CPA Quiz: Audit Evidence

20 questions · exam conditions

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Audit EvidenceQuestion 1 of 20

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?

Agree the accrual listing totals to the general ledger and conclude completeness is supported.

Perform a search for unrecorded liabilities by examining subsequent disbursements, unmatched receiving reports, and vendor statements, and evaluate cutoff around year-end.

Obtain a management representation that all liabilities have been recorded and treat it as sufficient evidence.

Reduce testing because post-year-end invoices relate to the next period and do not affect year-end accruals.

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CPA Quiz

CPA Quiz: Audit Evidence

Practice Audit Evidence in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Audit Evidence, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Agree the accrual listing totals to the general ledger and conclude completeness is supported.
Perform a search for unrecorded liabilities by examining subsequent disbursements, unmatched receiving reports, and vendor statements, and evaluate cutoff around year-end. (correct answer)
Obtain a management representation that all liabilities have been recorded and treat it as sufficient evidence.
Reduce testing because post-year-end invoices relate to the next period and do not affect year-end accruals.

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.

Question 2

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?

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. (correct answer)
Inquire of the warehouse manager about whether all inventory on hand was included in the count.
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.

Question 3

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 SOC report uses the same font and formatting as prior-year reports.
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). (correct answer)
Whether management believes the service organization's controls are strong.
Whether the auditor can assume controls remained unchanged because the service organization is reputable.

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.

Question 4

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 bank confirmations directly from the financial institutions (including the foreign bank) and reconcile confirmed balances to the general ledger. (correct answer)
Inspect the client-provided online bank statements and agree the ending balances to the cash account in the general ledger.
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.

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.

Question 5

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 analytics tool used by the auditor is commercially available and widely used in the profession.
The inability to validate completeness and accuracy of the journal entry population used for analytics, requiring additional procedures over the data extraction. (correct answer)
Whether management is willing to sign a representation letter that the extracted file includes all journal entries.
Whether the auditor performed interim testing of controls over journal entry approval earlier in the year, eliminating the need to validate the extraction.

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.

Question 6

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 alternative procedures (such as examining subsequent cash receipts and shipping documents) provide evidence comparable to confirmations for the nonresponses. (correct answer)
Whether management is willing to provide a representation letter stating that all receivables exist at year-end.
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.

Question 7

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.
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. (correct answer)
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.

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.

Question 8

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?

Use haphazard selection of a small number of payroll transactions because it is faster and avoids bias.
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. (correct answer)
Test only one pay period selected at random because payroll is recurring and results can be projected to the full year without additional work.
Rely on inquiry of human resources personnel regarding hiring and termination controls rather than performing substantive testing.

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.

Question 9

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?

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. (correct answer)
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.

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.

Question 10

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. (correct answer)
Rely on management's representation that the downturn is temporary and does not require adjustments.
Reduce substantive procedures because the allowance is an estimate and cannot be audited with evidence.

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.

Question 11

In a nonissuer audit, you plan to use sampling to test the occurrence of sales transactions. The client has many small-dollar sales and a few large, manual invoices processed outside the standard system workflow; controls over manual invoices are weak. Which factor would most likely affect the auditor's assessment of evidence sufficiency?

Whether the auditor uses monetary-unit sampling versus haphazard selection for the entire population, without considering manual invoices separately.
The presence of a small number of high-risk, large manual invoices may require targeted testing (100% examination) in addition to sampling the routine population. (correct answer)
Whether the sales manager believes the manual invoices are immaterial.
Whether the auditor can reduce sample size because many transactions are automated.

Explanation: This question tests AU-C Section 530, which addresses sampling in nonissuer audits for transaction testing. The key facts include weak controls over large manual invoices separate from routine processes. Option B aligns with AU-C 530 by requiring targeted testing for high-risk items beyond general sampling. Option A is incorrect as AU-C 530 requires risk-based approaches, not uniform methods; Option C is wrong because AU-C 315 assesses risk objectively; Option D is incorrect under AU-C 530 as automation does not reduce testing for high-risk items. Options A, C, and D ignore stratification. A judgment rule is to stratify populations by risk for effective sampling. This ensures sufficient evidence for heterogeneous transaction classes.

Question 12

During a nonissuer audit, management provides scanned copies of vendor invoices to support significant purchases; the original invoices are not available, and the scans lack metadata indicating source and date of scanning. You also noted prior instances of altered documents. Based on the circumstances, which response is most appropriate for evaluating evidence reliability?

Treat scanned invoices as equivalent to original documents and accept them without further work.
Corroborate scanned invoices with external evidence such as vendor statements, confirmations, and proof of delivery, and evaluate controls over document retention and scanning. (correct answer)
Rely on inquiry of the purchasing manager because they approved the purchases.
Conclude the purchases are misstated and issue an adverse opinion without performing alternative procedures.

Explanation: This question tests AU-C Section 500, which requires assessing reliability of scanned documents in nonissuer audits. The key facts include unavailable originals, lacking metadata, and prior alterations. Option B aligns with AU-C 500 by corroborating with external evidence and evaluating controls. Option A is incorrect as AU-C 500 assesses scans for manipulation risk; Option C is wrong because AU-C 500 states inquiry is insufficient; Option D is incorrect under AU-C 705 as alternatives are needed before adverse opinions. Options A, C, and D undervalue risks. A transferable rule is to supplement scanned evidence with external corroboration. Auditors should evaluate document integrity in fraud-risk areas.

Question 13

You are auditing an issuer and have a scope limitation related to a foreign component auditor's inability to provide access to certain workpapers due to local restrictions. The component is material to the consolidated financial statements. What is the most appropriate method for ensuring evidence sufficiency at the group level?

Rely on the component auditor's oral summary of results and proceed with an unmodified opinion.
Perform additional group-level procedures to obtain sufficient appropriate evidence (e.g., direct testing at the component where possible, alternative evidence, or using another auditor), and evaluate the impact of any remaining scope limitation on the audit opinion. (correct answer)
Remove the component from consolidation for audit purposes to avoid the scope limitation.
Communicate the restriction only to management because it is an operational issue, not an audit issue.

Explanation: This question tests PCAOB AS 1201, which addresses group audits and scope limitations in issuer audits. The key facts include restricted access to material component workpapers due to local laws. Option B aligns with AS 1205 by performing additional procedures and evaluating opinion impacts under AS 3105. Option A is incorrect as AS 1201 requires review of documentation; Option C is wrong because AS 2101 prohibits arbitrary exclusions; Option D is incorrect under AS 2805 as limitations affect reporting. Options A, C, and D ignore sufficiency. A framework is to mitigate limitations with alternative evidence. Auditors should assess materiality and qualify opinions if unresolved.

Question 14

During a nonissuer financial statement audit, you select a sample of capital additions and note several items lack vendor invoices; management provides internally generated receiving logs and a fixed asset register entry as support. The entity has a history of misclassifying repairs as capital. Which procedure provides the most reliable evidence that the additions meet capitalization criteria?

Inspect the fixed asset register entry and conclude it is sufficient because it is part of the accounting records.
Inquire of the plant manager whether the additions improved capacity and document the response as primary evidence.
Inspect third-party vendor invoices (or contracts) and, when unavailable, obtain alternative external evidence such as supplier statements and perform physical inspection to corroborate nature and use. (correct answer)
Wait until the next audit cycle to test capitalization because the amounts are already recorded and depreciation will self-correct.

Explanation: This question tests AU-C Section 330, which requires substantive procedures for existence and valuation in nonissuer audits of fixed assets. The key facts include missing vendor invoices, reliance on internal logs, and history of misclassification. Option C aligns with AU-C 500 by prioritizing external evidence like invoices or physical inspection for capitalization criteria. Option A is incorrect as AU-C 500 requires corroboration beyond internal records; Option B is wrong because AU-C 500 states inquiry is low-reliability evidence; Option D is incorrect under AU-C 330 as deferral violates current-period testing. Options A, B, and D lack persuasiveness. A transferable rule is to seek external corroboration for additions in error-prone areas. This ensures evidence supports key assertions like occurrence and classification.

Question 15

You are the auditor of an issuer in an audit. The company uses a third-party pricing service to value thinly traded securities classified as Level 2, and management provides the pricing file and a memo stating the service is reputable. Controls over the valuation process include a monthly review of price exceptions, but documentation of the review is minimal. What type of evidence should the auditor prioritize when assessing the reliability of fair value measurements?

Management's memo about the pricing service's reputation as sufficient evidence of valuation accuracy.
Obtain an understanding of the pricing service methodology, evaluate inputs and assumptions, and corroborate a sample of prices to independent sources or observable market data where available. (correct answer)
Assume Level 2 prices are always observable and therefore require no substantive testing beyond agreeing to the pricing file.
Rely exclusively on internal control testing documentation from prior years because the pricing service has not changed.

Explanation: This question tests PCAOB AS 2501, which requires auditing fair value measurements in issuer audits. The key facts include Level 2 securities valued by a pricing service with minimal review documentation. Option B aligns with AS 2502 by evaluating methodology, inputs, and corroborating prices independently. Option A is incorrect as AS 2405 limits reliance on memos without testing; Option C is wrong because AS 2501 requires testing even for Level 2; Option D is incorrect under AS 2110 as prior controls do not suffice. Options A, C, and D undervalue substantive testing. A framework is to independently verify third-party valuations using market data. Auditors should assess inputs and perform sample testing for reliability.

Question 16

You are the auditor of an issuer and are completing the audit. A material legal contingency is disclosed, and management provides a summary prepared by the general counsel but refuses to allow the auditor to send a letter of inquiry to external legal counsel. Which factor would most likely affect the auditor's assessment of evidence sufficiency related to the contingency?

Whether the auditor can replace the legal inquiry with expanded analytical procedures over legal expense accounts.
Whether the refusal restricts access to audit evidence such that the auditor may have a scope limitation affecting the opinion, depending on materiality and pervasiveness. (correct answer)
Whether PCAOB standards allow the auditor to accept management's summary because it is prepared by an attorney employed by the company.
Whether the auditor should communicate the matter only to management because it relates to legal strategy.

Explanation: AS 2505 (PCAOB) addresses inquiries of client's lawyers concerning litigation, claims, and assessments, establishing this as a generally accepted audit procedure for obtaining evidence about legal contingencies. The critical fact is management's refusal to allow external legal counsel inquiry for a material contingency, potentially limiting the auditor's access to corroborating evidence. Whether the refusal creates a scope limitation affecting the audit opinion (Option B) correctly identifies the primary concern, as the auditor must evaluate if sufficient appropriate evidence can be obtained through other means. Option A incorrectly suggests analytical procedures can replace legal inquiries; Option C misunderstands that internal counsel summaries lack the independence of external counsel letters; Option D fails to recognize this as a potential scope limitation requiring those charged with governance involvement. For material legal contingencies, external counsel confirmation is often the only sufficient evidence source. The decision rule is: when management restricts external legal inquiries for material contingencies, evaluate whether this constitutes a scope limitation based on the availability and sufficiency of alternative evidence.

Question 17

In a financial statement audit of a nonissuer, you obtained audit evidence about subsequent events through the report date. Two days before the planned report release, you learn from a news article that the client's largest customer filed for bankruptcy before year-end, but management asserts the article is inaccurate and asks you to ignore it. What type of evidence should the auditor prioritize to address the potential impact on accounts receivable valuation?

External evidence corroborating the customer's financial condition (for example, bankruptcy filings, direct communication/confirmation with the customer or trustee, and subsequent cash receipts), and evaluate the need to adjust the allowance. (correct answer)
Management's oral explanation because it is obtained directly from those charged with preparing the financial statements.
A copy of the news article alone, because external media sources are always more reliable than client records.
An updated management representation letter, because it is sufficient audit evidence for all subsequent events.

Explanation: AU-C 560 requires auditors to perform procedures to identify subsequent events requiring adjustment or disclosure, and to obtain sufficient appropriate evidence when such events are identified. The key fact is learning about a major customer's potential bankruptcy before year-end but after fieldwork, with management disputing the information. External evidence corroborating the customer's financial condition such as bankruptcy filings, direct confirmation, and subsequent receipts analysis (Option A) provides the most reliable evidence to resolve the conflicting information and determine necessary adjustments. Option B relies on management's oral explanation which is insufficient given the contradiction; Option C suggests the article alone is sufficient without corroboration; Option D misunderstands that representations cannot substitute for substantive evidence on known issues. When subsequent event information conflicts with management assertions, independent corroboration is essential. The professional judgment framework is: for subsequent events affecting asset valuation, prioritize external corroborating evidence over management explanations, especially when information sources conflict.

Question 18

You are performing an audit of a nonissuer and are evaluating evidence over revenue. The client implemented a new point-of-sale system midyear; IT general controls over program changes are not effectively designed, but the system produces detailed sales reports used by management. Based on the circumstances, which response is most appropriate for evaluating evidence reliability from the system-generated sales reports?

Increase reliance on the system reports because management uses them to run the business, and perform only trend analytics on monthly sales.
Treat the system reports as highly reliable because they are electronically generated and therefore less susceptible to human error than manual reports.
Test the completeness and accuracy of the underlying data and relevant IT/application controls, or obtain corroborating evidence from independent sources (for example, shipping documents and cash receipts). (correct answer)
Rely on the system reports without further testing because PCAOB standards require extensive IT testing only for issuers.

Explanation: AU-C 500 requires auditors to evaluate the reliability of information produced by the entity's information system, considering both the source and nature of the information and the circumstances under which it is obtained. The critical fact is that IT general controls over program changes are not effectively designed, which directly impacts the reliability of system-generated reports. Testing the completeness and accuracy of underlying data and relevant IT/application controls, or obtaining corroborating evidence (Option C), properly addresses the reliability concerns by either establishing confidence in the system or finding alternative evidence. Option A incorrectly assumes management's use validates reliability; Option B wrongly equates electronic generation with accuracy when controls are weak; Option D misunderstands that both GAAS and PCAOB standards require appropriate evidence reliability regardless of issuer status. When IT general controls are weak, auditors must either test the specific reports used as evidence or corroborate with independent sources. The decision rule is: when relying on system-generated information with weak IT controls, always test completeness/accuracy of the specific reports or obtain corroborating evidence from independent sources.

Question 19

You are performing an audit of a nonissuer with significant cash disbursements. The entity's accounts payable clerk prepares vendor master file changes and also processes payments; management provides an internal report listing vendor changes and asserts it is complete. Which factor would most likely affect the auditor's assessment of evidence sufficiency?

The vendor change report is in PDF format rather than spreadsheet format.
The lack of segregation of duties increases risk of unauthorized vendor changes, requiring more persuasive evidence (e.g., independent approval and corroboration) to support assertions. (correct answer)
The auditor's ability to complete the audit within the reporting deadline.
Whether the entity is planning to implement a new enterprise system next year.

Explanation: This question tests AU-C Section 500, which requires assessing audit evidence sufficiency in nonissuer audits. The key facts include lack of segregation in vendor changes and payments, with a potentially incomplete internal report. Option B aligns with AU-C 315 by recognizing increased risk necessitating more persuasive evidence like independent approvals. Option A is incorrect as AU-C 500 focuses on content reliability, not format; Option C is wrong because AU-C 230 prioritizes evidence over deadlines; Option D is incorrect under AU-C 300 as future changes do not affect current evidence. Options A, C, and D ignore risk factors. A judgment framework is to increase evidence persuasiveness in areas with segregation weaknesses. Auditors should evaluate control deficiencies and adjust substantive testing accordingly.

Question 20

During an issuer audit, you identify a significant unusual transaction near year-end: the company sold receivables to a related party with recourse. Management provides the executed agreement and an internal memo concluding sale accounting is appropriate. Which procedure provides the most reliable evidence to support the presentation and disclosure assertions?

Rely on management's internal memo because it references the applicable accounting guidance.
Obtain direct confirmation from the related party of key terms (including recourse), inspect cash settlement, and evaluate whether the transaction meets the criteria for sale accounting and related-party disclosure. (correct answer)
Limit procedures to agreeing the transaction to the general ledger because classification is an accounting matter, not an audit matter.
Communicate the transaction directly to the Securities and Exchange Commission to obtain their view on sale accounting.

Explanation: This question tests PCAOB AS 2505, which requires evidence for related-party transactions in issuer audits. The key facts include a significant unusual transaction with recourse, supported by internal documents. Option B aligns with AS 2410 by confirming terms externally and evaluating accounting criteria. Option A is incorrect as AS 1105 requires testing beyond memos; Option C is wrong because AS 2110 includes classification in scope; Option D is incorrect under AS 2805 as SEC communication is not for accounting judgments. Options A, C, and D undervalue external evidence. A transferable rule is to corroborate related-party terms with direct confirmations. Auditors should assess substance over form using independent evidence.