Audit Evidence, Procedures and Documentation

Introduction

An audit conclusion is persuasive only when it is supported by evidence that is sufficient in quantity and appropriate in quality. Auditors do not normally prove every transaction or establish absolute certainty. Instead, they obtain reasonable assurance by designing and performing procedures that reduce audit risk to an acceptably low level and by documenting the basis for their conclusions.

Audit evidence includes information used by the auditor in arriving at the conclusions on which the audit opinion is based. It includes accounting records, underlying documents, information obtained from external sources, explanations provided by management and results generated by the auditor. Evidence is not limited to information that supports management’s assertions: contradictory evidence and the absence of expected evidence are also important.

This chapter explains how auditors evaluate evidence, select procedures, obtain evidence about financial-statement assertions and prepare documentation that permits an experienced auditor to understand the work performed and the conclusions reached. The discussion is based principally on the concepts in International Standards on Auditing (ISAs), especially ISA 500, Audit Evidence, ISA 230, Audit Documentation, ISA 505, External Confirmations, ISA 520, Analytical Procedures, and ISA 530, Audit Sampling. Local law and professional standards may impose additional requirements.

Learning Objectives

After studying this chapter, you should be able to:

1. Explain the meaning and role of audit evidence.
2. Distinguish evidence sufficiency from evidence appropriateness.
3. Evaluate the reliability of different sources and forms of evidence.
4. Select and perform inspection, observation, inquiry, confirmation, recalculation, reperformance and analytical procedures.
5. Link procedures to assertions, risks and audit objectives.
6. Assess contradictory evidence and determine when further work is required.
7. Prepare clear, complete and defensible audit documentation.
8. Recognise ethical, technological and governance issues affecting evidence.

1. Evidence, Assurance and Professional Judgement

1.1 Reasonable assurance rather than certainty

An audit provides reasonable assurance, not a guarantee that the financial statements are free from material misstatement. Reasonable assurance is a high, but not absolute, level of assurance. Limitations arise from sampling, the use of judgement, persuasive rather than conclusive evidence, management estimation and the possibility of collusion or sophisticated fraud.

Audit evidence supports conclusions about management’s assertions. An assertion is an implicit or explicit representation by management about the recognition, measurement, presentation and disclosure of information in the financial statements. Common assertions include:

• Occurrence: recorded transactions and events occurred and relate to the entity.
• Completeness: all transactions, balances and disclosures that should be recorded are included.
• Accuracy: amounts and other data have been recorded appropriately.
• Cut-off: transactions are recorded in the correct accounting period.
• Classification: items are recorded in the appropriate accounts.
• Existence: assets, liabilities and equity interests exist at the reporting date.
• Rights and obligations: the entity controls or has rights to assets, and liabilities are its obligations.
• Valuation and allocation: amounts are recorded at appropriate values and adjustments are allocated correctly.
• Presentation and disclosure: information is appropriately described, classified and understandable.

A procedure that is persuasive for one assertion may be weak for another. For example, inspecting a sales invoice may provide evidence that an invoice was recorded and calculated accurately, but it does not by itself prove that the goods were delivered or that all sales were recorded.

1.2 The audit-risk relationship

Auditors design evidence-gathering procedures in response to assessed risks. The traditional audit-risk model is expressed as:

where AR is audit risk, RMM is risk of material misstatement and DR is detection risk. Risk of material misstatement is commonly analysed as inherent risk multiplied by control risk, although modern risk standards emphasise separate assessment of inherent and control risks. The equation is a conceptual model, not a precise mechanical calculator. It assumes that the components represent related dimensions of risk and that the auditor can respond to assessed risk by changing the nature, timing and extent of procedures.

When assessed risk is higher, the auditor generally seeks more persuasive evidence, performs procedures closer to the reporting date, increases sample sizes or uses more effective procedures. For example, external confirmation may be preferred to an internally generated schedule when existence and rights are significant concerns.

2. Sufficiency, Appropriateness and Reliability

2.1 Sufficiency

Sufficiency is the measure of the quantity of evidence. The required quantity depends on the risk of material misstatement and the quality of evidence. Higher risk normally requires more evidence. Evidence of lower quality cannot always be compensated for simply by collecting a large volume of similar evidence.

Factors affecting sufficiency include:

• the assessed risk at the assertion level;
• the materiality of the item;
• the characteristics of the population, including expected error;
• the persuasiveness of available evidence;
• whether evidence is consistent or contradictory; and
• the auditor’s experience with the entity and its control environment.

There is no universal number of documents that constitutes sufficient evidence. A small number of highly reliable items may be more persuasive than a large number of internally generated documents that are subject to the same control weakness.

2.2 Appropriateness

Appropriateness is the measure of the quality of evidence. It consists principally of relevance and reliability.

Relevance means that evidence helps address the audit objective or assertion. Evidence must be relevant to the specific question being tested. A bank statement may be relevant to the existence of cash, but it may not establish whether all restrictions on the cash balance have been disclosed.

Reliability concerns the source and nature of evidence. General indicators of greater reliability include:

1. Evidence obtained directly by the auditor is generally more reliable than evidence obtained indirectly.
2. Evidence from independent external sources is generally more reliable than internally generated evidence.
3. Evidence generated within an effective control system is generally more reliable than evidence generated where controls are ineffective.
4. Original documents are generally more reliable than copies or informal reproductions, subject to the risk of alteration.
5. Written evidence is generally more reliable than oral representations, although written documents can also be misleading or incomplete.

These are tendencies, not absolute rules. An external document may be unreliable if the source lacks competence or independence. Conversely, an internally generated report may be reliable when controls over its preparation, access and change management are effective.

2.3 Persuasiveness and contradictory evidence

Auditors must evaluate evidence as a whole. Evidence that agrees with management’s explanation is not automatically sufficient. If an external confirmation conflicts with the ledger, the auditor should investigate the difference rather than select the evidence that is more convenient.

Contradictory evidence may indicate an error, a control deficiency, fraud, a limitation in the procedure or an unreliable source. The auditor should revise the risk assessment and perform additional procedures when necessary. A management representation cannot normally replace evidence that should reasonably be available from another source.

Evidence evaluation matrix

3. Audit Procedures and Their Uses

Audit procedures are selected according to the assertion, assessed risk, expected evidence and cost-benefit considerations. The principal procedures are inspection, observation, inquiry, external confirmation, recalculation, reperformance and analytical procedures. Tests of controls and substantive procedures may use several of these techniques.

3.1 Inspection

Inspection involves examining records, documents or tangible assets.

Inspection of records and documents may include contracts, invoices, purchase orders, goods-received notes, payroll records, board minutes, bank statements and legal correspondence. The auditor should consider who prepared the document, whether it is original, whether it was subject to controls and whether it relates to the relevant period.

Inspection can be performed in two directions:

• Vouching: selecting recorded transactions and tracing them back to supporting documents. This is commonly useful for existence or occurrence and can identify fictitious transactions.
• Tracing: selecting source documents and following them forward into the accounting records. This is commonly useful for completeness.

The direction of testing matters. Vouching recorded purchases to invoices does not test whether unrecorded purchases exist. Tracing receiving reports to the purchases journal addresses that completeness concern more directly.

Inspection of tangible assets provides evidence about existence and, sometimes, condition. It does not necessarily establish ownership, valuation or completeness. For example, seeing machinery confirms that an item is present but does not prove that the entity owns it or that it is recorded at the correct carrying amount.

3.2 Observation

Observation involves watching a process or procedure being performed by others. Examples include observing inventory counting, cash counts, control performance and segregation-of-duties procedures.

Observation provides evidence about performance at the time observed. Its limitation is that personnel may behave differently when being watched, and observation does not prove that the procedure operated consistently throughout the period. The auditor should document the time, location, people involved, procedures observed, test counts and exceptions.

During an inventory count, the auditor may observe whether count instructions are followed, inspect inventory condition, perform independent test counts and record the last and first goods-received and dispatch documents. Observation alone does not establish ownership or the absence of obsolete inventory.

3.3 Inquiry

Inquiry seeks information from knowledgeable persons inside or outside the entity. It may be written or oral and may involve management, accounting staff, legal advisers, production personnel or specialists.

Inquiry is useful for understanding processes, identifying unusual events and locating relevant records. It is generally less persuasive when used alone because the respondent may be uninformed, biased or motivated to provide a favourable answer. Important oral responses should be corroborated through inspection, observation, confirmation or analytical procedures. The auditor should document the respondent’s name and role, the questions asked, the responses and corroborating work.

3.4 External confirmation

External confirmation is evidence obtained through a direct response to the auditor from a third party. Common examples include confirmation of bank balances, trade receivables, investments, borrowings, legal terms and significant contract conditions.

The auditor should retain control over the confirmation process: selecting the confirming party, designing the request, sending it and receiving the response. Electronic responses require attention to the identity of the respondent and the security of transmission.

Positive confirmation requests ask the respondent to reply whether the information is correct or incorrect. Negative confirmations request a response only when the information is incorrect. Positive confirmations are generally more persuasive but may require more follow-up. Negative confirmations are appropriate only when assessed risk is low, many small balances are involved, respondents are expected to give attention to the requests and there is no reason to expect a substantial number of exceptions.

A non-response to a positive confirmation is not evidence that the balance is correct. The auditor should perform alternative procedures, such as examining subsequent cash receipts, shipping documents and sales invoices. If management refuses permission to send a confirmation, the auditor should investigate the reasons, assess their effect on risk and perform alternative procedures; an unreasonable refusal may indicate a scope limitation or fraud risk.

3.5 Recalculation

Recalculation involves checking the mathematical accuracy of documents or records. Examples include recomputing invoice totals, depreciation, interest, payroll deductions, inventory extensions and provisions.

Recalculation addresses numerical accuracy but not necessarily the underlying assumptions. Recomputing a warranty provision using management’s model does not establish that the estimated failure rate or expected repair cost is reasonable. The auditor must separately test the data and assumptions.

3.6 Reperformance

Reperformance is the auditor’s independent execution of procedures or controls originally performed as part of the entity’s internal control. Examples include independently reperforming a bank reconciliation, reperforming an aged receivables review or rerunning an automated calculation using validated data.

Reperformance is often strong evidence about whether a control operated effectively for the selected instance. It does not by itself establish consistent operation throughout the period. The auditor should consider the population, frequency of the control and sample selection.

3.7 Analytical procedures

Analytical procedures evaluate plausible relationships among financial and non-financial data. They include ratio analysis, trend analysis, reasonableness tests, comparisons with budgets and industry information, and investigation of unexpected relationships.

A basic gross-profit percentage is:

Here, gross profit and revenue must be measured on a consistent basis and for the same period. Analytical procedures are meaningful only when the data is reliable and the relationship is expected to be sufficiently stable.

Analytical procedures may be used at three stages:

1. Risk assessment: to identify unusual relationships or transactions.
2. Substantive testing: to obtain evidence about amounts, when expectations are sufficiently precise and differences can be investigated.
3. Overall review: to assess whether the financial statements are consistent with the auditor’s understanding of the entity.

A good substantive analytical procedure requires a precise expectation, reliable data, an appropriate threshold for investigation and adequate follow-up. For example, payroll expense may be estimated from the number of employees, average salary, months employed and known bonuses. A broad comparison of this year’s revenue with last year’s revenue may be too imprecise to support a conclusion where revenue is highly susceptible to fraud.

#### Worked example: analytical procedure

An entity reports revenue of £4,000,000 and gross profit of £1,000,000. The reported gross-profit percentage is:

The auditor’s expectation, based on approved prices, purchase costs and product mix, is 27%. If the investigation threshold is a difference of 1 percentage point, the 2-point difference requires investigation. Possible explanations include pricing changes, unrecorded purchase costs, incorrect inventory valuation, sales cut-off errors or an altered product mix. The analytical result is an indicator for further work, not proof of misstatement.

4. Designing Procedures Around Assertions

Effective audit work begins with the question: what could be materially wrong, and what evidence would address that risk? The following pattern is useful:

1. Identify the significant account or disclosure.
2. Identify relevant assertions.
3. Assess inherent and control risks.
4. Define the audit objective.
5. Select procedures that produce relevant and reliable evidence.
6. Determine timing, sample selection and extent.
7. Evaluate exceptions and contradictory evidence.
8. Conclude and document the reasoning.

Example: trade receivables

For trade receivables, existence is often tested by positive confirmations, subsequent cash receipts and shipping documents. Valuation may require testing ageing, customer credit history, subsequent receipts and the expected-credit-loss calculation. Completeness may be addressed by reconciling subsidiary records to the general ledger and tracing dispatch records to sales invoices. Rights may require inspection of factoring agreements and consideration of whether receivables have been pledged or transferred.

No single procedure covers all these assertions. A confirmation response may support existence and some details of rights, but it may not address collectability or completeness.

Sampling and selection

When the auditor tests less than 100% of a population, each sampled item should have a chance of selection, unless the auditor is deliberately selecting specific items for a particular purpose. Statistical sampling uses probability theory; non-statistical sampling uses professional judgement. Both approaches require a properly defined population and a sample appropriate to the audit objective.

The auditor may select:

• All items: often for a small population or high-value and high-risk items.
• Specific items: such as unusual, high-value or risk-prone transactions; this does not provide evidence about the remainder of the population.
• A representative sample: selected to permit conclusions about the population.

A sample exception should be evaluated in relation to its nature, cause and possible effect on the population. The auditor should not automatically ignore an error because it is below materiality or assume that one exception proves all items are misstated.

5. Audit Documentation

5.1 Purpose and content

Audit documentation is the record of audit procedures performed, relevant evidence obtained and conclusions reached. It is commonly called the working papers. Documentation serves several purposes:

• supports the auditor’s report;
• demonstrates compliance with professional standards and law;
• assists supervision, review and quality control;
• supports continuity when team members change;
• provides evidence of accountability; and
• helps plan future audits.

Documentation should be sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the nature, timing and extent of procedures; the results and evidence obtained; significant matters; professional judgements; and the conclusions reached. It is not necessary to record every thought or duplicate information that is clearly available elsewhere.

5.2 Characteristics of defensible documentation

High-quality documentation is:

• Complete: it covers significant risks, procedures, results and conclusions.
• Clear: another auditor can understand what was tested and why.
• Accurate: dates, amounts, references and descriptions agree with the evidence.
• Timely: it is prepared promptly rather than reconstructed later.
• Objective: it records exceptions and contradictory evidence, not only favourable results.
• Traceable: schedules are cross-referenced to the ledger, trial balance and source evidence.
• Secure: access, alteration and retention are controlled.

A conclusion such as “no issues noted” is weak unless the file explains the population, selection, procedure, results and basis for the conclusion. Documentation should identify the preparer and reviewer and include dates of preparation and review.

5.3 Typical working-paper structure

A well-organised file commonly includes:

1. planning and risk assessment;
2. materiality and audit strategy;
3. understanding and testing of internal controls;
4. lead schedules agreeing accounts to the trial balance;
5. substantive test schedules;
6. confirmations and alternative procedures;
7. estimates and specialist work;
8. analytical procedures;
9. summary of misstatements and uncorrected differences;
10. subsequent events and going concern work; and
11. completion checklists and the final conclusion.

The file should distinguish evidence obtained from management explanations, auditor-generated calculations and independent external evidence. Electronic audit files should preserve the identity of source documents, version history where relevant and evidence that review occurred.

5.4 Completion and retention

After the auditor’s report is issued, the audit file should be assembled and administrative changes completed within the period required by applicable standards and firm policy. Changes made after completion should not delete or obscure original evidence. Any addition should identify the reason, date and person responsible. Retention periods are governed by applicable law, professional standards and firm policy; confidentiality and data-protection obligations continue throughout retention and disposal.

6. Integrated Illustrative Case

Background

The following is a fictional illustrative case. Meridian Homeware Ltd sells electrical appliances through stores and an online platform. Revenue increased by 32% in the final month of the year, while cash collections and gross margin did not increase proportionately. Management explains that a promotional campaign caused the growth.

Problem

The audit team identifies risks relating to revenue occurrence, cut-off, completeness of liabilities and inventory valuation. The online system allows manual amendments to dispatch dates, and the year-end inventory count was performed by warehouse staff without independent review.

Analysis

The revenue increase may be genuine, but it may also reflect premature recognition or fictitious sales. A high-level analytical procedure is insufficient because the relationship between promotions, dispatches and returns is uncertain. The team therefore links procedures to assertions:

• select recorded year-end sales and inspect orders, dispatch evidence and customer acceptance;
• trace dispatch records before and after year-end into the sales ledger to test cut-off and completeness;
• confirm a sample of significant receivable balances;
• inspect subsequent cash receipts and credit notes;
• test system access logs and manual date amendments;
• attend the inventory count and perform independent test counts;
• inspect damaged and slow-moving goods and test the valuation provision;
• reconcile goods received before year-end to recorded purchases and unpaid invoices.

Approach and solution

The team maintains control over confirmations and follows up non-responses with subsequent-receipt testing. It identifies several sales recorded before dispatch and projects the error only after evaluating whether the sampled items represent a broader population. IT specialists extract system logs because the audit team cannot independently validate the completeness of the log data. The team also investigates a discrepancy between the warehouse count and the inventory listing rather than treating it as an isolated counting error.

Documentation records the original risk assessment, changes made after contradictory evidence, the population and sample-selection method, exceptions, management’s explanations, corroborating evidence and the final conclusions. Proposed adjustments are accumulated and evaluated against materiality, individually and in aggregate.

Outcome

The audit identifies premature revenue recognition, an understated returns provision and obsolete inventory. Management corrects the financial statements. The audit committee receives a report on weak access controls and inadequate review of inventory counts. The auditor concludes that evidence from confirmations, subsequent receipts, system testing, observation and substantive cut-off work is mutually reinforcing.

Learning points

The case demonstrates that:

• analytical anomalies should lead to targeted procedures;
• evidence must be designed for particular assertions;
• contradictory evidence changes the audit response;
• inquiry is stronger when corroborated;
• technology can create both audit evidence and new risks; and
• a defensible conclusion depends on documentation of reasoning, not merely a collection of attachments.

7. Professional, Ethical and Technological Considerations

Auditors must maintain professional scepticism and avoid confirmation bias. Familiarity with management, pressure to meet deadlines and reliance on prior-year working papers can cause the auditor to accept weak explanations. Ethical requirements concerning integrity, objectivity, professional competence, confidentiality and professional behaviour apply to evidence gathering and documentation.

Confidential client information should be accessed only for legitimate audit purposes and transmitted securely. Personal data in confirmations, payroll files and customer records must be handled in accordance with applicable privacy law.

Audit software can analyse complete populations, identify duplicate payments, scan journal entries and compare dates across systems. Data analytics may improve coverage but does not eliminate the need to assess data completeness, accuracy, extraction logic and access rights. A visually impressive exception report is not reliable evidence unless the auditor understands how it was generated.

Artificial intelligence may assist in classifying invoices, identifying unusual journal entries or summarising contracts. However, auditors remain responsible for professional judgements. AI-generated outputs may contain fabricated explanations, systematic bias or errors caused by incomplete data. The auditor should retain source evidence, validate the tool’s operation where relevant, protect confidential information and document how the output influenced the audit conclusion.

8. Challenges and Limitations

Evidence has several inherent limitations. Documents may be forged, confirmations may be intercepted, management representations may be biased, systems may be incomplete and automated controls may operate incorrectly after a software change. Evidence obtained at one date may not represent the entire period. Estimates involve uncertainty, and analytical relationships may change because of economic conditions or business strategy.

Cost is also relevant, but efficiency cannot justify an inappropriate reduction in audit quality. The appropriate response is to design procedures that are both targeted and persuasive. When sufficient appropriate evidence cannot be obtained, the auditor must consider the effect on the audit opinion rather than simply documenting the limitation and proceeding as if no issue existed.

Best-Practice Checklist

Before finalising an audit area, ask:

• What assertion and risk does each procedure address?
• Is the evidence sufficient and appropriate for that risk?
• Is the source independent, competent and reliable?
• Have I considered completeness as well as existence?
• Have I investigated exceptions and contradictory evidence?
• Is the sample population clearly defined?
• Can another experienced auditor understand the work without oral explanation?
• Are calculations, dates, cross-references and conclusions accurate?
• Has confidential information been protected?
• Does the documentation support the final conclusion and audit report?

Chapter Summary

Audit evidence is the information on which an auditor’s opinion is based. Its sufficiency concerns quantity, while its appropriateness concerns relevance and reliability. The auditor evaluates evidence in relation to assertions, assessed risks and materiality, recognising that reasonable assurance is persuasive rather than absolute.

Inspection, observation, inquiry, confirmation, recalculation, reperformance and analytical procedures serve different purposes. Vouching generally addresses recorded items and occurrence; tracing is particularly relevant to completeness; confirmation can provide strong external evidence; recalculation tests mathematical accuracy; reperformance tests the execution of controls; and analytical procedures evaluate plausible relationships. No procedure automatically addresses every assertion.

Sound audit work requires professional scepticism, attention to contradictory evidence, appropriate sampling and a response proportionate to risk. Audit documentation should clearly record the nature, timing and extent of procedures, evidence obtained, exceptions, judgements and conclusions. It must be timely, accurate, secure and understandable to an experienced auditor with no previous connection to the engagement. Technology and AI can expand audit coverage, but they introduce data-quality, confidentiality and reliability risks that remain the auditor’s responsibility.

Key Terms

Analytical procedures: Evaluation of plausible relationships among financial and non-financial data.

Assertion: Management’s implicit or explicit representation about information in the financial statements.

Audit documentation: The record of procedures performed, evidence obtained and conclusions reached.

Audit evidence: Information used by the auditor in forming audit conclusions.

Audit risk: The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated.

Completeness: The assertion that all items that should be recorded or disclosed are included.

Confirmation: Evidence obtained through a direct response from an independent third party.

Cut-off: Recording transactions in the correct accounting period.

External evidence: Information obtained directly from an independent outside source.

Inspection: Examination of records, documents or tangible assets.

Inquiry: Seeking information from knowledgeable persons.

Materiality: The significance of an omission or misstatement to users’ decisions.

Observation: Watching a process or procedure being performed by others.

Occurrence: The assertion that recorded transactions and events actually happened.

Professional scepticism: An alert and questioning mind that critically assesses audit evidence.

Recalculation: Checking the mathematical accuracy of documents or records.

Reperformance: Independent execution of a procedure or control originally performed by the entity.

Sufficiency: The quantity of audit evidence.

Appropriateness: The quality of audit evidence, including relevance and reliability.

Vouching: Tracing recorded transactions back to supporting evidence.

Review Questions

Short Answer Questions

1. Distinguish audit evidence sufficiency from appropriateness.
2. Why does tracing generally provide different evidence from vouching?
3. State two limitations of inquiry as an audit procedure.
4. What is the purpose of external confirmation?
5. Identify four characteristics of defensible audit documentation.

Long Answer Questions

1. Explain how the auditor evaluates the reliability of evidence from internal and external sources.
2. Discuss how audit procedures should be linked to financial-statement assertions, using trade receivables as an example.
3. Explain the purposes and limitations of analytical procedures at the risk-assessment, substantive-testing and overall-review stages.
4. Describe the content and quality characteristics required for audit documentation under a risk-based audit approach.
5. Discuss how professional scepticism, contradictory evidence and ethical responsibilities influence audit conclusions.

Analytical / Application Questions

1. An entity’s recorded revenue rises sharply in the final week of the year, but dispatches and cash receipts do not. Identify the relevant assertions and design a set of procedures addressing the risks.
2. A positive receivables confirmation is not returned, while management states that the customer agrees with the balance. Evaluate the evidence and propose appropriate alternative procedures.
3. During an inventory count, the auditor observes damaged goods omitted from the inventory listing and discovers that count sheets were prepared in advance. Analyse the implications for evidence reliability, risk assessment, further procedures and documentation.

Multiple Choice Questions with Answers

Question 1

Which characteristic of audit evidence refers primarily to its quantity?

A. Relevance

B. Sufficiency

C. Reliability

D. Independence

Correct Answer: B. Sufficiency

Question 2

Which procedure is most directly associated with testing the completeness of recorded purchases?

A. Vouching recorded purchases to invoices

B. Confirming bank balances

C. Tracing goods-received notes into the purchases journal

D. Observing a cash count

Correct Answer: C. Tracing goods-received notes into the purchases journal

Question 3

Which procedure involves independently carrying out a control originally performed by the entity?

A. Inquiry

B. Inspection

C. Reperformance

D. Confirmation

Correct Answer: C. Reperformance

Question 4

A positive confirmation request normally asks the respondent to:

A. Reply only if the information is incorrect

B. Confirm whether the information is correct or identify differences

C. Provide an oral explanation to management

D. Recalculate the auditor’s sample

Correct Answer: B. Confirm whether the information is correct or identify differences

Question 5

An auditor recalculates an interest expense amount. What is primarily being tested?

A. Mathematical accuracy

B. Ownership of the liability

C. Completeness of all suppliers

D. Adequacy of disclosure format

Correct Answer: A. Mathematical accuracy

Question 6

Reported revenue is £4,000,000 and gross profit is £1,000,000. What is the gross-profit percentage?

A. 4%

B. 20%

C. 25%

D. 40%

Correct Answer: C. 25%

Question 7

Which statement about observing an inventory count is correct?

A. It proves that all inventory is owned by the entity

B. It provides evidence about the count process at the time observed

C. It eliminates the need to test inventory valuation

D. It proves that no inventory is obsolete

Correct Answer: B. It provides evidence about the count process at the time observed

Question 8

What should an auditor generally do when evidence conflicts with management’s explanation?

A. Ignore the conflict if management is experienced

B. Select the evidence that supports management

C. Investigate the conflict and reconsider the risk assessment

D. Delete the conflicting evidence from the audit file

Correct Answer: C. Investigate the conflict and reconsider the risk assessment

Question 9

Which item is an essential feature of defensible audit documentation?

A. A conclusion without recording the procedure performed

B. Only management’s written representations

C. The nature, timing and extent of procedures and the conclusions reached

D. A record of every informal thought of every team member

Correct Answer: C. The nature, timing and extent of procedures and the conclusions reached

Question 10

Why may a non-response to a positive confirmation not be treated as evidence that a balance is correct?

A. The customer may not have received or considered the request

B. Positive confirmations are never permitted

C. Non-responses automatically prove fraud

D. The general ledger cannot contain receivables

Correct Answer: A. The customer may not have received or considered the request