside the company are considered more reliable than those that
originate within the client's organization.
D) External evidence, such as communications from banks, is generally regarded as more
reliable than answers obtained from inquiries of the client.

19) Evidence is usually more persuasive for balance sheet accounts when it is obtained
A) as close to the balance sheet date as possible.
B) only from transactions occurring on the balance sheet date.
C) from various times throughout the client's year.
D) from the time period when transactions in that account were most numerous during the fiscal
period.

20) Which of the following statements is true?

A) Evidence must be relevant to all of the audit objectives.
B) If evidence is subjective, it cannot be reliable.
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C) Evidence obtained directly by the auditor may not be reliable if the auditor lacks the
qualifications to evaluate the evidence.
D) The persuasiveness of evidence can be evaluated after considering its sufficiency.

21) Which of the following statements relating to the competence of evidential matter is always
true?
A) Evidence from outside an enterprise is always reliable.
B) Accounting data developed under satisfactory conditions of internal control is not reliable.
C) Oral representations made by management are not reliable evidence.
D) Evidence must be both reliable and relevant to be considered appropriate.

22) Discuss three of the following characteristics of relevant evidence.

1. Independence of provider
2. Effectiveness of client's internal controls
3. Auditor's direct knowledge
4. Qualification of individuals providing the information
5. Degree of objectivity
6. Timeliness

23) Why is the appropriateness of audit evidence obtained by the auditor important in forming an
audit opinion? Describe the qualities information should have to be considered appropriate by
the auditor.

24) The reliability of evidence refers to the degree to which evidence is considered believable or
trustworthy. There are six factors that affect the reliability of audit evidence. One factor is the
independence of the provider; i.e., evidence obtained from a source outside the client company is
more reliable than that obtained within. Identify and discuss any two of the remaining five
factors.

True false questions

25) Audit evidence to support an opinion about the fairness of a client's financial statements
consists entirely of written information.

26) The relevance of audit evidence depends on the audit objective being tested.

27) Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an
audit objective.

28) Objective evidence is more reliable, and hence more persuasive, than subjective evidence.

29) The two most important factors when determining the appropriate sample size in an audit are
the auditor's expectation of misstatements and the objectivity of the evidence.

7.4 Learning Objective 7-4

1) Calculating the gross margin for the current audit year as a percent of sales and comparing it
with previous years is what type of evidence?
A) physical examination
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B) analytical procedures
C) observation
D) inquiry

2) When the auditor uses supporting evidence for amounts posted to account balances with
documentary evidence, that process is called
A) inquiry.
B) confirmation.
C) vouching.
D) physical examination.

3) An example of an external document that provides reliable information for the auditor is: a(n)
A) employees' time report.
B) bank statement.
C) purchase order for company purchases.
D) carbon copies of a check.

4) An example of a document the auditor receives from the client, but which was prepared by
someone outside the client's organization is a
A) confirmation.
B) sales invoice.
C) vendor invoice.
D) bank reconciliation.

5) The evaluations of financial information through analysis of plausible relationships among

financial and nonfinancial data is the definition of
A) analytical procedures.
B) tests of transactions.
C) tests of balances.
D) auditing.

6) Audit procedures can result in significant, unexpected differences. The auditor should
investigate further if
A)
Significant differences are Significant differences are
not expected but do exist expected but do not exist
Yes Yes

B)
Significant differences are Significant differences are
not expected but do exist expected but do not exist
No No

C)
Significant differences are Significant differences are
not expected but do exist expected but do not exist
Yes No
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D)
Significant differences are Significant differences are
not expected but do exist expected but do not exist
No Yes

7) When the auditor uses tracing as an audit procedure for tests of transactions, she is primarily
concerned with which audit objective?
A) occurrence
B) completeness
C) cutoff
D) classification

8) When the auditor uses the audit procedure vouching she is primarily concerned with which of
the following audit objectives when testing classes of transactions?
A) occurrence
B) completeness
C) authorization
D) classification

9) When auditors use documentation to support recorded transactions and amounts, the process is
usually called
A) tracing.
B) confirmations.
C) vouching.
D) reperformance.

10) Analytical procedures must be used during which phase(s) of the audit?
A)
Test of Controls Planning Completion
Yes Yes Yes

B)
Test of Controls Planning Completion
No Yes Yes

C)
Test of Controls Planning Completion
Yes No No

D)
Test of Controls Planning Completion
No No No

11) Auditors may decide to replace tests of details with analytical procedures when possible
because the
A) analytical procedures are more reliable.
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B) analytical procedures are considerably less expensive.
C) analytical procedures are more persuasive.
D) tests of details are more difficult to interpret.

12) Factors that determine the auditor's willingness to accept a document as reliable evidence
include
A) whether it is internal or external.
B) whether it was created and processed under conditions of effective internal control.
C) whether it is an original document or a photocopy.
D) all of the above.

13) "Physical examination" is the inspection or count by the auditor of items such as
A) cash, inventory, and payroll timecards.
B) cash, inventory, canceled checks, and sales documents.
C) cash, inventory, canceled checks, and tangible fixed assets.
D) cash, inventory, securities, notes receivable, and tangible fixed assets.

14) The primary purpose of audit procedures is to

A) detect all errors or fraudulent activities as well as illegal activities.
B) comply with auditing standards promulgated by the PCAOB for publicly held clients.
C) gather corroborative audit evidence about management's assertions regarding the client's
financial statements.
D) determine the amount of errors in the balance sheet accounts in order to adjust the accounts to
actual.

15) ________ generally provide the most reliable evidence.

A) Confirmations
B) Recalculations
C) Reperformances
D) Observations

16) When practical and reasonable, U.S. auditing standards require the confirmation of
A) individual transactions between organizations, such as sales transactions.
B) accounts receivable.
C) fixed asset additions.
D) payroll expenses.

17) To be considered reliable evidence, confirmations must be controlled by

A) the client's employee responsible for accounts receivable.
B) the external auditor.
C) the client's internal audit department.
D) the client's controller or CFO.

18) Indicate whether confirmation of accounts receivable and accounts payable, provided they
each are significant accounts, is required or optional.
A)
Accounts Receivable Accounts Payable
Required Required
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B)
Accounts Receivable Accounts Payable
Required Optional

C)
Accounts Receivable Accounts Payable
Optional Required

D)
Accounts Receivable Accounts Payable
Optional Optional

19) Physical examination

A) is a direct means of verifying that an asset really exists.
B) is sufficient evidence to verify that the existing assets are owned by the client.
C) can be used for both tangible assets and documents.
D) is not generally a reliable type of audit evidence.

20) Which of the following is not a correct combination of terms and related type of audit
evidence?
A) inquire — inquiries of client
B) count — physical examination
C) recompute — recalculation
D) read — documentation

21) Which of the following is a correct statement regarding confirmations?

A) Confirmations can be in oral or written form.
B) Electronic confirmations are not acceptable under generally accepted auditing standards.
C) Confirmations are generally used in the audit of fixed asset additions.
D) Auditors consider alternative evidence available when determining if confirmations should be
used.

22) The auditor is concerned that a client is failing to bill customers for shipments. An audit
procedure that would gather relevant evidence would be to
A) select a sample of duplicate sales invoices and trace each to related shipping documents.
B) trace a sample of shipping documents to related duplicate sales invoices.
C) trace a sample of Sales Journal entries to the Accounts Receivable subsidiary ledger.
D) compare the total of the Schedule of Accounts Receivable with the balance of the Accounts
Receivable account in the general ledger.

23) ________ is the auditor's examination of the client's documents and records to substantiate
that the information is included in the financial statements.
A) Inspection
B) Recalculation
C) Observation
D) Verification
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24) When the auditor scans the sales journal looking for large and unusual transactions, he is
gathering what type of evidence?
A) inspection
B) recalculation
C) physical examination
D) analytical procedures

25) You are auditing the company's purchasing process for goods and services. You are primarily
concerned with the company not recording all purchase transactions. Which audit procedure
below would be the most effective audit procedure in this case?
A) vouching from the accounts payable account to the vendor invoices
B) tracing vendor invoices to recorded amounts in the accounts payable account
C) confirmation accounts payable recorded amounts
D) reconciling the accounts payable subsidiary ledger to the accounts payable account

26) Which of the following discoveries through the use of analytical procedures would most
likely indicate a relatively high risk of financial failure?
A) a decline in gross margin percentages
B) an increase in the balance in fixed assets
C) an increase in the ratio of allowance for uncollectible accounts to gross accounts receivable,
while at the same time accounts receivable turnover also decreased
D) a higher than normal ratio of long-term debt to net worth as well as a lower than average ratio
of profits to total assets

27) Which of the following statements is correct regarding the costs involved in obtaining
evidence?
A)
Physical examination is usually the Cost of obtaining evidence may be a
least expensive type of audit factor in deciding whether to
evidence obtain that evidence
Yes Yes

B)
Physical examination is usually the Cost of obtaining evidence may be a
least expensive type of audit factor in deciding whether to
evidence obtain that evidence
No No

C)
Physical examination is usually the Cost of obtaining evidence may be a
least expensive type of audit factor in deciding whether to
evidence obtain that evidence
Yes No

D)
Physical examination is usually the Cost of obtaining evidence may be a
least expensive type of audit factor in deciding whether to
evidence obtain that evidence
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 No Yes

28) One purpose of performing analytical procedures in the planning phase of an audit is to
assess the client's financial condition. Explain how the assessment of a client's financial
condition can affect the auditor's decisions concerning evidence accumulation in later phases of
the audit.

29) Define the following terms commonly used in audit procedures:

1. examine
2. scan
3. compute
4. foot
5. compare
6. count
7. vouch

30) Below are 12 audit procedures. Classify each procedure according to the following types of
audit evidence: (1) physical examination, (2) confirmation, (3) documentation, (4) observation,
(5) inquiry of the client, (6) reperformance, and (7) analytical procedure.

Type of Evidence Audit Procedures

1. Watch client employees count inventory to determine
whether company procedures are being followed.
2. Count inventory items and record the amount in the audit
files.
3. Trace postings from the sales journal to the general
ledger accounts.
4. Calculate the ratio of cost of goods sold to sales as a test
of overall reasonableness of gross margin relative to the
preceding year.
5. Obtain information about the client's internal controls by
asking questions of client personnel.
6. Trace column totals from the cash disbursements journal
to the general ledger.
7. Examine a piece of equipment to make sure a recent
purchase of equipment was actually received and is in
operation.
8. Review the total of repairs and maintenance for each
month to determine whether any month's total was
unusually large.
9. Compare vendor names and amounts on purchase
invoices with entries in the purchases journal.
10. Foot entries in the sales journal to determine whether
they were correctly totaled by the client.
11. Make a surprise count of petty cash to verify that the
amount of the petty cash fund is intact.
12. Obtain a written statement from the client's bank stating
the client's year-end balance on deposit.
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31) Match nine of the terms (a-k) with the definitions provided below (1-9):

a. foot
b. compute
c. scan
d. inquire
e. count
f. trace
g. reperform
h. read
i. examine
j. observe
k. compare

________ 1. a calculation done by the auditor independent of the client

________ 2. addition of a column of numbers to determine if the total is the same as the client's

________ 3. a comparison of information in two different locations

________ 4. a use of the senses to assess certain activities

________ 5. following details of transactions from original documents to journals

________ 6. a less detailed examination of a document or record to determine if there is

something unusual warranting further investigation

________ 7. obtaining information from the client in response to specific questions

________ 8. a determination of assets on hand at a given time

________ 9. an examination of written information to determine facts pertinent to the audit

32) Match five of the terms (a-h) with the definitions provided below (1-5):

a. audit documentation
b. audit procedures
c. audit objectives
d. analytical procedures
e. budgets
f. reliability of evidence
g. sufficiency of evidence
h. persuasiveness of evidence

________ 1. use of comparisons and relationships to assess the reasonableness of account

balances

________ 2. detailed instructions for the collection of a type of audit evidence

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________ 3. the degree to which evidence can be considered believable or trustworthy

________ 4. contains all the information that the auditor considers necessary to conduct an
adequate audit and to provide support for the audit report

________ 5. this is determined by the amount of evidence obtained

33) Below are 10 documents typically examined during an audit. Classify each document as
either internal or external.

Type of Document Documents

1. canceled checks for payments of accounts payable
2. payroll time cards
3. duplicate sales invoices
4. vendors' invoices
5. bank statements
6. minutes of the board of directors' meetings
7. signed lease agreements
8. notes receivable
9. subsidiary accounts receivable records
10. remittance advices

34) Distinguish between internal documentation and external documentation as types of audit
evidence. Give two examples of each. Which type is considered more reliable?

True false questions

35) Confirmations are among the most expensive type of evidence to obtain.

36) Whenever practical and reasonable, the confirmation of accounts receivable is required of
CPAs.

37) Inquiries of clients and recalculations normally have a low cost associated with them.

38) When analytical procedures reveal unusual fluctuations in an account balance, the auditor
will probably perform fewer tests of details for that account and increase the tests of controls
related to the account.

39) The type of audit evidence known as inquiry requires the auditor to obtain oral or written
information from the client in response to questions.

40) Auditor judgment is the primary determinant in determining the amount of evidence
gathered.

41) Analytical procedures must be used in the planning and completion phases of the audit.

42) Confirmations are ordinarily used to verify account balances, but may be used to verify
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transactions.

43) Accounts receivable confirmations must be controlled by the client from the time they are
prepared until the time they are returned to the auditor.

44) Cost is never an adequate justification for omitting a necessary procedure or not gathering an
adequate sample size.

45) When the auditor foots the journals and the subsidiary ledgers, it is considered
reperformance.

46) Inspection consists of looking at a process or procedure being performed by others.

47) A canceled check written by the client, made payable to a local supplier and drawn on the
client's bank account is one type of internal document.

7.5 Learning Objective 7-5

1) Analytical procedures are so important that they are required during the
A) planning and test of control phases.
B) planning and completion phases.
C) test of control and completion phases.
D) planning, test of control, and completion phases.

2) A benefit obtained from using industry averages is that it provides a(n)

A) benchmark to compare the company's results.
B) indication where errors exist in the statements.
C) benchmark to be used in evaluating a client's budgets.
D) comparison of "what is" with "what should be."

3) Industry comparisons can be used as

A) an aid to understanding the client's business.
B) an indicator of errors.
C) an indicator of fraud.
D) an aid to internal controls.

4) Analytical procedures
A) performed during the audit planning phase generally use aggregate data.
B) are never performed during the testing phase of an audit.
C) are declining in importance as a type of audit evidence.
D) performed during the audit planning stage help the auditor take a final objective look at the
audited financial statements.

5) Analytical procedures performed during the planning phase of the audit

A) are used as a substantive test in support of account balances.
B) are used to assist in determining the nature, extent, and timing of audit procedures
C) are used to detect fraud.
D) are mandatory only for public companies.
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6) Analytical procedures performed during the completion stage of the audit
A) help the auditor understand the client's business and industry.
B) are typically performed by a senior partner with extensive knowledge of the client's business.
C) help the auditor identify significant matters requiring special attention later in the
engagement.
D) all of the above

7) Substantive analytical procedures performed during the testing phase of the audit
A) are required under generally accepted auditing standards.
B) are always done independently from other audit procedures.
C) are used as a substantive test in support of account balances.
D) do not need to be documented in the working papers.

8) Auditors compare client data with

A) industry data.
B) client-determined expected results.
C) similar prior-period data.
D) all of the above.

9) Which of the following is not a weakness of using industry averages for auditing?
A) The industry data are broad averages.
B) Different companies follow different accounting methods.
C) They can be helpful in identifying potential misstatements.
D) All of the above are weaknesses.

10) When comparing client data with similar prior-period data,

A) if there has been no significant changes in the client's operations in the current year, much of
the detail making up the totals in the financial statements should remain unchanged.
B) comparison of details must take the form of details over time.
C) comparing totals with previous years considers growth in the business activity.
D) percent relationships fail to consider declines in the business activity.

11) Which of the following is accurate regarding the comparison of client data?
A) Since budgets are only projections, auditors can ignore the differences between budgeted and
actual results.
B) One approach to overcome the limitations of industry averages is to compare the client to one
or more benchmark firms in the industry.
C) It is impractical to relate one account balance to another balance sheet or income statement
account.
D) it is extremely difficult to get industry data for comparative purposes.

12) State the three phases of the audit where analytical procedures can be performed and
describe the specific procedures performed in each phase.

True false questions

13) Substantive analytical procedures performed in all phases of the audit generally use
aggregate data to help understand where misstatements are more likely to occur.

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14) There has been an increased emphasis on the use of analytical procedures during an audit.

15) The usefulness of analytical procedures as audit evidence depends significantly on

appropriate comparison data.

16) The most important benefits of industry comparisons are to aid in understanding the client's
business and as an indication of the likelihood of financial failure.

17) One substantive analytical procedure involves the auditor calculating an expected balance for
an account and then comparing it to the actual account balance.

7.6 Learning Objective 7-6

1) Financial ratios
A) are used during the planning and final review phases of the audit.
B) can be linked to the trial balance so that calculations are automatically updated as adjustments
are made.
C) should be compared to previous years and industry averages.
D) all of the above

2) Which of the following ratios is not a measure of a company's short-term debt paying ability?
A) accounts receivable turnover
B) cash ratio
C) current ratio
D) quick ratio

3) Which financial ratio is computed by dividing current assets by current liabilities?

A) quick ratio
B) debt to equity
C) accounts receivable turnover
D) current ratio

4) Which account is used in the current ratio but not the quick ratio?
A) marketable securities
B) accounts payable
C) accounts receivable
D) inventory

5) To determine accounts receivable turnover, net sales is divided by

A) beginning net accounts receivable.
B) average gross receivables.
C) cost of goods sold.
D) 365 days.

6) A company's long-term solvency

A) can be measured by the gross profit percentage.
B) depends on the success of its operations and on its ability to raise capital for expansion.
C) can be measured by the days to collect receivables ratio.
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D) depends on its ability to generate cash for the payment of dividends.

7) Which of the following is an accurate statement regarding a company's ability to meet its
long-term debt obligations?
A) If the debt-to-equity ratio is too high, it may indicate that the company has used up its
borrowing capacity.
B) If the debt-to-equity ratio is too high, it may mean that available leverage is not being used to
the owners' benefit.
C) The times interest earned ratio indicates if a company can make its principal and interest
payments.
D) The key ratios that are used to measure a long-term solvency are debt to equity, return on
assets, and times interest earned.

8) Which ratio do auditors find useful for assessing misstatements in sales, cost of goods sold,
accounts receivable, and inventory?
A) earnings per share
B) profit margin
C) gross profit percent
D) current ratio

9) Which ratio is computed by dividing operating income by net sales?

A) gross profit percent
B) profit margin
C) return on sales
D) return on assets

True false questions

10) Auditors use trends in the accounts receivable turnover ratio to assess the reasonableness of
the company's credit policies.

11) Auditors use trends in the inventory turnover ratio to identify potential inventory
obsolescence.

12) The most widely used profitability ratio is the gross profit percent.

7.7 Learning Objective 7-7

1) Which of the following best describes one of the primary objectives of audit documentation?
A) defend against claims of a deficient audit
B) provide a basis for reviewing the work of subordinates
C) provide reasonable assurance that the audit was conducted in accordance with auditing
standards
D) provide additional support of recorded amounts to the client

2) Audit documents
A) are kept by the client for easy reference for their accounting staff.
B) should be considered as a substitute for the clients accounting records.
C) are designed to facilitate the review and supervision of the work performed by the audit team
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by a reviewing partner.
D) prepared during the engagement are the property of the client once the audit bill is paid.

3) Audit documentation
A) should identify the items tested when the audit procedures involve sampling of transactions or
balances.
B) does not aid in the preparation of the tax return since accounting and tax rules differ.
C) is another term for the audit program.
D) should not be given to anyone outside the audit firm, even if a subpoena has been issued.

4) Audit documentation of the evidence gathered by the auditor should meet which of the
following criteria?
A) Workpapers are prepared in sufficient detail so that they can be given to the client for future
reference.
B) The content is sufficient to provide support for the auditor's opinion, including the auditor's
representation as to compliance with auditing standards.
C) Audit evidence is principally gathered to determine if the client's financial statements, as
prepared by management, can be relied upon to make managerial decisions about the firm.
D) Audit evidence as displayed in the workpapers is primarily performed to protect the auditing
firm in the case of a lawsuit by investors.

True false questions

5) Audit documents are the joint property of the auditor and the audit client.

6) Auditing standards require that records for audits of private companies be retained for a
minimum of seven years.

7) The SEC requires the auditors of public companies to retain e-mail correspondence related to
the audit.

7.8 Learning Objective 7-8

1) When preparing and organizing audit files,

A) the rules established by the SEC and PCAOB must be followed.
B) a lead schedule contains the detailed accounts from the general ledger making up the line item
on the trial balance.
C) a working trial balance is considered part of the permanent file.
D) the audit program is not part of the audit files.

2) Audit documentation should possess certain characteristics. Which of the following is true
regarding those characteristics?
A)
Audit documentation should be Audit documentation should be
indexed and cross-referenced organized to benefit the client's staff
Yes Yes

B)
Audit documentation should be Audit documentation should be
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 indexed and cross-referenced organized to benefit the client's staff
No No

C)
Audit documentation should be Audit documentation should be
indexed and cross-referenced organized to benefit the client's staff
Yes No

D)
Audit documentation should be Audit documentation should be
indexed and cross-referenced organized to benefit the client's staff
No Yes

3) The permanent audit file would usually include the

A) client's working trial balance.
B) summary of the risk assessment procedures performed.
C) organizational chart of the company's employees.
D) summary of the auditors test of controls for the current years audit.

4) The permanent files included as part of audit documentation do not normally include
A) a copy of the current and prior years' audit programs.
B) copies of articles of incorporation, bylaws and contracts.
C) information related to the understanding of internal control.
D) results of analytical procedures from prior years.

5) Supporting schedules
A) must be prepared by the auditor.
B) make up the largest portion of audit documentation.
C) must consist of either reconciliation of amounts or substantive analytical procedures.
D) all of the above

6) What type of supporting schedule is designed to show detailed tests performed, does not tie in
to the general ledger, but must state a positive or negative conclusion about the objective of the
test?
A) outside documentation
B) reconciliation of amounts
C) examination of supporting documents
D) substantive analytical procedures

7) A(n) ________ is a supporting schedule that supports a specific amount and is normally
expected to tie the amount recorded in the client's records to another source of information.
A) reconciliation of amounts
B) analysis
C) summary of procedures
D) informational document

8) Which type of supporting schedule is designed to show the activity in a general ledger account
during the entire period under audit?
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A) trial balance
B) reconciliation of amounts
C) summary of procedures
D) analysis

9) When determining sufficient and appropriate audit evidence in order to form an opinion on the
client's financial statements the auditor compiles audit documentation to support the opinion. The
largest portion of audit documentation will include detailed supporting schedules prepared by the
client or the auditor in support of specific accounts on the financial statements. Two types of
supporting schedules are analysis and reconciliation of amounts. Discuss those two schedules
and give an example for each schedule.

10) The basis for preparing financial statements for companies is the general ledger. As soon as
possible the auditor obtains the general ledger accounts of the client and prepares a working trial
balance. Discuss the audit documentation in the current file that relates to the working trial
balance. Include a description of lead and support schedules in your answer.

True false questions

11) Auditors use tick marks, which are symbols adjacent to the detail on the body of the
schedule.

12) An example of a supporting schedule is a reconciliation of amounts, which consists of the

details that make up a year-end balance.

13) Since confirmation replies and copies of client agreements are not considered schedules in
the usual sense, they are not indexed and filed.

14) An auditor can use engagement management software to facilitate tracking audit progress.

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