BMGT 422 CHAPTER 6 TEST QUESTIONS
AND ANSWERS
Sufficiency of audit evidence concerns what? What affects sufficiency? -
ANSWER The quantity of audit evidence; quantity is affected by assessment of
risk of material misstatement (more risk=more evidence) and quality of
evidence (better quality=less evidence)
When performing substantive tests, what does an auditor consider to select
sample size? - ANSWER client factors, like the risk of material misstatement
and assurance obtained from other substantive procedures performed by the
auditor
When performing tests of controls, what does an auditor consider to select
sample size? - ANSWER whether client has tested controls as a basis for its
assertion on the effectiveness of internal control, and type of control being
tested (shorter term controls require larger sample)
What additional consideration is required when auditing controls over adjusting
entries? - ANSWER the better the control environment, the smaller the sample
size; want to determine that a) other controls aren't being overridden by
management b) there is support for the adjusting entries c) the entries are
properly approved by the appropriate level of management
high number of transactions=sampling, low number of transactions=focus on
larger transactions
Appropriateness of audit evidence concerns what? What affects
appropriateness? - ANSWER measures evidence quality; includes relevance of
evidence; relevance determines if the evidence provides insight on the validity
of the assertion being tested and reliability of evidence (whether evidence is
convincing)
What affects relevance of audit evidence? - ANSWER the purpose of the
procedure being performed, the direction of testing, and the specific
, procedure/set of procedures being performed; evidence can be either directly or
indirectly relevant
What does the purpose of an audit procedure determine? - ANSWER whether
the procedure is a risk assessment procedure, test of controls, or substantive
procedure
What is the goal of directional testing? - ANSWER to test balances primarily
for either overstatement or understatement, but not both
What does vouching test? - ANSWER tests for existence/occurrence by
comparing sample of ledger to source document (overstatement); typically used
to test assets and revenues
What does tracing test? - ANSWER tests for completeness by comparing
sample of source document to the ledger (understatement); typically used to test
liabilities and expenses
What affects the reliability of audit evidence? - ANSWER source (internal or
external), nature, and circumstances under which the evidence is obtained
(inquiry, physical documentation, etc)
What factors affect the reliability of internal documentation? - ANSWER
effectiveness of internal controls over documentation, management motivation
to misstate individual accounts (ie fraud potential), formality of the
documentation, and independence of those preparing documentation
What factors affect the reliability of external documentation? - ANSWER if the
documentation was prepared by a knowledgeable/independent outside party and
if the documentation is received directly by the auditor
What is a management's specialist? - ANSWER an individual/organization
possessing expertise in a field other than accounting/auditing and whose
expertise is used by client to provide relevant data needed to prepare the
financial statements
What factors affect the reliability/relevance of the information provided by a
management's specialist? - ANSWER specialist's competence, capabilities, and
AND ANSWERS
Sufficiency of audit evidence concerns what? What affects sufficiency? -
ANSWER The quantity of audit evidence; quantity is affected by assessment of
risk of material misstatement (more risk=more evidence) and quality of
evidence (better quality=less evidence)
When performing substantive tests, what does an auditor consider to select
sample size? - ANSWER client factors, like the risk of material misstatement
and assurance obtained from other substantive procedures performed by the
auditor
When performing tests of controls, what does an auditor consider to select
sample size? - ANSWER whether client has tested controls as a basis for its
assertion on the effectiveness of internal control, and type of control being
tested (shorter term controls require larger sample)
What additional consideration is required when auditing controls over adjusting
entries? - ANSWER the better the control environment, the smaller the sample
size; want to determine that a) other controls aren't being overridden by
management b) there is support for the adjusting entries c) the entries are
properly approved by the appropriate level of management
high number of transactions=sampling, low number of transactions=focus on
larger transactions
Appropriateness of audit evidence concerns what? What affects
appropriateness? - ANSWER measures evidence quality; includes relevance of
evidence; relevance determines if the evidence provides insight on the validity
of the assertion being tested and reliability of evidence (whether evidence is
convincing)
What affects relevance of audit evidence? - ANSWER the purpose of the
procedure being performed, the direction of testing, and the specific
, procedure/set of procedures being performed; evidence can be either directly or
indirectly relevant
What does the purpose of an audit procedure determine? - ANSWER whether
the procedure is a risk assessment procedure, test of controls, or substantive
procedure
What is the goal of directional testing? - ANSWER to test balances primarily
for either overstatement or understatement, but not both
What does vouching test? - ANSWER tests for existence/occurrence by
comparing sample of ledger to source document (overstatement); typically used
to test assets and revenues
What does tracing test? - ANSWER tests for completeness by comparing
sample of source document to the ledger (understatement); typically used to test
liabilities and expenses
What affects the reliability of audit evidence? - ANSWER source (internal or
external), nature, and circumstances under which the evidence is obtained
(inquiry, physical documentation, etc)
What factors affect the reliability of internal documentation? - ANSWER
effectiveness of internal controls over documentation, management motivation
to misstate individual accounts (ie fraud potential), formality of the
documentation, and independence of those preparing documentation
What factors affect the reliability of external documentation? - ANSWER if the
documentation was prepared by a knowledgeable/independent outside party and
if the documentation is received directly by the auditor
What is a management's specialist? - ANSWER an individual/organization
possessing expertise in a field other than accounting/auditing and whose
expertise is used by client to provide relevant data needed to prepare the
financial statements
What factors affect the reliability/relevance of the information provided by a
management's specialist? - ANSWER specialist's competence, capabilities, and
