Professional Documents
Culture Documents
A. The third standard of fieldwork requires sufficient, competent evidential matter to be obtained
through inspection, observation, inquiries and confirmations to afford a reasonable basis for an
opinion regarding the financial statements under examination.
B. Evidential matter consists of underlying accounting data and corroborating information. What are
examples of each?
Underlying accounting data - books of original entry, journals, G/L and S/L, accounting
manuals, worksheets, computations and reconciliations
Corroborating information - documentary evidential material such as checks, invoices,
contracts, confirmations, representations
C - Confirmation V - Visual
A - Analytical O - Oral
M - Mathematical R - Representations
P - Physical D - Documentary
1. Tracing and Vouching involve the auditor following the audit trail. An audit trail may be
defined as the accumulation of source documents and records maintained by the client
which serves as the support for the transactions occurring during the period.
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2. Which type of auditing procedure would give you which type of evidence?
recalculating mathematical
observing visual
tracing and vouching documentary
reconciling analytical
a) Quantitative factors
b) Qualitative factors
1. Valid
The CPA exam asks about types of evidence and the validity of the evidence. The
validity of evidential matter is dependent upon the circumstances under which it is
obtained. What are three presumptions about the validity of evidential matter?
b) Data and financial statements from a good I/C structure are more reliable than
those from a weak I/C structure.
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must be pertinent to the question being asked
The relationship between sufficient and competent is inverse.
A. The auditor uses her professional judgment to determine the nature, extent and timing of audit
procedures and evidential matter required. When selecting particular substantive tests, the auditor
considers:
B. In addition to the results of the internal control evaluation, two limitations (constraints) impact
how much, and what type of, audit evidence we accumulate: Cost and Time. In particular, we
must consider cost/benefit relationship of evidence
must note, cost is not a justification for omitting an audit procedure the auditor considers
necessary
C. The auditor controls the risk that a material error will not be detected by the audit (remember
detection risk) by manipulating NET:
a. Nature --
b. Extent --
c. Timing --
A. Recall that our audit objectives are based on the F/S assertions and we undertake audit procedures
(including substantive tests) to ascertain whether the assertions are fair.
B. Audit evidence is accumulated during the planning of the audit, consideration of the internal
control structure and by performing substantive tests. Substantive tests are designed to
substantiate account balances. That is, they ascertain whether specific F/S accounts are in
conformity with GAAP. Substantive tests can be one of two types:
1. Tests of Details - which examine the actual details making up the account balance, e.g.,
confirmation of A/R, recalculation of depreciation expense, observation of inventory.
2. Analytical Procedures (AP) - ratios, trends, comparisons, fluctuation analysis.
Substantive tests are the auditors means of substantiating (validating) account balances, that is,
determining that accounts are free from material error or irregularity. Some audit procedures are both tests
of controls and substantive tests. These tests are called dual-purpose tests. Dual-purpose tests are very
common in practice for obvious cost reasons.
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V. ANALYTICAL PROCEDURES (AU 329)
Analytical Procedures (AP) consists of evaluation of financial information made by a study of plausible
relationships among both financial and nonfinancial data. The basic premise underlying AP is that
plausible relationships among data may reasonably be expected to exist and continue in the absence of
known conditions to the contrary. Analytical procedures can range from simple comparisons to ratio
analysis to complex models, such as multiple regression analysis. Analytical procedures are used for three
purposes:
1. Develops an expectation of the account balance or ratio, possibly from the following
sources
I INDUSTRY information
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B. Relationships differ in predictability. This should be taken into consideration when relying on AP.
1. Relationships involving BALANCE SHEET accounts are less predictable than income statement
accounts.
C. Increases in the reliability of the prediction occur when data for the expectation comes from
4. A VARIETY of sources
5. EXTERNAL sources
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Exhibit I: ANALYTICAL PROCEDURES EXAMPLE FOR SALES AND
COLLECTIONS
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Exhibit II
from the Journal of Accountancy,
ANALYTICAL PROCEDURES THAT CAN BE USED AS SUBSTANTIVE TESTS
SAS no. 56s most important change is the Finished goods inventory pricing. Refer to selling
introduction of guidance on the development, use prices less costs to dispose and normal gross
and evaluation of the results of analytical margin.
procedures as substantive tests. Although it
doesnt require their use n this context, the SAS Scrap income. Relate standard cost scrap factor to
encourages auditors to apply them if they make pounds of material processed and apply the result
sense in the particular circumstances. The only to published scrap price per pound.
limits are the availability of reliable information
and the creativity of the auditor. Here are some Payroll expense. Refer to the average number of
analytical procedures that can be used as employees and the average pay per period.
substantive tests:
Accrued payroll. Refer to days accrued and
Provision for bad debts. Refer to aging of average daily payroll or subsequent period gross
receivables, days sales in receivables or sales and payroll.
historical charge-off percentage.
Interest expense and related accrual. Refer to average
Inventory standard costs. Compare the current debt outstanding, weighted average interest rate and
standards to the prior-year standards adjusted by payment dates.
average inflation rate.
SAS no. 56 requires the auditor to use analytical indicated a significant amount of audit work relating to
procedures in the planning and final review stages of all existence, completeness, rights and obligations (pledged
audits. However, the earlier they are used, the better, as and consigned inventory) and even valuation as it related
this case history involving an accounting estimate to the companys method or pricing inventory, but there
indicates. was no analysis of excess inventory and no consideration
of that aspect of the valuation assertion.
The client. A small manufacturer of toys and games. In essence, a two-minute analysis in the final review
identified a significant audit issue that simple analytical
The problem. The valuation of excess inventories. No procedures could have identified in the planning stage.
questions were raised until the preissuance review by the Moreover, the issue wasnt identified by all of the
CPA firms report reviewer. substantive tests of details performed during the course
of the audit.
Observations by report reviewer. The problem surfaced
about two minutes into the final review. My review Epilogue. Fortunately, the valuation problem was
began with what I consider to be one of the most corrected before the report was issued--but not
important analytical procedures--a close reading of the without certain costs. Those costs included
financial statements. That gives me a good sense of the performing additional procedures that could have
overall financial statement presentation and key areas been completed more efficiently earlier in the audit.
before I continue with the rest of the review. More important, we could have avoided the delays in
Initial comparisons showed that sales were down issuing the report, aggravation to the client and
while inventory increased substantially. A quick embarrassment to us from raising such a key issue so
calculation indicated well over a years supply of late in the audit.
inventory at yearend. The clients past experience and
readily available industry data suggested that a three- or
four-month supply would be more typical.
The inventory workpapers were extensive and
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RATIOS USED FOR ANALYSIS OF FINANCIAL STATEMENTS
Liquidity Ratios:
THE BEST SOLDIER DOES NOT ATTACK. THE SUPERIOR FIGHTER SUCCEEDS WITHOUT
VIOLENCE. THE GREATEST CONQUEROR WINS WITHOUT A STRUGGLE. THE MOST
SUCCESSFUL MANAGER LEADS WITHOUT DICTATING. THIS IS CALLED MASTERY OF MEN.
LAO-TSU
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Profitability Ratios:
Return on Assets Net Income + Interest Expense x (1- Avg. Tax Rate)
Total Assets
Leverage Ratios:
Debt/Equity Total Debt
Total Stockholders Equity
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CPA Exam Essay on Analytical Procedures
Analytical procedures are evaluations of financial information made by a study of plausible relationships
among financial and nonfinancial data. Understanding and evaluating such relationships are essential to
the audit process.
The following financial statements were prepared by Holiday Manufacturing Co. for the year ended
December 31, 1995. Also presented are various financial statement ratios for Holiday as calculated from
the prior year's financial statements. Sales represent net credit sales. The total assets and the receivables
and inventory balances at December 31, 1995, were the same as at December 31, 1994.
ASSETS:
Cash $ 240,000
Receivables 400,000
Inventory 600,000
Total current assets $1,240,000
Plant and equipment - net 760,000
Total assets $2,000,000
Answers to this question which goes on for the next couple of pages:
1. H 11. A,B,E
2. E 12. A,B,E
3. K 13. P
4. G 14. L,P
5. D 15. H
6. T
7. P
8. N
9. U
10. A,B,D
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Holiday Manufacturing Co.
Income Statement
Year Ended December 31, 1995
Sales $3,000,000
Cost of goods sold
Material $800,000
Labor 700,000
Overhead 300,000 1,800,000
Gross margin $1,200,000
Selling expenses $240,000
General and administrative
expenses 300,000 540,000
Operating income $660,000
Less interest expense 40,000
Income before taxes $620,000
Less federal income taxes 220,000
Net income $400,000
Required
a. Items 1 through 9 represent financial ratios that the auditor calculated during the prior
year's audit. For each ratio, calculate the current's year's ratio from the financial
statements presented above. Select the answer from List A. Calculations should be
rounded, if necessary to the same number of places as the prior year's ratios. Answers
on the list may be selected once, more than once, or not at all.
Holiday Holiday
Mfg. Co Mfg. Co.
Ratio 12/31/95 12/31/94
1. Current ratio 2.5
2. Quick ratio 1.3
3. Accounts receivable turnover 5.5
4. Inventory turnover 2.5
5. Total asset turnover 1.2
6. Gross margin percentage 35%
7. Net operating margin percentage 25%
8. Times interest earned 10.3
9. Total debt to equity percentage 50%
10. Inventory turnover increased substantially from the prior year. (Select 3 explanations.)
11. Accounts receivable turnover decreased substantially from the prior year. (Select 3 explanations.)
12. Allowance for doubtful accounts increased from the prior year, but allowance for doubtful accounts
as a percentage of accounts receivable decreased from the prior year. (Select 3 explanations.)
13. Long-term debt increased from the prior year, but interest expense increased a larger-than-
proportionate amount than long-term debt. (Select 1 explanation.)
14. Operating income increased from the prior year, although the entity was less profitable than in the
prior year. (Select 2 explanations.)
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15. Gross margin percentage was unchanged from the prior year, although gross margin increased from
the prior year. (Select I explanation.)
List B--Explanations:
A. Items shipped on consignment during the last month of the year were recorded as sales.
B . A significant number of credit memos for returned merchandise that were issued during the last
month of the year were not recorded.
C. Year-end purchases of inventory were overstated by incorrectly including items received in the first
month of the subsequent year.
D. Year-end purchases of inventory were understated by incorrectly excluding items received before the
year-end.
E. A larger percentage of sales occurred during the last month of the year, as compared to the prior year.
F. A smaller percentage of sales occurred during the last month of the year, as compared to the prior
year.
G. The same percentage of sales occurred during the last month of the year, as compared to the prior
year.
H. Sales increased at the same percentage as cost of goods sold, as compared to the prior year.
I. Sales increased at a greater percentage than cost of goods sold increased, as compared to the prior
year.
J. Sales increased at a lower percentage than cost of goods sold increased, as compared to the prior
year.
K. Interest expense decreased, as compared to the prior year.
L. The effective income tax rate increased, as compared to the prior year.
M. The effective income tax rate decreased, as compared to the prior year.
N. Short-term borrowing was refinanced on a long-term basis at the same interest rate.
O. Short-term borrowing was refinanced on a long-term basis at lower interest rates.
P. Short-term borrowing was refinanced on a long-term basis at higher interest rates.
A. Working papers are the auditors collection of audit evidence and serve mainly to:
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1. Support the auditors opinion
C. Working papers provide documentation of the procedures applied, tests performed, information
obtained and conclusions reached.
D. The quality, type and content of working papers vary with the circumstances but should be
sufficient to show that accounting records reconcile with F/S and field work standards observed.
E. What are the factors affecting the auditors judgment about the quality, type and content of
working papers?
F. Who owns the Working Papers? What restriction is there regarding ownership?
However, must consider the confidentiality of the relationship with the client
H. Must have reasonable procedures safe custody of W/Ps and retain them as long as needed and as
I. W/Ps must allow an unrelated, experienced auditor to be able to determine 1) who performed
and reviewed 2) what work 3) when and 4) what conclusions were reached . (2nd partner review)
J. A final set of W/P must be completed by 45 days after the report release date (RRD) which is
called the documentation completion date. NOTHING CAN be taken out of the W/Ps after
that date; but info may be added. The W/Ps MUST BE RETAINED 7 YEARS after RRD.
L. The W/Ps must support the final conclusions, but also must include significant findings or issues
that are inconsistent with, or contradict, the final conclusions.
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How are working papers organized? CPA exam also classifies bank
recs, time budgets, attorneys letters
Current Years bank statements, review comments, and
Working Papers a copy of F/S as current year working papers.
((
*Specifically tested
on CPA exam.
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CPA Essay (estimated time--15 to 25 minutes)
The following Accounts Receivable- Confirmation Statistics working paper (Indexed B-3) was prepared by an audit assistant during
the calendar year 1991 audit of Lewis County Water Co., Inc., a continuing audit client. The engagement supervisor is reviewing the
working papers.
Accounts Dollars
Number Percent Amount Percent
Confirmation Requests
Positives 54 2.7 $ 260,000 13.0%
Negatives 140 7.0% 20,000 10.0%
Total Sent 194 9.7% 280,000 23.0%
Accounts selected/client asked us not to confirm 6 0.3%
Total accounts receivable at 12/31/91, confirm date 200 10.0% $2,000,000 100.0%
RESULTS
Replies received through 2/25/92
Positives - no exception 44 C 2.2% 180,000 9.0%
Negative - did not reply or replied no exception 120 C 6.0% 16,000 .8%
Total confirmed without exception 164 8.2% 196,00 9.8%
Tickmark Legend
Agreed to accounts receivable subsidiary ledger
Agreed to general ledger and lead schedule
Includes one related party transaction
C Confirmed without exception, W/P B-4
CX Confirmed with exception, W/P B-5
Overall conclusion - The potential adjustment of $12,000 or .6% is below materiality threshold; therefore, the accounts receivable
balance is fairly stated.
Required: Describe the deficiencies in the working paper that the engagement supervisor should discover. Assume that the accounts
were selected for confirmation on the basis of a sample that was properly planned and documented on working paper B-2.
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Number 4 (Estimated time --- 15 to 25 minutes)
The following long-term debt working paper (index K-1) was prepared by client personnel and audited by AA, an audit assistant, Index K-1
during the calendar year 1988 audit of American Widgets, Inc., a continuing audit client. The engagement supervisor is reviewing Initials Date
the working papers thoroughly Prepared By AA 3/21/89
Approved By
American Widgets, Inc
WORKING PAPERS
DECEMBER 31, 1988
Accrued
Interest
Interest Balance 1988 1988 Balance Interest Payable
Lender Rate Payment Terms Collateral 12/31/87 Borrowings Reductions 12/31/88 paid to 12/31/88
First 12% Interest only on 25th Inventories $50,000 $300,000 A $100,000 $ 250,000 CX 12/25/88 $2,500 NR Dividend $80,000 paid 9/2/88
Commercial of the month, principal 1/31/88 6/30/88 (W/P N-3) violates a provision
Bank due in full 1/1/92; of the debt agreement which
no prepayment permits lender to demand immediate
penalty payment; lender has refused to
Lenders Prime Interest only on last 2nd Mortgage 100,000 50,000 A 200,000 C 12/31/88 Prime rate was 8% to 9% during the year
Capital plus 1% day of month, principal- on Park St. 2/29/88
Corp. pal due in full 3/5/90 Building
Gigantic 12% $5,000 principal 1st Mortgage 720,000 60,000 660,000 C 12/5/88 5,642 Reclassification entry for current portion
Building & plus interest due on on Park St. pro-posed (See RJE- 3)
Loan Assoc. 5th of month, due in Building
full 12/31/99
J. Lott, 0% Due in full 12/31/91 Unsecured 300,000 100,00 N 200,000 C Borrowed additional $100,000 from
majority 12/31/88 J. Lott on 1/7/89
stockholder _______ _______ ________ _________ ______
$1,170,000 $350,000 $260,000 $1,310,000 T/B $8,142 T/B
F F F F
Tickmark Legend
F Readded foots correctly Interest costs from long-term debt
C Confirmed without exception, W/P K-2 Interest expense for year $ 281, 333 T/B
CX Confirmed with exception, W/P K-3 Average loan balance outstanding $1,405, 667 R
NR Does not recompute correctly
A Agreed loan agreement, validated bank deposit ticket, and board of directors Five year maturities (for disclosure purposes)
authorization, W/P W-7 Year end 12/31/89 $ 60,000
Agreed to canceled checks and lenders monthly statements 12/31/90 260,000
N Agreed to cash disbursements journal and canceled check dated 12/28/88, clearing 1/8/89 12/31/91 260,000
T/B Traced to working trial balance 12/31/92 310,000
Agreed to 12/31/87 working papers 12/31/93 60,000
Agreed interest rate, term, and collateral to copy of note and loan agreement Thereafter 360,000
Agreed to canceled check and board of directors authorization, W/P W-7 $1,310,000
F
Overall conclusions
Long-term debt, accrued interest payable, and
interest expense are correct and complete at 12/31/88
Required: Identify the deficiencies in the working paper that the engagement supervisor should discover
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Long Term Debt A/R
The working paper contains the following The working paper contains the following
deficiencies: deficiencies:
1. The subject matter of the working paper is not 1. The working paper was not initialed and dated by the
properly indicated in the title. audit assistant.
2. There is no indication of any follow-up on the 2. Negative confirmations not returned cannot be
identified error in the accrued interest payable considered to be accounts confirmed without
computation. exception.
3. There is no indication whether the confirmation 3. The two positive confirmations that were sent but
exception was resolved. were unanswered are not accounted for.
4. The loan with the unwaived violation of a 4. There is no documentation of alternate procedures,
provision of the debt agreement is misclassified possible scope limitation, or other working paper
as long-term. reference for the six accounts selected for
confirmation that the client asked the auditor not to
confirm.
5. The liability activities of Lenders Capital 5. The dollar amount and percent of the six accounts
Corp. and the working paper totals do not selected for confirmation that the client asked the
crossfoot. auditor not to confirm is omitted from the :Dollars
columns for the Total selected for testing.
6. There is no indication or cross-referencing of 6. The Dollars-Percent for Confirmation Requests-
the stockholder loan to the related party Negatives is incorrectly calculated at 10%.
transactions working papers.
7. There is no investigation of the payment on the 7. There is no indication of follow-up or cross-
stockholder loan that was reborrowed soon referencing of the account confirmed - related party
after year-end. transaction.
8. There is no consideration of the need to impute 8. The tickmark is used but is not explained in the
interest expense on the 0% stockholder loan. tickmark legend.
9. There is no indication that the dates under 9. There is no explanation or proposed disposition of
interest paid to were audited. the 10 differences aggregating $12,000.
10. There is no indication that the unusually high 10. The overall conclusion reached is not appropriate.
average interest rate ($281,333/$1,406,667=
20%) was noted and investigated.
11. The working paper does not support the overall 11. There is no notation that a projection from the
conclusions expressed. sample to the population was made.
12. The tickmark R is used but not explained in 12. There is no reference to second requests.
the tickmark legend.
13. There is no indication that the working paper 13. Cross-referencing is incomplete, such as the 18
was prepared by client personnel. Differences reported and resolved, no adjustment
and Confirmation Requests to confirmation control
schedule.
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STANDARD TICKMARKS
Fudging resorted to. (We gave up, and therefore fudged the figures to
make them come out.
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AUDIT EVIDENCE CPA MULTIPLE CHOICE QUESTIONS
1. The following four statements were made in a discussion of audit evidence between two CPAs. Which
statement is not valid concerning evidential matter?
A. I am seldom convinced beyond all doubt with respect to all aspects of the statements being
examined.
B. I would not undertake that procedure because at best the results would only be persuasive and
Im looking for convincing evidence.
C. I evaluate the degree of risk involved in deciding the kind of evidence I will gather.
D. I evaluate the usefulness of the evidence I can obtain against the cost to obtain it.
2. Evidential matter supporting the financial statements consists of the underlying accounting data and all
corroborating information available to the auditor. Which of the following is an example of corroborating
information?
A. Minutes of meetings C. Accounting manuals
B. General and subsidiary ledgers D. Clients supporting worksheets
3. From which of the following evidence-gathering audit procedures would an auditor obtain most assurance
concerning the existence of inventories?
A. Observation of physical inventory counts.
B. Written inventory representations from management.
C. Confirmation of inventories in a public warehouse.
D. Auditors recomputation of inventory extensions.
4. During the course of an audit engagement an auditor prepares and accumulates audit working papers. The
primary purpose of the audit working papers is to
A. Show that an adequate audit was performed to support the auditors opinion.
B. Support the underlying concepts included in the preparation of the basic financial statements.
C. Aid the auditor in adequately planning the work.
D. Provide a point of reference for future audit engagements.
5. Which of the following best describes the element of relative risk which underlies the application of
generally accepted auditing standards, particularly the standards of field work and reporting?
A. Inventories may require more attention by the auditor on an engagement for a merchandising
enterprise than on an engagement for a public utility.
B. The scope of the examination need not be expanded if errors that arouse suspicion of fraud are of
relatively insignificant amounts.
C. Intercompany transactions are usually subject to less detailed scrutiny than arms length
transactions with outside parties.
D. Cash audit work may have to be carried out in a more conclusive manner than inventory audit
work.
6. One reason why the independent auditor performs analytical procedures of the clients operations is to
identify
A. Weaknesses of a material nature in the internal control structure.
B. Noncompliance with prescribed control procedures.
C. Improper separation of accounting and other financial duties.
D. Unusual transactions.
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7. Which of the following situations has the best chance of being detected when a CPA compares 1996
revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage?
A. An increase in property tax rates has not been recognized in the companys 1996 accrual.
B. The cashier began lapping accounts receivable in 1996.
C. Because of worsening economic conditions, the 1996 provision for uncollectible accounts was
inadequate.
D. The company changed its capitalization policy for small tools in 1996.
8. An auditor uses analytical procedures during the course of an audit. The most important phase of this
review is the
A. Computation of key ratios such as inventory turnover and gross profit percentages.
B. Investigation of significant variations and unusual relationships.
C. Comparison of client-computed statistics with industry data on a quarterly and full-year basis.
D. Examination of the client data that generated the statistics that are analyzed.
9. The auditor will most likely perform extensive tests for possible understatement of
A. Revenues. C. Liabilities.
B. Assets. D. Capital.
10. If the auditor was engaged to discover errors or irregularities and the auditor performed detailed work,
which of the following could the auditor be expected to detect?
A. Misposting of recorded transactions.
B. Unrecorded transactions.
C. Counterfeit signatures of paid checks.
D. Collusive fraud.
11. Which of the following is the least persuasive documentation in support of an auditors opinion?
A. Schedules of details of physical inventory counts conducted by the client.
B. Notation of inferences drawn from ratios and trends.
C. Notation of appraisers conclusions documented in the auditors working papers.
D. Lists of negative confirmation requests for which no response was received by the auditor.
12. Which of the following statements relating to the competence of evidential matter is always true?
A. Evidential matter gathered by an auditor from outside an enterprise is reliable.
B. Accounting data developed under satisfactory conditions of internal control are more relevant than
data developed under unsatisfactory internal control conditions.
C. Oral representations made by management are not valid evidence.
D. Evidence gathered by auditors must be both valid and relevant to be considered competent.
13. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the
following is least persuasive?
A. Vendors notice.
B. Bank statement obtained from client.
C. Computations made by the auditor.
D. Prenumbered client invoices.
14. Which of the following eliminates voluminous details from the auditors working trial balance by
classifying and summarizing similar or related items?
A. Account analyses. C. Control accounts.
B. Supporting schedules. D. Lead schedules.
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15. In planning an audit engagement, which of the following is a factor that affects the independent auditors
judgment as to the quantity, type and content of working papers?
A. The estimated occurrence rate of attributes.
B. The preliminary evaluations based upon initial substantive testing.
C. The content of the clients representation letter.
D. The anticipated nature of the auditors report.
16. Which of the following is not a primary purpose of audit working papers?
A. To coordinate the examination.
B. To assist in preparation of the audit report.
C. To support the financial statements.
D. To provide evidence of the audit work performed.
17. Which of the following factors will least affect the independent auditors judgment as to the quantity, type
and content of working papers desirable for a particular engagement?
A. Nature of the auditors report.
B. Nature of the financial statements, schedules or other information upon which the auditor is
reporting.
C. Need for supervision and review.
D. Number of personnel assigned to the audit.
18. An auditors working papers will generally be least likely to include documentation showing how the
A. Clients schedules were prepared.
B. Engagement had been planned.
C. Clients system of internal control had been reviewed and evaluated.
D. Unusual matters were resolved.
19. To test for unsupported entries in the ledger, the direction of audit testing should be from the
A. Ledger entries. C. Externally generated documents.
B. Journal entries. D. Original source documents.
21. The third standard of field work states that sufficient, competent evidential matter may in part be obtained
through inspection, observation, inquiries and confirmations to afford a reasonable basis for an opinion
regarding the financial statements under examination. The evidential matter required by this standard may
in part be obtained through
A. Auditor working papers.
B. Proper planning of the audit engagement.
C. Analytical procedures.
D. Review of the internal control system.
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23. An auditor testing long-term investments would ordinarily use analytical procedures to ascertain the
reasonableness of the
A. Existence of unrealized gains or losses in the portfolio.
B. Completeness of recorded investment income.
C. Classification between current and non-current portfolios.
D. Valuation of marketable equity securities.
24. As a result of analytical procedures, the independent auditor determines that the gross profit percentage has
declined from 30% in the preceding year to 20% in the current year. The auditor should
A. Express an opinion which is qualified due to inability of the client company to continue as a going
concern.
B. Evaluate managements performance in causing this decline.
C. Require footnote disclosure.
D. Consider the possibility of an error in the financial statements.
25. In which of the following instances would it be appropriate for the auditor to refer to the work of an
appraiser in the auditors report?
A. An unqualified opinion is expressed and the auditor wishes to place emphasis on the use of a
specialist.
B. A qualified opinion is expressed because of a major uncertainty unrelated to the work of the
appraiser.
C. An adverse opinion is based on a difference of opinion between the client and the appraiser as to
the value of certain assets.
D. A disclaimer of opinion is expressed due to a scope limitation imposed on the auditor by the
appraiser.
26. Which of the following would the accountant most likely investigate during the review of F/S of a
nonpublic entity if accounts receivable did not conform to a predictable pattern during the year?
A. Sales return and allowances. C. Sales of consigned goods.
B. Credit sales. D. Cash sales.
28. Which of the following statements is generally correct about the competence of evidential matter?
A. The auditors direct personal knowledge, obtained through observation and inspection, is more
persuasive than information obtained indirectly from independent outside sources.
B. To be competent, evidential matter must be either valid or relevant, but need not be both.
C. Accounting data alone may be considered sufficient, competent evidential matter to issue an
unqualified opinion of F/S.
D. Competence of evidential matter refers to the amount of corroborative evidence to be obtained.
29. An entitys F/S were misstated over a period of years due to large amounts of revenue being recorded in
journal entries that involved debits and credits to an illogical combination of accounts The auditor could
most likely have been alerted to this irregularity by
A. Scanning the general journal for unusual entries.
B. Performing a revenue cut-off test at year-end.
C. Tracing a sample of journal entries to the general ledger.
D. Examining documentary evidence of sales return and allowances recorded after year-end.
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MORE EVIDENCE
I. RELATED PARTY TRANSACTIONS (AU334)
Parent-subsidiary
Brother-Sister
Company-Officers
3. Selling REAL ESTATE at a price that differs significantly from its appraised value.
4. Making LOANS with no scheduled terms or plan for how the funds will be repaid.
No, but the auditor should be aware of the possible existence of material related party
transactions.
E. Are transactions with related parties assumed to be outside of the normal course of business?
F. Are related party transactions accounted for on a basis different than if the parties were unrelated:
23
I. What are the required audit procedures relative to related party transactions?
J. A qualified or adverse opinion may be issued in connection with a related party transaction if the
related party transaction is improperly accounted for, disclosed, or if the client represents that a
related party transaction was consummated on terms equivalent to those that prevail in an arms
length transaction.
A person (or firm) possessing special skill or knowledge in a particular field other than
accounting or auditing, e.g., actuaries, engineers, geologist.
B. An auditor employs a specialist to aid in gaining competent, evidential matter about the assertions
in the financial statements.
C. When selecting a specialist, the auditor should consider the reputation, professional certification or
license, and relationship to the client.
DONT mention the use of the specialist if you are issuing an unqualified opinion.
If you are issuing a modified opinion because of the specialists report, then you MAY make
reference to the specialist if you believe it facilitates understanding the modification.
Make sure the specialist understands the auditors corroborative use of the specialists
findings.
24
CONSIDERING THE USE OF AN OUTSIDE SPECIALIST
No
Yes No
25
III. AUDITING ACCOUNTING ESTIMATES (AU 342)
D. The auditors objectives regarding estimates are to determine that all estimates:
26
Examples of Accounting Estimates
The following are examples of accounting estimates that are included in financial statements. The list is presented for
information only, it should not be considered all-inclusive.
Receivables:
None of us can decideRevenues:
Uncollectible receivables
the length of our life, but we do make the
Airline passenger revenue
decisions which determine
Allowance for loan losses its width
Subscription income and its depth. Paul Harvey
Uncollectible pledges Freight and cargo revenue
Dues income
Inventories: Losses on sales contracts
Obsolete inventory
Net realizable value of inventories where future Contracts:
selling prices and future costs are involved Revenue to be earned
Losses on purchase commitments Costs to be incurred
Percent of completion
Financial instruments:
Valuation of securities Leases:
Trading versus investment security classification Initial direct costs
Probability of high correlation of a hedge Executory costs
Sales of securities with puts and calls Residual values
27
IV. CLIENT REPRESENTATION LETTERS (AU333)
An auditor MUST obtain written representations from management (FOR ALL F/S PERIODS COVERED
BY THE AUDITOR'S REPORT EVEN IF MGMT HAS CHANGED) as part of a GAAS audit, but it may
be limited to those matters that _____________________ and the ____________________ agree are material.
A. May written representations from the client substitute for audit procedures? _______________
Written representations from management document the oral representations made by management
during the engagement and reduce the chance of misunderstanding between the auditor and the client.
Evidence contradicting management's representations must be thoroughly investigated.
See Next Page for other representations , but the auditor also tailors the letter to include any
unique circumstances in the audit
28
CLIENT REPRESENTATIONS (AU 333, SAS 19)
GUARANTEES, whether written or oral, under which the entity is contingently liable.
Plans or INTENTIONS on the part of management that may affect either the carrying value or classification of
assets or liabilities.
**MANAGEMENT'S belief that the financial statements are fairly presented in conformity with GAAP.
** MANAGEMENT'S belief that the effects of any uncorrected misstatements, BOTH INDIVIDUALLY AND IN
THE AGGREGATE, are immaterial. Management IS REQUIRED to append a summary of all uncorrected
misstatements to the representation letter.
OTHER WRITTEN REPRESENTATIONS - The auditor may decide that other matters in addition to those
indicated above may require written representation. He should obtain written representations concerning unaudited
replacement cost information and interim financial information included in the audited financial statements.
NONCOMPLIANCE with aspects of contractual agreements that may affect the financial statements.
Other liabilities and gain or LOSS contingencies that are required to be accrued or disclosed by SFAS 5.
COMPLETENESS and availability of all minutes of meetings of stockholders, directors and committees of directs.
COMMUNICATIONS from regulatory agencies concerning noncompliance with, or deficiencies in, financial
reporting practices.
UNASSERTED claims or assessments that the clients legal counsel has advised are probable of assertion and must
be disclosed in accordance with SFAS 5.
**Management's acknowledgment of its RESPONSIBILITY that the financial statement presentations conform to
GAAP (or another comprehensive basis of accounting, e.g., cash basis).
VIOLATIONS of laws or regulations whose effects should be considered for disclosure in the F/S or as a basis for
recording a loss contingency.
Information concerning RELATED party transactions and related amounts receivable or payable.
29
IV. INQUIRY OF A CLIENTS LAWYER (AU337)
A. The auditor communicates with the clients lawyer regarding litigation, claims and assessment
(LCA) the client is involved in. The auditor is also concerned about possible contingencies.
EXISTENCE of LCA
PERIOD in which it occurred
PROBABILITY of loss
AMOUNT or range of loss
F. A letter of inquiry to a clients lawyer is required, but the inquiry can be limited to those matters
that the __________________ and the ______________ agree are material.
Also may limit response to those matters that the ____________________ and the
____________________ agree are material.
May limit response to matters to which substantive consultation or representation was
given.
H. If material LCAs are not on the list prepared by the client, the auditor should consider the
advisability of relying on managements other representations.
I. If the lawyer refuses to cooperate, this is a limitation on scope - results in a qualified opinion,
perhaps a disclaimer.
The lawyer might have resigned because his advise regarding the financial accounting
and reporting for LCAs was disregarded by the client.
30
K. What are some of the other required audit procedures?
1. Discuss with management the clients policies and procedures for identifying, evaluating
and accounting for LCAs.
2. Evaluate the LCAs that existed at balance sheet date and up until end of audit.
3. Examine appropriate documents relating to contingencies, including correspondence and
invoices from lawyers.
4. Obtain written assurance from management that they have disclosed all unasserted claims
the lawyers feel are probable of assertion and that must be disclosed in accordance with
GAAP.
definition of Controller
A person who passes as an exacting expert on the
basis of being able to turn out with prolific fortitude
infinite strings of incomprehensible figures
calculated with micrometric precision from what may
be vague assumptions which are based on debatable
facts carried out with machines of problematical
accuracy to the fourth decimal for the avowed
purpose of annoying and confounding that hapless
group of fanatics usually referred to as presidents
You seem to have the qualifications were looking
for in a bookkeeper
OPRAH WINFREY VIRUS: Your 200MB hard drive suddenly shrinks to 80MB and then slowly expands back to
200MB.
AT&T VIRUS: Every three minutes it tells you that great service you are getting.
MCI VIRUS: Every three minutes it reminds you that you are paying too much for the AT&T virus.
PAUL REVERE VIRUS: This revolutionary virus does not horse around. It warn you of impending hard disk attack---
once if by LAN, twice if by C:
POLITICALLY CORRECT VIRUS: Never calls itself a virus, but instead refers to itself as an electronic micro-
organism.
ROSS PEROT VIRUS: Activates every component in you system, just before the whole thing quits.
31
Number 5 (Estimated time 15 to 25 minutes)
Cole & Cole, CPAs, are auditing the financial statements of Consolidated Industries Co. for the year ended
December 31, 1992. On April 2, 1993, an inquiry letter to J.J. Young, Consolidateds outside attorney, was drafted to
corroborate the information furnished to Cole by management concerning pending and threatened litigation, claims
and assessments, and unasserted claims and assessments. On May 6, 1993, C.R. Brown, Consolidateds Chief
Financial Officer, gave Cole a draft of the inquiry letter below for Coles review before mailing it to Young.
Required:
Describe the omissions, ambiguities, and inappropriate statements and terminology in Browns letter below:
May 6, 1993
In connection with an audit of our financial statements at December 31,1992, and for the year then ended,
management of the Company has prepared, and furnished to our auditor, Cole & Cole, CPAs, 456 Broadway,
Anytown, USA, a description and evaluation of certain contingencies, including those set forth below involving
matters with respect to which you have been engaged and to which you have devoted substantive attention on behalf
of the Company in the form of legal consultation or representation. Your response should include matters that
existed at December 31, 1992. Because of the confidentiality of all these matters, your response may be limited.
In November 1992, an action was brought against the Company by an outside salesman alleging breach of contract
for sales commissions and pleading a second cause of action for accounting with respect to claims for fees and
commissions. The causes of action claims damages of $300,000, but the Company believes it has meritorious
defenses to the claims. The possible exposure of the Company to a successful judgement on behalf of the plaintiff is
slight.
In July 1988, an action was brought against the Company by Industrial Manufacturing Co. (Industrial) alleging
patent infringement and seeking damages of $20,000,000. The action in U.S. District Court resulted in a decision on
October 16, 1992, holding that the Company infringed seven Industrial patents and awarded damages of
$14,000,000. The Company vigorously denies these allegations and has filed an appeal with the U.S. Court of
Appeals for the Federal Circuit. The appeal process is expected to take approximately two years, but there is some
chance that Industrial may ultimately prevail.
Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing
information, including an explanation of these matters as to which your views may differ from those stated and an
identification of the omission of any pending or threatened litigation, claims, and assessments or a statement that the
list of such matters is complete. Your response may be quoted or referred to in the financial statements without
further correspondence with you.
You also consulted on various other matters considered pending or threatened litigation. However, you may not
comment on these matters because publicizing them may alert potential plaintiffs to the strengths of their cases. In
addition, various other matters probable of assertion that have some chance of an unfavorable outcome, as of
December 31, 1992, are unasserted claims and assessments.
C.R. Brown
Chief Financial Officer
32
Answer 5 (10 points)
The omissions, ambiguities, and inappropriate statements and terminology in Browns letter are as follows:
1. The action that Consolidated intends to take concerning each suit (for example, to contest the matter vigorously,
to seek an out-of-court settlement, or to appeal an adverse decision) is omitted.
4. An estimate, if one can be made, of the amount or range of potential loss of each case is omitted.
5. The various other pending or threatened litigation on which Young was consulted is not identified.
6. The unasserted claims and assessments probable of assertion that have a reasonable possibility of an
unfavorable outcome are not identified.
10. Young in not requested to identify the nature of and reasons for any limited response.
11. Young is not requested to include matters that existed after December 31, 1992, up to the date of Youngs
response.
13. The reference to Youngs response possibly being referred to in the financial statements is inappropriate.
14. Vague terminology such as slight/ some chance is included where "remote/ possible" is more appropriate.
15. There is no inquiry about any unpaid or unbilled charges, services, or disbursements.
33
LETTER SUMMARY
Type of Engagement Client Representation Management Letter Letters for Lawyers
Letter Letter (issued for Under- Letter (also called a (I/C Letter) Underwriters Letter
standing with the Client) management rep letter) (Comfort Letters) *
What Documents and confirms Summarizes the most Written summary of Provides comfort as to Client prepares a list of
the nature of the audit important oral reportable conditions and financial information for claims, litigations, and
engagement to be representations made material weaknesses of underwriters who wish to assessments that is
performed by the auditor. during the engagement. internal control. perform investigations on corroborated by the clients
registration statements. lawyers.
Who Engagement letters are Client representation Management letters are Letters for underwriters Lawyer letters are written
written by the auditor, letters are written by the written and signed by the are written by the auditor by management and sent
signed by the client. client (but drafted by the auditors. for the client, underwriter, by the auditor to the
auditor); dated as of the or both. clients legal counsel and
last day of fieldwork. returned to the auditor.
When Submitted to the client Obtained from the client at Prepared by the auditor Dated on or before the Submitted prior to the end
prior to the client prior to the conclusion of the after their review of registration statement date; of the engagement.
the engagement. examination. internal control. DOES NOT repeat the
audit opinion.
Examples: Outlines the All financial records Personnel at individual Letter identifies Pending or threatened
objectives and scope of have been made stores fail to prepare Financial Statements litigation
the audit. available to the receiving reports for Data examined Unasserted claims
Outlines the extent of auditors. shipments of goods from Registration Assessments
the auditor responsibility Financial statements wholesalers. statements
Outlines the tests and are complete and SEC compliance
procedures to be prepared in conformity
performed with GAAP. * In a SEC prospectus,
Illegal acts have been the auditor is considered
disclosed. an expert in auditing and
accounting.
Why The auditor needs an Confirm in writing oral The letter serves as a Provides additional A letter to the clients legal
understanding with the representations made by valuable reference information to the counsel is the auditors
client as to the nature of management, reduces the document for the client underwriter concerning primary means of
services to be performed. likelihood of and may also serve to CPAs independence obtaining evidence
Preferably it should be in misunderstandings. Not a minimize the auditors Compliance with SEC regarding pending and
writing and signed by the substitute for other audit legal liability in the event requirements threatened litigation.
client and the CPA. procedures. of a lawsuit. Unaudited statements,
etc.
34
MORE EVIDENCE CPA MULTIPLE CHOICE QUESTIONS
1. The refusal of a clients attorney to provide a representation on the legality of a particular act committed by
the client is generally
a. Sufficient reason to issue an adverse opinion.
b. Considered to be a scope limitation.
c. Insufficient reason to modify the auditors report due to the attorneys obligation of confidentiality.
d. Proper ground to withdraw from the engagement.
2. Which of the following procedures would an auditor most likely perform to obtain evidence about an
entitys subsequent events?
a. Reconcile bank activity for the month after the B/S date with cash activity reflected in the
accounting records.
b. Examine on a test basis the purchase invoices and receiving reports for several days after the
inventory date.
c. Review the treasurers monthly reports on temporary investments owned, purchased and sold.
d. Obtain a letter from the entitys attorney describing any pending litigation, unasserted claims, or
loss contingencies.
3. Auditors often request that the audit client send a letter of inquiry to those attorneys who have been
consulted with respect to litigation, claims or assessments. The primary reason for this request is to provide
the auditor with
a. An estimate of the dollar amount of the problem loss.
b. An expert opinion as to whether a loss is possible, probable or remote.
c. Information concerning the progress of cases to date.
d. Corroborative evidential matter.
4. A lawyers response to an auditors request for information concerning litigation, claims and assessments
will ordinarily contain which of the following?
a. An explanation of any limitations on the scope of the response.
b. A statement of concurrence with the clients determination of which unasserted possible claims
warrant specification.
c. Confidential information which would be prejudicial to the clients defense if publicized.
d. An assertion that the list of unasserted possible claims identified by the client represents all such
claims of which the lawyer may be aware.
5. The letter of audit inquiry addressed to the clients legal counsel would not ordinarily be
a. Sent to a lawyer who was engaged by the audit client during the year and soon thereafter resigned
the engagement.
b. A source of corroboration of the information originally obtained from management concerning
litigation, claims and assessments.
c. Limited to references concerning only pending or threatened litigation with respect to which the
lawyer has been engaged.
d. Needed during the audit of clients whose securities are not registered with the SEC.
6. When obtaining evidence regarding litigation against a client, the CPA would be least interested in
determining
a. An estimate of when the matter will be resolved.
b. The period in which the underlying cause of the litigation occurred.
c. The probability of an unfavorable outcome.
d. An estimate of the potential loss.
35
7. A lawyer limits a response concerning a litigated claim because the lawyer is unable to determine the
likelihood of an unfavorable outcome. Which type of opinion should the auditor express if the litigation is
adequately disclosed and the range of potential loss is material in relation to the clients F/S considered as a
whole?
a. Adverse. c. Qualified
b. Unaudited. d. Unqualified.
8. An attorney is responding to an independent auditor as a result of the audit clients letter of inquiry. The
attorney may appropriately limit the response to
a. Asserted claims and litigation.
b. Matters to which the attorney has given substantive attention in the form of legal consultation or
representation.
c. Asserted, overtly threatened, or pending claims and litigation.
d. Items which have an extremely high probability of being resolved to the clients detriment.
9. Which of the following material events occurring subsequent to the December 31, 1983, balance sheet
would not ordinarily results in an adjustment to the F/S before they are issued on March 2, 1984.
a. Write-off of a receivable from a debtor who had suffered from deteriorating financial condition for
the past six years. The debtor filed for bankruptcy on January 23, 1984.
b. Acquisition of a subsidiary on January 23, 1984. Negotiations had begun in December of 1983.
c. Settlement of extended litigation on January 23, 1984, in excess of the recorded year-end liability.
d. A reverse 3 for 1 stock split on January 23, 1984.
10. Which of the following would not necessarily be a related party transaction?
a. Sales to another corporation with a similar name.
b. Purchases from another corporation that is controlled by the corporations chief stockholder.
c. Loan from the corporation to a major stockholder.
d. Sales of land to the corporation by the spouse of a director.
11. For a reporting entity that has participated in related party transactions that are material, disclosure in the
financial statement should include
a. The nature of the relationship and the terms and manner of settlement.
b. Details of the transactions with major classifications.
c. A statement to the effect that a transaction was consummated on terms that would have been
obtained if the transaction had been with an unrelated party.
d. A reference to deficiencies in the entitys I/C structure.
12. Which of the audit procedures listed below would be least likely to disclose the existence of related party
transactions
a. Reading conflict-of-interest statements obtained by the client from its management.
b. Scanning accounting records for large transactions at or just prior to the end of the period under
audit.
c. Inspecting invoices from law firms.
d. Confirming large purchase and sales transactions with the vendors and/or customers involved.
13. An example of a transaction which may be indicative of the existence of related parties is
a. Borrowing or lending at a rate of interest which equals the current market rate.
b. Selling real estate at a price that is comparable to its appraised value.
c. Making large loans with specified terms as to when or how the funds will be repaid.
d. Exchanging property for similar property in a nonmonetary transaction.
36
14. An independent auditor finds that Simner Corporation occupies office space, at no charge, in an office
building owned by a shareholder. This finding indicates the existence of
a. Management fraud. c. Window dressing.
b. Related party transactions. d. Weak internal control.
15. If management refuses to furnish certain written representations that the auditor believes are essential,
which of the following is appropriate?
a. The auditor can rely on oral evidence relating to the matter as a basis for an unqualified opinion.
b. The clients refusal does not constitute a scope limitation that may lead to a modification of the
opinion.
c. This may have an effect on the auditors ability to rely on other representations of management.
d. The auditor should issue an adverse opinion because of managements refusal.
16. Which of the following statements is correct concerning related party transactions?
a. In the absence of evidence to the contrary, related party transactions should be assumed to be
outside the ordinary course of business.
b. An auditor should determine whether a particular transaction would have occurred if the parties
had not been related.
c. An auditor should substantiate that RPTs were consummated on terms equivalent to those that
prevail in arms-length transactions.
d. The audit procedures directed toward identifying RPTs should include considering whether
transactions are occurring but are not being given proper accounting recognition.
17. Which of the following procedures would an auditor most likely rely on to verify managements assertion
of completeness?
a. Review standard bank confirmations for indications of kiting.
b. Compare a sample of shipping documents to related sales invoices.
c. Observe the clients distribution of payroll checks.
d. Confirm a sample of recorded receivables by direct communication with the debtors.
19. Managements refusal to furnish a written representation which the auditor considers essential constitutes
a. Prima facie evidence that the financial statements are not represented fairly.
b. A violation of the Foreign Corrupt Practices Act.
c. An uncertainty sufficient to preclude an unqualified opinion.
d. A scope limitation sufficient to preclude an unqualified opinion.
20. The date of the management representation letter should coincide with the
a. Date of the auditors report.
b. Balance sheet date.
c. Date of the latest subsequent event referred to in the notes to the financial statements.
d. Date of the engagement agreement.
22. The audit inquiry letter to the clients legal counsel should be mailed only by the
37
a. Client after the auditor has reviewed it for appropriate content.
b. Auditor after preparation by the client and review by the auditor.
c. Auditors attorney after preparation by the client and review by the auditor.
d. Client after review by the auditors attorney.
23. Which of the following is not an audit procedure which the independent auditor would perform with
respect to LCAs?
a. Inquire of and discuss with management the policies and procedures adopted for identifying,
evaluating and accounting LCAs.
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 it has disclosed all unasserted claims that the lawyer has
advised are probable of assertion and must be disclosed.
d. Confirm with the clients lawyer that all claims have been recorded in the financial statements.
24. Which of the following subsequent events might require an adjustment to the clients financial statement?
a. A business combination with another company.
b. Loss on the sale of a closely-held investment.
c. Loss of plant and equipment due to a fire.
d. Retirement of bonds payable at a loss.
25. Jones, CPA, examined the 1983 financial statements of Ray Corp. and issued an unqualified opinion on
March 10, 1984. On April 2, 1984, Jones became aware of a 1983 transaction that may materially affect
the 1983 financial statements. This transaction would have been investigated had it come to Jones
attention during the course of the examination. Jones should
a. Take no action because an auditor is not responsible for events subsequent to the issuance of the
auditors report.
b. Contact Rays management and request their cooperation in the investigation of the matter.
c. Request that Rays management disclose the possible effects of the newly discovered transaction
by adding an unaudited footnote to the 1983 financial statements.
d. Contact all parties who might rely upon the financial statements and advise them that the financial
statements are misleading.
26. After discovering that a RPT exists, the auditor should be aware that
a. The substance of the transaction could be significantly different than its form.
b. The adequacy of disclosure of the transaction is secondary to its legal form.
c. The transaction is assumed to be outside the ordinary course of business.
d. Financial Statements should recognize the legal form of the transactions rather than its substance.
27. An auditor who is determining the scope of work to be performed concerning possible related party
transactions should
a. Assume that transactions with related party transactions are outside the ordinary course of
business.
b. Determine whether transactions with related party transactions would have taken place if the
parties had not been related.
c. Obtain an understanding of management responsibilities and the relationship of each of the parties
to the total entity.
d. Establish a basis of accounting principles different from that which would have been appropriate
had the parties not been related.
38
28. As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more
work on individual accounts to
a. Find smaller errors.
b. Find larger errors.
c. Increase the tolerable error in the accounts.
d. Decrease the risk of overreliance.
29. When considering the use of managements written representations as audit evidence about the
completeness assertion, an auditor should understand that such representations
a. Complement, but do not replace, substantive tests designed to support the assertion.
b. Constitute sufficient evidence to support the assertion when considered in combination with
reliance on internal controls.
c. Are not part of the evidential matter considered to support the assertion.
d. Replace reliance on internal controls as evidence to support the assertion.
30. Which of the following statements ordinarily is included among the written client representations obtained
by the auditor?
a. Sufficient evidential matter has been made available to permit the issuance of an unqualified
opinion.
b. Compensating balances and other arrangements involving restrictions on cash balances have been
disclosed.
c. Management acknowledges responsibility or illegal actions committed by employees.
d. Management acknowledges that there are no material weaknesses internal control.
39