3.0 Performing Further Procedures and Obtaining Evidence AUD Practice Quiz

• A. Entity-produced data (accounting records, transaction files, master files) and external data (market prices, third-party records, industry benchmarks)
• B. Data from the prior-year audit workpapers only, current-year data is prepared exclusively by management
• C. Data from regulatory agencies and government databases exclusively, entity-produced data is not reliable for audit purposes
• D. Oral representations from management and verbal confirmations from customers, documentary data is not required

AU-C Section 500 recognizes that audit evidence comes from two broad sources: (1) entity-produced data, including accounting records (general ledger, subsidiary ledgers), transaction files (purchase orders, invoices, receiving reports), master files (customer files, vendor files), and entity-prepared reports (aged receivables listings, inventory compilations); and (2) external data, including market prices from external data providers, industry benchmarks, confirmation responses from third parties, and regulatory filings. The auditor uses both types, evaluating the reliability of each based on its source and how it was obtained.

• A. Ask management to sign a written representation confirming that the data file is complete and accurate
• B. Randomly select 10 items from the file and verify them manually to the accounting records
• C. Reconcile the file's record counts and total dollar amounts to independently prepared control totals, such as summary reports from the entity's accounting system or the trial balance
• D. Accept the data file without testing since management prepared it using the same system used to prepare the financial statements

Reconciling record counts (total number of transactions in the file) and total dollar amounts to independent control totals, such as totals from the entity's accounting system summary reports, the trial balance, or bank statements, provides evidence that the file contains all records (completeness) and that the amounts are accurate (accuracy). If the file reconciles to these independently prepared totals, the auditor has reasonable assurance that the data is complete and accurate for audit use.

• A. To satisfy a regulatory disclosure requirement that data transformations be reported to the SEC
• B. To ensure that the analysis can be reproduced, reviewed, and understood by any experienced auditor reviewing the workpapers, and to demonstrate that transformations did not inadvertently exclude or misclassify transactions relevant to the procedure
• C. To provide evidence of the auditor's technical proficiency in data manipulation for quality control purposes
• D. Documentation is not required for data transformations since they are a preparatory step rather than an audit procedure

AU-C Section 230 requires the auditor to document audit procedures performed in sufficient detail to enable an experienced auditor with no prior connection to the engagement to understand the nature, timing, and extent of procedures. When data transformations are applied, documenting them serves to: (1) demonstrate that the analysis is reproducible and the conclusions are based on a specific, defined dataset; (2) show that the transformations were appropriate (the date filter captured the right period, the intercompany exclusion was correct, the aggregation logic was sound); and (3) reveal if any transformations inadvertently excluded records that should have been included or included records that should have been excluded, which would affect the validity of the analytical result.

• A. The effectiveness of the entity's controls over the preparation of accounting reports, including access controls, review procedures, and reconciliation of the aging report to the accounts receivable subsidiary ledger
• B. The age of the entity, older companies produce more reliable data because they have longer operating histories
• C. The number of customers on the aging report, reports with more customers are inherently more reliable because they represent a larger dataset
• D. Whether the report was prepared on a Saturday or a weekday, timing of preparation affects data reliability

AU-C Section 500 specifically notes that the reliability of internally generated information as audit evidence is affected by the effectiveness of the entity's controls over the preparation of that information. For an accounts receivable aging report, the relevant controls include: access controls (preventing unauthorized modification of the underlying receivables data); review procedures (supervisory review comparing the aging to prior periods and to supporting data); and reconciliation procedures (ensuring the aging report totals agree to the accounts receivable subsidiary ledger and general ledger). Strong controls over these processes increase the reliability of the aging report as audit evidence.

• A. Accept the photocopies as equivalent to originals since the amounts and vendor names appear consistent with other records
• B. Exclude the photocopied invoices from the test sample and use only original documents, resulting in a smaller effective sample size
• C. Document the observation and consider whether additional procedures are needed to corroborate the amounts represented by the photocopied invoices, for example, by obtaining confirmation from vendors or examining additional supporting documentation
• D. Discard the findings from all invoices and start the entire test over using a fresh sample

When original documents appear to have been replaced by photocopies, the auditor should: document the finding in the workpapers; investigate the reason for the substitution (were the originals lost or intentionally replaced?); apply professional skepticism, the substitution may indicate an attempt to alter or fabricate documentation; and perform additional corroborating procedures for the affected items, such as obtaining direct confirmation from the vendor of the amounts and transaction details, or examining alternative supporting documents (purchase orders, receiving reports, contract terms).

• A. Accept management's explanation without further testing since in-transit shipments are a common and reasonable explanation for confirmation differences
• B. Discard the confirmation response since a difference was found and the confirmation is therefore unreliable
• C. Investigate the $170,000 difference by examining shipping records (bills of lading, freight invoices, delivery confirmations) to determine whether the December shipments actually occurred and whether revenue was appropriately recognized at the shipping date
• D. Treat the entire $620,000 balance as uncollectible since the customer only acknowledges $450,000

A difference between the confirmed balance and the recorded balance does not mean the entire balance is uncollectible, the difference may reflect timing (in-transit items not yet received by the customer) rather than a collection risk. Treating the full balance as uncollectible would be an overreaction not supported by the evidence at hand.

• A. Population-based analytics reduces audit quality because it cannot evaluate the business purpose of individual entries as effectively as detailed sample testing
• B. Population-based analytics requires the auditor to obtain management approval for each entry reviewed, which is more time-consuming than sample selection
• C. There is no difference, data analytics and sample-based testing produce identical results for journal entry populations
• D. Population-based analytics identifies every entry exhibiting the specified risk characteristics across the entire population, allowing the auditor to focus investigation on the highest-risk entries; sample-based testing covers only a subset of entries and may miss high-risk entries not selected in the sample

Population-based analytics significantly improves the detection capability for entries with specific risk characteristics, it identifies all entries meeting the defined criteria, not just those that happened to be selected in a sample. This does not reduce audit quality, it enhances it. Evaluating the business purpose of specific high-risk entries identified by analytics is a follow-up procedure that the auditor performs after the analytics identify the flagged items.

• A. Proceeding is appropriate since 3.1% is below the auditor's materiality threshold and management has provided an explanation
• B. Proceeding is appropriate if the auditor reduces the sampling risk allowance by 3.1% to compensate for the missing population
• C. Proceeding is appropriate since management's explanation is plausible and the file represents 96.9% of the population
• D. Proceeding without resolving the $2.3 million discrepancy is inappropriate, the unreconciled population means the sampling results cannot be validly extrapolated to the full accounts payable balance; the auditor must investigate the discrepancy and either obtain a complete file or modify the audit approach

Audit sampling produces conclusions that are extrapolated from the sample to the entire defined population. If the population used for sampling (the file) is known to be incomplete by $2.3 million, the auditor's projected findings cannot be reliably extrapolated to the full accounts payable balance, the sampling results will systematically miss the unrepresented portion. The auditor must: obtain a complete file that reconciles to the trial balance; understand and verify the nature of the discrepancy (are the missing accruals legitimate year-end entries?); and either use a complete population or modify the approach to address the unrepresented items separately.