Fundamental Concepts: Evidential matter and its documentation page 1

CHAPTER 4

FUNDAMENTAL CONCEPTS:
EVIDENTIAL MATTER AND ITS DOCUMENTATION

Audit Evidence
Audit Evidence (also referred to as evidential matter) refers to the necessary information
that an auditor gathers in order to form a credible opinion on the assertions by the client’s
management that are inherent in the financial statements. This evidence will therefore often
include information relating to the completeness, validity and accuracy of the recorded value of
assets, liabilities and equity of the client entity. Some examples of audit evidence follow.

 In the client acceptance/retention stage, audit evidence includes information that enables
the auditor to determine whether to accept or reject an entity as client, such as
information relating to the prospective client’s industry, Board of Directors, products
manufactured, etc.
 In the audit planning stage, audit evidence includes information that enables the auditor
to determine the audit approach, such as information relating to the likely effectiveness of
particular internal control procedures.
 In the control testing stage, audit evidence includes information that assists the auditor in
determining whether or not internal controls are effective in their operation, such as
information as to whether a particular control procedure is or not supervised.
 In the substantive testing stage, audit evidence includes information as to whether a
particular account balance is complete, valid and accurate, such as evidence that an asset
actually exists.
 In the opinion formulation stage, audit evidence includes information relating to the
completeness, validity and accuracy of the financial statements as a whole, such as
information relating to the consistency of the financial statements as a whole, such as
information relating to the consistency of the financial statements with the auditor’s
knowledge of the business.

Types of Evidence

According to PSA 500 there are two types of evidential matter that support management’s
financial statements(1) source documents and accounting records underlying the financial
statements and (2) corroborating information from other sources.

Underlying evidence comprises the accounting data from which financial statements are
prepared, including not only the formal journals and ledgers but also informal and memorandum
recurs such as worksheets of computation, allocations, and reconciliations. The important
characteristics of underlying accounting data are that they are prepared by the client’s personnel
and represent the end result in the processing of transactions.

Auditors use corroborating information to verify the fairness of the underlying

accounting data and may include responses to confirmations sent to third parties and other
evidence gathered through observation, inspection and inquiry. Corroborating evidence includes
documentary material showing the (a) cancellations on checks, vouchers, invoices and the like;
(b) contracts and minutes of meetings; (c) confirmations and title written representations of
knowledgeable persons; (d) results of direct observation, physical inspection, and computation;
and (e) conclusions reached through valid reasoning.

Seven types of audit evidence are available to the auditor to support a given objective.
1. physical examination
2. reperformance
3. documentation
4. confirmation
5. analytical procedures
Fundamental Concepts: Evidential matter and its documentation page 2

6. inquires of client personnel or management

7. observation

Characteristics of Evidence

Auditors gather evidence of sufficient quantity and appropriate quality (i.e. appropriate
relevance and reliability) to form their opinion on the financial statements. Sufficiency and
appropriateness are interrelated and apply to audit evidence obtained from both tests of controls
and substantive procedures.

Sufficiency of Evidence

Sufficiency of evidence relates to the quantity of evidence gathered by the auditor. The
concept of sufficiency recognizes that the accumulation of evidence should be persuasive rather
than convincing. This concept is consistent with the idea that the auditor is not free to collect
unlimited amounts of evidence since he or she must work within economic limits. Cost, cannot,
however be the sole basis for the quantity or quality of audit procedures. The sufficiency of
evidence is influenced by the following factors:

1. Auditor’s assessment of the nature and level of inherent risk at both the financial
statement level and the account balance or class of transactions level
2. Nature of the accounting and internal control systems and the assessment of control
risk.
3. Materiality of the item being examined.
4. Experience gained during previous audits
5. Results of audit procedures, including fraud or error which may have been found.
6. Source and reliability of information available.

Appropriateness of Evidence

Appropriateness of evidence is the measure of the quality of the evidence and its
relevance to a particular assertion and its reliability. Relevance refers to whether evidence
provides the auditor with information sought by him/her. Audit evidence is said to be relevant if
it pertains to the specific audit objective being tested. For example, suppose an auditor wants to
check the completeness objective for recording sales transaction, that is, all goods shipped to
customers are recorded in the sales journal. A normal audit procedure would be to trace a sample
of shipping documents to the related sales invoice and entries to the sales journal. If the auditor
instead, samples sallies invoices issued for the period, the evidence would not relate to the audit
objective of completeness hence unbilled shipments would not be detected.

Reliability, which is related to validity, of evidence is influenced by its source (internal or

external), and by its nature (visual, documentary or oral). PSA 500 notes the following general
rules relating to the reliability of audit evidence.

1. Evidence from external sources (such as confirmations received form third party) is
more reliable than that generated internally.
2. Evidence generated internally is more reliable when the related accounting and
internal control systems are effective.
3. Evidence obtained directly by the auditor is more reliable than that obtained from the
entity.
4. Evidence in the form of documents and written representations are more reliable than
oral representations

Figure 4.1 illustrates the hierarchy of evidence (from the most reliable to the least
reliable) and provides an example of each type of evidence.
Fundamental Concepts: Evidential matter and its documentation page 3

Figure 4.1- Hierarchy of Reliability of Evidence

Types of Evidence Ex ample of audit evidence
Direct evidence Physical observations by the auditor
Evidence received directly from external Confirmation received from banks and
sources customers, banks statements received from
banks
Evidence created by external sources but Bank statements received from the client,
received from the client vendor invoices for purchases made by the
client
Evidence created by the client Invoices from sales made to customers,
cost allocation and other internal records

Initial Engagements- Opening Balances

According to PSA 510, Initial Engagements- Opening Balances, the auditor should obtain
sufficient competent audit evidence that (a) the opening balances do not contain misstatements
that materially affect the current period’s financial statements, (b) the prior period’s closing
balances have been correctly brought forward to the current period or when appropriate, have
been restated, and (c) appropriate accounting policies are consistently applied or changed in
accounting policies have been properly accounted for and adequately disclosed.

Procedures for Obtaining Evidence

The auditor obtains audit evidence by one or more of the procedures listed below. The
timing of such procedures will be dependent upon the periods of time during which the audit
evidence sought is available.

Inspection- consists of examining records, documents, or tangible assets. Review of documents

for unusual items is also referred to as scanning. Because of the variety; of documents, records or
tangible assets that auditors may inspect, this audit technique addresses all of the financial
statements assertions.

Examples: The existence of tangibles assets such as inventory, PPE, investment securities
and cash can be physically verified.

An auditor may scan the accounts receivable ledger to determine the existence of any
customers with large credit balances that should be reclassified as liabilities.

Valuation of sales transactions may be tested by examining shipping documents, sales

invoices and cash receipts.
Documents and records that may be inspected include internal audit reports, minutes of
meetings of directors and important committees, internal financial management reports for
current and previous periods, management reports, marketing and sales plans.

Observation - consist o looking at a process or procedures being performed by others where no

“paper trail” exists (nothing, for example, those operations which appear inherently risky).
Observation differs from physical inspection in that observation focuses on client activities to
understand them or how and when they are done.

Examples: Mail clerks may restrictively endorse checks received from customers “for
deposit only.” Since those checks are returned to the customer, they are unavailable for auditor
examination. To see if such endorsements are actually being used, the auditor might observe the
mail clerks as they perform the task.
Fundamental Concepts: Evidential matter and its documentation page 4

An auditor may observe the client’s inventory taking to assess the degree of care
exercised.

Inquiry- consists of seeking information of knowledgeable person inside or outside the entity.
Inquiries may range from formal written inquiries addressed to third parties to informal oral
inquiries addressed to persons inside the entity. Although the responses to inquiries are usually of
limited reliability, they do provide a starting point for the performance of other auditing
techniques. However, the auditor is usually more efficient when corroborating responses to
inquiries that when finding answers independently through an undirected examination of detailed
evidence.

Examples: An auditor might ask the credit manager why specific receivables was written
off as a bad debt or ask the plant supervisor what procedures the company uses to approve the
purchases the company of equipment.

Confirmation- consists of the response to an inquiry to corroborate information contained in the

accounting records.

Example: Customer confirmation of balances of receivable, bank confirmation of

account balances including loans, attorney confirmations of litigation (possible contingent
losses) and supplier confirmation of balances owed (accounts payable)

Computation- consists of checking the arithmetical accuracy of source documents and

accounting records or of performing independent calculations.

Examples: An auditor may foot a listing of inventory items to determine that total
inventory agrees with the detailed listing.

An auditor may recalculate the depreciation and interest expense or earnings per share for
the period and compare their results with those of the client. This procedure is also referred to as
“test of reasonableness”.

Analytical Procedures- consists of the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationships that are inconsistent with other relevant
information or deviate from predicted amounts.

Example: Gross profit percentage, defined as sales minus cost of goods sold divided by
sales, provides an indication of the profitability of a company’s product. If the percentage were
to change drastically in one year, it could indicate a change in operations of the company, a
change in accounting principle, or an error in inventory.

Relationship of Evidence to Audit Objectives and Audit Activities

As emphasized earlier, the overall objective of the audit of the financial statements of an
entity is to gather and evaluate audit evidence of sufficient quantity and appropriate quality (i.e.
appropriate relevance and reliability) in order to form, and communicate to the users of the
financial statements, an opinion on the reliability of the assertions of management inherent in
those financial statements for the purpose of adding credibility to those assertions.

Audit procedures constituting the specific acts performed in the conduct of the audit are
designed to generate information indicative of the fairness of management assertions and are
therefore useful for determining if an audit objective is satisfied. When an audit procedure (a
collection of this is called an audit program) is performed, it results in the generation of audit
evidence. Figure 4.2 presents the relationship of procedures, evidence and financial statement
errors.
An audit program (which is discussed in depth in the Chapter for Audit Planning)
describes what and how much evidence is required to be gathered and evaluated during the
Fundamental Concepts: Evidential matter and its documentation page 5

interim and final visits. In other words, an audit program details the nature, timing and extent of
the planned audit procedures relating to a particular account balance or account balance
assertion. Auditors prepare audit programs in respect of evidence gathered and evaluated in each
of the control testing, substantive testing and opinion formulation stages. Ii is prepared, or
revised, as part of the operational planning activities of those three audit stages and is
documented in the working papers.

Figure 4.2. Types of Audit Procedures

Type of Procedure Resulting Audit evidence Relationship with Financial Statement

Errors
Procedures to Assess Current Conditions
Understanding an Client inquiries Indication of errors indirect; procedures
entity’s Observation indicate the risk from the environment
environment, Documentation that can adversely affect the entity and
strategies, plans Analytical evidence the reliability of management and
and risks information systems in general but do
not indicate whether specific transactions
or accounts are correct
Evaluation of Client inquiries Indication of errors indirect; breakdown
information system Observation in information system and controls over
reliability and Documentation transaction flows may or may not result
control testing Analytical evidence in an error in a transaction or account;
frequent breakdowns increase the
likelihood that errors occur and go
undetected by the entity
Preliminary Client inquiries Indication of errors indirect; procedures
analytical Analytical evidence indicate circumstances that appear to be
procedures unusual and could lead to misstatements
or errors
Procedures to Test Financial Statement Assertions
Substantive Client inquiries Indication of errors indirect; procedures
analytical Accuracy indicate accounts that appear to have
procedures Analytical evidence unusual balances that may due to an error
Tests of Client inquiries Indication of errors in transactions direct-
transactions Documentation error occurrence can be documented;
Accuracy indication for account balances in
indirect because the error may have been
corrected at a later date
Tests of account Client inquiries Indication of errors in accounts direct;
details Documentation transactions causing the errors may not
Accuracy be directly examined
Confirmation
Physical examination

AUDIT DOCUMENTATION

According to PSA 230, ‘Documentation’, audit documentation pertains to the records

kept by the auditor of the procedures applied, the tests performed, the information obtained, and
the pertinent conclusions reached in the engagement. Audit documentation which is also term as
working papers should include:
Fundamental Concepts: Evidential matter and its documentation page 6

 the audit plan including the audit approach for each material account balance
assertion, and the basis for their determination,
 the related audit programs,
 the audit evidence gathered by the auditor necessary to form the opinion on the
financial statements, and
 the details of critical decisions made by the auditor that have an impact on the
final audit opinion.

Form and Content of Working Papers

The working papers for a client audit engagement are sufficiently detailed to enable
another appropriately experienced and competent auditor that is not familiar with the client to
overall understanding of the engagement. The matters listed below affect the form and content of
working papers according to PSA230, “Documentation”.

1. Nature of the engagement

2. Form of the auditor’s report
3. Nature and complexity of the business
4. Nature and condition of the entity’s accounting and internal control system
5. Needs in the particular circumstances for direction, supervision and review of
work performed by assistants.
6. Specific audit methodology and technology used in the course of the audit

Working Paper Files

Working papers remain in the custody, and are the property of the auditor. Accordingly,
auditor is prohibited by the Accounting Law from disclosing any information contained therein
without the client’s consent because of the confidential relationship between the client and the
auditor. The only time anyone else has a legal right to examine files is when they are subpoenaed
by a court as legal evidence. Although portions of or extracts form the working papers may be
made available to the client at the discretion of the auditor, they are not a substitute for the
client’s accounting records.

Auditors retain a set of working papers for each audit engagement for each year. The
working papers for the current year are referred to as the current working papers. Working papers
that are relevant to more than one audit engagement are often kept separately in file referred to as
permanent working papers. These two categories of audit working papers can be classified
further to facilitate compilation and easy reference to wit:

Permanent Files- normally contain information that the auditor will use on the engagement in
both the current and future years and may include:

 Information concerning the legal and organization structure of the entity such as the
articles of incorporation and bylaws.
 Extracts or copies of minutes and important legal documents and agreements such as
bond indentures, person plans, leases, stock options, contracts, etc.
 Information concerning the industry, economic environment and legislative environment
within which the entity operates.
 Copies of communications with other auditors, experts and other third parties
 Copies of letters or notes concerning audit matters communicated to or discussed teeth
the entity, including the terms of the engagement and material weakness in internal
control.
 Analysis from previous years, of accounts that have continuing importance to the
auditors; long-term debt, stockholders equity, goodwill, property, plant and equipment.
 The results of analytical procedures from previous year’s audits.
Fundamental Concepts: Evidential matter and its documentation page 7

Current files- include all audit documentation applicable to the period under audit, such as:

Audit program- describes how the audit approach is to be implemented. Auditors

develop an audit program for each material account balance or account balance assertion. An
audit program describes what and how much evidence is required to be gathered and evaluated,
and how, when and by whom it is to be gathered and evaluated during the interim and final visits.
The audit program is ordinarily maintained in a separate file to improve the coordination and
integrated of all parts of the audit.

Working trial balance- represents a listing of ending balance in the entire client’s accounts prior
to preparing adjusting and reclassification of journal entries and contains the following
information:

1. Reference to Assembly sheet and lead schedules

2. Current year’s ending balances (per client)
3. Reference for adjustments/reclassifications
4. Adjustment/reclassification
5. Current year’s financial statement balances(per audit)
6. Prior year’s ending balance

Assembly sheets or lead schedules- summarize the major components of the account balances
or class of transactions in support of a financial statement item such as Cash and cash
equivalents, inventories and PPE.

Adjusting and reclassification entries- documentation for the adjustments and reclassifications
identified by the auditor or client. Adjustments are made to correct errors while reclassifications
are made to properly present information in the financial statements. Reclassification entries are
not posted in the client’s records.

Audit memoranda- much of the auditor’s work is documented in written memoranda including
discussions of items such as internal controls, inventory observation, errors identified, and
problems encountered in the audit.

Supporting schedules- comprise the largest portion of audit documentation that are prepared by
the client or the auditor in support of specific amounts on the financial statements, which include

o Analysis - design to show the activity in a general ledger account during the entire period
under audit, tying together the beginning and ending balances. Examples: marketable
securities, notes receivable, allowance for doubtful accounts, PPE, long-term debt and all
equity accounts.

o Trial balance or list- consist of the details that makes up a year-end balance of a general
ledger account. Examples: trial balance or lists in support of trade accounts receivable,
trade accounts payable, repairs and maintenance expense, legal expense and
miscellaneous income

o Reconciliation of amounts- supports a specific amount and is normally expected to tie

the amount recorded in client’s records to another source of information. Example: bank
balances with bank statement, subsidiary accounts receivable balances with confirmations
from customers and accounts payable balance with vendor’s statement.
o Tests of reasonableness- contain information that enables the auditor to evaluate whether
the clients’ balance appears to include a misstatement considering the circumstances of
the engagement. Example: depreciation expense, allowance for doubtful accounts
o Summary of procedures- summarizes the result of a specific audit procedure performed.
Examples: results of accounts receivable confirmation and summary of physical
inventory observation
Fundamental Concepts: Evidential matter and its documentation page 8

o Examination of supporting documents- show detailed tests performed such as

examination of documents during cutoffs, test of controls and substantive tests of
transactions. These schedules show no totals and they do not tie in to the general ledger
balance because they document only the tests performed and the results found.

o Informational- contains information as opposed to evidence such as tax returns, time

budget and client’s working hours.

o Outside documentation- although not “schedules” in the real sense, they are indexed
and interfiled and procedures are indicated in them such as confirmation replies from
banks and customers.

CONFIDIENTIALITY, SAFE CUSTODY, RETENTION and OWNERSHIP OF

WORKING PAPERS

PSA 230, “Documentation” requires that the auditor should adopt appropriate procedures
for maintaining the confidentiality and safe custody of the working papers and for retaining them
for a period sufficient to meet the needs of the practice and in accordance with legal and
professional requirements. Although the auditor owns the working papers, they cannot be shown
except under certain circumstances to anyone without the client consent.

SUMMARY OF KEY POINTS:

1. Assertions are expressed or implied representations by management that are reflected in

the financial statement components. In obtaining evidence to support the assertions
contained in the financial statements the auditor develops specific audit objectives that
relate to each management assertion. Audit objectives test components of the financial
statements. Once the auditor has sufficient evidence that the set of audit objectives is met,
he or she has reasonable assurance that the financial statements are fairly presented.

2. Three examples of corroborating evidential matter are: (a) Books of the original entry: (b)
Related accounting manual and records, and (c) Information obtained through inquiry,
observation, inspection and physical examination.

3. General factors that the auditor should consider when assessing reliability of the audit
evidence are: (a) Independence of the source of the evidence: (b) Effectiveness of the
internal control; and (c) Auditor’s direct personal knowledge.

4. The auditor determines the objectives of auditing each account by relating them to the
management’s assertions, i.e., the auditors objectives are to determine whether
management’s assertions are valid.

5. There are seven types of audit evidence: (a) Physical examination, (b) Reperformance, (c)
Documentation, (d) Analytical procedures, (e) Confirmation, (f) Inquires of clients
personnel or management, and (g) Observation.

6. The working papers are the property of the auditor. However, they cannot be shown,
except under certain circumstances, to anyone without the client’s consent. On the other
hand, the CPA can disclose confidential information without the client’s consent: (a) to
meet disclosures requirements for GAAP and GAAS, (b) to comply with a valid and
enforceable subpoena, (c) as required by an authorized peer review board or body, and (d)
as part of an investigation or disciplinary proceeding.

7. Types of working papers: (a) audit plans and programs, (b) working trial balance, (c)
Account analysis and listings, (d) audit memoranda, (e) adjusting and reclassification
entries.
Fundamental Concepts: Evidential matter and its documentation page 9

8. Because of the evidence is not from the independent sources and is therefore not
considered highly reliable, auditors normally gathers additional corroborative evidence to
support the client’s responses. In the case of the internal controls over the storeroom, the
audit might follow up the client responses by testing the control procedures to verify their
existence and effectiveness.

9. Adjusting entries are proposed by the auditor to correct errors in the accounting records
while reclassification entries are used to change the classification of an item for financial
statement presentation purposes.

MULTIPLE CHOICE QUESTIONS

1. In determining the quantity and quality of evidence to gather, the auditor will be satisfied
when the evidence is
a. highly persuasive
b. irrefutable
c. conclusive
d. completely convincing

2. An audit working paper that shows the detailed evidence and procedures regarding the
balance in the balance of the accumulated depreciation account in the year under audit will
be found in the
a. Current file of working papers
b. Permanent file of working papers
c. Other information working papers in the current file
d. Planning memorandum in the current file

3. The detailed instructions for the collection of a particular type of audit evidence that is to be
obtained at some time during the audit” is the definition of a(an)
a. audit procedures
b. audit programs
c. audit plan
d. sampling plan

4. Which of the following forms of evidence would be least persuasive in forming the auditor’s
opinion?
a. Responses to auditors questions by the president and controller regarding the investments
account.
b. Minutes of the board of directors authorizing the purchase of stock as an investment.
c. Correspondence with a stockholder regarding the quantity of client’s investments held in
street name by the broker.
d. The auditor’s count of marketable securities.

5. Which of the following is not one of the four determinants of the persuasive of evidence?
a. Physical examination
b. Competence
c. Relevance
d. Sufficiency

6. Which one of the following statements about the competence of evidence is not true?
a. Competence can be improved by selecting a larger sample size.
b. Competence deals only with the audit procedures selected.
c. Competence can be improved by selecting audit procedures that contain a higher quality
of the characteristics sought.
d. Competence cannot be improved by selecting different population items to include in the
sample size.
Fundamental Concepts: Evidential matter and its documentation page 10

7. Which of the following is not one of the characteristics of competent evidence?

a. Size of the sample
b. Degree of objectivity
c. Effectiveness of internal control structure
d. Independence of provider

8. Which one of the following forms of evidence would be least reliable?

a. Client’s copy of a purchase requisition.
b. Monthly bank statement.
c. A letter from client’s attorney stating that there are no known lawsuits pending against the
client.
d. Positive confirmation of customer’s balances.

9. Which one of the following forms of evidence would be most reliable?

a. An insurance policy in client’s file.
b. The file copy of a purchase requisition.
c. The file copy of a receiving report.
d. The file copy of a sales invoice.

10. When the auditor is gathering evidence, he/she will conclude that if the source of information
is independent, the evidence will
a. Not be reliable unless the provider is qualified to do so.
b. Be reliable if the provider has no reason to be biased.
c. Be reliable.
d. Not be reliable.

11. When an auditor calculates the gross profit as a percent of sales and compares it with
previous periods, this type of evidence is called
a. Computation
b. Inquiry
c. Observation
d. Physical examination

12. Evidence obtained directly by the auditor is more competent that information obtained
indirectly. Which of the following is not an example of the auditor’s direct knowledge?
a. Inquiry
b. Computation
c. Observation
d. Physical examination

13. Which of the following is an example of objective evidence?

a. The physical count of securities and cash.
b. Observation of cobwebs on some inventory bins.
c. Inquiries of the credit manager about the collectivity of noncurrent accounts receivables.
d. A letter written by the client’s attorney discussing the likely outcome of outstanding
lawsuits.

14. Which of the following statements is an incorrect use of terminology?

a. Documentary evidence is more reliable when it is received by the auditor directly from an
independent third party.
b. External evidence, such as communication from banks, is generally regarded as more
reliable than answers obtained from inquiries of the client.
c. Evidence obtained from an independent source outside the client organization is more
reliable than that obtained from within.
d. Documents that originate outside the company are considered more reliable than those
that originate within the client’s organization.
Fundamental Concepts: Evidential matter and its documentation page 11

15. In making decisions about evidence for a given audit, the auditor’s goa; is to obtain sufficient
amount of timely, reliable evidence that is relevant to the information being verified, and to
do so
a. At the lowest possible total cost.
b. At any cost because the cost are billed to the client.
c. Only if the cost is reasonable.
d. No matter what the cost involved in obtaining such evidence.

16. Evidence is more persuasive for balance sheet accounts when it is obtained
a. As close to the balance sheet date as possible..
b. From various times throughout the client’s year.
c. Only from transactions occurring on the balance sheet date.
d. From the period when transactions in that account were most numerous during the fiscal
period.

17. The distinction between the physical examination of assets and examination of documents is
dependent on the item being examined. If the object being examined has no inherent value,
the evidence is called
a. Documentation
b. Physical examination
c. Confirmation
d. Garbage

18. Physical examination is not an objective means of ascertaining an asset’s

a. Ownership
b. Condition or quality
c. Description
d. Quantity

19. Confirmations are highly regarded and often-used type of evidence because they
a. come from independent sources.
b. Are inexpensive
c. Cause no inconvenience for auditor or third party
d. All of the above

20. Traditionally, confirmations are used to verify

a. bank balances and accounts receivables
b. additions to property, plant and equipment
c. individual transactions between organization, such as sales transactions
d. All three of the above

21. Evidential matter supporting the financial statements consists of the underlying accounting
date and all corroborating information available to the auditor. Which of the following is an
example of corroborating information?
a. Minutes of meetings.
b. Accounting manuals.
c. Worksheets supporting cost allocation.
d. General and subsidiary ledgers.

22. Evidence is generally competent when

a. It has the qualities of being relevant, objective, and free from known bias.
b. It consists of written statements made by managers of the entity under audit.
c. It has been obtained by random selection.
d. There is enough of it to afford a reasonable basis for an opinion on financial statements.
Fundamental Concepts: Evidential matter and its documentation page 12

23. Those procedures specifically outlined in an audit program are primarily designed to
a. gather evidence
b. test internal control systems
c. detect errors or irregularities
d. prevent litigation

24. The most common statistical technique for analytical procedures is

a. regression analysis
b. analysis of variance
c. time-series analysis
d. descriptive analysis

25. A common comparison occurs when the auditor calculates the expected balance and
compares it with the actual balance. The auditor’s expected account balance may be
determined by
a. relating it to some other balance sheet or income statement account or accounts.
b. Inquiry of client
c. Using industry standards
d. All of the above

26. Documentation is a form of evidence

a. used in every financial statement audit
b. used in most financial statements audit
c. used in the rare occasions when it is both readily available and less costly than other
procedures
d. used when nothing is available that is more competent

27. Three common types of confirmations used by auditors are (1) negative confirmations, (2)
positive confirmations with a request for information, (3) positive confirmations with the
information included. If they were placed in the order of their reliability, from highest to
lowest, the sequence would
a. 2,3,1
b. 3,1,2
c. 1,2,3
d. 3,2,1

28. For income statement accounts, evidence is more persuasive if there is a sample from
a. the entire period under audit
b. the period closest to the end of the fiscal period
c. at least three months of the fiscal year
d. December, since this would include large holiday sales

29. The Auditing Standards and Practices Council ( in PSA 520) has concluded that analytical
procedures are so important that they are required during
a. planning and overall review stages of the audit
b. planning and testing phases
c. testing and overall review stages
d. planning, testing and overall review stages of the audit

30. The third standard of fieldwork requires the auditor to accumulate sufficient appropriate
evidence to support the opinion issued. Because of the nature of audit evidence, it is
a. unlikely the auditor will be completely convinced that the opinion is correct
b. Unlikely the auditor will arrive at a conclusion
c. Likely the auditor will be completely convinced that the opinion is correct
d. Likely that the auditor would change his or her mind about the opinion if he/she took the
time to gather additional evidence.
Fundamental Concepts: Evidential matter and its documentation page 13

31. In the regular audit of FAL Company, Vito Cruz, CPA, discovered a material fraud being
perpetrated by the cashier. What do you expect most of Vito Cruz to do?
a. Report the incident to the Securities and Exchange Commission.
b. Communicate the existence and details of the fraud to the audit committee of the board of
directors and to at least one managerial level higher than the position occupied by the
fraudster.
c. Advise the shareholders of the client enterprise regarding the fraud.
d. Make an extensive investigation as well as examination in order to account the extent of
the fraud.

32. Which of the following is not a correct statement?

a. The volume and amount of audit work should vary inversely with the likelihood of
material misstatements existing in the accounting records.
b. The better the organizational control structure, the less likely that the material
misstatements will be present.
c. Unusual transactions are more likely to e recorded in an error than recurring or routine
transactions are.
d. If misstatements are likely to occur in the recording process, the auditor should develop
procedures to detect such misstatements.

33. What differentiates fraud from an error?

a. Materiality
b. Intent
c. Effect on financial statements
d. Frequency of occurrence

34. Which of the following acts are considered fraud?

I. Changing of records or documents
II. Misinterpretation of facts
III.Misappropriation of assets
IV.Recording of transactions without documentation\
VClerical Mistakes
a. III only
b. I and III only
c. I,III and IV only
d. All of them

35. A CPA guilty of act or omission of certifying financial statements for a business enterprise
with essential misstatements of facts or omission in respect of the transaction, taxable
income, deduction and exemption of his client, shall be punished by a fine of:
a. Not less than P10,000 but not more than P30,000
b. Not less than P25,000 but not more than P50,000
c. Not less than P50,000 but not more than P100,000
d. Not less than P100,000 but not more than P250,000

36. Which of the following is the least potential concern in managerial reporting?
a. Management bias in providing financial information
b. Lack of expertise in Financial reporting
c. Remoteness of the users from the entity
d. Complexity of transactions affecting the financial statements

37. The Auditor should obtain sufficient appropriate audit evidence that________ for the initial
audit engagement
a. there is consistency in the use of audit procedures
b. opening balances do not contain material misstatements
c. prior periods real account balances have been correctly carried forward to the current
period
Fundamental Concepts: Evidential matter and its documentation page 14

d. appropriate accounting policies are consistently observed or changes in accounting

policies have been properly accounted for and adequately disclosed.

38. The beginning balances are based on the closing balances of prior periods and reflect the
effects of:
I. Current transaction (e.g stock dividends) given retroactive effect recognition.
II. Transactions of prior period.
III. Accounting policies applied in the prior period.
a. All of these
b. I and II only
c. I only
d. II and III only

39. Which of the following is least considered in determining the sufficiency and appropriateness
of an adult evidence that the auditor will obtain regarding opening balances?
a. length of years in operation of the entity
b. materiality of the opening balances relative to the current period’s financial statements
c. accounting policies adopted by the entity
d. risk misstatement of the accounts