Weekly Review Quiz #457 – AUD: Evidence
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Failure to detect material dollar misstatements in the financial statements is a risk which the auditor primarily mitigates by
- Performing substantive procedures.
- Performing tests of controls.
- Assessing internal control.
- Obtaining a client representation letter.
The correct answer is: A.
A. This answer is correct because substantive procedures are used to control the risk of incorrect acceptance of a population which is materially in error. The auditor faces two separate risks. The first risk is that material misstatements may occur in the accounting process, and the second risk is that material misstatements that have occurred will not be detected in the auditor’s examination. The auditor relies on internal control to reduce the first risk and substantive tests to reduce the second risk.
B. This answer is incorrect because tests of controls relate more directly with control operating effectiveness rather than the risk of failing to detect material dollar errors.
C. This answer is incorrect because the auditor’s assessment of internal control does not ordinarily identify material misstatement.
D. This answer is incorrect because obtaining a client representation letter will not in any way mitigate the risk of failure to detect material misstatements. Representation letters confirm the oral representations which have been made by management to the auditor but are not substitutes for any other audit procedures.
Which of the following audit procedures is least likely to detect an unrecorded liability?
- Analysis and recomputation of interest expense.
- Analysis and recomputation of depreciation expense.
- Mailing of standard bank confirmation form.
- Reading of the minutes of meetings of the board of directors.
The correct answer is: B.
A. This answer is incorrect because unrecorded debt may be discovered through recomputation of interest expense.
B. This answer is correct because an analysis and recomputation of depreciation expense is based upon transactions which have already been recorded (in this case an equipment purchase).
C. This answer is incorrect because the standard bank confirmation form explicitly asks for information on liabilities.
D. This answer is incorrect because the minutes of the meeting of the board of directors may include discussions of major liabilities incurred by the firm.
Which of the following types of audit evidence generally is the most reliable?
- Inquiries made of management.
- Confirmation of account information.
- Analytical procedures.
- Review of prior year audit procedures.
The correct answer is: B.
A. This answer is incorrect because management’s personal interest in the matters of inquiry may lead to a lesser quality of evidence.
B. This answer is correct because evidence obtained from external parties and received directly by the auditor is generally considered most reliable.
C. This answer is incorrect because analytical procedures depend upon the reliability of the company’s underlying accounting system.
D. This answer is incorrect because a review of prior year audit procedures will provide only limited guidance in the current year.
Which of the following statements concerning analytical procedures is correct?
- Analytical procedures may be omitted entirely for some financial statement audits.
- Analytical procedures used during risk assessment of the audit should not use nonfinancial information.
- Analytical procedures usually are effective and efficient for tests of controls.
- Analytical procedures alone may provide the appropriate level of assurance for some assertions.
The correct answer is: D.
A. This answer is incorrect because the performance of analytical procedures is required during the planning and overall review stages of audits.
B. This answer is incorrect because analytical procedures used during the risk assessment of the audit may use nonfinancial information (e.g., number of employees, square footage of selling space).
C. This answer is incorrect because analytical procedures are not used to test controls.
D. This answer is correct because analytical procedures may in certain circumstances provide the appropriate level of assurance for some assertions.
Which of the following analytical procedures most likely would be used during the risk assessment stage of an audit?
- Comparing current year to prior year sales volumes.
- Reading the financial statements and notes and considering the adequacy of evidence.
- Comparing the current year ratio of aggregate salaries paid to the number of employees to the prior year’s ratio.
- Reading the letter from the client’s attorney and considering the threat of litigation.
The correct answer is: A.
A. This answer is correct because comparing current year to prior-year sales volumes is an analytical procedure and because analytical procedures in risk assessment often use such aggregated data.
B. This answer is incorrect because reading the financial statements and notes may be considered an analytical procedure but it would be performed during the final review stage of an audit, not during planning.
C. This answer is incorrect because comparing such salaries is most likely to be an application of analytical procedures as a substantive procedure.
D. This answer is incorrect because reading a letter from an attorney is not considered an analytical procedure.
End of Quiz
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