BBD2603 Auditing

Tutorial 6: Audit Evidence

Section A: Multiple Choice Questions

1. Which of the following statements best describes what is meant by the term
appropriateness of audit evidence?

I. Appropriateness is a measure of the quality of audit evidence.

II. Appropriateness refers to the relevance and reliability of audit evidence.
III. Appropriateness is a measure of the quantity of audit evidence.

A. I only
B. I and II only
C. II and III only
D. I, II and III

2. Which of the following factors affects the relevance of audit evidence?

I. The purpose of the audit procedure.

II. The direction of testing.
III. The type of procedure.

A. I only
B. I and II only
C. II and III only
D. I, II and III

3. Which of the following statements is false regarding substantive analytical

procedures?

A. Substantive analytical procedures are not required to be performed on all

audit engagements.
B. If the results of substantive analytical procedures suggest that an
account is materially correct, the evidence needed from tests of details
can likely be reduced.
C. Substantive analytical procedures would be performed after tests
of details.
D. None of the above.
E.

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4. The appropriateness of audit evidence is affected by which of the following

factors?

I. The reliability of the audit evidence.

II. The relevance of the audit evidence gathered.
III. The risk of material misstatement of the assertion being examined.

A. I only
B. I and II only
C. II and III only
D. I, II and III

5. Which of the following forms of evidence is most reliable?

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.

6. 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.

7. Calculating the gross margin as a percent of sales and comparing it with

previous periods.

This is referring to _______________ of evidence.

A. Physical examination
B. Analytical procedures
C. Observation
D. Inquiry

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8. Sufficiency of evidence is a measure of the _________________.

A. Quantity of evidence
B. Quality of evidence
C. Appropriateness of evidence
D. Meaning of evidence

9. Which of the followings refer to the determinants of persuasiveness of

evidence?

A. Competency and sufficiency

B. Relevance and sufficiency
C. Appropriateness and sufficiency
D. Independence and effectiveness

10. Which of the following is the example of external source document?

A. Employees’ time reports

B. Bank statements
C. Purchase orders for company purchases
D. Carbon copies of checks

11. Which of the following is not a purpose of analytical procedures?

A. Understand the trends of the financial items fluctuations

B. Assess the client’s ability to continue as a going concern
C. Evaluate internal controls
D. Reduce detailed audit tests

12. Auditors will replace tests of details with analytical procedures when possible
because the _______________.

A. Analytical procedures are more reliable

B. Test of details are more expensive
C. Analytical procedures are more persuasive
D. Test of details are more difficult to interpret

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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 cash.
C. Inquiries of the credit manager about the collectability of current
accounts receivable.
D. Observation of cobwebs on some inventory bins.

14. Which of the following statements about confirmations is true?

A. Confirmations are expensive and so are often not used.

B. Confirmations may inconvenience those asked to supply them, but
they are widely used.
C. Confirmations are sometimes not reliable and so auditors use them only
as necessary.
D. Confirmations are required for several balance sheet accounts but no
income statement accounts.

15. Traditionally, confirmations are used to verify:

A. Individual transactions between organizations, such as sales

transactions.
B. Bank balances and accounts receivable.
C. Fixed asset additions.
D. Payroll expenses.

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 has the qualities of being relevant, objective, and free from
known bias.
D. It consists of written statements made by managers of the enterprise
under audit.

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17. Which of the following statements is not a correct use of the terminology of
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.

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Section B: Subjective Questions

Question 1

Classify each procedure according to the following types of the audit evidence.

(i) physical examination, (ii) confirmation, (iii) documentation, (iv) observation, (v)
inquiry of the client, (vi) reperformance, and (vii) analytical procedure.

Type of Audit Procedures

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

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Question 2

Outline the audit assertions that are fulfilled through the audit procedures below:

01) Debtors balance confirmation

02) Physical inspection of inventory
03) Review of bank reconciliation stations
04) Confirmation of legal advisers
05) Verification of title deeds of fixed assets

Answers:

01) Existence, Rights and obligation

02) Existence

03) Existence, completeness, accuracy & valuation

04) Completeness and Valuation

05) Rights and Obligation

Question 3 (Adapted from ACCA June 2010)

State TWO (2) test of control and TWO (2) substantive procedures in relation to
sales invoicing year end sales.

Answers:
Example tests of control over sales invoicing

– Inspect numerical sequence of sales invoices, if any breaks in the sequence

noted, enquire of management as to missing invoices.

– Review a sample of sales invoices for evidence of authorisation by a

responsible official of any discounts allowed.

– Inspect customer statements of accounts for evidence of regular

preparation.

Example substantive procedures over sales invoicing

– Select a sample of pre and post year end goods despatch notes
and follow through to pre or post year end sales invoices, to ensure the sales
cut-off has been correctly applied.

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– Perform an analytical review of monthly sales, compare any trends to prior

years and discuss significant fluctuations with management.

– Review post year end credit notes to identify if any pre year end sales should
be removed.

Question 4 (Adapted from ACCA June 2011)

Outline any SIX (6) procedures relevant to the audit for purchases and other
expenses.
Procedures to obtain evidence and an audit test relevant to purchases and
other expenses:

– Inspect a sample of purchase invoices and agree the amount is included

correctly within the purchase ledger.

– Inspect purchase orders for evidence of authorisation by a responsible

official.

– Observe the process for logging purchase invoices into the system to ensure
that all invoices are entered completely and accurately.

– Observe the goods received department to assess whether goods received

are checked against purchase orders and reviewed for adequate quality.

– Calculate the operating profit margin/overhead ratio and compare it to last

year and budget and investigate any significant differences.

– Review monthly other expenses to identify any significant fluctuations and

discuss with management.

– Discuss with management whether there have been any changes in the key
suppliers used and compare this to the purchase ledger to assess completeness
and accuracy of purchases.

– Inquire of department heads the process they follow in authorising orders to

ensure that it follows the specified company authorisation process.

– Recalculate the accuracy of a sample of purchase invoices.

– Recalculate the prepayments and accruals charged at the year end to ensure
the accuracy of the other expenses.

– Reperform the purchase ledger control account reconciliation to ensure

accuracy.

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– Select a sample of purchase orders and match them to the goods received
notes and purchase invoices to ensure completeness of the purchase cycle.

Question 5

ISA 500 Audit evidence requires audit evidence to be reliable.

Required:

List FOUR (4) factors could influence the reliability of audit evidence

Suggested Answers:

(i) Audit evidence is more reliable when it is obtained from independent sources
outside the entity.

(ii) Audit evidence that is generated internally is more reliable when the related
controls imposed by the entity are effective.

(iii) Audit evidence obtained directly by the auditor (for example, observation of
the application of a control) is more reliable than audit evidence obtained indirectly
or by inference (for example, inquiry about the application of a control).

(iv) Audit evidence is more reliable when it exists in documentary form, whether
paper, electronic, or other medium. (For example, a contemporaneously written
record of a meeting is more reliable than a subsequent oral representation of the
matters discussed.)

(v) Audit evidence provided by original documents is more reliable than audit
evidence provided by photocopies or facsimiles (fax).

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