Assignment
Rename your file with your first name, last name, and "HW4." Reminder - I do not allow direct quotes in student's work in this class. You need to paraphrase and cite your outside sources. "Outside sources" do not include the text and so you don't need to cite it. Type your answers into this document, rename it, and upload it to the Homework assignment for Week 4.
1) The following are several multiple choice questions adapted from the CPA exam that concern the persuasiveness of evidence, audit documentation, and materiality. For each question, selected the best answer and then explain why it is better than all the alternatives. Your explanations should address all the possible alternatives presented in the question.
The parts of question 1 were taken directly from the text and I am aware that the answers are available through an internet search. I want to remind you that searching the internet for the answers and using those answers is a violation of UMUC academic integrity policies. In addition, using any outside source without citation is plagiarism. However, just gaining access to the answers will not satisfy the homework assignment because I have added the requirement that you explain your answers, which cannot be found on the internet and needs to be reasoned out from the material in the chapter. In grading, I will place more emphasis you explanation than your selection of the correct alternative.
Hint - The most common problem students have with these questions is being thorough and accurate in their explanations. I want to not only support your selection but discuss why the other three alternatives were weaker. Sometimes this can be done by treating the alternatives as a group, but in most cases you will need to address each one separately. I also have included some specific hints with each question.
a) Which of the following types of documentary evidence should the auditor considered to be the most reliable and why?
i) A sales invoice issued by the client and supported by a delivery receipt from an outside trucker.
ii) Confirmation of an account payable balance mailed by and returned directly to the auditor.
iii) A check, issued by the company and bearing the payee's endorsement, that is included with the bank statements mailed directly to the auditor.
iv) An audit schedule prepared by the client's controller and reviewed by the client's treasurer.
Hint - Base your answer on the evidence reliability issues discussed in the text.
b) Which of the following statements concerning audit evidence is true?
i) To be appropriate, audit evidence should be either persuasive or relevant, but need not be reliable.
ii) The measure of the quantity and quality of audit evidence lies in the auditor's judgment.
iii) The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.
iv) A client's accounting records can be sufficient audit evidence to support the financial statements.
Hint - This question involves consideration of all this issues that affect persuasiveness.
c) Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
i) Vendor's invoice
ii) Bank statement obtained from the client
iii) Computations made by the auditor
iv) Prenumbered sales invoices
Hint - While the question mentions persuasiveness, the main issues here are reliability relevance.
d) Which of the following presumptions is correct about the reliability of audit evidence?
i) Information obtained indirectly from outside sources is the most reliable audit evidence.
ii) To be reliable, audit evidence should be convincing rather than merely persuasive.
iii) Reliability of audit evidence refers to the amount of corroborative evidence obtained.
iv) Effective internal control provides more assurance about the reliability of audit evidence.
Hint - Some of the options are trying to distract you from the reliability issue. Keep focused on it. Also, consider all the issues raise in the text about reliability.
e) Which of the following is not a primary purpose of audit documentation?
i) To coordinate the audit.
ii) To assist in preparation of the audit report.
iii) To support the financial statements.
iv) To provide evidence of the audit work performed.
Hint - Stay focused on what an auditor's responsibilities are versus what the client's are.
f) During an audit engagement, pertinent data are compiled and included in the audit files. The audit files primarily are considered to be
i) a client-owned record of conclusions reached by the auditors who performed the engagement.
ii) evidence supporting financial statements.
iii) support for the auditor's representations as to compliance with auditing standards.
iv) a record to be used as a basis for the following year's engagement.
Hint - Same as above. Stay focused on the auditor's responsibilities.
g) Which one of the following statements is correct concerning the concept of materiality?
i) Materiality is determined by reference to guidelines established by the AICPA.
ii) Materiality depends only on the dollar amount of an item relative to other items in the financial statements.
iii) Materiality depends on the nature of an item rather than the dollar amount.
iv) Materiality is a matter of professional judgment.
Hint: Pick the answer that applies to all the discussion of materiality in the text and is always true.
h) In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 will have a material effect on an entity's income statement, but that misstatements will have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it is appropriate to design audit procedures that are expected to detect misstatements that aggregate to
i) $10,000
ii) $15,000
iii) $20,000
iv) $30,000
Hint: Planning materiality applies to the financial statements taken as a whole. When you start breaking materiality down by financial statement and account, that becomes more performance materiality.
i) A client decides not to record an auditor's proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?
i) The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
ii) The financial statements do not conform with generally accepted accounting principles (GAAP).
iii) The financial statements contain unadjusted misstatements that should result in a qualified opinion.
iv) The financial statements are free from material misstatement, but disclosure ofthe proposed adjustment is required in the notes to the financial statements.
Hint: Stick to what an auditor certifies - that the financial statements taken as a whole are free of material misstatement.
2) The following audit procedures were performed in the audit of inventory to satisfy specific balance-related audit objectives as discussed in Chapter 6. The audit procedures assume that the auditor has obtained the inventory count sheets that list the client's inventory. For each audit procedure, identify what type of audit procedure it is (see page 76) and what balance-related audit objective(s) it meets. Explain you selection of audit objective(s). Some procedures may meet more than one objective.