Audit Evidence
Help Questions
CPA Auditing and Attestation (AUD) › Audit Evidence
In a nonissuer audit, you are testing completeness of accrued liabilities. Management provides an accrual listing prepared from the general ledger and asserts it includes all accruals; however, you noted significant post-year-end invoices and recurring late vendor billings. Which procedure provides the most reliable evidence to support completeness of accruals?
Reduce testing because post-year-end invoices relate to the next period and do not affect year-end accruals.
Perform a search for unrecorded liabilities by examining subsequent disbursements, unmatched receiving reports, and vendor statements, and evaluate cutoff around year-end.
Agree the accrual listing totals to the general ledger and conclude completeness is supported.
Obtain a management representation that all liabilities have been recorded and treat it as sufficient evidence.
Explanation
AU-C 450 for nonissuers requires auditors to obtain sufficient appropriate audit evidence to support the completeness assertion for accrued liabilities, emphasizing procedures that address the risk of understatement. The key facts here include management's accrual listing, their assertion of completeness, and the auditor's observation of significant post-year-end invoices and recurring late vendor billings, which indicate a risk of unrecorded liabilities. Performing a search for unrecorded liabilities by examining subsequent disbursements, unmatched receiving reports, vendor statements, and evaluating cutoff aligns with AU-C 330, as it provides substantive evidence to detect omissions in accruals by identifying liabilities that existed at year-end but were recorded later. Agreeing the accrual listing totals to the general ledger (choice A) only confirms accuracy of recorded amounts but does not address completeness, per AU-C 500, which distinguishes between tests of details and substantive procedures for existence versus completeness. Relying solely on a management representation (choice C) is insufficient under AU-C 580, as representations are not a substitute for other audit evidence, and reducing testing based on post-year-end invoices (choice D) ignores the cutoff risk outlined in AU-C 330, potentially leading to misstatement. A transferable framework for auditors is to prioritize substantive procedures like subsequent events testing when indicators of incompleteness are present, ensuring evidence is both relevant and reliable. Professional judgment should weigh the persuasiveness of evidence against identified risks, always corroborating management assertions with independent verification.
You are the auditor of a nonissuer in a financial statement audit. Management provides a spreadsheet of year-end inventory quantities compiled from periodic counts, and internal control over inventory count sheets is weak (count tags are not prenumbered and there is no independent review). Which procedure provides the most reliable evidence about the existence assertion for inventory at year-end?
Inquire of the warehouse manager about whether all inventory on hand was included in the count.
Inspect management’s inventory compilation spreadsheet for formulas and recalculate extensions for a sample of items.
Observe the physical inventory count (or perform test counts) at year-end and reconcile test counts to the final inventory listing.
Perform analytical procedures by comparing gross margin percentages to the prior year and investigating significant fluctuations.
Explanation
AU-C 500 establishes that audit evidence obtained through direct observation provides more reliable evidence than inquiry or analytical procedures, particularly for existence assertions. The key fact is that internal control over inventory counts is weak (no prenumbered tags, no independent review), making physical observation critical. Observing the physical inventory count and reconciling test counts to the final listing (Option B) provides direct evidence that inventory physically exists at year-end, addressing the existence assertion through the auditor's direct personal knowledge. Option A tests mathematical accuracy but not physical existence; Option C relies on inquiry which is the least reliable form of evidence; Option D provides indirect evidence through analytics that may indicate issues but doesn't confirm physical existence. When testing existence assertions for tangible assets with weak controls, auditors should prioritize direct observation and physical inspection over indirect procedures. The professional judgment framework is: for existence of physical assets, rank evidence reliability as observation > inspection of documents > analytical procedures > inquiry.
You are performing an issuer audit and considering whether audit evidence obtained from a service organization is appropriate. The service organization provides a SOC report covering relevant controls, but the report period ends three months before the client’s year-end and there is no bridge letter. Which factor would most likely affect the auditor's assessment of evidence sufficiency?
Whether the auditor can assume controls remained unchanged because the service organization is reputable.
The gap between the SOC report period and the client’s year-end, requiring procedures to address the intervening period (e.g., bridge letter, additional testing, or other evidence).
Whether management believes the service organization’s controls are strong.
Whether the SOC report uses the same font and formatting as prior-year reports.
Explanation
PCAOB AS 2501 for issuers requires auditors to evaluate the sufficiency and appropriateness of audit evidence from service organizations, particularly when relying on SOC reports for controls relevant to the audit. The key facts include the SOC report covering relevant controls but ending three months before the client’s year-end, with no bridge letter provided, creating a coverage gap that impacts evidence reliability. The gap necessitates additional procedures like obtaining a bridge letter or performing testing for the intervening period, aligning with AS 2501 and AU-C 402, which emphasize the need for evidence covering the entire period under audit to support control reliance. Checking font and formatting consistency (choice A) is irrelevant to evidence sufficiency under AS 1105, as it does not address control effectiveness or period coverage. Relying on management's belief in control strength (choice C) or assuming no changes due to reputation (choice D) violates AS 2301, which prohibits unsubstantiated assumptions and requires corroborative evidence beyond assertions. Auditors should apply a decision rule to assess SOC report coverage gaps by determining if the uncovered period poses material risks, then designing procedures to bridge it. This framework ensures professional judgment focuses on obtaining evidence that is timely, relevant, and sufficient for the full audit period.
You are auditing an issuer under PCAOB standards. The company’s cash balance is material and held at multiple banks, including a foreign bank in a high-risk jurisdiction. Management provides monthly bank statements downloaded from online banking portals and asks the audit team not to send confirmations to “avoid delays.” Which procedure provides the most reliable evidence regarding the existence and rights assertions for cash?
Obtain a management representation that all bank accounts are owned by the issuer and that balances are fairly stated.
Rely on internal audit’s walkthrough documentation of the cash reconciliation process as the primary evidence for cash existence.
Obtain bank confirmations directly from the financial institutions (including the foreign bank) and reconcile confirmed balances to the general ledger.
Inspect the client-provided online bank statements and agree the ending balances to the cash account in the general ledger.
Explanation
AS 2301 (PCAOB) establishes that evidence obtained directly by the auditor is more reliable than evidence obtained indirectly, and evidence from independent sources outside the entity is more reliable than that from within. The critical fact is material cash held at multiple banks including a foreign bank in a high-risk jurisdiction, with management discouraging confirmations. Obtaining bank confirmations directly from financial institutions (Option A) provides the most reliable evidence for both existence and rights assertions because it comes from independent third parties with direct knowledge of the account. Option B relies on client-provided documents which could be altered; Option C uses management representations which cannot substitute for substantive evidence; Option D inappropriately relies on internal audit for primary evidence on material balances. For cash balances, especially in high-risk jurisdictions, direct confirmation is the gold standard. The decision framework is: for material cash balances, always obtain direct confirmations from financial institutions regardless of management preferences, as this provides the highest reliability evidence for existence and rights assertions.
In an issuer financial statement audit, you use data analytics to test journal entries for potential management override. The complete population of journal entries was extracted by management’s IT analyst and provided as a flat file; you observed that the file lacks system-generated record counts and the extraction query was not retained. Which factor would most likely affect the auditor's assessment of evidence sufficiency?
Whether the auditor performed interim testing of controls over journal entry approval earlier in the year, eliminating the need to validate the extraction.
The inability to validate completeness and accuracy of the journal entry population used for analytics, requiring additional procedures over the data extraction.
Whether the analytics tool used by the auditor is commercially available and widely used in the profession.
Whether management is willing to sign a representation letter that the extracted file includes all journal entries.
Explanation
This question tests PCAOB AS 2315, which requires auditors to assess the sufficiency of evidence from data analytics in issuer audits. The key facts include a management-extracted journal entry file lacking validation like record counts or retained queries, impacting completeness and accuracy. Option B aligns with AS 1105 by highlighting the need to validate data populations for analytics, requiring additional procedures over extraction. Option A is incorrect as AS 1215 focuses on evidence reliability, not tool popularity; Option C is wrong because AS 2405 states representations do not substitute for testing; Option D is incorrect under AS 2301 as interim controls testing does not eliminate year-end validation needs. Options A, C, and D overlook data integrity issues. A judgment framework is to always verify the completeness and accuracy of data used in analytics by reconciling to source systems. This ensures analytical procedures provide persuasive evidence for risk areas like management override.
In an audit of a nonissuer, you identified a significant risk related to accounts receivable existence due to aggressive revenue incentives. You mailed positive confirmations but received a low response rate, and management suggests you accept the nonresponses as implied confirmation because customers rarely reply. Which factor would most likely affect the auditor’s assessment of evidence sufficiency for accounts receivable existence?
Whether management is willing to provide a representation letter stating that all receivables exist at year-end.
Whether alternative procedures (such as examining subsequent cash receipts and shipping documents) provide evidence comparable to confirmations for the nonresponses.
Whether the auditor can reduce substantive testing because confirmations were mailed, regardless of response rate.
Whether the auditor can treat the low response rate as a scope limitation requiring an immediate disclaimer of opinion.
Explanation
AU-C 505 addresses external confirmations and requires auditors to perform alternative procedures when confirmations are not received, evaluating whether such procedures provide sufficient appropriate evidence. The key circumstance is a significant risk related to accounts receivable existence with a low confirmation response rate, making alternative procedures critical. Whether alternative procedures provide evidence comparable to confirmations (Option A) directly addresses the sufficiency of audit evidence for the existence assertion when direct confirmation is unavailable. Option B incorrectly suggests management representations can substitute for substantive evidence; Option C misunderstands that sending confirmations alone doesn't reduce testing requirements without responses; Option D incorrectly jumps to scope limitation without considering alternative procedures. For significant risks, auditors must obtain persuasive evidence through alternative means when confirmations fail. The professional framework is: when confirmation response rates are low for significant risks, evaluate whether alternative procedures (subsequent receipts, shipping documents, customer orders) provide evidence of comparable quality and sufficiency to meet the planned level of assurance.
You are auditing a nonissuer and testing the completeness and cutoff of accounts payable. The client’s controls over vendor master file changes are weak, and the accounts payable listing is generated from the system; management provides a PDF export of the year-end listing. Which procedure provides the most reliable evidence for identifying unrecorded liabilities at year-end?
Trace a sample of amounts from the accounts payable listing to approved vendor invoices to confirm amounts are supported.
Recalculate the mathematical accuracy of the PDF export totals and agree the total to the general ledger.
Reduce substantive testing because weak controls indicate higher control risk, which allows reliance on management’s listing for completeness.
Perform a search for unrecorded liabilities by examining subsequent cash disbursements, unmatched receiving reports, and vendor statements, and reconcile exceptions to the year-end accounts payable balance.
Explanation
AU-C 500 establishes that the completeness assertion for liabilities requires procedures designed to detect unrecorded obligations, particularly when controls are weak. The critical fact is weak controls over vendor master file changes, increasing the risk of unrecorded liabilities at year-end. Performing a search for unrecorded liabilities through subsequent disbursements, unmatched receiving reports, and vendor statements (Option B) specifically targets the completeness assertion by looking for evidence of obligations that exist but weren't recorded. Option A tests recorded amounts but not completeness; Option C only verifies mathematical accuracy; Option D incorrectly suggests weak controls reduce rather than increase substantive testing needs. For accounts payable completeness with weak controls, searching beyond recorded amounts is essential. The decision framework is: when testing completeness of liabilities with weak controls, always perform searches using subsequent payments, unmatched documents, and third-party statements rather than relying solely on client-provided listings.
You are auditing a nonissuer and have identified elevated fraud risk in payroll due to prior findings of ghost employees. The payroll population consists of 3,200 employees across multiple locations, and you plan to test payroll disbursements for occurrence. What is the most appropriate method for ensuring evidence sufficiency when selecting items for substantive testing?
Select a risk-focused sample that targets higher-risk items (for example, new hires, terminated employees still paid, manual checks, and employees with duplicate bank accounts) and increase sample size as needed.
Rely on inquiry of human resources personnel regarding hiring and termination controls rather than performing substantive testing.
Test only one pay period selected at random because payroll is recurring and results can be projected to the full year without additional work.
Use haphazard selection of a small number of payroll transactions because it is faster and avoids bias.
Explanation
AU-C 530 on audit sampling requires auditors to design samples that provide a reasonable basis for conclusions, with sample selection methods and sizes appropriate to the specific audit objective and risk assessment. The critical fact is elevated fraud risk due to prior ghost employee findings, requiring targeted testing approaches. Risk-focused sampling targeting higher-risk items like new hires, terminated employees, and duplicate accounts (Option B) directly addresses the identified fraud risk while allowing for increased sample size based on findings. Option A uses haphazard selection which may miss fraud patterns; Option C inadequately tests only one period for a year-long fraud risk; Option D relies on inquiry alone which is insufficient for fraud risks. When fraud risk is elevated, sampling must specifically target risk indicators. The professional framework is: for elevated fraud risks, use directed sampling focusing on high-risk characteristics and transactions, with sample sizes responsive to findings, rather than random or limited selection methods.
In an audit of a nonissuer, you are testing the valuation of a complex Level 3 investment measured at fair value. Management provides a valuation memo prepared by an outside specialist engaged and paid by the company, and the memo includes unobservable inputs that significantly affect the estimate. Based on the circumstances, which response is most appropriate for evaluating evidence reliability?
Rely primarily on management’s representation letter because valuation is inherently subjective and cannot be audited with persuasive evidence.
Treat the use of a management-engaged specialist as a lack of auditor independence and withdraw from the engagement.
Accept the specialist’s memo as sufficiently reliable because it was prepared by a third party and includes detailed calculations.
Evaluate the specialist’s competence and objectivity, understand the methods and significant assumptions used, and, if needed, develop an independent estimate or involve the auditor’s specialist.
Explanation
AU-C 500 addresses using the work of management's specialist and requires auditors to evaluate the competence, capabilities, and objectivity of the specialist, as well as understand their work sufficiently to use it as audit evidence. The key fact is a Level 3 investment with unobservable inputs valued by a management-engaged specialist, creating both complexity and potential bias concerns. Evaluating the specialist's competence and objectivity, understanding methods and assumptions, and potentially developing an independent estimate (Option B) properly addresses the reliability concerns for this complex estimate. Option A fails to consider potential bias and assumption reasonableness; Option C inappropriately relies on representations for complex estimates; Option D misunderstands that using management's specialist doesn't impair auditor independence. For Level 3 fair values, professional skepticism requires thorough evaluation of specialist work. The decision framework is: when auditing complex estimates prepared by management's specialist, always evaluate competence/objectivity, understand and test key assumptions, and consider developing an independent estimate or engaging an auditor's specialist for material amounts.
In a nonissuer audit, you are evaluating the allowance for credit losses. Management’s model uses historical loss rates but did not adjust for a recent downturn affecting the entity’s key customer base; internal controls over the model are limited. Which procedure provides the most reliable evidence to support the reasonableness of management’s estimate?
Agree the historical loss rates to prior-year workpapers and conclude the estimate is reasonable.
Perform a retrospective review of prior estimates versus actual write-offs and develop an independent expectation incorporating current economic conditions and customer-specific risk.
Reduce substantive procedures because the allowance is an estimate and cannot be audited with evidence.
Rely on management’s representation that the downturn is temporary and does not require adjustments.
Explanation
This question tests AU-C Section 540, which requires evidence for credit loss allowances in nonissuer audits. The key facts include unadjusted historical rates despite downturns and limited controls. Option B aligns with AU-C 540 by performing retrospective reviews and independent expectations. Option A is incorrect as AU-C 540 requires current assessment; Option C is wrong because AU-C 580 limits representations; Option D is incorrect under AU-C 330 as estimates require testing. Options A, C, and D lack independence. A rule is to incorporate external factors in estimate testing. Auditors should use hindsight analysis for reasonableness.