Since 1977

AUDITING THEORY L. R. CABARLES/J.M. D. MAGLINAO

AT.2903—Audit Evidence and Documentation: The Framework OCTOBER 2020

Suggested Readings:
1. PSA 500, Audit Evidence
2. PSA 230, Audit Documentation
3. Chapter 3, Auditing: A Risk-Based Approach, Part 1-Theory 2019 Issue—1st Edition by Cabarles/Ocampo/Valdez

DISCUSSION QUESTIONS
Audit Evidence: Purpose, Definition and Types 7. External confirmation
1. The principal reason for an independent auditor to a. Consists of seeking information of knowledgeable
gather and evaluate audit evidence is to persons, both financial and non-financial,
a. Form an opinion on the financial statements. throughout the entity or outside the party.
b. Detect fraud. b. Is the process of obtaining a representation of
c. Evaluate management. information or of an existing condition directly from
d. Evaluate internal control. a third party.
c. Is the auditor’s independent execution of
2. Which statement is incorrect regarding audit evidence? procedures or controls that were originally
a. Audit evidence is all the information used by the performed as part of the entity’s internal control.
auditor in arriving at the conclusions on which the d. Consists of checking the mathematical accuracy of
audit opinion is based. documents or records.
b. Audit evidence includes the information contained
in the accounting records underlying the financial 8. This consists of looking at a process or procedure
statements and other information. being performed by others.
c. Audit evidence is cumulative in nature. a. Reperformance c. Observation
d. Auditors are expected to address all information b. Recalculation d. Inspection
that may exist.
9. Generally, which of the following audit procedures is
3. Accounting records alone cannot constitute sufficient the most costly?
evidence. Thus, the auditor should obtain other a. Inspection c. Inquiry
information. Which of the following is considered as b. Observation d. Confirmation
other information type of audit evidence?
a. The records of initial entries and supporting 10. Which of the following audit procedures is used
records. extensively throughout the audit and is often
b. The general and subsidiary ledgers. complementary to performing other audit procedures,
c. Work sheets and spreadsheets supporting cost yet the least reliable?
allocations. a. Inspection c. Inquiry
d. Comparable data about competitors b. Observation d. Recalculation
(benchmarking) and industry analyses.
Sufficiency and Appropriateness of Audit Evidence
4. Underlying accounting records most likely include 11. Two overriding considerations affect the many ways an
a. Minutes of meetings. auditor can accumulate evidence:
b. Confirmation from third parties. I. Sufficient appropriate evidence must be
c. Inventory count observation memorandum. accumulated to meet the auditor’s professional
d. Checks and electronic fund transfer records. responsibility.
II. Cost of accumulating evidence should be
Audit Procedures—The Means to Obtain Audit minimized.
Evidence
In evaluating these considerations:
5. The auditor obtains audit evidence by performing
a. the first is more important than the second.
which of the following audit procedures?
b. the second is more important than the first.
a. Risk assessment procedures.
c. they are equally important.
b. Further audit procedures comprising test of
d. it is impossible to prioritize them.
controls and substantive procedures.
c. Both a and b.
12. Which statement is correct regarding the sufficiency
d. Neither a nor b.
and appropriateness of audit evidence?
a. Sufficiency is the measure of the quality of audit
6. Substantive procedures performed to detect material
service.
misstatement in the financial statements include the
b. Appropriateness is the measure of the quantity of
following, except
audit evidence; that is, its relevance and its
a. Test of details of transactions and balances.
reliability in providing support for or, detecting
b. Test of details of presentation and disclosures.
misstatements in, the classes of transactions,
c. Analytical procedures.
account balances, and disclosures and related
d. Reperformance.
assertions.

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EXCEL PROFESSIONAL SERVICES, INC.
c. Merely obtaining more audit evidence may
compensate for its poor quality.
d. The quantity of audit evidence needed is affected
by the risk of misstatement (the greater the risk,
the more audit evidence is likely to be required)
and also by the quality of such audit evidence (the
higher the quality, the less may be required).
13. Which of the following means available to the auditor
for selecting items for testing is required under PSA
500?
a. All items or 100% examination.
b. Specific items.
c. Audit sampling.
d. No particular means is required.
14. Ultimately, what is sufficient appropriate audit
evidence depends on
a. Auditor’s professional judgment
b. Users’ view
c. Management’s judgment
d. All of the above
Relevance of Audit Evidence
15. The following statements relate to relevance of audit
evidence. Which is correct?
a. Relevance deals with the logical connection with,
or bearing upon, the purpose of the audit
procedure, direction of testing and, where
appropriate, the assertion under consideration.
b. The auditor shall perform tests of control to obtain
understanding the entity and its environment,
including internal control.
c. The auditor shall perform substantive procedures
to test the operating effectiveness of entity’s
internal control.
d. The auditor shall perform risks assessment
procedures to detect material misstatements in the
financial statements.
16. Financial statements implicitly or explicitly include
management’s assertions about the fair presentation of
information, that is, about its recognition,
measurement, presentation, and disclosure. The
auditor uses management’s assertion in which of the
following?
a. Obtaining and evaluating audit evidence.
b. Developing audit programs.
c. Identifying and assessing risks of material
misstatement.
d. All of the above.
17. Which statement is incorrect regarding the audit
evidence relevance and assertion?
a. A given set of audit procedures may provide audit
evidence that is relevant to certain assertions, but
not to others.
b. The auditor often obtains audit evidence from
different sources or of a different nature that is
relevant to the same assertion.
c. Obtaining audit evidence relating to a particular
assertion is not a substitute for obtaining audit
evidence regarding another assertion.
d. None of the above
18. 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.
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d. To be relevant, evidence must be derived from a
system including effective internal controls.
19. The auditor of G Co is performing audit procedures to
confirm the company's ownership of motor vehicles.
Which of the following would provide the most
persuasive evidence of this?
a. Physical inspection of the motor vehicles
b. Inspection of vehicle registration documents
c. Checking that the motor vehicles are recorded in
the non-current asset register
d. Review of vehicle insurance documentation
20. Which of the following statements about the existence
(testing is from accounting records to the supporting
evidence) and completeness (testing is from
supporting evidence to the accounting records)
assertions is not true?
a. The existence and completeness assertions
emphasize different audit concerns.
b. The completeness assertion deals with unrecorded
transactions.
c. Existence deals with overstatements and
completeness deals with understatements.
d. Existence deals with understatements and
completeness deals with overstatements.
21. In determining whether transactions have been
recorded, the direction of the audit testing should
begin from the
a. General ledger balances.
b. Original source documents.
c. Adjusted trial balance.
d. General journal entries.
Reliability of Audit Evidence
22. Which of the following generalizations in assessing the
reliability of audit evidence is incorrect?
a. Audit evidence is more reliable when it is obtained
from independent sources outside the entity.
b. Audit evidence obtained directly by the auditor is
more reliable than audit evidence obtained
indirectly or by inference.
c. Audit evidence is more reliable when it exists in
documentary form.
d. Audit evidence provided by photocopies is more
reliable than that provided by facsimiles.
23. Which of the following statements concerning evidence
is correct?
a. Appropriate evidence supporting management’s
assertions should be convincing rather than merely
persuasive.
b. An effective internal control structure contributes
none or little to the reliability of the evidence
created within the entity
c. The cost of obtaining evidence is not an important
consideration to an auditor in deciding what
evidence should be obtained.
d. A client’s accounting records cannot be considered
sufficient audit evidence to support the financial
statements
24. Which one of the following would be considered the
most persuasive type of audit evidence?
a. Purchase orders from vendors
b. Customer accounts receivable files
c. Computerized general ledger
d. Confirmations from banks
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Audit Documentation: Definition and Purpose
25. An auditor’s work papers document all of the following
except:
a. the procedures performed and evidence collected
by the auditor.
b. the auditor’s planning and performance of work.
c. conclusions reached by the auditor.
d. the time required for company personnel to
compile the records requested by the auditor.
26. An auditor's working papers serve mainly to
a. Provide the principal support for the auditor's re-
port.
b. Satisfy the auditor's responsibilities.
c. Monitor the effectiveness of the CPA firm's quality
control procedures.
d. Document the level of independence maintained by
the auditor.
27. Working papers least likely
a. Assist in the planning and performance of the
audit.
b. Assist in the supervision and review of the audit
work.
c. Prevent misunderstandings with respect to the
engagement.
d. Record the evidence that the audit was planned
and performed in accordance with PSAs and
applicable legal and regulatory requirements.
28. Which of the following is incorrect regarding audit
working papers?
a. They show auditor’s accountability.
b. They are a record for reference in future audits.
c. They enable quality control reviews and
inspections.
d. They are a part of client’s accounting records used
to demonstrate that accounting records agreed
with the financial statements.
29. 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 amount that will appear in the financial
statement, is referred to as a:
a. Working trial balance.
b. Lead schedule.
c. Summarizing schedule.
d. Supporting schedule.
30. 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. Supporting schedule.
b. Lead schedule.
c. Corroborating schedule.
d. Reconciling schedule.
31. In creating lead schedules for an audit engagement, a
CPA often uses automated audit documentation
software. What client information is needed to begin
this process?
a. Interim financial information, such as third quarter
sales, net income, and inventory and receivables
balances.
b. Specialized journal information, such as the invoice
and purchase order numbers of the last few sales
and purchases of the year.
c. General ledger information, such as account
numbers, prior-year account balances, and
current-year unadjusted information.
d. Adjusting entry information, such as deferrals and
accruals and reclassification journal entries.
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Types of Audit Files
32. The current file of the auditor's working papers
generally should include
a. A flowchart of the internal controls.
b. Organization charts.
c. A copy of the financial statements.
d. Copies of bond and note indentures.
33. Which of the following workpapers would one normally
expect to find in the permanent file?
a. A copy of a long-term bond indenture.
b. The working trial balance.
c. An analysis of additions and disposals relating to
marketable securities.
d. A workpaper analyzing customer replies to
confirmation requests.
Audit File Preparation—Understandable to
Unconnected, Experienced Auditor
34. Audit documentation should be prepared in enough
detail so that:
a. An experienced auditor who has worked with the
client in the past can understand the procedures
performed and the evidence obtained.
b. A reader of the financial statements who has no
previous connection with the audit can understand
the procedures performed and the evidence
obtained.
c. A reader of the financial statements who has a
background in financial analysis can understand
the procedures performed and the evidence
obtained.
d. An experienced auditor who has no previous
connection with the audit can understand the
procedures performed, the evidence obtained, the
conclusions reached, and the reasons of departure
from a relevant PSA requirement and how the
alternative audit procedures performed achieve the
aim of that requirement.
35. The auditor typically includes which of the following in
preparing audit files?
a. A heading that includes client’s name, period
covered, and description of contents.
b. A purpose statement.
c. A conclusion statement.
d. All of the above.
36. All of the following are typically included in preparing
audit files. Which one is used to indicate the audit
procedures performed and their results thereof?
a. Index.
b. Cross-reference.
c. Identifying characteristics of specific items tested,
initials of preparer and reviewer, and dates of
preparation and review.
d. Tick mark.
37. Which of the following is least likely to be a factor in
the auditor's decision about the extent of the
documentation of a particular audit area?
a. The risk of material misstatement.
b. The extent of the judgment involved in performing
the procedures.
c. The nature and extent of exceptions identified.
d. Whether or not the client has an internal audit
function.
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38. Which of the following is least likely to be a factor in
the auditor's decision about the extent of the
documentation of a particular audit area?
a. The size and complexity of the entity.
b. The significance of the audit evidence obtained.
c. The audit methodology and tools used.
d. The medium in which it is recorded and
maintained.
Audit File Organization, Assembly, Retention,
Ownership, and Confidentiality
39. The PSAs specify how audit files should be organized to
facilitate timely review of working papers.
Auditors may organize audit files by audit phase, by
financial statements area, or a combination thereof.
a. True, true c. False, true
b. True, false d. False, false
40. In accordance with PSAs, the final assembly of audit
files should take place on a timely basis ordinarily
a. More than 45 days after the auditor’s report date.
b. More than 60 days after the auditor’s report date.
c. Not more than 45 days after the auditor’s report
date.
d. Not more than 60 days after the auditor’s report
date.
41. In accordance with PSQC 1, audit documentation
should be retained
a. A minimum of seven years.
b. As long as lead schedules have relevance to
forthcoming audits.
DO-IT-YOURSELF (DIY) DRILL
1. Evidential matters supporting the financial statements
consist of accounting records and other information
available to the auditor. Other information can be
found in:
a. The subsidiary ledgers
b. Worksheet supporting cost allocation
c. Minutes of directors’ meetings
d. Adjusting entries
2. Which of the following is not a basic procedure used in
an audit?
a. Risk assessment procedures.
b. Substantive procedures.
c. Tests of controls.
d. Tests of direct evidence.
3. Reperformance is
a. Consists of looking at a process or procedure being
performed by others.
b. Consists of seeking information of knowledgeable
persons throughout the entity or outside the party.
c. Is the process of obtaining a representation
directly from a third party.
d. Is the auditor’s independent execution of
procedures or controls that were originally
performed as part of the entity’s internal control.
4. The extent of procedures is affected mostly by which of
the following factors?
a. the sheer volume of procedures to be applied by
the auditor.
b. the time of year in which the client takes a
physical inventory in the warehouse.
c. the auditor's judgment that misstatements are
probable in certain balances.
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c. Until 3 years after the client selects another
auditor.
d. Working papers must be maintained indefinitely.
42. The following statements pertain to audit working
papers:
I. Working papers are owned by the auditors; the
rights of ownership are subject to ethical
limitations relating to the confidential relationships
with the client.
II. Working papers serve as useful reference source
for client and as a substitute for client’s accounting
records.
III. Working papers must be permanently kept or
retained by the auditors.
The above statements are respectively
a. True, True, True c. True, False, False
b. True, True, False d. False, False, False
43. Which statement is correct concerning the deletion of
audit documentation?
a. Superseded audit documentation should always be
deleted from the audit file.
b. After the audit file has been completed, the auditor
should not delete or discard audit documentation.
c. Auditors should use professional skepticism in
determining which audit documentation should be
deleted.
d. Audit documentation should never be deleted from
the audit file.
- now do the DIY drill -
d. the availability of the client's staff at or near the
balance sheet date.
5. Inspection involves examining records or documents,
whether internal or external, in paper form, electronic
form, or other media, or a physical examination of an
asset. Evaluate whether each of the following
statements qualifies as inspection:
I. test performed on 100% of the items within a
population
II. selecting items over a certain amount
III. selecting items for the total population on the
basis that was expected to be representative
a. I, II and III qualify
b. I and II qualify; III does not qualify
c. I and II do not qualify; III qualifies
d. I, II and III do not qualify
6. Theoretically, which of the following would not have an
effect on the amount of audit evidence gathered by the
auditor?
a. The type of opinion to be issued.
b. The auditor’s evaluation of internal control.
c. The types of audit evidence available to the
auditor.
d. Whether or not the client reports to the Securities
and Exchange Commission.
7. “Physical examination” is the inspection or count by
the auditor of items such as:
a. cash, inventory, and payroll timecards.
b. cash, inventory, and sales documents.
c. cash, inventory, canceled checks, and tangible
fixed assets.
d. cash, inventory, securities, notes receivable, and
tangible fixed assets.
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8. Which statement is incorrect regarding audit evidence?
a. The auditor should obtain sufficient appropriate
audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion.
b. Accounting records alone do not provide sufficient
audit evidence.
c. The auditor uses professional judgments and
exercises professional skepticism in evaluating the
quantity and quality of audit evidence, and thus its
sufficiency and appropriateness, to support the
audit opinion.
d. The matter of difficulty or expense involved is a
valid basis for omitting and audit procedure for
which there is no alternative.
9. Which of the following statements concerning audit
evidence is correct?
a. To be competent, audit evidence should be either
persuasive or relevant, but need not be both
b. The measure of the validity of audit evidence lies
in the auditor’s judgment
c. The difficulty and expense of obtaining audit
evidence is valid basis for omitting the test
d. A client’s accounting data can be sufficient audit
evidence to support the financial statements
10. Each of the following might by itself, form a valid basis
for an auditor to decide to omit a test, except for the
a. Relative risk involved.
b. Degree of reliance on the relevant internal
controls.
c. Difficulty and expense involved in testing a
particular item.
d. Relationship between the cost of obtaining
evidence and its usefulness.
11. Which of the following types of audit evidence is the
most persuasive?
a. Prenumbered client purchase order forms
b. Client work sheets supporting cost allocations
c. Bank statements obtained from the client
d. Client representation letter
12. Which of the following statements is incorrect
regarding the reliability of audit evidence?
a. Oral representation by the client management is
not a valid evidence.
b. Audit evidence obtained directly by the auditor is
more reliable than that one provided by the client.
c. The effectiveness of accounting and internal
control adds to the reliability of internal evidence.
d. While internal audit evidence is considered to be
acceptable, the auditor usually prefers audit
evidence form external sources.
13. Which of the following types of audit evidence is the
least reliable?
a. Evidence from the client’s organization.
b. Evidence derived from a well-controlled system.
c. Evidence from independent outside sources.
d. Original documents.
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14. Audit evidence can come in different forms with
different degrees of persuasiveness. Which of the
following is the least persuasive type of evidence?
a. Bank statement obtained from the client
b. Oral representations of client
c. Prenumbered client sales invoices
d. Vendor’s invoices
15. Which of the following statements about working
papers is correct?
a. Working papers are not permitted to be used as a
reference source by the client.
b. The auditor should document the understanding of
the client's internal control obtained to plan the
audit
c. Working papers may be regarded as a substitute
for the client's accounting records.
d. The independent auditor may discard working
papers after two years.
16. Which of the following items would most likely be
found in an auditor’s permanent file papers?
a. Excerpts of shareholders’ and directors’ meetings
b. Staff assignments for the current audit
c. Preliminary analytical procedure notes
d. Representation letter
17. No deletions of audit documentation are allowed after
the
a. Client's year-end.
b. Documentation completion date.
c. Last date of significant fieldwork.
d. Report release date.
18. Generally, which of the following audit procedures is
most reliable?
a. Inspection c. Inquiry
b. Observation d. Recalculation
19. Working papers that record the procedures used by the
auditor to gather evidence should be:
a. Considered the primary support for the FSs 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.
20. Which of the following is not a factor affecting the
independent auditor's judgment about the quantity,
type, and content of audit working papers?
a. The needs for supervision and review of the work
performed by assistants.
b. The nature and condition of the client's records
and internal controls.
c. The expertise of client personnel and their
participation in preparing schedules.
d. The type of the financial statements, schedules, or
other information on which the auditor is reporting.
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