AUD THEORY 06

AUDITING THEORY

AUDIT EVIDENCE
AUDIT EVIDENCE-SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS EXTERNAL CONFIRMATIONS
AUDIT DOCUMENTATION

PSA 500
AUDIT EVIDENCE

1. The auditor shall design and perform audit procedures that are appropriate in the circumstances for the
purpose of obtaining sufficient appropriate audit evidence.

2. “Audit evidence” is information used by the auditor in arriving at the conclusions on which the opinion is
based, and includes the information contained in the accounting records underlying the financial statements
and other information.

3. Accounting records generally include:

 The records of initial accounting entries and supporting records, such as checks and records of electronic
fund transfer;
 Invoices;
 Contracts;
 The general and subsidiary ledgers, journal entries and other adjustments to the financial statements
that are not reflected in journal entries; and
 Records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliation
and disclosures.

4. Other information that the auditor may use as audit evidence includes:
 Minutes of meetings;
 Confirmations from third parties;
 Analyst reports;
 Comparable date about competitors (benchmarking)
 Controls manuals;
 Information obtained by auditors from such audit procedures as inquiry, observation, and inspections;
and
 Other information developed by, or available to. The auditor that permits the auditor to reach
conclusions through valid reasoning.

5. When designing and performing audit procedures, the auditor shall consider the relevance and reliability of
the information to be used as audit evidence;

6. When information to be used as audit evidence has been prepared using the work of management’s expert,
the auditor shall, to the extent necessary, having regard to the significance of that expert’s work for the
auditor’s purposes;
a) Evaluate the competence, capabilities and objectivity of that expert;
b) Obtain an understanding of the work of that expert and
c) Evaluate the appropriateness of that experts work as audit evidence for the relevant assertion.

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7. When using information produced by the entity, the auditor shall evaluate whether the information is
sufficiently reliable for the auditor’s purposes, including as necessary in the circumstances;
a) Obtaining audit evidence about the accuracy and completeness of the information; and
b) Evaluating whether the information is sufficiently precise and detailed for the auditor’s purposes.

8. When designing tests of controls and test of details, the auditor shall determine means of selecting items for
testing that are effective in meeting the purpose of the audit procedure.

The means available to the auditor for selecting items for testing are:

a) Selecting all items (100% examination). 100% examination may be appropriate when:
1. The population constitutes a small number of large value items;
2. There is a significant risk and other means do not provide sufficient appropriate audit evidence; or
3. The repetitive nature of a calculation or other process performed automatically by an information
system makes 100% examination cost effective.

b) Selecting specific items. Specific items selected may include:

1. High value or key items.
2. All items over a certain amount
3. Items to obtain certain information.

c) Audit sampling. Audit sampling is designed to enable conclusion to be drawn about the entire population
on the basis of testing a sample drawn from it.

9. If audit evidence obtained from one source is inconsistent with that obtained from another, or the auditor
has doubts over the reliability of information to be used as audit evidence, the auditor shall determine what
modifications or additions to audit procedures are necessary to resolve the matter, and shall consider the
effect of the matter, if any, on other aspects of the audit.

10. The following generalizations can be made about the reliability of audit evidence:
a) Audit evidence is more reliable when it’s obtained from independent sources outside the entity.
b) Audit evidence that is generated internally is more reliable when the related controls imposed by the
entity are effective.
c) 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).
d) Audit evidence is more reliable when it exists in a 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).
e) Audit evidence provided by original documents is more reliable that audit evidence provided by
photocopies or facsimiles, or documents that have been filmed, digitized or otherwise transformed into
electronic form, the reliability of which may depend on the controls over their preparation and
maintenance.

Financial statement assertions (Glossary of Terms)

Financial statement assertions are assertions by management, explicit or otherwise, that are embodied in the financial
statements and can be categorized as follows:
a) Existence: an assets or liability exists at a given date;

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b) Rights and obligations: an asset or a liability pertains to the entity at a given date;
c) Occurrence: a transaction or event took place which pertains to the entity during the period;
d) Completeness: there are no unrecorded assets, liabilities, transactions or events, or undisclosed items;
e) Valuation: an asset or liability is recorded at an appropriate carrying value;
f) Measurement: a transaction or event is recorded at the proper amount and revenue or expense is allocated
to the proper period; and
g) Presentation and disclosure: an item is disclosed, classified, and described in accordance with applicable
financial reporting framework.

Audit procedures for obtaining audit evidence

1. RISK ASSESSMENT PROCEDURES
Obtain an understanding of the entity and its environment, including its internal control, to assess the risks
of material misstatement at the financial statement and assertion levels.

2. TESTS OF CONTROLS
When necessary or when the auditor has determined to do so, test the operating effectiveness of controls
in preventing, or detecting and correcting, material misstatements at the assertion level.

3. SUBSTANTIVE PROCEDURES
Detect material misstatements at the assertion level. These include substantive analytical review procedures
and test of details.

Examples of audit procedures:

1. INSPECTION – consists of examining records and documents, whether internal or external, in paper form,
electronic form, or other media. Inspection of tangible assets consists of physical examination of the
assets.

2. OBSERVATION – consists of looking at a process or procedure being performed by others.

3. INQUIRY – consists or seeking information of knowledgeable persons, both financial and non-financial,
within the entity or outside the entity.

4. EXTERNAL CONFIRMATION – represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party (the confirming party), in paper form, or by electronic or other
medium.

5. RECALCULATION –consists of checking the mathematical accuracy of documents or records. It may be

performed manually or electronically.

6. REPERFORMANCE – is the auditor’s independent execution of procedures or controls that were original
performed as part of the entity’s internal control, either manually or through the use of CAATs.

7. ANALYTICAL PROCEDURES – consist of evaluations of financial information made by a study of plausible

relationship among both financial and non-financial date. It also encompasses the investigation of
identified fluctuations and relationship that are inconsistent with other relevant information or deviate
significantly from predicted amount.

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PSA 501
AUDIT EVIDENCE – SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS

Inventory
1. When inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory by:
a) Attendance at physical inventory counting, unless impracticable, to:
1) Evaluate management’s instructions and procedures for recording and controlling the results of the
entity’s physical inventory counting;
2) Observe the performance of management’s count procedures;
3) Inspect the inventory; and
4) Perform test counts; and

b) Performing audit procedures over the entity’s final inventory records to determine whether they accurately
reflect actual inventory count results.

2. If unable to attend the physical inventory count on the date planned due to unforeseen circumstances, the
auditor shall make or observe some physical counts on an alternative date and perform audit procedures on
intervening transactions.

3. If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit
procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory. If
it is not possible to do so, the auditor shall modify the opinion in the auditor’s report in accordance with PSA 705
(Revised and Redrafted), “Modifications to the Opinion in the Independent Auditor’s Report.”

4. When inventory under the custody and control of a third party is material to the financial statements, the auditor
shall obtain sufficient appropriate audit evidence regarding the existence and condition of that inventory by
performing one or both of the following:
a. Request confirmation from the third party as to the quantities and condition of inventory held on behalf
of the entity.
b. Perform inspection or other audit procedures appropriate in the circumstance.

Litigation and claims

1. The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity
which may give rise to a risk material misstatement, including:
a) Inquiry of management and, where applicable, others within the entity, including in house legal counsel.
b) Reviewing minutes of meetings of those charged with governance and correspondence between the entity
and its external legal counsel; and
c) Reviewing legal expense accounts.

2. If the auditor assess a risk of material misstatement regarding litigation or claims that have been identified, or
when audit procedures performed indicate that other material litigation or claims may exist, the auditor shall in
addition to the procedures required by other PSAs, seek direct communication with entity’s external legal counsel
through a letter general inquiry.

3. A letter of general inquiry, prepared by management and sent by the auditor, requests the entity’s external legal
counsel to inform the auditor of any litigation and claims that the counsel is aware of, together with an

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assessment of the outcome of the litigation and claims, and an estimate of the financial implications, including
costs involved.

4. If it is considered unlikely that the entity’s external legal counsel will respond appropriately to a letter of general
inquiry, the auditor may seek direct communication through a letter of specific inquiry, which includes:
 A list of litigation and claims.
 Where available, management’s assessment of the outcome of each of the identified litigation and claims
and its estimate of the financial implications, including costs involved.
 A request that the entity’s external legal counsel confirm the reasonableness of management’s assessments
and provide the auditor with further information if the list is considered by the entity’s external legal counsel
to be incomplete or incorrect.

5. The auditor considers the status of legal matters up to the date of the audit report.

6. If management refuses to give the auditor permission to communicate with the entity’s lawyers, this would be a
scope limitation and should ordinarily lead to a qualified opinion or a disclaimer of opinion.

Segment information
The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and disclosure or segment
information in accordance with the applicable financial reporting framework
a) Obtain an understanding of the methods used by management In determining segment
(I) Evaluating whether such methods are likely to result in disclosure in accordance with the applicable
financial reporting framework: and
(II) Where appropriate, testing the application of such methods; and

b) Performing analytical procedures or other audit procedures appropriate in the circumstances.

PSA 505
EXTERNAL CONFIRMATIONS
1. External confirmation - Audit evidence obtained as a direct writer response to the auditor from a third party (the
confirming party), in paper form, or by electronic or other medium.

2. Positive confirmation request - A request that the confirming party respond directly to the auditor indicating
whether the confirming party agrees or disagrees with the information in the request, , or providing the requested
Information.

3. Negative confirmation request - A request that the confirming party respond directly to the auditor only if the
confirming party disagrees with the information provided in the request.

4. When using external confirmation procedures, the auditor shall maintain control over external confirmation
requests, including:
a) Determining the Information to be confirmed or requested;
b) Selecting the appropriate confirming party;
c) Designing the confirmation requests, including determining that requests are property addressed and
contain return information for responses to be sent directly to the auditor, and
d) Sending the requests, including follow-up requests when applicable, to the confirming party

5. If management refuses to allow the auditor to send a confirmation request, the auditor shall:

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a) Inquires as to management's reasons for the refusal, and seek audit evidence as to their validity and
reasonableness;
b) Evaluate the implications of management's refusal on the auditor's assessment of the relevant risks of
material misstatement, including the risk of fraud, and on the nature, timing and extent of other audit
procedures; and
c) Perform alternative procedures designed to obtain relevant and reliable audit evidence.

PSA 230
AUDIT DOCUMENTATION
1. Audit documentation that meets the requirements of PSA 230 and the specific documentation requirements of
other relevant PSAs provides:
 Evidence of the auditor's basis fix a conclusion about the achievement of the overall objective of the auditor;
and
 Evidence that the audit was planned and performed in accordance with PSAs and applicable legal regulatory
requirements

2. Audit documentation - The record of audit procedures performed, relevant audit evidence obtained, and
conclusions the auditor reached.

3. Audit tile - One or more folders or other storage media, in physical or electronic form, containing the records that
comprise the audit documentation for a specific engagement.

4. Experienced auditor - An Individual (whether internal cc external to the firm) who has practical audit experience,
and a reasonable understanding of:
 Audit processes;
 PSAs and applicable legal and regulatory requirements;
 The business environment In which the entity operates; and
 Auditing and financial reporting Issues relevant to the entity's industry:

5. The auditor shall prepare audit documentation that is sufficient in to enable an experienced auditor, having no
previous connection with the audit, to understand:
a) The nature, timing and extent of the audit procedures performed to comply with PSAs and applicable legal
and regulatory requirements;
b) The results of the audit procedures and the audit evidence obtained; and
c) Significant matters arising during the audit, the conclusions reached thereon, and significant professional
judgments made in reaching those conclusions.

6. In documenting the nature, timing and extent of audit procedures performed, the auditor shall record:
a) The identifying characteristics of the specific items or matters tested;
b) Who performed the audit work and the date such work was completed; and
c) Who reviewed the audit work performed and the date and extent of such review?

7. The auditor shall document discussions of significant matters with management, those charged with governance,
and others, including the nature of the significant matters discussed and when and with whom the discussions
took place.

8. If the auditor identified information that is inconsistent with the auditor's final conclusion regarding a significant
matter, the auditor shall document how the auditor addressed the inconsistency.

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9. If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant requirement In a PM,
the auditor shall document how the alternative audit procedures performed achieve the aim of that requirement,
and the reasons for the departure.

10. If, in exceptional circumstances, the auditor performs new or additional audit procedures or draws new
conclusions after the date of the auditor's report, the auditor shall document:
a) The circumstances encountered;
b) The new or additional procedures performed, audit evidence obtained, and conclusions reached, and their
effect on the auditor's report; and
c) When and by whom the resulting changes to audit documentation were made and reviewed.

Assembly of the final audit file

11. The auditor shall complete the assembly of the final audit file on a timely basis after the date of the auditor’s
report. As PSQC 1 indicates, 60 days report is ordinarily an appropriate time limit within which to complete the
assembly of the final audit file

MULTIPLE CHOICE QUESTIONS

1. Which of the following should be considered by the auditor in deciding which means (or combination of means)
to use in selecting items for testing?
I. The risk of material misstatement related to the assertion being tested.
II. Audit efficiency
A. Both I and II
B. II only
C. Both I and II
D. Neither I nor II

2. It will be appropriate to audit all the items that make up a class of transactions or account balance (100%
examination), except
A. When the class of transactions or account balance consists of a large number of small value items.
B. When the class of transactions or account balance consists of a small number of large value items.
C. When there is a significant risk of misstatement and other selection methods do not provide sufficient
appropriate audit evidence.
D. When the repetitive nature of a calculation or other process performed automatically by the client's
computer information system (CIS) makes a 100% examination cost effective.

3. Which of the following statements concerning audit evidence is correct?

A. To be appropriate, audit evidence should be either reliable or relevant, but it reed 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 concerning an account balance is a valid basis for
omitting the test.
D. A client’s accounting records can be sufficient audit evidence to support the financial statements.

4. The quantity of audit evidence needed is affected by the risk of misstatement and also by the quality of such audit
evidence.

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The reliability of audit evidence is influenced by its source and by its nature and is dependent on the individual
circumstances under which it is obtained.
A. Both statements are true
B. Both statements are false.
C. True; False.
D. False; True.

5. Which of the following is false statement about audit objectives?

A. There should be a one-to-one relationship between audit objectives and procedures.
B. Audit objectives should be developed In light of management assertions about the financial statement
components.
C. Selection of tests to meet audit objectives should depend upon the understanding of internal control.
D. The auditor should resolve any substantial doubt about any of management's material financial statement
assertions.

6. Management makes certain assertions that are embodied in financial statement components; for example, two
such categories of assertions are completeness and valuation and allocation. Which of the following is not a broad
category of management assertions?
A. Rights and obligations
B. Completeness
C. Existence
D. Errors or fraud

7. The objective of test of details of transactions performed as substantive tests is to

A. Comply with generally accepted auditing standards.
B. Attain assurance about the reliability of the accounting system.
C. Detect material misstatements in the financial statements.
D. Evaluate whether management’s policies and procedures operated effectively.

8. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. Financial statements to the potentially unrecorded items.
B. Potentially unrecorded items to the financial statements.
C. Accounting records to the supporting evidence.
D. Supporting evidence to the accounting records.

9. In determining whether transactions have been recorded, the direction of the audit testing should be from the
A. General ledger balances
B. Adjusted trial balance
C. Original source document
D. General journal entries

10. Which of the following statements concerning evidential matter is true?

A. Appropriate evidence supporting management's assertions should be convincing rather than merely
persuasive.
B. Effective internal control contributes 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 evidence to support the financial statements.

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11. Which of the following is an example of "other information" that could be used by an auditor as evidential matter
supporting the financial statements?
A. Worksheets supporting cost allocations.
B. Confirmation of accounts receivable.
C. Special journals.
D. Accounting manuals.

12. 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. Test counts of inventory made by the auditor.
C. Prenumbered purchase order forms.
D. Correspondence from the client's attorney about litigation

13. Which of the following types of audit evidence is the most persuasive?
A. Prenumbered purchase order forms. .
B. Client worksheets supporting cost allocations.
C. Bank statements obtained from the client.
D. Client representation letter.

14. Which of the following generalizations does not relate to the appropriateness of evidence?
A. Audit evidence from external sources (for example, confirmation received from a third party) is more reliable
than that generated internally.
B. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence
obtained at a reasonable cost.
C. Audit evidence generated internally is more reliable when the related accounting and internal control
systems are effective.
D. Audit evidence obtained directly by the auditor is more reliable than that obtained from the entity.

15. Each of the following might, by itself, form a valid basis for an auditor to decide to omit a test except for the
A. Difficulty and expense involved in testing a particular item.
B. Assessment of control risk at a low level.
C. Inherent risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.

16. Which of the following statements concerning audit evidence is correct?

A. An audit usually involves the authentication of documentation.
B. A given set of procedures may provide audit evidence that is relevant to certain assertions, but not others
C. Audit evidence obtained from an independent external source is always reliable.
D. An entity’s accounting records can be sufficient audit evidence to support the financial statements.

17. In which of the following circumstance would the use of accounts receivable confirmation most likely be justified.
A. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales
to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales
to many customers with small balances.

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C. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few
major customers.
D. A small number of accounts may be in dispute and the accounts receivable balances arises from sales to
many customers with small balances.

18. Which of the following statements is correct concerning the use of negative confirmation requests?
A. Unreturned negative confirmation requests rarely provide significant explicit evidence.
B. Negative conformation requests rarely provide significant explicit evidence.
C. Unreturned negative confirmation requests indicate that alternative procedures are necessary
D. Negative confirmation requests are effective when understatements of account balances are suspected.

19. An auditor most likely would review an entity’s periodic accounting for the numerical sequence of shipping
documents and invoices to support management’s financial statement assertion of
A. Existence
B. Rights and obligations
C. Valuation
D. Completeness

20. Which of the following might be detected by an auditor’s review of the client’s sales cut-off?
A. Excessive goods returned for credit.
B. Unrecorded sates discount.
C. Lapping of year end accounts receivable
D. Inflated sates for the year.

21. Cut-off tests designed to detect credit sales made before the end of the year that have been recorded in the
subsequent year provide assurance about management’s assertion of
A. Occurrence
B. Completeness
C. Rights and obligations
D. Existence

22. Which of the following most nicety would give the most assurance concerning the valuation and allocation
assertion of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping documents.
B. Comparing receivable turnover ratios with industry statistics for reasonableness.
C. Inquiring about receivables pledged under loan agreements
D. Assessing the allowance for uncollectible accounts for reasonableness.

23. Confirmation is "the process of obtaining and evaluating a direct communication from a third party In response
to a request for information about a particular item affecting financial statement assertions" Two assertions for
which confirmation of accounts receivable balances provides primary evidence are
A. Completeness and valuation
B. Valuation and rights and obligations
C. Rights and obligations and existence
D. Existence and completeness

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24. An auditor confirms a representative number of open accounts receivable as of December 31 and investigates
respondents' exceptions and comments. By this procedure the auditor be most likely to learn of which of the
following?
A. One of the cashiers has been covering a personal embezzlement by lapping.
B. One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
C. One of the computer control clerks has been removing all sales invoices applicable to his account from the
data file.
D. The credit manager has misappropriated remittances from customers whose accounts have been written
off.

25. The auditor may consider confirming accounts receivable balances at an interim date if
A. Collections subsequent to year-end are to be reviewed
B. The assessed revel of risk of material misstatement relative to financial statement assertions about
receivables is acceptably low.
C. Negative confirmations are to be used for a sample of the accounts.
D. Cash and accounts receivable are audited at the same time.

26. When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations,
the auditor most likely would
A. Inspect the allowance account to verify whether the accounts were subsequently written off.
B. Increase the assessed level of detection risk for the valuation and completeness assertions.
C. Send the customer a second confirmation.
D. Increase the assessed level of inherent risk for the revenue cycle.

27. The return of positive accounts receivable confirmation without an exception attests to the
A. Collectability of the accounts receivable.
B. Accuracy of the aging of accounts receivable.
C. Accuracy of the receivables balance.
D. Accuracy of the allowance or debts.

28. Which of the following procedures would an auditor most likely perform for year-end accounts receivable
confirmations when the audited' did not receive replies to second requests.
A. Review the cash receipts journal for the month to year-end.
B. Intensify the study of internal control concerning the revenue cycle.
C. Increase the assessed level of detection ink for the existence assertion.
D. Inspect the shipping records documenting the merchandise sold to the debtors.

29. Which of the following sets of information does an auditor usually confirm on one form?
A. Accounts payable and purchase commitments.
B. Cash in bank and collateral for loans.
C. Inventory on consignment and contingent liabilities.
D. Accounts receivable and accrued interest receivable.

30. The primary purpose of sending a standard confirmation request to financial institutions with which the client
has done business during the year is to
A. Detect kiting activates that may otherwise not be discovered.
B. Corroborate Information regarding deposit and ban balances.
C. Provide the data necessary to prepare a proof of cash.

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D. Request Information about contingent liabilities and seared transactions.

31. Which of the following audit procedures is the most appropriate when internal control over cash is weak or when
a client’s requests an investigation of cash transactions
A. Proof of cash.
B. Bank reconciliation.
C. Cash confirmation.
D. Evaluate ratio of cash to current liabilities

32. An auditor should test bank transfers for the last part of the audit period and first part of the subsequent period
to detect whether
A. The cash receipts journal was held open for a few days after year-end.
B. The last checks recorded before year-end were actually made by year-end.
C. Cash balances were overstated because of kiting.
D. Any unusual payments to or receipts from related parties occurred.

33. Which of the following statement procedures would an auditor most likely perform in auditing the statement of
cash flows?
A. Compare the amounts included in the statement of cash flows to similar amounts in the prior year’s
statement of cash flows.
B. Reconcile the cut-off bank statement to verify the accuracy of the year-end bank balances.
C. Vouch all bank transfer the last week of the year and first week of the subsequent Year.
D. Reconcile the amounts included in the statement of cash flows to the other financial statements' balances
and amounts.

34. To gain assurance that all Inventory items in a client's Inventory listing schedule are valid, an auditor most likely
would vouch
A. Inventory tags noted during the auditor's observation to items listed in the inventory listing schedule.
B. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors'
invoices.
C. Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets.
D. Items listed in receiving reports and vendors' invoices to the inventory listing schedule.

35. An auditor selected Items for test counts while observing a client's physical inventory. The auditor then traced
the test counts to the client's inventory listing. This procedure most likely obtain evidence concerning
management's assertion of
A. Rights and obligations
B. Completeness
C. Existence
D. Valuation

36. While observing a client's annual physical inventory, an auditor recorded test .counts for several items and
noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This
situation could be the result of the client's failure to record
A. Purchase discounts
B. Purchase returns
C. Sales
D. Sales returns

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37. The primary source of information to be reported about litigation, claims, and assessments is the
A. Court lawyer
B. Court records
C. Client's management.
D. Independent auditor

38. Which of the following is an audit procedure that an auditor most likely would perform concerning litigation,
claims, and assessments?
A. Request the client's lawyer to evaluate whether the client's pending litigation, claims, and assessments
indicate a going concern problem.
B. Examine the legal documents in the client's lawyer's possession concerning ligation, claims, and assessments
to which the lawyer has devoted substantive attention.
C. Discuss with management its policies and procedures adopted for evaluating and accounting for litigation,
claims, and assessments.
D. Confirm directly with the client's lawyer that all ligation, claims, and assessments have been recorded or
disclosed in the financial statements.

39. Which of the following is not an audit procedure that the independent auditor would perform with respect to
litigation, claims, and assessments?
A. Inquire of and discuss with management the policies and procedures adopted for litigation, claims, and
assessment.
B. Obtain from management a description and evaluation of litigation, claims, and assessments that existed at
the balance sheet date.
C. Obtain assurance from management that if has disclosed all un-asserted claims that the lawyer has advised
are probable of assertion and must be disclosed.
D. Confirm directly with the client's lawyer that all claims have been recorded in the financial statements.

40. The following are ordinarily excluded from audit documentation:

A B C D
Superseded drafts of working papers and financial statement Yes No No Yes
Notes that reflect incomplete or preliminary thinking Yes Yes No No
Previous copies of documents corrected for typographical or other Yes Yes Yes Yes
error
Duplicates of documents Yes No Yes no

41. Audit documentation may be recorded on paper or on electronic or other media. The following are examples of
audit documentation, except
A. Audit programs
B. Letters of confirmation and representation
C. Correspondence (including e-mall) concerning significant matters
D. The entity's accounting records

42. The completion of the assembly of the final audit file after the date of the auditor's report does not ordinarily
involve
A. The performance of new audit procedures or the drawing of new conclusions.
B. Sorting, collating and cross-referencing working papers.
C. Deleting or discarding superseded documentation.

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D. Signing off on completion checklists relating to the file assembly process.

43. In documenting the nature, timing and extent of audit procedures performed, the auditor should record
I. Who performed the audit work and the date such work was completed
II. Who reviewed the audit work and the date and extent of such review
A. I only
B. II only
C. Both I and II
D. Neither I nor it

44. The evidence collection method that examines all supporting documents to determine the validity of a
transaction is called vouching.

The evidence collection method that considers the relationship and trends among information to detect items
that should be investigated further is called physical examination.

A. True; False
B. True; True;
C. False; True
D. False; False

45. Audit evidence is information used to draw reasonable conclusions on which to base the auditor's opinion. Audit
evidence is obtained by performing
I. Risk assessment procedures
II. Further audit procedures
A. I only
B. II only
C. Either I or II
D. Both I and II

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