6
1. Chapter easy a 2. easy c
Multiple-Choice Questions
3. easy d 4. easy b 5. easy A 6. easy A
7. easy B
8. easy D 9. hard C
10. easy A 11. Easy C
The objective of the ordinary audit of financial statements is the expression of an opinion on: a. the fairness of the financial statements. b. the accuracy of the financial statements. c. the accuracy of the annual report. d. the balance sheet and income statement. If the auditor believes that the financial statements are not fairly stated or is unable to reach an conclusion because of insufficient evidence, the auditor: a. should withdraw from the engagement. b. should request an increase in audit fees so that more resources can be used to conduct the audit. c. has the responsibility of notifying financial statement users through the auditors report. d. should notify regulators of the circumstances. Auditors accumulate evidence to: a. defend themselves in the event of a lawsuit. b. justify the conclusions they have otherwise reached. c. satisfy the requirements of the Securities Acts of 1933 and 1934. d. enable them to reach conclusions about the fairness of the financial statements. The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the: a. board of directors. b. company management. c. financial statement auditor. d. companys internal audit department. The auditors best defense when material misstatements are not uncovered is to have conducted the audit: a. in accordance with auditing standards. b. as effectively as reasonably possible. c. in a timely manner. d. only after an adequate investigation of the management team. If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can: Issue an adverse audit Issue a qualified audit report report a. Yes Yes b. No No c. Yes No d. No Yes If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can do all but which of the following? a. Issue an adverse audit report. b. Issue a disclaimer of opinion. c. Withdraw from the engagement. d. Issue a qualified audit report. Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements? a. The auditor commonly examines a sample, rather than the entire population of transactions. b. Accounting presentations contain complex estimates which involve uncertainty. c. Fraudulently prepared financial statements are often difficult to detect. d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases. In certifying their annual financial statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of: a. GAAP. b. the Sarbanes-Oxley Act. c. the Securities Exchange Act of 1934. d. GAAS. Which of the following statements is most correct regarding errors and fraud? a. An error is unintentional, whereas fraud is intentional. b. Frauds occur more often than errors in financial statements. c. Errors are always fraud and frauds are always errors. d. Auditors have more responsibility for finding fraud than errors. Which of the following statements is true of a public companys financial statements? a. Sarbanes-Oxley requires the CEO only to certify the financial statements. b. Sarbanes-Oxley requires the CFO only to certify the financial statements. c. Sarbanes-Oxley requires the CEO and CFO to certify the financial statements. d. Sarbanes-Oxley neither requires the CEO nor the CFO to certify the financial statements.
12. Easy B 13. easy D 14. easy b 15. easy C
16. easy C 17. easy C 18. easy A 19. easy A 20. easy C 21. Med c
22. Med B 23. med A
Which of the following is not one of the three categories of assertions? a. Assertions about classes of transactions and events for the period under audit b. Assertions about financial statements and correspondence to GAAP c. Assertions about account balances at period end d. Assertions about presentation and disclosure If a short-term note payable is included in the accounts payable balance on the financial statement, there is a violation of the: a. completeness assertion. b. existence assertion. c. cutoff assertion. d. classification and understandability assertion. Professional skepticism requires auditors to possess a(n) ______ mind. a. introspective b. questioning c. intelligent d. unbelieving The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not ________ are detected. a. important to the financial statements b. statistically significant to the financial statements c. material to the financial statements d. identified by the client Fraudulent financial reporting is most likely to be committed by whom? a. Line employees of the company. b. Outside members of the companys board of directors. c. Company management. d. The companys auditors. Which of the following would most likely be deemed a direct-effect illegal act? a. Violation of federal employment laws. b. Violation of federal environmental regulations. c. Violation of federal income tax laws. d. Violation of civil rights laws. The concept of reasonable assurance indicates that the auditor is: a. not an insurer of the correctness of the financial statements. b. not responsible for the fairness of the financial statements. c. responsible only for issuing an opinion on the financial statements. d. responsible for finding all misstatements. Tests of details of balances are specific procedures intended to: a. test for monetary errors in the financial statements. b. prove that the accounts with material balances are classified correctly. c. prove that the trial balance is in balance. d. identify the details of the internal control system. Which of the following is the auditor least likely to do when aware of an illegal act? a. Discuss the matter with the clients legal counsel. b. Obtain evidence about the potential effect of the illegal act on the financial statements. c. Contact the local law enforcement officials regarding potential criminal wrongdoing. d. Consider the impact of the illegal act on the relationship with the companys management. The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are unlikely to mislead: a. investors. b. management. c. a prudent user. d. the reader. The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to: a. the auditor. b. management. c. both management and the auditor equally. d. management for the statements and the auditor for the notes. When engaged to audit the financial statements, it is acceptable for the auditor to draft: The clients financial statements The footnotes to the clients financial
24. med A
25. easy B
26. med D
27. med D 28. med A 29. hard C
30. Med C 31. med b
32. med A
33. med
statements a. Yes Yes b. No No c. Yes No d. No Yes The auditor has considerable responsibility for notifying users as to whether or not the statements are properly stated. This imposes upon the auditor a duty to: a. provide reasonable assurance that material misstatements will be detected. b. be a guarantor of the fairness in the statements. c. be equally responsible with management for the preparation of the financial statements. d. be an insurer of the fairness in the statements. The auditor should not assume that management is dishonest, but the possibility of dishonesty must be considered. This is an example of: a. unprofessional behavior. b. an attitude of professional skepticism. c. due diligence. d. a rule in the AICPAs Code of Professional Conduct. If the auditor were responsible for making certain that all of managements assertions in the financial statements were absolutely correct: a. bankruptcies could no longer occur. b. bankruptcies would be reduced to a very small number. c. audits would be much easier to complete. d. audits would not be economically feasible. The auditors best defense when existing material misstatements in the financial statements are not uncovered in the audit is: a. the audit was conducted in accordance with generally accepted accounting principles. b. the financial statements are the clients responsibility. c. the client is guilty of contributory negligence. d. the client is guilty of fraudulent misrepresentation. Fraudulent financial reporting is often called: a. management fraud. b. theft of assets. c. defalcation. d. embezzlement. Which of the following statements is usually true? a. It is easier for the auditor to uncover fraud than errors. b. It is easier for the auditor to uncover indirect-effect illegal acts than fraud. c. The auditors responsibility for detecting direct-effect illegal acts is similar to the responsibility to detect fraud. d. The auditors responsibility for detecting indirect-effect illegal acts is similar to the responsibility to detect fraud. Auditing standards make _____ distinction(s) between the auditors responsibilities for searching for errors and fraud. a. little b. a significant c. no d. various In comparing management fraud with employee fraud, the auditors risk of failing to discover the fraud is: a. greater for management fraud because managers are inherently more deceptive than employees. b. greater for management fraud because of managements ability to override existing internal controls. c. greater for employee fraud because of the higher crime rate among blue collar workers. d. greater for employee fraud because of the larger number of employees in the organization. Which of the following statements is correct with respect to the auditors responsibilities relative to the detection of indirect-effect illegal acts? a. The auditor has no responsibility for searching for indirect-effect illegal acts. b. The auditor has the same responsibility for searching for indirect-effect illegal acts as any other potential misstatement that may occur. c. Auditors have responsibility for searching for any illegal act, whether direct-effect or indirecteffect. d. Discovery of indirect-effect illegal acts is usually easier than discovery of fraud. When comparing the auditors responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility:
c
34 Med A 35. med D
a. more on discovering errors than employee fraud. b. more on discovering employee fraud than errors. c. equally on discovering either one. d. on the senior auditor for detecting errors and on the manager for detecting employee fraud. If several employees collude to falsify documents, the chance a normal audit would uncover such acts is: a. very low. b. very high. c. zero. d. none of the above. When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor should: a. include audit procedures which have a strong probability of detecting illegal acts. b. still include some audit procedures designed specifically to uncover illegalities. c. ignore the issue. d. make inquiries of management regarding their policies for detecting and preventing illegal acts and regarding their knowledge of violations, and then rely on normal audit procedures to detect errors, irregularities, and illegalities. When the auditor has reason to believe an illegal act has occurred, the auditor should: a. inquire of management only at one level below those likely to be involved with the illegality. b. begin communication with the FASB in accordance with PCAOB regulations. c. consider accumulating additional evidence to determine if there is actually an illegal act. d. withdraw from the engagement. When the auditor knows that an illegal act has occurred, the auditor must: a. report it to the proper governmental authorities. b. consider the effects on the financial statements, including the adequacy of disclosure. c. withdraw from the engagement. d. issue an adverse opinion. If an auditor uncovers an illegal act at a public company, the auditor must notify: a. local law enforcement officials. b. the Public Company Accounting Oversight Board. c. the Securities and Exchange Commission. d. all of the above. Why does the auditor divide the financial statements into smaller segments? a. Using the cycle approach makes the audit more manageable. b. Most accounts have few relationships with others and so it is more efficient to break the financial statements into smaller pieces. c. The cycle approach is used because auditing standards require it. d. All of the above are correct. Why does the auditor divide the financial statements into segments around the financial statement cycles? a. Most auditors are trained to audit cycles as opposed to entire financial statements. b. The approach aids in the assignment of tasks to different members of the audit team. c. The cycle approach is required by auditing standards. d. The cycle approach allows the auditor to detect indirect-effect illegal acts. The most important general ledger account included in and affecting several cycles is the: a. cash account. b. inventory account. c. income tax expense and liability accounts. d. retained earnings account. Management assertions are: a. implied or expressed representations about accounts, transactions, and disclosures in the financial statements. b. stated in the footnotes to the financial statements. c. explicitly expressed representations about the financial statements. d. provided to the auditor in the assertions letter, but are not disclosed on the financial statements. Which of the following statements is true? a. Audit objectives follow and are closely related to management assertions. b. Managements assertions follow and are closely related to the audit objectives. c. The auditors primary responsibility is to find and disclose fraudulent management assertions. d. Assertions about presentation and disclosure deal with whether the accounts have been included in the financial statements at appropriate amounts. Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each account balance?
36. med c 37. med b 38. med c 39. med a
40. med b
41. med a 42. med a
43. med a
44. med
b
a.
45. med c 46. med b 47. med b
The specific audit objectives are applicable to every account balance on the financial statements. b. The general audit objectives are applicable to every account balance on the financial statements. c. The general audit objectives are stated in terms tailored to the engagement. d. For any given class of transactions, usually only one audit objective must be met to conclude the transactions are properly recorded.. Which of the following statements about the existence and completeness assertions is not true? a. The existence and completeness assertions emphasize different audit concerns. b. Existence deals with overstatements and completeness deals with understatements. c. Existence deals with understatements and completeness deals with overstatements. d. The completeness assertion deals with unrecorded transactions. The occurrence assertion applies to _______. a. presentation and disclosure matters b. classes of transactions and events during the period c. account balances d. proper classification of income statement accounts Which of the following management assertions is not associated with transaction-related audit objectives? a. Occurrence b. Classification and understandability c. Accuracy d. Completeness Which of the following statements is not true? a. Balance-related audit objectives are applied to account balances. b. Transaction-related audit objectives are applied to classes of transactions. c. Balance-related audit objectives are applied to the ending balance in balance sheet accounts. d. Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts. In testing for cutoff, the objective is to determine: a. whether all of the current periods transactions are recorded. b. whether transactions are recorded in the correct accounting period. c. the proper cutoff between capitalizing and expensing expenditures. d. the proper cutoff between disclosing items in footnotes or in account balances. The detail tie-in objective is not concerned that the details in the account balance: a. agree with related subsidiary ledger amounts. b. are properly disclosed in accordance with GAAP. c. foot to the total in the account balance. d. agree with the total in the general ledger. The detail tie-in is part of the_______ assertion for account balances. a. classification b. valuation and allocation c. rights and obligations d. completeness Which of the following is not a proper match of a transaction-related audit objective and management assertion? a. Accuracy and cutoff. b. Classification and classification. c. Posting and summarization with accuracy. d. Occurrence and occurrence. Which of the following statements is not correct? a. There are many ways an auditor can accumulate evidence to meet overall audit objectives. b. Sufficient appropriate evidence must be accumulated to meet the auditors professional responsibility. c. It is appropriate to minimize the cost of accumulating evidence. d. Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects. Two overriding considerations affect the many ways an auditor can accumulate evidence: 1. Sufficient appropriate evidence must be accumulated to meet the auditors professional responsibility. 2. Cost of accumulating evidence should be minimized. In evaluating these considerations: a. the first is more important than the second.
48. med d
49. med b
50. med b 51. med b 52. med a
53. med d
54. med a
55. med b
56. med d
57. med c 58. med b
59. med a
60. med c
61. med b 62. med a
63. hard c
b. the second is more important than the first. c. they are equally important. d. it is impossible to prioritize them. If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control, assessing control risk, testing controls, and analytical procedures, then the auditor: a. can issue an unqualified opinion. b. can significantly reduce other substantive tests. c. can write the engagement letter. d. needs to perform additional tests of controls so that the assurance level can be increased. After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on: a. generally accepted auditing standards. b. the AICPAs Code of Professional Conduct. c. generally accepted accounting principles. d. the auditors professional judgment. Which of the following combinations is correct? a. Existence relates to whether the amounts in accounts are understated. b. Occurrence relates to whether balances exist. c. Existence relates to whether amounts included exist. d. Occurrence relates to whether the amounts in accounts occurred in the proper year. If an auditor conducted an audit in accordance with auditing standards, which of the following would the auditor likely detect? a. Unrecorded transactions. b. Incorrect postings of recorded transactions. c. Counterfeit signatures on paid checks. d. Fraud involving collusion. Which of the following statements best describes the auditors responsibility with respect to illegal acts that do not have a material effect on the clients financial statements? a. Generally, the auditor is under no obligation to notify parties other than personnel within the clients organization. b. Generally, the auditor is under an obligation to inform the PCAOB. c. Generally, the auditor is obligated to disclose the relevant facts in the auditors report. d. Generally, the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act. Which of the following statements best describes the auditors responsibility regarding the detection of fraud? a. The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter. b. The auditor must extend auditing procedures to actively search for evidence of fraud in all situations. c. The auditor must extend auditing procedures to actively search for evidence of fraud where the examination indicates that fraud may exist. d. The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued. The essence of the attest function is to: a. assure the consistent application of correct accounting procedures. b. determine whether the clients financial statements are fairly stated. c. examine individual transactions so that the auditor may certify as to their validity. d. detect collusion and fraud. The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of: a. transactions. b. authorizations. c. costs. d. cutoffs. The auditors evaluation of the likelihood of material employee fraud is normally done initially as a part of: a. tests of controls. b. tests of transactions. c. understanding the entitys internal control. d. the assessment of whether to accept the audit engagement. When using the cycle approach to segmenting the audit, the reason for treating capital acquisition and repayment separately from the acquisition of goods and services is that: a. the transactions are related to financing a company rather than to its operations.
64. hard c
b.
65. hard c 66. hard b 67. hard a 68. hard d
most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively. c. both a and b are correct. d. neither a nor b is correct. Illegal acts are defined in SAS 54 (AU217) as: a. violations of laws or government regulations. b. violations of laws or government regulations other than errors. c. violations of laws or government regulations other than fraud. d. violations of law which would result in the arrest of the perpetrator. Most illegal acts affect the financial statements: a. directly. b. only indirectly. c. both directly and indirectly. d. materially if direct; immaterially if indirect. With respect to the detection of illegal acts, auditing standards state that the auditor provides: a. no assurance that they will be detected. b. the same reasonable assurance provided for other items. c. assurance that they will be detected, if material. d. assurance that they will be detected, if highly material. In describing the cycle approach to segmenting an audit, which of the following statements is not true? a. b. c. All general ledger accounts and journals are included at least once. Some journals and general ledger accounts are included in more than one cycle. The capital acquisition and repayment cycle is closely related to the acquisition of goods and services and payment cycle. d. The inventory and warehousing cycle may be audited at any time during the engagement since it is unrelated to the other cycles. Which of the following journals would be included most often in the various audit cycles? a. Cash receipts journal. b. Cash disbursements journal. c. General journal. d. Sales journal. Transaction cycles begin and end: a. at the beginning and end of the fiscal period. b. each start of the annual audit. c. at January 1 and December 31. d. at the origin and final disposition of the company. After general audit objectives are understood, specific audit objectives for each account balance on the financial statements can be developed. Which of the following statements is true? a. There should be at least one specific objective for each relevant general objective. b. There will be only one specific objective for each relevant general objective. c. There will be many specific objectives developed for each relevant general objective. d. There must be one specific objective for each general objective. An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors or fraud and therefore should: a. plan and perform the engagement with an attitude of professional skepticism. b. not rely on internal controls that are designed to prevent or detect errors or fraud. c. design audit tests to detect unrecorded transactions. d. extend the work to audit most recorded transactions and records of an entity. Multiple-Choice Questions Auditors must make decisions regarding what evidence to gather and how much to accumulate. Which of the following is a decision that must be made by auditors related to evidence?
69. hard c 70. hard d 71. hard a
72. hard a
Chapter 7
1. Easy c
2. Easy a
Sample size Timing of audit procedures a. Yes Yes b. No No c. Yes No d. No Yes Audit procedures may be performed: a. Prior to the fiscal year-end of the client Yes Subsequent to the fiscal year-end of the client Yes
3. easy b 4. easy b 5. easy c
b. No c. Yes d. No Which of the following forms of evidence is most reliable? a. General ledger account balances. b. Confirmation of accounts receivable balance received from a customer. c. Internal memo explaining the issuance of a credit memo. d. Copy of month-end adjusting entries. Which of the following is not a characteristic of the reliability of evidence? a. Effectiveness of client internal controls. b. Education of auditor. c. Independence of information provider. d. Timeliness. Which of the following is not a characteristic of the reliability of evidence? a. Qualification of individual providing information. b. Auditors direct knowledge. c. Degree of subjectivity. d. Degree of objectivity.
No No Yes
6. easy b
Calculating the gross margin as a percent of sales and comparing it with previous periods is what type of evidence? a. Physical examination. b. Analytical procedures. c. Observation. d. Inquiry Audit evidence obtained directly by the auditor will not be reliable if: a. the auditor lacks the qualifications to evaluate the evidence. b. it is provided by the clients attorney. c. the client denies its veracity. d. it is impossible for the auditor to obtain additional corroboratory evidence. Appropriateness of evidence is a measure of the: a. quantity of evidence. b. quality of evidence. c. sufficiency of evidence. d. meaning of evidence. Which of the following statements regarding the relevance of evidence is correct? a. To be relevant, evidence must pertain to the audit objective of the evidence. b. To be relevant, evidence must be persuasive. c. To be relevant, evidence must relate to multiple audit objectives. d. To be relevant, evidence must be derived from a system including effective internal controls. Two determinants of the persuasiveness of evidence are: a. competence and sufficiency. b. relevance and reliability. c. appropriateness and sufficiency. d. independence and effectiveness. Three common types of confirmations used by auditors are (1) negative confirmations, (2) blank form positive confirmations, and (3) positive confirmations with information included. Place the confirmations in order of reliability from highest to lowest. a. 1, 2, 3. b. 3, 2, 1. c. 2, 3, 1. d. 3, 1, 2. When auditors use documents to support recorded transactions, the process is often called: a. inquiry. b. confirmation. c. vouching. d. physical examination. An example of an external document is: a. employees time reports. b. bank statements. c. purchase order for company purchases. d. carbon copies of checks. An example of a document the auditor receives from the client, but which was prepared by someone outside the clients organization, is a(n):
7. easy a 8. easy b 9. easy a 10. easy c 11. easy c
12. easy c 13. easy b 14. easy
c
15. easy a
a. confirmation. b. sales invoice. c. vendor invoice. d. bank reconciliation. Evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data involving comparisons of recorded amounts to expectations developed by the auditor is a definition of: a. analytical procedures. b. tests of transactions. c. tests of balances. d. auditing. Often, auditor procedures result in significant differences being discovered by the auditor. The auditor should investigate further if: Significant differences are not Significant differences are expected but do not exist expected but do exist a. Yes Yes b. No No c. Yes No d. No Yes Which of the following is not a purpose of analytical procedures? a. Understand the clients industry. b. Assess the clients ability to continue as a going concern. c. Evaluate internal controls. d. Reduce detailed audit tests. Which of the following forms of evidence would be least persuasive in forming the auditors opinion? a. Responses to auditors questions by the president and controller regarding the investments account. b. Correspondence with a stockbroker regarding the quantity of clients investments held in street name by the broker. c. Minutes of the board of directors authorizing the purchase of stock as an investment. d. The auditors count of marketable securities. Which of the following statements is not true? The evidence-gathering technique of inquiry: a. cannot be regarded as conclusive. b. requires the gathering of corroborative evidence. c. is the auditors principal method of evaluating the clients internal control. d. does not provide evidence from an independent source. Sarbanes-Oxley requires auditors of public companies to maintain audit documentation for what period of time? a. Not less than 3 years. b. Not less than 5 years. c. Not less than 7 years. d. Through the issuance of the financial statements. Analytical procedures must be used during which phase(s) of the audit? Test of Controls Planning Completion a. Yes Yes Yes b. No Yes Yes c. Yes No No d. No No No Which of the following statements is not correct? a. It is possible to vary the sample size from one unit to 100% of the items in the population. b. The decision of how many items to test should not be influenced by the increased costs of performing the additional tests. c. The decision of how many items to test must be made by the auditor for each audit procedure. d. The sample size for any given procedure is likely to vary from audit to audit. Auditors will replace tests of details with analytical procedures when possible because the: a. analytical procedures are more reliable. b. tests of details are more expensive. c. analytical procedures are more persuasive. d. tests of details are more difficult to interpret. Which of the following statements is not correct? a. Persuasiveness of evidence is partially determined by the reliability of evidence. b. The quantity of evidence obtained determines its sufficiency. c. The auditor need not consider the independence of an information source when obtaining evidence.
16. Easy a
17. easy c 18. med a
19. med c 20. med c
21. med b
22. med b
23. med b 24. med c
25. med d 26. med b 27. med b
d. Evidence obtained directly by the auditor is ordinarily more reliable than evidence obtained from other sources. Which one of the following is not one of the primary purposes of audit documentation? a. A basis for planning the audit. b. A record of the evidence accumulated and the results of the tests. c. A basis for review by supervisors and partners. d. A basis for determining work deficiencies by peer review teams. Which of the following is the most objective type of evidence? a. A letter written by the clients attorney discussing the likely outcome of outstanding lawsuits. b. The physical count of securities and cash. c. Inquiries of the credit manager about the collectibility of noncurrent accounts receivable. d. Observation of cobwebs on some inventory bins. Which of the following statements regarding documentation is not correct? a. Documentation includes examining client records such as general ledgers and supporting journals. b. Internal documents are documents that are generated within the company and used to communicate with external parties. c. External documents are documents that are generated outside of the company and are used to communicate the results of a transaction. d. External documents are considered more reliable than internal documents. When making decisions about evidence for a given audit, the auditors goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified, and to do so: a. no matter the cost involved in obtaining such evidence. b. at any cost because the costs are billed to the client. c. at the lowest possible total cost. d. at the cost suggested in the engagement letter. Physical examination is the inspection or count by the auditor of items such as: a. cash, inventory, and payroll timecards. b. cash, inventory, canceled checks, and sales documents. c. cash, inventory, canceled checks, and tangible fixed assets. d. cash, inventory, securities, notes receivable, and tangible fixed assets. Which items affect the sufficiency of evidence when choosing a sample? Selecting items with a high likelihood of The randomness of the items selected misstatement a. Yes Yes b. No No c. Yes No d. No Yes Which of the following is an example of vouching? a. Trace inventory purchases from the acquisitions journal to supporting invoices. b. Trace selected sales invoices to the sales journal. c. Trace details of employee paychecks to the payroll journal. d. All of the above are examples of vouching. Which of the following statements about confirmations is true? a. Confirmations are expensive and so are often not used. b. Confirmations may inconvenience those asked to supply them, but they are widely used. c. Confirmations are sometimes not reliable and so auditors use them only as necessary. d. Confirmations are required for several balance sheet accounts but no income statement accounts. Traditionally, confirmations are used to verify: a. individual transactions between organizations, such as sales transactions. b. bank balances and accounts receivable. c. fixed asset additions. d. payroll expenses. To be considered reliable evidence, confirmations must be controlled by: a. a client employee responsible for accounts receivable. b. a financial statement auditor. c. a clients internal audit department. d. a clients controller or CFO. Indicate whether confirmation of accounts receivable and accounts payable is required or optional: Accounts Receivable Accounts Payable
28. med c
29. med d 30. med c
31. med a 32. med b 33. med b 34. med b 35. med b
36. med b
a. Required Required b. Required Optional c. Optional Required d. Optional Optional The Auditing Standards Board has concluded that analytical procedures are so important that they are required during: a. planning and test of control phases. b. planning and completion phases. c. test of control and completion phases. d. planning, test of control, and completion phases. Which of the following statements regarding analytical procedures is not correct? a. Analytical tests emphasize a comparison of client internal controls to GAAP. b. Analytical procedures are required on all audits. c. Analytical procedures can be used as substantive tests. d. For certain accounts with small balances, analytical procedures alone may be sufficient evidence. A benefit obtained from comparing the clients data with industry averages is that it provides a(n): a. indication of the likelihood of financial problems. b. indication where errors exist in the statements. c. benchmark to be used in evaluating a clients budgets. d. comparison of what is with what should be. Which of the following is not a correct combination of terms and related type of audit evidence? a. Foot reperformance. b. Compare documentation. c. Vouch documentation. d. Trace analytical procedures. Which of the following is not a correct combination of terms and related type of audit evidence? a. Inquire inquiries of client. b. Count physical examination. c. Recompute documentation. d. Read documentation. Which of the following is not one of the major types of analytical procedures? a. Compare client with industry averages. b. Compare client with prior year. c. Compare client with budget. d. Compare client with SEC averages. What is the overall objective of audit documentation? a. Defend against claims of a deficient audit. b. Provide a basis for reviewing the work of subordinates. c. Provide reasonable assurance that the audit was conducted in accordance with standards. d. Provide additional support of recorded amounts to the client. An important benefit of industry comparisons is as: a. an aid to understanding the clients business. b. an indicator of errors. c. an indicator of fraud. d. a least-cost indicator for audit procedures. The permanent files included as part of audit documentation do not normally include: a. a copy of the current and prior years audit programs. b. copies of articles of incorporation, bylaws and contracts. c. information related to the understanding of internal control. d. results of analytical procedures from prior years. Those procedures specifically outlined in an audit program are primarily designed to a. prevent litigation. b. detect errors or irregularities. c. test internal systems. d. gather evidence. Evidence is generally considered appropriate when: a. it has been obtained by random selection. b. there is enough of it to afford a reasonable basis for an opinion on financial statements. c. it has the qualities of being relevant, objective, and free from known bias. d. it consists of written statements made by managers of the enterprise under audit. Given the economic constraints in which auditors collect evidence, the auditor normally gathers evidence that is: a. irrefutable.
37. med a 38. med a
40. med d 41. med c 42. med d 43. med c 44. med a 45. med a 46. med d 47. med c 48. hard c
49. hard b
b. conclusive. c. persuasive. d. completely convincing. The auditor is concerned that a client is failing to bill customers for shipments. An audit procedure that would gather relevant evidence would be to: a. select a sample of duplicate sales invoices and trace each to related shipping documents. b. trace a sample of shipping documents to related duplicate sales invoices. c. trace a sample of Sales Journal entries to the Accounts Receivable subsidiary ledger. d. compare the total of the Schedule of Accounts Receivable with the balance of the Accounts Receivable account in the general ledger. Relevance can be considered only in terms of: a. general audit objectives. b. specific audit objectives. c. transaction audit objectives. d. balance audit objectives. Audit documentation should possess certain characteristics. Which of the following is one of the characteristics? Audit documentation should be indexed Audit documentation should be organized to benefit the clients staff and cross-referenced a. Yes Yes b. No No c. Yes No d. No Yes Which of the following statements is not a correct use of the terminology? a. Evidence obtained from an independent source outside the client organization is more reliable than that obtained from within. b. Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly. c. Documents that originate outside the company are considered more reliable than those that originate within the clients organization. d. External evidence, such as communications from banks, is generally regarded as more reliable than answers obtained from inquiries of the client. Evidence is usually more persuasive for balance sheet accounts when it is obtained: a. as close to the balance sheet date as possible. b. only from transactions occurring on the balance sheet date. c. from various times throughout the clients year. d. from the time period when transactions in that account were most numerous during the fiscal period. Audit documentation should provide support for: The audit report The financial statements a. Yes Yes b. No No c. Yes No d. No Yes Which of the following statements is not correct concerning audit documentation? a. Audit documentation is acquired to defend against claims that the auditor performed a deficient audit. b. The only time anyone has a legal right to examine audit documentation is when the documentation is subpoenaed by a court as legal evidence. c. Audit documentation is the primary frame of reference used by supervisory personnel to evaluate the sufficiency of evidence. d. The auditor may deny requests by the client to review audit evidence. Which of the following statements is not true? a. A large sample of highly competent evidence is not persuasive unless it is relevant to the objective being tested. b. A large sample of evidence that is neither competent nor timely is not persuasive. c. A small sample of only one two or pieces of relevant, competent, and timely evidence lacks persuasiveness. d. The persuasiveness of evidence can be evaluated after considering its competence and its sufficiency. Which of the following statements is not correct? a. Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively. b. c. For certain immaterial accounts, analytical procedures may be the only evidence needed. In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance
50. hard b 51. hard c
52. med b
53. hard a 54. med c
55. hard a
56. hard d
57. hard d
58. hard a
appears reasonable. Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures. Which of the following statements is not correct? a. The effectiveness of the clients internal control has little effect on the reliability of most types of evidence. d. b. Analytical procedures may be reliable even if tests of internal controls indicate control weaknesses. c. Both physical examination and mechanical accuracy are likely to be highly reliable if the internal control is effective. d. A specific type of evidence is rarely sufficient by itself to provide reliable evidence to satisfy any audit objective. Audit evidence supporting the financial statements consists of the underlying accounting data and all corroborating information available to the auditor. Which of the following is an example of corroborating information? a. Minutes of meetings. b. General and subsidiary ledgers. c. Accounting manuals. d. Worksheets supporting cost allocations. Which of the following discoveries through the use of analytical procedures would indicate a relatively high risk of financial failure? a. A decline in gross margin percentages. b. An increase in the balance in fixed assets. c. An increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at the same time accounts receivable turnover also decreased. d. A higher than normal ratio of long-term debt to net worth as well as a lower than average ratio of profits to total assets. Which of the following statements is correct regarding the costs involved in obtaining evidence? Physical examination is Cost of obtaining evidence may be a factor in deciding whether to obtain usually the least that evidence expensive type of audit evidence a. Yes Yes b. No No c. Yes No d. No Yes A common comparison occurs when the auditor calculates the expected balance and compares it with the actual balance. The auditors expected account balance may be determined by: a. using industry standards. b. using Dun and Bradstreet reports. c. relating it to some other balance sheet or income statement account or accounts. d. inquiry of the client. Two analytical procedures available to the auditor are: Compare current years balances with the preceding year. Compare details of a particular accounts balance with the preceding year. Shortcomings of these two procedures are that: a. the first ignores effects of tests of controls and the second fails to consider possible changes in client personnel. b. the first fails to consider growth or decline in business activity and the second ignores relationships of data to other data. c. both fail to consider growth or decline in business activity and ignore relationships of data. d. it is difficult, time consuming, and, therefore, costly to perform these procedures. Which of the following statements relating to the competence of evidential matter is always true? a. Evidence from outside an enterprise is always reliable. b. Accounting data developed under satisfactory conditions of internal control are more under unsatisfactory internal control conditions. c. Oral representations made by management are not reliable evidence. d. Evidence must be both reliable and relevant to be considered appropriate. relevant than data developed
59. hard a
60. hard d
61. hard d
62. hard c
63. med b
64. hard d
Chapter 8
1. easy a
Multiple-Choice Questions
Which of the following is not one of the three main reasons why the auditor should properly plan engagements? a. To enable proper on-the-job training of employees.
2. easy a
b. To enable the auditor to obtain sufficient appropriate evidence. c. To avoid misunderstandings with the client. d. To help keep audit costs reasonable. Avoiding misunderstandings with the client is important for: Good client relations Facilitating high-quality work at a reasonable cost a. Yes Yes b. No No c. Yes No d. No Yes A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the: a. inherent risk. b. acceptable audit risk. c. statistical risk. d. financial risk. A measure of the auditors assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the clients internal control is called: a. control risk. b. acceptable audit risk. c. statistical risk. d. inherent risk. When inherent risk is high, there will need to be: A lower assessment of More evidence accumulated by the auditor audit risk a. Yes Yes b. No No c. Yes No d. No Yes The auditor is likely to accumulate more evidence when the audit is for a company: Which has large Which is to be sold in the near future amounts of debt a. Yes Yes b. No No c. Yes No d. No Yes Which of the following is not typically included in initial audit planning? a. Client acceptance/continuation decisions. b. Determination of the purpose of the audit. c. Obtain an understanding with the client. d. Perform analytical procedures as substantive tests. Initial audit planning involves four matters. Which of the following is not one of these? a. Develop an overall audit strategy. b. Request that bank balances be confirmed. c. Schedule engagement staff and audit specialists. d. Identify the clients reason for the audit. Most auditors assess inherent risk as high for related parties and related-party transactions because: a. of the unique classification of related-party transactions required on the balance sheet. b. of the lack of independence between the parties. c. of the unique classification of related-party transactions required on the income statement. d. it is required by generally accepted accounting principles. Which of the following is not correct regarding the communications between successor and predecessor auditors? a. The burden of initiating the communication rests with the predecessor auditor. b. The burden of initiating the communication rests with the successor auditor. c. The predecessor auditor must receive their former clients permission prior to divulging information to the successor auditor d. The predecessor auditor may choose to provide a limited response to a successor auditor. A successor auditor may perform which of the following for a new audit client? Speak to local attorneys,
3. easy b
4. easy d
5. Easy d
6. easy a
7. easy d 8. easy b 9. easy b
10. easy a
11. easy a
12. med b
13. med a
14. Med D
15. Med B
16. Med B
17. med b
banks and other Speak to the predecessor auditors about businesses regarding the disagreements they had with management companys reputation a. Yes Yes b. No No c. Yes No d. No Yes Which of the following is not a potential effect of an auditors decision that a lower acceptable audit risk is appropriate? a. More evidence is accumulated. b. Less evidence is accumulated. c. Special care is required in assigning experienced staff. d. Review of audit documentation is performed by personnel not assigned to the engagement. It is easier and more common to implement increased evidence accumulation for inherent risk than for acceptable audit risk because: a. inherent risk can usually be isolated to specific accounts. b. inherent risk applies to the entire audit. c. acceptable audit risk and sample sizes are set statistically. d. acceptable audit risk does not impact on the amount of evidence which must be accumulated. If an auditor is requested to perform nonaudit services for a public company audit client, who is responsible for agreeing to those services with the audit firm? a. The clients management. b. The clients chief executive officer. c. The clients chief financial officer. d. The clients audit committee. Which of the following statements is true regarding communications between predecessor and successor auditors? a. The burden of initiating the communication rests with the predecessor. b. The predecessors response can be limited to stating that no information will be provided. c. The predecessor should communicate with the successor only if the client is public. d. There must be communication between the predecessor and successor if the successor is to accept the engagement. Investigating new clients with a focus on assessing the auditors potential relationship with that new client is a critical element in determining: a. inherent risk. b. acceptable audit risk. c. statistical risk. d. financial risk. The purpose of an engagement letter is to: a. document the CPA firms responsibility to external users of the audited financial statements. b. document the terms of the engagement in writing to minimize misunderstandings. c. notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated. d. emphasize managements responsibility for approving the audit program. One means of informing the client that the auditor is not responsible for the discovery of all acts of fraud is the: a. engagement letter. b. representation letter. c. responsibility letter. d. client letter. Which of the following normally signs the engagement letter for an audit of a public company? a. Corporate treasurer. b. Chief financial officer. c. Chairman of the board of directors. d. Audit committee. Which of the following normally signs the engagement letter for an audit of a private company? a. Management. b. Board of directors representative. c. Audit committee representative. d. Corporate treasurer. An understanding of a clients business and industry and knowledge about operations are essential for performing an adequate audit. For a new client, most of this information is obtained: a. from the predecessor auditor.
18. med a
19. med d 20. med a 21. med d
22. med c 23. med c
b. from the Securities and Exchange Commission. c. from the permanent file. d. at the clients premises. The least effective method of identifying related parties for a public company would be a(n): a. inquiry of management. b. review of SEC filings. c. distribution of the engagement letter to all stockholders. d. examination of stockholders listings to identify principal stockholders. An official record of meetings of the board of directors and stockholders is included in the corporate: a. bylaws. b. charter. c. minutes. d. license. Which of the following is not likely to be a related party? a. Affiliated companies. b. A major stockholder of the company. c. A warehouse employee. d. The chief executive officer. Which of the following is most likely to occur at the beginning of an initial audit engagement? a. Prepare a rough draft of the financial statements and of the auditors report. b. Study and evaluate the system of internal administrative control. c. Determine the clients reason for an audit. d. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management. An auditor should examine minutes of the board of directors meetings: a. through the date of the financial statements. b. through the date of the audit report. c. only at the beginning of the audit. d. on a test basis. The first standard of field work, which states that the work is to be adequately planned and that assistants, if any, are to be properly supervised, recognizes that: a. early appointment of the auditor is advantageous to the auditor and the client. b. acceptance of an audit engagement after the close of the clients fiscal year is generally not permissible. c. appointment of the auditor subsequent to the physical count of inventories requires a disclaimer of opinion. d. performance of substantial parts of the examination is necessary at interim dates. The corporate minutes are the official record of the meetings of the board of directors and stockholders. The minutes typically include authorizations related to: The CPAs use of outside specialists Management compensation
24. med c 25. med c
26. med b 27. med a
28. med d
29. med c 30. med c
31. Med d
a. Yes Yes b. No No c. Yes No d. No Yes An engagement letter sent to an audit client usually would not include a(n): a. reference to the auditors responsibility for the detection of errors or irregularities. b. estimation of the time to be spent on the audit work by audit staff and management. c. statement that management advisory services would be made available upon request. d. reference to managements responsibility for the financial statements. Which of the following is correct with respect to a companys corporate charter? a. The corporate charter is granted by the federal government and is required to recognize the corporation as a separate entity. b. The corporate charter includes the rules and procedures used to operate a corporation. c. The corporate charter includes the exact name of the corporation, the date of incorporation, and the types of business the corporation is authorized to conduct. d. The corporate charter must be annually reviewed by the PCAOB. Corporate bylaws include: The types and amounts of capital stock the corporation is authorized to issue a. The rules and procedures used to operate the corporation Yes Yes
32. med b
33. med b 34. med d 35. hard b
36. hard c
37. hard d
38. hard c
b. No No c. Yes No d. No Yes In what order should the following steps occur? A. Assess client business risk B. Understand the clients business and industry C. Perform preliminary analytical procedures D. Assess acceptable audit risk a. D, B, C, A. b. B, A, D, C. c. B, D, A, C. d. D, C, B, A. Which of the following statements is not correct with respect to analytical procedures? a. Auditing standards emphasize the need for auditors to develop and use expectations. b. Analytical procedures must be performed throughout the audit. c. Analytical procedures may be performed at any time during the audit. d. Analytical procedures use comparisons and relationships to assess whether account balances appear reasonable. The most widely used profitability ratio is the: a. quick ratio. b. profit margin. c. return on assets. d. earnings per share. The purpose of the requirement in SAS No. 84 of having communication between the predecessor and successor auditor is to: a. allow the predecessor to disclose information which would otherwise be confidential. b. help the successor auditor to evaluate whether to accept the engagement. c. help the client by facilitating the change of auditors. d. ensure the predecessor collects all unpaid fees prior to a change in auditor. The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when: a. the predecessor auditor has poor relations with the successor auditor. b. the client is dissatisfied with the predecessors work. c. there are actual or potential legal problems between the client and the predecessor. d. the predecessor believes that the client lacks integrity. Which of the following is correct with respect to the use of analytical procedures? a. Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption. b. Analytical procedures must be used throughout the audit. c. Analytical procedures used in the testing phase of the audit are primarily used to direct an auditors attention so that the auditors understanding of the business is improved. d. Analytical procedures are performed by studying plausible relationships between financial and nonfinancial data. Which of the following ratios is best used to assess a companys ability to meet its long-term debt obligations? a. Quick ratio. b. Return on common equity. c. Debt to equity. d. Current ratio. Which of the following statements is not correct? a. Analytical procedures used in the planning phase of the audit are primarily directed at understanding the clients business and directing the auditors attention to areas that may contain possible misstatements. b. Analytical procedures used in the completion phase are primarily aimed at assessing going concern and secondarily aimed at directing the auditors attention to areas that may contain possible misstatements. c. Analytical procedures must be used in the planning and completion phases of the audit, and are optional in the testing phase. d. Analytical procedures used in the completion phase are primarily aimed at directing the auditors attention to areas that may contain possible misstatements and secondarily aimed at assessing going concern. Which of the following would not likely be classified as a related-party transaction? a. An advance of one weeks salary to an employee. b. Sales of merchandise between affiliated companies. c. Loans or credit sales to the principal owner of the client company. d. Exchanges of equipment between two companies owned by the same person. Which of the following would not be found in the corporate charter? a. The kinds and amount of capital stock authorized. b. The date of incorporation.
39. hard b
40. med a 41. hard d
42. hard a 43. hard d
44. hard a 45. hard b
46. hard a
47. hard d 48. med a
c. The types of business activity that the corporation is allowed to conduct. d. The rules and procedures adopted by the stockholders. Which of the following would not usually be included in the minutes of the board of directors? a. The duties and powers of the corporate officers. b. Declaration of dividends. c. Authorization of long-term loans. d. Approval of executive bonuses. When are auditors likely to encounter judgment problems in the use of analytical procedures? a. Whenever the auditor places reliance on managements explanations for unusual fluctuations in account balances without first developing independent expectations. b. Whenever the auditor allows unaudited balances to unduly influence his/her expectations of current balances. c. Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations when trying to explain what caused them. d. The auditor is likely to encounter judgment problems in each of the above instances. The major concern when using nonfinancial data in analytical procedures is the: a. accuracy of the nonfinancial data. b. source of the nonfinancial data. c. type of nonfinancial data. d. presence of multiple sources of nonfinancial data. An auditor searching for related party transactions should obtain an understanding of each subsidiarys relationship to the total entity because: a. the business structure may be deliberately designed to obscure related party transactions. b. this may reveal whether transactions would have taken place if the parties had been unrelated. c. transactions may have been consummated on terms equivalent to arms-length transactions. d. this may permit the audit of intercompany account balances to be performed as of concurrent dates. The first standard of fieldwork requires, in part, that audit work be properly planned. Proper planning as intended by the first standard of fieldwork would occur when the auditor: a. physically observes the movement of securities already counted to guard against the substitution of such securities for others that are not actually on hand. b. uses negative accounts receivable confirmations instead of positive confirmations because the latter require mailing of second requests and review of subsequent cash collections. c. compares all cash as of a particular date to avoid performing time-consuming cash cutoff procedures. d. eliminates the possibility of counting inventory items more than once by arranging to make extensive test counts. Early appointment of the independent auditor will enable: a. a more thorough examination to be performed. b. a proper study and evaluation of internal control to be performed. c. sufficient competent evidential matter to be obtained. d. a more efficient examination to be planned. Whenever an auditor compares client data to client-prepared budgets, there are two special concerns. Indicate if the two items below are concerns. Assessing whether the budgets were Client data may have been altered to conform to the budget realistic plans a. A concern A concern b. Not a concern Not a concern c. A concern Not a concern d. Not a concern A concern An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should: a. engage financial experts familiar with the nature of the business entity. b. obtain a knowledge of matters that relate to the nature of the entitys business. c. refer a substantial portion of the audit to another CPA who will act as the principal auditor. d. first inform management that an unqualified opinion cannot be issued. Which is a liquidity activity ratio? a. Profit margin b. Inventory turnover c. Return on assets d. Times interest earned Which is usually included in an engagement letter? Estimate of hours required to complete audit Yes No Dollar estimate of fees to be billed to the client Yes No
49. hard b
50. med b 51. med d
a. b.
52. med a
c. Yes d. No Which is usually included in an engagement letter? A reference to GAAP a. Yes b. No c. Yes d. No Which is usually included in an engagement letter?
No Yes A reference to GAAS Yes No No Yes
53. med c
a. b. c. d 54. med c
The financial statements are the responsibility of the Ratios to be used by the auditor in the planning phase companys management Yes Yes No No Yes No No Yes When may the auditor refer to a specialist in the audit report? Only if the specialists report results in a modification of the audit opinion a. Yes b. No c. Yes d No Which is usually included in the engagement letter? The projected type of opinion on the financials statement to be audited a. Yes b. No c. Yes d No Which is usually included in the engagement letter? List of audit procedures to be used in inventory observation a. b. c. d
Only if the specialist assisted in the audit of an account material to the financial statements Yes No No Yes
55. med b
Name(s) of the client personnel responsible for supplying the auditor with information Yes No No Yes
56. med b
The auditors assessment of Audit Risk Yes No Yes No Yes No No Yes
Chapter 9
1. easy a
Multiple-Choice Questions
If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is, by definition of FASB Statement No. 2: a. material. b. insignificant. c. significant. d. relevant. The preliminary judgment about materiality is the amount by which the auditor believes the statements could be misstated and still not affect the decisions of reasonable users. a. minimum b. maximum c. mean average d. median average Auditors are responsible for determining whether financial statements are materially misstated, so upon discovering
2. easy b
3.
easy d
4. easy c 5. easy d
6. easy c 7. easy b
8. easy b 9. easy d
a material misstatement they must bring it to the attention of: a. regulators. b. the audit firms managing partner. c. no one in particular. d. the clients management. The FASB definition of materiality emphasizes what class of financial statement users? a. Regulators. b. Informed investors. c. Reasonable persons. d. Potential investors. When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to as: a. the materiality range. b. the error range. c. tolerable materiality. d. tolerable misstatement. Why do auditors establish a preliminary judgment about materiality? a. To determine the appropriate level of audit experience required for the work. b. So that the client can know what records to make available to the auditor. c. To plan the appropriate audit evidence to accumulate and develop an overall audit strategy. d. To finalize the assessment of control risk. Auditors are _____ to decide on the combined amount of misstatements in the financial statements that they would consider material early in the audit. a. permitted b. required c. not allowed d. strongly encouraged If an auditor establishes a relatively high level for materiality, then the auditor will: a. accumulate more evidence than if a lower level had been set. b. accumulate less evidence than if a lower level had been set. c. accumulate approximately the same evidence as would be the case were materiality lower. d. accumulate an undetermined amount of evidence. The preliminary judgment about materiality and the amount of audit evidence accumulated are _____ related. a. directly b. indirectly c. not d. inversely After the preliminary judgment about materiality has been established, auditors may: a. not adjust it. b. adjust it downward only. c. adjust it upward only. d. adjust it either downward or upward. In an audit area that has a lower inherent risk, it would be prudent to: a. increase the amount of audit evidence gathered. b. assign more experienced staff to that area. c. increase the tolerable misstatement for the area. d. expand planning procedures. Which of the following is least likely to be appropriate as the basis for determining the preliminary judgment about materiality in the audit of financial statements? a. Net income before taxes. b. Current assets. c. Owners equity. d. Inventory. Auditing standards _____ that the basis used to determine the preliminary judgment about materiality be documented in the audit files. a. permit b. do not allow c. require d. strongly encourage Amounts involving fraud are usually considered _____ important than unintentional errors of equal dollar amounts. a. b. less no less
10. easy d 11. easy c 12. easy d
13. easy c
14. easy d
15. easy a
c. no more d. more Which of the following qualitative factors may significantly influence whether an item is deemed to be material? Misstatements that are otherwise minor may be material if there are possible consequences arising from contractual obligations.
Misstatements that are otherwise immaterial may be material if they affect a trend in earnings
16. easy a 17. easy c
18. easy a
19. med b
a Yes Yes b No No c Yes No d No Yes Auditors generally allocate the preliminary judgment about materiality to the: a. balance sheet only. b. income statement only. c. income statement and balance sheet. d. statement of cash flows. Which of the following statements regarding inherent risk is correct? a. The inherent risk assigned in the audit risk model is unaffected by the auditors experience with clients organization. b. Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect. c. Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain experience, even when there is inherent risk. d. The inherent risk assigned in the audit risk model is dependent upon the strengths in clients internal control system. Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent risk during the planning phase? a. Obtaining clients agreement on the engagement letter. b. Obtaining knowledge about the clients business and industry. c. Touring the clients plant and offices. d. Identifying related parties. Auditors commonly allocate materiality to balance sheet accounts rather than income statement accounts because most income statement misstatements have a(n) _____ effect on the balance sheet. a. reduced b. equal c. undetermined d. increased Which of the following is not a correct statement regarding the allocation of the preliminary judgment about materiality to balance sheet accounts? a. Auditors expect certain accounts to have more misstatements than others. b. The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence. c. Auditors expect to identify overstatements as well as understatements in the accounts. d. Relative audit costs affect the allocation. What is the primary means of dealing with risk in planning decisions related to audit evidence? a. Selection of more effective tests of details of balances. b. Application of the audit risk model. c. Establishing a lower preliminary judgment about materiality. d. Allocating materiality judgment to segments. The phrase in our opinion in the auditors report is intended to inform users that auditors: a. guarantee fair presentation of the financial statements. b. act as insurers of the accuracy of the statements. c. certify the material presented in the statements by management. d. base their conclusions about the statements on professional judgment. Inherent risk is _______ related to detection risk and _______ related to the amount of audit evidence.
20. med b
21. med b 22. med d 23.
med d
24. med b
25. med b 26. med a
27. med a
a. directly, inversely b. directly, directly c. inversely, inversely d. inversely, directly The five steps in applying materiality are listed below in random order. 1. Estimate the combined misstatement. 2. Estimate the total misstatement in the segment. 3. Set preliminary judgment about materiality. 4. Allocate preliminary judgment about materiality to segments. 5. Compare combined estimate with preliminary judgment about materiality. The correct sequence from start to finish would be: a. 1 2 5 4 3. b. 3 4 2 1 5. c. 4 3 1 5 2. d. 5 1 3 2 4. Which of the following statements is not correct? a. Materiality is a relative rather than an absolute concept. b. The most important base used as the criterion for deciding materiality is total assets. c. Qualitative factors as well as quantitative factors affect materiality. d. Given equal dollar amounts, frauds are usually considered more important than errors. Since materiality is relative, it is necessary to have bases for establishing whether misstatements are material. Normally, the most common base for deciding materiality is: a. net income before taxes. b. net working capital. c. net income after taxes. d. total assets. Certain types of misstatements are likely to be more important than other types to users, even if the dollar amounts are the same. Which of the following demonstrates this? Amounts Misstatements that are otherwise immaterial may be material if they affect a involving frauds trend in earnings. are considered more important than errors of equal amount a. Yes Yes b. No No c. Yes No d. No Yes Allocating the preliminary judgment about materiality to financial statements segments is necessary because: a. evidence is accumulated for the financial statements as a whole so materiality does not apply to them. b. evidence is accumulated by segments rather than for the financial statements as a whole. c. it is required by the AICPAs Code of Professional Conduct. d. it is required by the SEC. Which of the following statements is not correct? a. Either an overstatement of an asset account or an understatement of a liability account would have the same effect on the income statement. b. A misclassification in the balance sheet will have no effect on operating income. c. Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement. d. Either an understatement of an asset account or an overstatement of a liability account would have the same effect on the income statement. Regardless of how the preliminary judgment about materiality is allocated, the auditor must be confident that total combined misstatements in all accounts are: a. less than the preliminary judgment. b. equal to the preliminary judgment. c. more than the preliminary judgment. d. less than or equal to the preliminary judgment. Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to ________. a. b. detection risk audit report risk
28. med b
29. med c
30. med d
31. med c
32. med c
c. acceptable audit risk d. inherent risk _____ misstatements are those where the auditor can determine the amount of the misstatement in the account. a. Potential b. Likely c. Known d. Projected When a different extent of evidence is needed for the various cycles, the difference is caused by: a. errors in the clients accounting system. b. a clients need to achieve an unqualified opinion. c. an auditors need to follow auditing standards. d. an auditors expectations of errors and assessment of internal control. If planned detection risk is reduced, the amount of evidence the auditor accumulates will: a. increase. b. decrease. c. remain unchanged. d. be indeterminate. Likely misstatements can result from: Differences between managements and an auditors judgment about account balances Projections of misstatements based on an auditors tests of a sample from a population
33. med d 34. med a 35. Med A
Computation of the sampling error for the cash account
36. med b
37. med D
a. No Yes Yes b. Yes Yes No c. No No Yes d. Yes No No When discussing control risk (CR) and the audit risk model, which of the following is false? a. CR is a measure of the auditors assessment of the likelihood that misstatements will not be prevented or detected by internal control. b. If the auditor concludes that internal control is completely ineffective to prevent or detect errors, he/she would assign a low value (e.g., 0%) to CR. c. The relationship between control risk and detection risk is inverse. d. The relationship between control risk and evidence needed to support account balances is direct. Which of the following is not a good indicator of the degree to which statements are relied on by external users? a. Clients size, as measured by total assets or total revenue. b. Distribution of ownership among the public. c. Nature and amount of liabilities. d. Amount of net income or loss after taxes. If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor, acceptable audit risk would likely: a. be reduced. b. be increased. c. remain the same. d. be calculated using a computerized statistical package. When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normally: a. reduce acceptable audit risk and increase inherent risk. b. reduce inherent risk and control risk. c. increase inherent risk and control risk. d. increase acceptable audit risk and reduce inherent risk. One accounting issue that does not require management to use significant judgments is: a. the allowance for doubtful accounts. b. the useful life of equipment for tax purposes. c. obsolete inventory. d. the liability for warranty payments. Inherent risk is often low for an account such as: a. inventory. b. marketable securities.
38. med A
39. med A
40. med B 41. med D
42. med D 43. med A 44. med B 45. med A 46. med D
47. med B 48. med A 49. hard B
50. hard C 51. med a
c. cash. d. accounts receivable. The auditor typically does not assess control risk and inherent risk for: a. each audit objective. b. each cycle. c. each account. d. the overall audit. To what extent do auditors typically rely on internal controls of their public company clients? a. Extensively b. Only very little c. Infrequently d. Never Auditors typically rely on internal controls of their private company clients: a. Only as needed to complete the audit and satisfy Sarbanes-Oxley requirements. b. Only if the controls are determined to be effective. c. Only if the client asks an auditor to test controls. d. Only if the controls are sufficient to increase Control Risk to an acceptable level. Acceptable audit risk is ordinarily set by the auditor during planning and: a. held constant for each major cycle and account. b. held constant for each major cycle but varies by account. c. varies by each major cycle and by each account. d. varies by each major cycle but is constant by account. When the auditor is attempting to determine the extent to which external users rely on a clients financial statements, they may consider several factors except for: a. client size. b. concentration of ownership. c. types and amounts of liabilities. d. assessment of detection risk. A major difficulty in the application of the audit risk model is: a. defining the terms of the model. b. measuring the components of the model. c. understanding the effect on other factors in the model when one factor is changed. d. the failure of the Audit Standards Board to accept it and incorporate it into standards. When setting a preliminary judgment about materiality: a. more evidence is required for a low dollar amount than for a high dollar amount. b. less evidence is required for a low dollar amount than for a high dollar amount. c. the same amount of evidence is required for either low or high dollar amounts. d. there is no relationship between it and the dollar amount of evidence needed. When allocating materiality, most practitioners choose to allocate to: a. the income statement accounts because they are more important. b. the balance sheet accounts because there are fewer. c. both balance sheet and income statement accounts because there could be errors on either. d. all of the financial statements because there could be errors on other statements besides the income statement and balance sheet. The risk of material misstatement refers to: a. control risk and acceptable audit risk. b. inherent risk. c. the combination of inherent risk and control risk. d. inherent risk and audit risk. Auditors may assess inherent risk and control risk: Jointly to Separately and combine their effects in the audit risk model determine the risk of material misstatement a. Yes Yes b. No No c. Yes No d. No Yes Which one of the following statements about the cycle approach to auditing is not correct? a. There are differences among cycles in the frequency and size of expected errors. b. There are differences among cycles in the effectiveness of internal controls. c. There are differences among cycles on the auditors willingness to accept risk that material errors exist after the auditing is complete.
52. hard C
53. hard A
54. hard B
55. hard C 56. hard c
57. hard D 58. hard A
d. It is common for auditors to want an equally low likelihood of errors for each cycle after the auditor is finished. When the auditor has the same level of willingness to risk that material misstatements will exist after the audit is finished for all financial statement cycles: a. a different extent of evidence will likely be needed for various cycles. b. the same amount of evidence will be gathered for each cycle. c. the auditor has not followed generally accepted auditing standards. d. the level for each cycle must be no more than 2% so that the entire audit does not exceed 10%. Which of the following statements is not true? a. Inherent risk is inversely related to detection risk. b. Inherent risk is inversely related to evidence. c. Inherent risk is the susceptibility of the financial statements to material error, assuming no internal controls. d. Inherent risk is the auditors assessment of the likelihood that errors exceeding a tolerable amount exist in a segment before considering the effectiveness of internal controls. Which of the following is not a primary consideration when assessing inherent risk? a. Nature of clients business. b. Existence of related parties. c. Frequency and intensity of managements review of accounting transactions and records. d. Susceptibility to defalcation. Which of the following is an example of the concept of inherent risk? a. Humans make more errors than computers; therefore, a manual accounting system is riskier than a computerized system. b. Accounting systems with vouchers have many more controls built in, so the risk that there will be errors on the financial statements is reduced. c. Loans receivable for a finance company are less likely to be collectible than those of a bank. d. Audits with larger sample sizes are less risky than those with smaller sample sizes. Tolerable misstatement as set by the auditor: a. decreases acceptable audit risk. b. increases inherent risk and control risk. c. affects planned detection risk. d. does not affect any of the four risks. Which of the following underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? a. The elements of materiality and relative risk. b. The element of internal control. c. The element of corroborating evidence. d. The element of reasonable assurance.