ACCT 431chapter 7. Auditing and Assurance Services, 15e (Arens) Chapter 7 Audit Evidence. 100%.

A) True B) False Terms: Audit evidence Objective: LO 7-1 AACSB: Reflective thinking skills 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 Terms: Decision to be made by auditors related to evidence Objective: LO 7-2 AACSB: Reflective thinking skills 2) Audit procedures are concerned with the nature, extent, and timing in gathering audit evidence. Which, of the following, is true as to the timing of audit procedures? A) Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client Yes Yes B) Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client No No C) Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client Yes No D) Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client No Yes Terms: Timing of audit procedures Objective: LO 7-2 AACSB: Reflective thinking skills 3) A(n) ________ is the detailed instruction that explains the audit evidence to be obtained during the audit. A) audit objectives B) audit procedure C) audit assertion D) audit program Terms: Audit evidence and audit procedures Objective: LO 7-2 AACSB: Analytic skills 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 Terms: Audit evidence and audit procedures Objective: LO 7-2 AACSB: Analytic skills 5) An audit program is the list of audit procedures for an audit area or an entire audit. A) True B) False Terms: Audit program Objective: LO 7-2 AACSB: Reflective thinking skills 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 Terms: Audit evidence qualities of relevance and reliability Objective: LO 7-3 AACSB: Analytic skills 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 Terms: Characteristic of reliability of evidence Objective: LO 7-3 AACSB: Reflective thinking skills 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. Terms: Sufficient evidence Objective: LO 7-3 AACSB: Reflective thinking skills 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. Terms: Audit evidence obtained directly by auditor Objective: LO 7-3 AACSB: Reflective thinking skills 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. Terms: Appropriateness of evidence Objective: LO 7-3 AACSB: Reflective thinking skills 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. Terms: Relevance of evidence Objective: LO 7-3 AACSB: Reflective thinking skills 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. Terms: Determinants of persuasiveness of evidence Objective: LO 7-3 AACSB: Reflective thinking skills 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. Terms: Appropriateness of evidence Objective: LO 7-3 AACSB: Reflective thinking skills 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 Terms: Least persuasive form of evidence Objective: LO 7-3 AACSB: Reflective thinking skills 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. B) The decision of how many items to test should not be influenced by the increased costs of performing the additional tests. 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. Terms: Testing of items; Sample size Objective: LO 7-3 AACSB: Reflective thinking skills 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. Terms: Appropriateness of audit evidence Objective: LO 7-3 AACSB: Reflective thinking skills 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. Terms: Purposes of audit documentation Objective: LO 7-3 AACSB: Reflective thinking skills 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 Terms: Most objective type of evidence Objective: LO 7-3 AACSB: Reflective thinking skills 14) Which items affect the sufficiency of evidence when choosing a sample? A) Selecting items with a high likelihood of misstatement The randomness of the items selected Yes Yes B) Selecting items with a high likelihood of misstatement The randomness of the items selected No No C) Selecting items with a high likelihood of misstatement The randomness of the items selected Yes No D) Selecting items with a high likelihood of misstatement The randomness of the items selected No Yes Terms: Sufficiency of evidence when choosing a sample Objective: LO 7-3 AACSB: Reflective thinking skills 15) Determine which of the following is most correct 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. Terms: Reliability of audit evidence Objective: LO 7-3 AACSB: Reflective thinking skills 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. Terms: Evidence considered appropriate Objective: LO 7-3 AACSB: Reflective thinking skills 17) Given the economic and time constraints in which auditors can collect evidence about management assertions about the financial statements, the auditor normally gathers evidence that is: A) irrefutable. B) conclusive. C) persuasive. D) completely convincing. Terms: Auditor normally gathers evidence that is Objective: LO 7-3 AACSB: Reflective thinking skills 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. Terms: Audit evidence Diff: Challenging Objective: LO 7-3 AACSB: Reflective thinking skills 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. Terms: Evidence is more persuasive for balance sheet accounts Diff: Challenging Objective: LO 7-3 AACSB: Reflective thinking skills 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. 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. Terms: Audit evidence Objective: LO 7-3 AACSB: Reflective thinking skills 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. Terms: Competence of evidential matter Diff: Challenging Objective: LO 7-3 AACSB: Reflective thinking skills 22) Discuss three of the following influences on the persuasiveness of evidence. 1. Relevance 2. Independence of provider 3. Effectiveness of client’s internal controls 4. Auditor’s direct knowledge 5. Degree of objectivity 6. Timeliness Answer: 1. Relevance Evidence must pertain to the audit objective if it is to be persuasive. Relevance must be considered in terms of specific audit objectives as evidence may be relevant to one objective and not another. 2. Independence of provider Evidence obtained from a source outside the entity is more reliable and persuasive than that obtained from within. 3. Effectiveness of client’s internal controls When a client’s internal controls are effective, evidence obtained is more reliable than when they are weak. 4. Auditor’s direct knowledge Evidence obtained directly by the auditor through physical examination, observation, computation and inspection is more competent than information obtained indirectly. 5. Degree of objectivity Objective evidence is more reliable than evidence that requires considerable judgment to determine whether it is correct. 6. Timeliness The timeliness of audit evidence can refer either to when it is accumulated or to the period covered by the audit. Evidence is usually more reliable for balance sheet accounts when it is obtained as close to the balance sheet date as possible. Terms: Influences persuasiveness of evidence Objective: LO 7-3 AACSB: Reflective thinking skills 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. ppropriateness is a measure of the quality of evidence. Audit evidence that is considered appropriate contains the characteristics of relevance and reliability. Relevant evidence relates to the assertion being tested. Reliability refers to the degree to which evidence can be believable or worthy of trust. Terms: Appropriateness of audit evidence Objective: LO 7-3 AACSB: Reflective thinking skills 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: Answer: The remaining four factors that affect the reliability of evidence are: Effectiveness of client’s internal control. When a client’s internal controls are effective, evidence obtained from the client is more reliable than when controls are weak. Auditor’s direct knowledge. Evidence obtained directly by the auditor is more reliable than information obtained indirectly. Qualifications of individuals providing the information. Although the source of the information may be independent, the evidence will not be reliable unless the individual providing it is qualified to do so. Also, evidence obtained directly by the auditor many not be reliable if the auditor lacks the qualifications to evaluate the evidence. Degree of objectivity. Objective evidence is more reliable than evidence that requires considerable judgment to determine whether it is correct. Timeliness The timeliness of audit evidence can refer either to when it is accumulated or to the period covered by the audit. Evidence is usually more reliable for balance sheet accounts when it is obtained as close to the balance sheet date as possible. Terms: Reliability of evidence Diff: Challenging Objective: LO 7-3 AACSB: Reflective thinking skills 25) Audit evidence to support an opinion about the fairness of a client’s financial statements consists entirely of written information. A) True B) False Terms: Audit evidence to support an opinion Objective: LO 7-3 AACSB: Reflective thinking skills 26) The relevance of audit evidence depends on the audit objective being tested. A) True B) False Terms: Relevance of audit evidence Objective: LO 7-3 AACSB: Reflective thinking skills 27) Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an audit objective. A) True B) False Terms: Inquiries of client; Appropriate evidence Objective: LO 7-3 AACSB: Reflective thinking skills 28) Objective evidence is more reliable, and hence more persuasive, than subjective evidence. A) True B) False Terms: Objective evidence more reliable Objective: LO 7-3 AACSB: Reflective thinking skills 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. A) True B) False Terms: Sufficiency of evidence and sample size Objective: LO 7-3 AACSB: Reflective thinking skills Learning Objective 7-4 1) Calculating the gross margin for the current year under audit as a percent of sales and comparing it with previous years is what type of evidence? A) Physical examination B) Analytical procedures C) Observation D) Inquiry Terms: Calculate and compare gross margin Objective: LO 7-4 AACSB: Reflective thinking skills 2) When the auditor develops supporting evidence for amounts posted to account balances with documentary evidence, that process is called: A) inquiry. B) confirmation. C) vouching. D) physical examination. Terms: Auditor develops supporting evidence for amounts posted with documentary evidence Objective: LO 7-4 AACSB: Reflective thinking skills 3) An example of an external document that provides reliable information for the auditor is: A) employees’ time reports. B) bank statements. C) purchase order for company purchases. D) carbon copies of checks. Terms: External document Objective: LO 7-4 AACSB: Reflective thinking skills 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. Terms: Example of document auditor receives from client but prepared by outside source Objective: LO 7-4 AACSB: Reflective thinking skills 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. Terms: Use of comparisons and relationships to assess whether account balances Objective: LO 7-4 AACSB: Reflective thinking skills 6) Audit procedures can result in significant, unexpected differences. The auditor should investigate further if: A) Significant differences are not expected but do exist Significant differences are expected but do not exist Yes Yes B) Significant differences are not expected but do exist Significant differences are expected but do not exist No No C) Significant differences are not expected but do exist Significant differences are expected but do not exist Yes No D) Significant differences are not expected but do exist Significant differences are expected but do not exist No Yes Terms: Audit procedures result in significant differences Objective: LO 7-4 AACSB: Reflective thinking skills 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 Terms: Tracing as an audit procedure concerned with audit objective Objective: LO 7-4 AACSB: Reflective thinking skills 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 Terms: Vouching as an audit procedure concerned with audit objective Objective: LO 7-4 AACSB: Reflective thinking skills 9) When auditors use documentation to support recorded transactions and amounts, the process is usually called: A) tracing. B) confirmations. C) vouching. D) reperformance. Terms: Directional testing Objective: LO 7-4 AACSB: Reflective thinking skills 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 Terms: Analytical procedures use during phases of the audit Objective: LO 7-4 AACSB: Analytic skills 11) Auditors may decide to replace tests of details with analytical procedures when possible because the: A) analytical procedures are more reliable. B) analytical procedures are considerably less expensive. C) analytical procedures are more persuasive. D) tests of details are more difficult to interpret. Terms: Tests of details of balances; Substantive analytical procedures Objective: LO 7-4 AACSB: Reflective thinking skills 12) When making decisions about evidence for a given audit, the auditor’s goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified. In addition, the goal of audit efficiency is to gather and evaluate the information: A) no matter the cost involved in obtaining such evidence. B) even if cost is irrelevant to the auditor, because they bill the client for costs incurred. C) at the lowest possible total cost. D) at the cost suggested in the engagement letter. Terms: Goal of audit efficiency Objective: LO 7-4 AACSB: Reflective thinking skills 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. Terms: Physical examination Objective: LO 7-4 AACSB: Reflective thinking skills 14) Which of the following statements is most correct regarding the primary purpose of audit procedures? A) To detect all errors or fraudulent activities as well as illegal activities B) To comply with auditing standards promulgated by the PCAOB for publicly held clients C) To gather corroborative audit evidence about management’s assertions regarding the client’s financial statements D) To determine the amount of errors in the balance sheet accounts in order to adjust the accounts to actual Terms: Primary purpose of audit procedures Objective: LO 7-4 AACSB: Reflective thinking skills 15) Which of the following generally provides the most reliable evidence? A) Confirmations B) Recalculation C) Reperformance D) Observations Terms: Audit evidence Objective: LO 7-4 AACSB: Reflective thinking skills 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. Terms: Confirmations Objective: LO 7-4 AACSB: Reflective thinking skills 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. Terms: Confirmations controlled to be considered reliable evidence Objective: LO 7-4 AACSB: Reflective thinking skills 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 B) Accounts Receivable Accounts Payable Required Optional C) Accounts Receivable Accounts Payable Optional Required D) Accounts Receivable Accounts Payable Optional Optional Terms: Confirmation of accounts receivable and accounts payable Objective: LO 7-4 AACSB: Reflective thinking skills 19) The Auditing Standards Board has concluded that analytical procedures are so important that they are required during: 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. Terms: Analytical procedures required Objective: LO 7-4 AACSB: Reflective thinking skills 20) 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.” Terms: Comparing client data with industry averages Objective: LO 7-4 AACSB: Reflective thinking skills 21) 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. Terms: Audit evidence Objective: LO 7-4 AACSB: Reflective thinking skills 22) 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 documentation D) Read documentation Terms: Combination of terms and related audit evidence Objective: LO 7-4 AACSB: Reflective thinking skills 23) 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. Terms: Confirmations Objective: LO 7-4 AACSB: Reflective thinking skills 24) An important benefit of industry comparisons is as: A) an aid to understanding the client’s business. B) an indicator of errors. C) an indicator of fraud. D) a least-cost indicator for audit procedures. Terms: Benefit of industry comparisons Objective: LO 7-4 AACSB: Reflective thinking skills 25) 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. Terms: Audit procedure to gather relevant evidence that client fails to bill Diff: Challenging Objective: LO 7-4 AACSB: Analytic skills 26) ________ 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 Terms: Audit evidence Objective: LO 7-4 AACSB: Analytic skills 27) Which of the following statements regarding the appropriateness of evidence is correct? A) The effectiveness of a client’s internal control has no influence on the reliability of most types of evidence. B) Analytical procedures will be reliable evidence even if the client’s internal controls are weak. C) One type of evidence is generally sufficient by itself to provide appropriate evidence. D) The objectivity of evidence obtained through inspection is high. Terms: Audit evidence Objective: LO 7-4 AACSB: Reflective thinking skills 28) 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 Terms: Audit procedure for recording all purchase transactions Diff: Challenging Objective: LO 7-4 AACSB: Analytic skills 29) 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 Terms: Analytical procedures Diff: Challenging Objective: LO 7-4 AACSB: Analytic skills 30) Which of the following statements is correct regarding the costs involved in obtaining evidence? A) Physical examination is usually the least expensive type of audit evidence Cost of obtaining evidence may be a factor in deciding whether to obtain that evidence Yes Yes B) Physical examination is usually the least expensive type of audit evidence Cost of obtaining evidence may be a factor in deciding whether to obtain that evidence No No C) Physical examination is usually the least expensive type of audit evidence Cost of obtaining evidence may be a factor in deciding whether to obtain that evidence Yes No D) Physical examination is usually the least expensive type of audit evidence Cost of obtaining evidence may be a factor in deciding whether to obtain that evidence No Yes Terms: Costs in obtaining evidence Diff: Challenging Objective: LO 7-4 AACSB: Reflective thinking skills 31) When using analytical procedures: A) unusual fluctuations occur when significant unexpected differences between the current year’s data and other data used in comparisons are found. B) and no unusual fluctuations are noted, the possibility of material misstatement is increased. C) “attention directing” indicates an area where fraud has occurred. D) and no unusual fluctuations are noted, tests of details of balances can be eliminated, Terms: Analytical procedures Objective: LO 7-4 AACSB: Reflective thinking skills 32) 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. uditors must obtain knowledge about a client’s industry and business as a part of planning an audit. By conducting analytical procedures in which the current year’s unaudited information is compared with prior years’ audited information or industry data, changes are highlighted. These changes can represent important trends or specific events, all of which will influence audit planning. The use of analytical procedures is often a useful indicator for determining whether the client company has financial problems and if substantial doubt exists about the entity’s ability to continue as a going concern. Certain analytical procedures can help the auditor assess the likelihood of failure. The analytical procedures could also indicate the presence of possible misstatements in the financial statements if significant unexpected fluctuations occur. These items may warrant increased audit procedures, whereas when the analytical procedures reveal no unusual fluctuations, the possibility of material misstatement is minimized and it is possible to perform fewer detailed tests on related accounts or to eliminate certain audit procedures, reduce sample sizes, or to move the procedures farther away from the balance sheet date. Terms: Analytical procedures Objective: LO 7-4 AACSB: Reflective thinking skills 33) There are four important purposes of analytical procedures. Identify three of these four purposes and, for each purpose, give a specific example of an analytical procedure that an auditor might perform. Answer: Four important purposes of analytical procedures are: To help the auditor understand the client’s industry and business, the auditor might analyze recent trends in the client’s gross marg

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