Excel Professional Services, Inc.
Management Firm of Professional Review and Training Center (PRTC)
(LUZON) Manila 87339344 * Calamba City, Laguna * Dasmariñas City, Cavite * Lipa City,
Batangas (0917) 8852769 * (VISAYAS) Bacolod City (034) 4346214 * Cebu City (032)
2537900 loc. 218 (MINDANAO) Cagayan De Oro (0917) 7081465 * Davao City (082) 2250049
AUDITING THEORY
AT.3004 – Nature and Type of Audit
Evidence
References:
a. PSA 500 (Redrafted), Audit Evidence
b. PSA 230 (Redrafted), Audit Documentation
DISCUSSION QUESTIONS
Nature and Sources of Audit Evidence
1. The principal reason for an independent auditor to
gather and evaluate audit evidence is to
a. Form an opinion on the financial statements.
b. Detect fraud.
c. Evaluate management.
d. Evaluate internal control.
2. Which statement is incorrect regarding audit evidence?
a. Audit evidence is all the information used by the
auditor in arriving at the conclusions on which the
audit opinion is based.
b. Audit evidence includes the information contained
in the accounting records underlying the financial
statements and other information.
c. Audit evidence is cumulative in nature.
d. Auditors are expected to address all information
that may exist.
3. Accounting records alone cannot constitute sufficient
evidence. Thus, the auditor should obtain other
information. Which of the following is considered as
other information type of audit evidence?
a. The records of initial entries and supporting
records.
b. The general and subsidiary ledgers.
c. Work sheets and spreadsheets supporting cost
allocations.
d. Comparable data about competitors
(benchmarking) and industry analyses.
4. Underlying accounting records most likely include
a. Minutes of meetings.
b. Confirmation from third parties.
c. Inventory count observation memorandum.
d. Checks and electronic fund transfer records.
Audit Procedures for Obtaining Audit Evidence
5. The auditor obtains audit evidence by performing
which of the following audit procedures? a. Risk
assessment procedures.
b. Further audit procedures comprising test of
controls and substantive procedures.
c. Both a and b.
d. Neither a nor b.
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6. The following are considered substantive procedures
used to detect material misstatement in the financial
statements, except
a. Test of details of transactions and balances.
b. Test of details of presentation and disclosures.
c. Analytical procedures.
d. Reperformance.
7. Which of the following audit procedures is used
extensively throughout the audit and is often
complementary to performing other audit procedures,
yet the least reliable?
a. Inspection c. Inquiry
b. Observation d. Recalculation
8. Which statement is incorrect regarding inspection as
an audit procedure?
a. Inspection consists of examining records or
documents or physical examination of assets.
b. Inspection of tangible assets may provide reliable
audit evidence with respect to their existence and
about the entity’s rights and obligations on the
assets.
c. Inspection of individual inventory items ordinarily
accompanies the observation of inventory
counting.
d. Some documents represent direct audit evidence
of the existence of an asset.
9. The strongest criticism of the reliability of audit
evidence that the auditor physically observes is that a.
The client may conceal items from the auditor
b. The auditor may not be qualified to evaluate the
item he is observing.
c. Such evidence is too costly in relation to its
reliability
d. The observation must occur at a specific time,
which is often difficult to arrange
10. Analytical procedures enable the auditor to predict the
balance or quantity of an item under audit.
Information to develop this estimate can be obtained
from
a. Comparison of financial data with data for
comparable prior periods or anticipated results and
similar data for the industry in which the entity
operates.
b. Study of the relationships of elements of financial
data that would be expected to conform to a
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EXCEL PROFESSIONAL SERVICES, INC.
predictable pattern based on the entity’s
experience.
c. Study of plausible relationships of financial data
with relevant non-financial data.
d. All of the above.
11. When must an auditor perform analytical review
procedures in a financial statement audit? a. Testing
controls over financial cycles
b. Performing tests to substantiate balances
c. Planning the nature, timing and extent of
procedures
d. Performing tests to substantiate transactions
12. Which one of the following types of procedures will aid
the auditor in obtaining evidence regarding the
mathematical accuracy of accounting records and
other information? a. Confirmation
b. Recalculation
c. Inspection
d. Inquiry
13. Traditionally, confirmations are used to verify:
a. Individual transactions between organizations,
such as sales transactions
b. Fixed asset additions
c. Bank balances and account receivables
d. All of the above
14. External confirmation
a. Consists of seeking information of knowledgeable
persons, both financial and non-financial,
throughout the entity or outside the party.
b. Is the process of obtaining a representation of
information or of an existing condition directly
from a third party.
c. Is the auditor’s independent execution of
procedures or controls that were originally
performed as part of the entity’s internal control.
d. Consists of checking the mathematical accuracy of
documents or records.
15. Reperformance may be performed during
a. Risk assessment procedures
b. Test of controls
c. Substantive test procedures
d. All of the above
Sufficiency and Appropriateness of Audit Evidence
16. Which statement is correct regarding the sufficiency
and appropriateness of audit evidence?
a. Sufficiency is the measure of the quality of audit
service.
b. Appropriateness is the measure of the quantity of
audit evidence; that is, its relevance and its
reliability in providing support for or, detecting
misstatements in, the classes of transactions,
account balances, and disclosures and related
assertions.
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).
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17. 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.
18. 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
19. 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.
20. 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.
21. 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
22. 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.
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EXCEL PROFESSIONAL SERVICES, INC.
23. 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.
24. 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
25. 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.
26. 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
27. 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
Audit Documentation
28. An auditor's working papers, which are the record of
audit procedures performed, relevant audit evidence
obtained, and conclusions the auditor reached, serve
mainly to
a. Provide the principal support for the auditor's
report.
b. Satisfy the auditor's responsibilities.
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c. Monitor the effectiveness of the CPA firm's quality
control procedures.
d. Document the level of independence maintained
by the auditor.
29. 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.
30. 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.
31. 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.
32. 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.
33. 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.
Types of Audit Files
34. 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.
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EXCEL PROFESSIONAL SERVICES, INC.

35. Which of the following workpapers would one normally d. The medium in which it is recorded and
expect to find in the permanent file? maintained.
a. A copy of a long-term bond indenture.
b. The working trial balance. Audit File Organization
c. An analysis of additions and disposals relating to
marketable securities. 41. The PSAs have specified how audit files should be
d. A workpaper analyzing customer replies to organized to facilitate timely review of working papers.
confirmation requests.
Auditors may organize audit files by audit phase, by
Audit Files – Preparation, Documentation, Assembly financial statements area, or a combination thereof. a.
and Retention True, true c. False, true
b. True, false d. False, false
Audit Files Preparation
Audit File Assembly, Retention, Ownership, and
36. Audit documentation should be prepared in enough Confidentiality
detail so that:
a. An experienced auditor who has worked with the 42. In accordance with PSAs, the final assembly of audit
client in the past can understand the procedures files should take place on a timely basis ordinarily
performed and the evidence obtained. a. More than 45 days after the auditor’s report date.
b. A reader of the financial statements who has no b. More than 60 days after the auditor’s report date.
previous connection with the audit can understand c. Not more than 45 days after the auditor’s report
the procedures performed and the evidence date.
obtained. d. Not more than 60 days after the auditor’s report
c. A reader of the financial statements who has a date.
background in financial analysis can understand
the procedures performed and the evidence 43. Ignoring any particular legal or regulatory
obtained. requirement, audit documentation should be retained
d. An experienced auditor who has no previous a. A minimum of five years.
connection with the audit can understand the b. As long as lead schedules have relevance to
procedures performed, the evidence obtained, the forthcoming audits.
conclusions reached, and the reasons of departure c. Until 3 years after the client selects another
from a relevant PSA requirement and how the auditor.
alternative audit procedures performed achieve d. Working papers must be maintained indefinitely.
the aim of that requirement.
44. The following statements pertain to audit working
37. The auditor typically includes which of the following in papers:
preparing audit files? I. Working papers are owned by the auditors; the
a. A heading that includes client’s name, period rights of ownership are subject to ethical
covered, and description of contents. limitations relating to the confidential relationships
b. A purpose statement. with the client.
c. A conclusion statement. II. Working papers serve as useful reference source
d. All of the above. for client and as a substitute for client’s accounting
records.
38. Which of the following is used to indicate the audit III. Working papers must be permanently kept or
procedures performed and their results in the retained by the auditors. The above statements
preparation of working papers? a. Index. are respectively
b. Cross-reference. a. True, True, True c. True, False, False
c. Identifying characteristics of specific items tested, b. True, True, False d. False, False, False
initials of preparer and reviewer, and dates of
preparation and review. 45. Which statement is correct concerning the deletion of
d. Tick mark. audit documentation?
a. Superseded audit documentation should always be
39. Which of the following is least likely to be a factor in deleted from the audit file.
the auditor's decision about the extent of the b. After the audit file has been completed, the auditor
documentation of a particular audit area? a. The risk of should not delete or discard audit documentation.
material misstatement. c. Auditors should use professional skepticism in
b. The extent of the judgment involved in performing determining which audit documentation should be
the procedures. deleted.
c. The nature and extent of exceptions identified. d. Audit documentation should never be deleted from
d. Whether or not the client has an internal audit the audit file.
function.

40. 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.

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EXCEL PROFESSIONAL SERVICES, INC.

- now do the DIY drill –

9.
W
DO-IT-YOURSELF (DIY) DRILL

1. Evidential matters supporting the financial statements b. the time of year in which the client takes a physical
consist of accounting records and other information inventory in the warehouse.
available to the auditor. Other information can be c. the auditor's judgment that misstatements are found in:
probable in certain balances.
a. The subsidiary ledgers d. the availability of the client's staff at or near the
b. Worksheet supporting cost allocation balance sheet date.
c. Minutes of directors’ meetings
d. Adjusting entries 4. Inspection involves examining records or documents, whether internal or external, in
paper form, electronic
2. Which of the following is not a basic procedure used in form, or other media, or a physical examination of an an
audit? asset. Evaluate whether each of the following
a. Risk assessment procedures. statements qualifies as inspection:
b. Substantive procedures. I. test performed on 100% of the items within a
c. Tests of controls. population
d. Tests of direct evidence. II. selecting items over a certain amount
III. selecting items for the total population on the
3. The extent of procedures is affected mostly by which basis that was expected to be representative of the following
factors? a. I, II and III qualify
a. the sheer volume of procedures to be applied by b. I and II qualify; III does not qualify the auditor. c. I and
II do not qualify; III qualifies
d. I, II and III do not qualify hich one of the following would be considered the
most persuasive type of audit evidence? a. Purchase
5. Which of the following is not an information source for orders from vendors
developing analytical procedures used in the audit? b. Customer accounts receivable files
a. Relationships among financial statement elements c. Computerized general ledger
b. Relationships between financial and relevant d. Confirmations from banks
nonfinancial data
c. Comparison of financial data with anticipated 10. Which of the following statements is incorrect
results (e.g., budgets and forecasts) regarding the reliability of audit evidence?
d. Comparison of current year financial data with a. Oral representation by the client management is
projections for next year's financial results not a valid evidence.
b. Audit evidence obtained directly by the auditor is
6. Theoretically, which of the following would not have an more reliable than that one provided by the client
effect on the amount of audit evidence gathered by management.
the auditor? c. The effectiveness of accounting and internal
a. The type of opinion to be issued. control adds to the reliability of internal audit
b. The auditor’s evaluation of internal control. evidence.
c. The types of audit evidence available to the d. While internal audit evidence is considered to be
auditor. acceptable, the auditor usually prefers audit
d. Whether or not the client reports to the Securities evidence from external sources.
and Exchange Commission.
11. Audit evidence can come in different forms with
7. Which of the following statements concerning audit different degrees of persuasiveness. Which of the
evidence is correct? following is the least persuasive type of evidence? a.
a. To be competent, audit evidence should be either Bank statement obtained from the client
persuasive or relevant, but need not be both b. Oral representations of client
b. The measure of the validity of audit evidence lies c. Prenumbered client sales invoices
in the auditor’s judgment d. Vendor’s invoices
c. The difficulty and expense of obtaining audit
evidence concerning an account balance is valid 12. An auditor's working papers, the record of audit
basis for omitting the test procedures performed, relevant audit evidence
d. A client’s accounting data can be sufficient audit obtained, and conclusions the auditor reached, serve
evidence to support the financial statements mainly to
a. Provide the principal support for the auditor's
8. Each of the following might by itself, form a valid basis report.
for an auditor to decide to omit a test, except for the b. Satisfy the auditor's responsibilities concerning the
a. Relative risk involved. Code of Professional Conduct.
b. Degree of reliance on the relevant internal c. Monitor the effectiveness of the CPA firm's quality
controls. control procedures.
c. Difficulty and expense involved in testing a d. Document the level of independence maintained
particular item. by the auditor.
d. Relationship between the cost of obtaining
evidence and its usefulness. 13. Which of the following does not describe one of the
functions of audit workpapers?

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EXCEL PROFESSIONAL SERVICES, INC.

a. Facilitates third-party reviews. b. Documentation completion date.

b. Aids in the planning, performance, and review of c. Last date of significant fieldwork.
audits. d. Report release date.
c. Provides the principal evidential support for the
auditor's report. - end of AT.3004 -
d. Aids in the professional development of the
operating staff.

14. The permanent file section of the working papers that

is kept for each audit client most likely contains
a. Review notes pertaining to questions and
comments regarding the audit work performed
b. A schedule of time spent on the engagement by
each individual auditor
c. Correspondences with the client’s legal counsel
concerning pending litigation
d. Narrative descriptions of the client’s accounting
procedures and internal accounting controls

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. When reporting on comparative financial
statements, the independent auditor may discard
working papers after two years.

16. 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.

17. 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.

18. 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.

19. 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

20. No deletions of audit documentation are allowed after

the
a. Client's year-end.

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