Test Bank for Solution Manual for Auditing and Assurance Services An Asia Edition, 1st Edition

TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

Chapter 1 – The Market for Auditing and Assurance Services TRUE/FALSE 1. The need for assurance services arises because the interests of the users of information may be different than the interests of those responsible for providing information.

ANS: T PTS: 1 OBJ: Demand for Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. An audit of financial statements is a form of attestation service.

ANS: T PTS: 1 OBJ: Scope of Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. Independence is an attribute necessary to perform assurance services.

ANS: T PTS: 1 OBJ: Scope of Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. A bank using Milton Company's financial statements to determine the creditworthiness of a potential loan to Milton is a good example of the need for unbiased reporting.

ANS: T PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. Independence is only required for assurance service providers.

ANS: T PTS: 1 OBJ: Credibility of Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. A CPA of Singapore automatically qualifies as an assurance provider in all areas of business.

ANS: F PTS: 1 OBJ: Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. Attestation services are a subset of assurance services and always involve a report that goes to a third party.

ANS: T PTS: 1 OBJ: Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. The Institute of Certified Public Accountants of Singapore has the primary authority to set auditing standards.

ANS: F PTS: 1 OBJ: Types of Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 9. The audit function is unique because it exists to perform services on a "client" on behalf of shareholders, directors and other parties.

ANS: T PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Auditing is the process of attesting to assertions about economic actions and events.

ANS: T PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Auditing is the process of verifying the accuracy of the financial statements.

ANS: F PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. Internal auditing only provides assurance services to clients.

ANS: F PTS: 1 OBJ: Types of Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. Auditing exists because users need unbiased information on which to assess management performance and make economic decisions.

ANS: T PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. Users prefer management's financial statements over audited financial statements because few users have direct knowledge of the company's operations and management is the most knowledgeable about operations.

ANS: F PTS: 1 OBJ: Demand for Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. Users rely on auditors' independent assessment of financial statement presentation because few users have direct knowledge of the company's operations.

ANS: T PTS: 1 OBJ: Demand for Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. An assertion is a positive statement about an action, event, condition, or performance over a specified time period.

ANS: T PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Management is required to comment on the fairness of the company's financial presentation. This reduces the auditor's legal responsibility for the opinion rendered on the financial statements.

ANS: F

PTS: 1

OBJ: Auditing Defined

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. Audited financial statements should be free from all errors and fraud.

ANS: F PTS: 1 OBJ: Scope of Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. Audited financial statements should be presented fairly according to the substance of IFRS. ANS: T PTS: 1 OBJ: Scope of Audit Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20.

The auditor will examine the quality of internal controls using COSO framework.

ANS: T PTS: 1 OBJ: Internal Audit Scope NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

21. Being free from material errors is the same as being free from all errors.

ANS: F PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. Attestation is confined to an audit of client financial statements.

ANS: F PTS: 1 OBJ: Scope of Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. An auditor must have a good understanding of the risks associated with a client's industry in order to ensure that the financial statements reflect the underlying substance of accounting transactions and the economic effects of such transactions.

ANS: T PTS: 1 OBJ: Credibility of Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24.

Public Accountants Oversight Committee in Singapore promotes audit quality and protects the public interest through various functions such as registration of Public Accountants.

ANS: T PTS: 1 OBJ: Credibility of Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

25. It is mandatory to establish independent internal audit function within the organization as per the Code of Corporate Governance.

ANS: F PTS: 1 OBJ: Internal Audit NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. Businesses that use independent auditors do not need the use of internal auditors.

ANS: F PTS: 1 OBJ: Types of Auditors NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 27.

ICPAS accords the CPA Singapore designation.

ANS: T PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

28. Internal auditing is an objective evaluation function established within an organization.

ANS: T PTS: 1 OBJ: Types of Auditors NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. Operational audits are designed to determine if the company’s financial statements are prepared in compliance with IFRS. ANS: F PTS: 1 OBJ: Types of Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. Governmental auditors perform operational and financial statement audits.

ANS: T PTS: 1 OBJ: Types of Auditors NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. The internal audit profession adheres exclusively to standards set by the Public Accountants Oversight Committee.

ANS: F PTS: 1 OBJ: Types of Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. The execution of solutions to issues brought to light by internal auditors is the responsibility of management of the organization.

ANS: T PTS: 1 OBJ: Types of Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. Governmental audit standards are developed by the Public Accountants Oversight Committee.

ANS: F PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34.

AGO performs three types of Audit those are, Financial Statement Audit, Compliance Audit and Internal Audit.

ANS: F PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

35. AGD involved in setting Accounting Standards for Statutory Boards and takes on the Statutory role of protecting Singapore’s past reserves.

ANS: T PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 36. AGO who is Singapore’s National Auditor submits its audit report to public.

ANS: F PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37.

Public Accountants Oversight Committee in Singapore was established under the Accountants Act and assists ACRA. ANS: T PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

38. Auditors of public companies need not adhere to the requirements of statutory or regulatory organizations.

ANS: F PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. When the auditor has no reservations about management’s financial statements, then the report issued is called a qualified report.

ANS: F PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. Auditors need only understand the rules of accounting as the principles are outdated.

ANS: F PTS: 1 OBJ: Scope of Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. An audit is a form of an attestation service.

ANS: T PTS: 1 OBJ: Audit, Attestation, and Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. An audit and an assurance service both require a report to a third party.

ANS: F PTS: 1 OBJ: Audit, Attestation, and Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. The purpose of assurance services is to improve the quality of the information provided.

ANS: T PTS: 1 OBJ: Audit, Attestation, and Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. The internal auditor is a primary provider of assurance services.

ANS: T PTS: 1 OBJ: Audit, Attestation, and Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. The internal auditor is a primary provider of operational audits.

ANS: T PTS: 1 OBJ: Audit, Attestation, and Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 MULTIPLE CHOICE 1. The need for assurance services arises for all of the following reasons EXCEPT: a. potential bias in providing information. b. Closeness between a user and the organization. c. complexity of the processing systems. d. remoteness between a user and the organization.

ANS: B PTS: 1 OBJ: Demand for Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Independent professional services that are provided on financial or other information that improve the quality of decision making are known as a. internal auditing. b. financial auditing. c. assurance services. d. attestation services.

ANS: C PTS: 1 OBJ: Scope of Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. Which one of the following is not a critical component of assurance services? a. a process on which service is provided b. an assurance service provider c. a user who derives value d. a CPA ANS: D PTS: 1 OBJ: Scope of Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. Which one of the following is not a key attribute needed to perform assurance? a. subject matter knowledge b. independence c. established criteria or standards d. accounting skills ANS: D PTS: 1 OBJ: Credibility of Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. A service provided by practitioners that always involves a report that goes to a third party is a. assurance b. attestation c. audit d. Both B and C. ANS: D PTS: 1 OBJ: Assurance Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 6. Which one of the following is not part of the attest process? a. gathering evidence about assertions b. proving the accuracy of the books and records c. evaluating evidence against objective criteria d. communicating the conclusions reached ANS: B PTS: 1 OBJ: Scope of Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. Which of the following is part of the attest process? a. communicating the conclusions reached to a third party b. guaranteeing the accuracy of the books and records c. evaluating evidence against objective criteria d. A and C e. B and C ANS: D PTS: 1 OBJ: Scope of Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. Which one of the following is a potential problem with management's communication of financial information that causes third parties to desire the independent auditor's assessment of the financial statement presentation? a. complexity of transactions affecting the financial statements b. lack of criteria on which to base information c. remoteness of the user from the organization d. A and C e. A and B ANS: D PTS: 1 OBJ: Demand for Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. Users of the audit report can reasonably expect the audited financial statements to be a. complete and contain many of the important financial disclosures. b. presented fairly according to IFRS. c. free from all errors. d. all of the above. e. none of the above.

ANS: B PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Which one of the following is not a management expectation for independent auditors? a. an outside source of expertise on accounting matters b. individuals who perform tests and draw conclusions on assertions c. a participant in management decision making d. a provider of a written communication ANS: C PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 11. Users can reasonably expect audited financial statements to be a. complete and contain all important financial disclosures, be free from material misstatements and be presented fairly. b. complete and contain all important financial disclosures, be free from material misstatements and be presented fairly according to IFRS. c. complete, be accurate and be presented fairly according to IFRS. d. complete and contain all important financial disclosures, be free from all misstatements and be presented fairly according to the substance of IFRS. ANS: B PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. Internal auditors may perform all of the following types of audits except a. operational audits. b. compliance audits. c. computer system audits. d. all of the above may be performed by internal auditors.

ANS: D PTS: 1 OBJ: Types of Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. An “integrated audit” includes an audit of a. the company’s internal controls. b. the company’s financial statements. c. the company’s compliance with its rules and policies. d. Both A and B. ANS: D PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. Which of the following services is the broadest and most inclusive? a. Audit b. Attestation c. Assurance d. Compliance ANS: C PTS: 1 OBJ: Scope of Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. An expectation of the public is that the auditor will recognize that the primary users of audit assurance are a. the clients. b. the Public Accountants Oversight Committee. c. members of management. d. third-party users.

ANS: D PTS: 1 OBJ: Scope of Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 16. Auditing is important in a free market society because a. the public requires CPAs functioning as divisions of regulatory bodies. b. auditors detect all errors and fraud made by company employees. c. it provides reliable information based upon which to judge economic performance. d. the auditor is an amiable insurance policy for investors. e. all of the above are true.

ANS: C PTS: 1 OBJ: Unique Service NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Third-party users of the audit report expect the auditor to do all of the following except: a. to evaluate measurements and disclosures made by management b. to provide a biased evaluation of the financial statements c. to determine whether financial statements are presented in accordance with IFRS d. to gather sufficient evidence to support their opinion ANS: B PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. CPA firms performing public financial statement audits must a. register with the Institute of Certified Public Accountants of Singapore. b. register with the Institute of Internal Auditors. c. register with the Auditor General’s Office. d. register with the Public Accountants Oversight Committee.

ANS: D PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. The auditor of financial statements must make very difficult interpretations regarding authoritative literature. Additionally, the auditor must a. proceed beyond IFRS to assess how the economic activity is portrayed in the financial statements. b. force management to make certain decisions regarding their financial statements. c. disregard independence in order to find the underlying truth of the evidence. d. establish new criteria by which financial statements may be compared.

ANS: A PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Results of the financial statement audit are communicated to users through a(n) a. financial statement. b. written management assertion. c. audit report. d. none of the above.

ANS: C PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 21. Assurance services may include which of the following? a. attesting to financial statements b. examination of the economy and efficiency of governmental operations c. evaluation of a division's performance for management d. tax preparation services e. A, B, and C only ANS: E PTS: 1 OBJ: Scope of Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. IFRS is set of accounting standards, interpretations and framework that is formulated by a. Institute of Certified Public Accountants. b. International Accounting Standards Board. c. Accounting Standards Council. d. Ministry of Finance in Singapore.

ANS: B PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. Management of a company is responsible for a. hiring the auditor. b. preparing the financial statements. c. the audit workpapers. d. independence and obtaining evidence.

ANS: B PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24.

SAA Global Education (SAA- GE) was established in 1985 as a. an accountancy and assurance facilitator in world b. A regulator of public accountants in Singapore c. a training arm of ICPAS d. a national accountancy body ANS: C PTS: 1 OBJ: Scope of Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

25. Which one of the following is not a provider of assurance services? a. CPAs b. internal auditors c. governmental auditors d. ICPAS ANS: D PTS: 1 OBJ: Scope of Assurances NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 26. The internal audit profession has emerged and is increasingly becoming active for all of the following reasons except: a. management's need for an objective appraisal of organizational or departmental performance b. increased internal and external emphasis on effective procedures to detect or prevent fraud c. compliance with Code of Corporate Governance issued by Corporate Governance Committee d. mandatory compliance with Singapore Exchange Listing Rules ANS: D PTS: 1 OBJ: Types of Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. Which one of the following statements is not true about internal auditing? a. Internal auditing is an objective evaluation function. b. Internal auditing is established within an organization. c. Internal auditing's purpose is to provide assurance regarding the company's compliance with stated policies and procedures. d. Internal auditing is established as an independent service to regulatory bodies and creditors.

ANS: D PTS: 1 OBJ: Types of Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. An audit which has as its purpose the evaluation of the economy and efficiency with which resources are employed is known as a(n) a. financial audit. b. compliance audit. c. operational audit. d. governmental audit.

ANS: C PTS: 1 OBJ: Types of Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. An audit which determines whether organizational policies are being followed and whether external mandates are being met is known as a. a financial audit. b. a compliance audit. c. an operational audit. d. none of the above ANS: B PTS: 1 OBJ: Types of Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30.

The Chairman and member of Accounting Standards Council (ASC) are appointed by a. Minister of Finance in Singapore. b. Chairman of ICPAS. c. Auditors General’s Office in Singapore. d. Accountant General’s Department.

ANS: A PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 31. The objective of an operational audit is to a. evaluate whether laws have been broken by management. b. evaluate fairness of presentation of financial statements. c. evaluate compliances with company rules and regulations. d. evaluate the effectiveness and efficiency with which resources are employed.

ANS: D PTS: 1 OBJ: Types of Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. The primary governing board that performs quality reviews on registered CPA firms that audit public companies is the a. PAOC b. AGO c. IPCAS d. ASC ANS: A PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33.

Which of the following organizations develops, reviews and approves Accounting Standards? a. PAOC b. AGD c. ASC d. ACRA ANS: C PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

34. The public expects auditors to a. understand and enforce adherence to IFRS in presentation of Financial Statements. b. be neutral to preparers and users of financial information. c. recognize that the public are the primary users of audit services. d. take more responsibility for the discovery of fraud. e. all of the above are expectations of the public.

ANS: E PTS: 1 OBJ: Scope of Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. Which of the following describes ACRA’s role? a. facilitating for development of business entities and public accountancy profession b. providing a responsive and trusted regulatory environment for public accountants c. achieving synergies between business and public accountants d. all of above ANS: D PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 36.

AGD performs following role a. preparing government’s financial statements b. formulating Accounting, financial policies c. registration of CPAs d. A and B ANS: D PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

37. AGO has legal mandate to carry on a. audit of companies listed on Singapore stock exchange b. Internal audit of public companies c. audit of statutory bodies d. audit of government, ministries, organs of state, other public entities and government owned companies ANS: D PTS: 1 OBJ: Regulatory Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. The organization that issued the Internal Control, Integrated Framework which serves as the primary criterion for evaluating the quality of a company’s internal control system is a. PAOC b. COSO c. ICPAS d. AGO ANS: B PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. Auditing is a systematic process that includes all of the following except: a. communicating results to users b. procuring and evaluating evidence c. providing important managerial decisions for a client d. comparing evidence regarding assertions to certain established criteria ANS: C PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. As it relates to an audit, materiality is a. not taken into consideration. b. related only to the sufficiency of procedures performed. c. based upon audit fees. d. determined based upon the importance to a user of the financial statements.

ANS: D PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. Which of the following is not a component of assurance services? a. information or a process on which the assurance services is provided. b. report to a third party. c. a user or a group of users who derive value from the service provided. d. a service provider.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: B PTS: 1 OBJ: Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. Which type of auditor may perform a financial statement audit? a. external auditor. b. internal auditor. c. governmental auditor. d. Both A and C. e. All of the above.

ANS: D PTS: 1 OBJ: Types of Auditors NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. Which type of auditor may perform an operational audit? a. external auditor. b. internal auditor. c. governmental auditor. d. Both B and C. e. All of the above.

ANS: E PTS: 1 OBJ: Types of Auditors NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. What are the criteria used in an operational audit? a. IFRS. b. effectiveness and efficiency. c. rules and regulations. d. company policies. e. Both B and C. ANS: B PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. What are the criteria used in a compliance audit? a. IFRS. b. effectiveness and efficiency. c. rules and regulations. d. company policies. e. Both C and D. ANS: E PTS: 1 OBJ: Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. Attributes of assurance providers Discuss the three or more attributes that an assurance professional must possess in order to maintain credibility. Explain the importance of these attributes to the assurance process.

ANS:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 1) 2)

3) 4)

Subject Matter Knowledge - The assurance provider must be an expert in the area of service provided. Expertise in a complex body of knowledge sets the assurance professional apart from others.

Independence - The assurance provider must be unbiased, free from conflict of interest, objective and independent of the company receiving assurance services. This allows the professional to remain neutral and free from influence by parties with a vested interest in the outcome of assurance services.

Agreed Upon Criteria - Clear criteria must be available for the assurance provider to measure objectives and results against. In a financial statement assurance engagement, the criteria are represented by Generally Accepted Accounting Principles.

Process Expertise - Evidence is obtained and evaluated during the course of an assurance engagement. Professionals providing these services must be able to draw accurate conclusions based upon the results of testing competent, sufficient evidence obtained.

PTS: 1 OBJ: Credibility of Assurances NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 2. Users of financial statements Identify at least three types of users of financial statements. Describe their primary use of the financial statements and how the misstatement of those statements might injure the user.

ANS: Users of audited financial statements may include:  Management may utilize the audit report to determine whether the financial statements are presented in accordance with IFRS, whether the firm is availing itself of appropriate internal controls, and as a means of evaluating employee performance. Misstatement of the financial statements would cause the client to make erroneous decisions about financial position, internal controls and employee rewards and punishments.  A financial institution that is asked to make a loan uses the financial statement to judge the credit worthiness of the borrower. Misstatements in the financial statements lead to errors in lending that jeopardize the assets of the bank and depositors.  A vendor who is asked to grant credit uses the statements and faces injury in a manner similar to the financial institution.  A third-party stockholder uses the financial statements to determine if the investment will provide the returns consistent with the needs of the investor. Misstatements of the financial statements will lead to different results or possible loss of the investment.  Others: Potential stockholders, taxing authorities, regulatory agencies, labor unions, employees, bondholders, court system, retirement plans, or retired employees PTS: 1 OBJ: Auditing Defined NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Overview of Financial Statement Audit Define auditing and discuss how its components fit into an overview of a financial statement audit.

ANS:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 Financial statement auditing has been defined as a “systematic process of actively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.”

PTS: 1 OBJ: Overview of Financial Statement Audit NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 4. Professional and regulatory organizations Identify at least four professional or regulatory organizations. Explain how and why they assist and/or monitor the audit and assurance profession.

ANS: PAOC: Public Accountants Oversight Committee in Singapore was established under the Accountants Act and assists ACRA in the many matters relating to the profession of public accountancy. It undertakes registration of public accountants, determination of standards and other professional requirements and administering the Practice Monitoring Program (PMP), complaints and disciplinary procedures.

ICPAS: Institute of Certified Public Accountants of Singapore (ICPAS) is the national accountancy body that develops, supports and enhances the integrity, status and interests of the profession. ICPAS accords the CPA Singapore designation. The Auditing and Assurance Standards Committee of the ICPAS considers all new and revised pronouncements issued by the IAASB and recommends them for adoption in Singapore.

ASC: Accounting Standards Council develops, reviews, amends and approves accounting standards for entities under its purview. The ASC track closely the introduction of new International Financial Reporting Standards (IFRS) for possible application in Singapore by taking into account the local economic and business circumstances and context.

ACRA: Accounting and Corporation Regulatory Authority is the national regulator of business entities and public accountants in Singapore. ACRA also plays the role of a facilitator for the development of business entities and the public accountancy profession. It provides a responsive and trusted regulatory environment for businesses and public accountants. It plays role to achieve synergies between the monitoring of corporate compliance with disclosure requirements and regulation of public accountants performing statutory audit.

The IIA is a voluntary organization that administers the Certified Internal Auditor program and issues standards for the practice of internal audit.

PTS: 1 OBJ: Regulatory Role NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 5. Internal and external auditors Compare and contrast the work of an internal and an independent external auditor.

ANS:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 The independent external auditor is engaged to perform an audit of the financial statements for the purpose of expressing a professional opinion thereon. The internal auditor is an employee of the company who provides an active appraisal function within an organization to evaluate its activities as a service to the audit committee or board of directors. The work of external and internal auditors is often very similar in form, but the purpose and uses of the work are different. Both groups conform to professional standards that are in many ways similar. Often times, the internal and external auditors work together in identifying potential solutions to problems identified.

PTS: 1 OBJ: Types of Auditors NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 6. Objectives of different audit types Compare and contrast the objectives of financial, compliance, operational and governmental audits.

Include in your answer who performs each type of audit.

ANS: Financial audits performed by independent CPAs have as their aim the expression of a professional opinion as to the overall fairness of the statements in all material respects and as to the presentation of these statements in accordance with GAAP. External auditors and governmental auditors may perform them; because of lack of independence, the internal auditor can only assist the external auditor in the performance of an audit of their financial statements.

Compliance audits are a systematic process to determine whether or not an entity's activities are carried out in accordance with standards or policies promulgated by management or regulatory agencies, e.g., rules, laws or regulations. All three types of auditors, external, internal and governmental, perform compliance audits regularly.

Operational audits are systematic appraisals of an entity's operations to determine whether an organization's operations are being carried out in an efficient manner. The criteria used depend very much on the abilities and knowledge of the auditor in judging the efficiency and effectiveness of operations and methods to improve them. All three types of auditors may perform them, i.e., external, internal and governmental, though operational audits are most closely associated with internal and governmental auditors.

Governmental audits are usually performed by employees of the government and they usually encompass all three types of audits just mentioned. The major difference is the governmental orientation. Operational audits for effectiveness and efficiency may be performed, as well as financial audits for compliance with governmental IFRS, and compliance audits with laws, rules and regulations.

PTS: 1 OBJ: Types of Audits and Auditors NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 7. Regulatory and professional bodies Write the full name of the following regulatory and professional acronyms and describe the function of each entity: PAOC

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ICPAS ASC AGD ACRA ANS: PAOC: Public Accountants Oversight Committee in Singapore was established under the Accountants Act and assists ACRA in the many matters relating to the profession of public accountancy. Its functions are registration of public accountants, determination of standards and other professional requirements and administering the Practice Monitoring Program (PMP), complaints and disciplinary procedures.

ICPAS: Institute of Certified Public Accountants of Singapore (ICPAS) is the national accountancy body that develops, supports and enhances the integrity, status and interests of the profession. ICPAS accords the CPA Singapore designation. The Auditing and Assurance Standards Committee of the ICPAS considers all new and revised pronouncements issued by the IAASB and recommends them for adoption in Singapore.

ASC: Accounting Standards Council develops, reviews, amends and approves accounting standards for entities under its purview. The ASC track closely the introduction of new International Financial Reporting Standards (IFRS) for possible application in Singapore by taking into account the local economic and business circumstances and context.

AGD: Accountant-General’s Department is a department under the Ministry of Finance in Singapore.

It is responsible for the delivery of a wide spectrum of financial and accounting related activities, such as preparing government financial statements, formulating accounting, financial and reserves policies, monitoring government borrowings, managing government cash, developing and administering the integrity of government accounting systems etc. It is also involves in setting accounting standards for statutory boards and takes on the statutory role of protecting Singapore’s past reserves.

ACRA: Accounting and Corporation Regulatory Authority is the national regulator of business entities and public accountants in Singapore. ACRA also plays the role of a facilitator for the development of business entities and the public accountancy profession. It provides a responsive and trusted regulatory environment for businesses and public accountants. It plays role to achieve synergies between the monitoring of corporate compliance with disclosure requirements and regulation of public accountants performing statutory audit.

PTS: 1 OBJ: Regulatory Role NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 8. Requirements of auditors in public accounting Recent landscape changes in accounting and auditing developed from corporate fraud and, arguably, auditor failure. In order to continually lead and adapt to the dynamics of regulation, principles based accounting practices and auditing standards, what types of skills and traits are auditors required to possess?

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: In addition to integrity, ethics and independence, auditors must possess an inherent ability to understand the client. This pertains not only to the manner in which the company operates, but the industry in which the client participates. The auditor must be able to use sound professional judgment and skepticism to perceive issues and propose solutions. An auditor must understand the environment in which a client does business. The surrounding economic, cultural and political aspects of a company are all vital to the auditor's understanding of risks.

An auditor must be able to interpret a complex body of knowledge, apply audit procedures and measure assertions against the criteria of generally accepted accounting principles. Risks must be adequately considered for the audit and the client so that the audit firm may reduce exposure in the marketplace.

Information technology used by clients must also be understood by the auditor so that internal control, prevention and detection of misstatements and the audit trail might be assessed. Similarly, the auditor must use software to perform an audit efficiently and adequately.

PTS: 1 OBJ: Auditing Defined NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 9. The need for assurance services Identify three reasons for the rise of assurance services.

ANS: Three potential reasons for the rise of assurance services are: 1. The party who provides information may bias that information to convey a better impression than the real circumstances merit.

2. Remoteness between an information user and the organization.

3. The complexity of transactions, information or processing systems may make it difficult to determine a proper presentation without an independent review.

4. There is a need to minimize financial surprises. Material errors and fraud must be found and corrected prior to the release of audited financial statements.

PTS: 1 OBJ: Demand for Assurances NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 10. Attestation versus assurance Distinguish between attestation services and assurance services.

ANS: Attestation services are a subset of the broader spectrum of assurance services. Attestation services always involve evaluation of an assertion by one party to a third party. Assurance services do not need to involve a report, nor do they need to involve a third party.

PTS: 1 OBJ: Scope of Assurances NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking Chapter 2 - Corporate Governance and Audit Standards

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

TRUE/FALSE 1. The objective of financial reporting is to provide useful information to interested users.

ANS: T PTS: 1 OBJ: Expectations of Auditors NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 2. Corporate governance is a process by which the owners, but not the creditors, exert control over the resources of the enterprise.

ANS: F PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 3. The development of strategic plans for a business entity is the responsibility of the board of directors.

ANS: F PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 4. The audit committee is a subcommittee of the board of directors comprised of independent outside directors.

ANS: T PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 5. The auditor must communicate significant audit adjustments to the audit committee.

ANS: T PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 6. Any major disagreement the auditor has with management should be discussed with the audit committee.

ANS: T PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 7. An audit must be performed by persons who can make sound judgment relating to complex accounting issues.

ANS: T PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 8. Managers of organizations are hired by Boards of Directors to perform responsibilities such as the implementation of internal control.

ANS: T PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 9.

The objective of corporate governance is to enhance long-term shareholder value without compromising the interest of other shareholders.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: T PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 10. Audit Committee must include two non-executive directors.

ANS: F PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 11. A company with good corporate governance has a lower cost of capital and superior stock returns as compared to other companies.

ANS: T PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 12. The audit process is designed around directions that are inherent in the accounting communications.

ANS: T PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 13. Audit procedures are adjusted for the risk of potential misstatement in the account balance.

ANS: T PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 14. Audit program is the document that lists the specific procedures and audit tests to be performed in gathering evidence to test assertions.

ANS: T PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 15. An auditor must be independent in fact and in appearance.

ANS: T PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 16. An auditor must be independent in fact and in appearance.

ANS: T PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 17. Due professional care is defined as following Generally Accepted Accounting Standards.

ANS: F PTS: 1 OBJ: Generally Accepted Auditing Standards NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 18. Public accounting firms use close supervision and review of audit work to ensure that audits are conducted with due professional care.

ANS: T

PTS: 1

OBJ: Audit Process

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 19. The process of planning the audit includes the preparation of the audit program.

ANS: T PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 20. Part of the planning process of an audit is identifying factors that may require extension or modification of the audit tests, such as potential related-party transactions or the possibility of material errors or potential fraud.

ANS: T PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 21. Evidence is required to be sufficient, reliable and relevant in order to provide a reasonable basis for audit conclusions.

ANS: T PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 22. Fieldwork standards include planning and supervision, understanding the internal control structure, and sufficient, competent evidential matter.

ANS: T PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 23. Corporate Governance starts with shareholders or owners delegating responsibilities directly to operating unit.

ANS: F PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

24. In 2005, the Council of Corporate Disclosure and Governance (CCDG) issued the code of corporate governance.

ANS: T PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 25. Compliance of corporate governance is mandatory for a company listed on the Singapore Stock Exchange.

ANS: F PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 26. The Corporate Governance Code is divided in Board matters and communication with shareholders.

ANS: F PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 27. An auditor is required to communicate new accounting principles adopted by the organization to the audit committee.

ANS: T PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 28. With effect from 1 September 2007, the Code of Corporate Governance came under the purview of the Monetary Authority of Singapore (MAS) and Singapore Exchange (SGX).

ANS: T PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 29. The Audit Committee Guidance Committee (ACGC) was set up by the Monetary Authority of Singapore (MAS), the Accounting and Corporate Regulatory Authority (ACRA), and the Singapore Exchange Ltd (SGX) in 2008.

ANS: T PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 30.

The ACGC was set up to strengthen the Corporate Governance Practice of listed companies in Singapore.

ANS: T PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

31. The primary parties to audit are the auditors (CPA firm), audit committees, management (owners of financial reporting process), and internal auditors.

ANS: T PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 32. Audit planning meetings ensure that the auditors are aware of the audit approach and responsibilities.

ANS: F PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 33. Omissions in the presentation of financials of the company by the management are not considered material.

ANS: F PTS: 1 OBJ: Auditing NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 34.

Poor corporate governance is co-related to audit risk.

ANS: T PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

35. The audit committee must be composed of outsiders such as the organization's attorney and audit partner.

ANS: F

PTS: 1

OBJ: Role of Audit Committees

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 36. Management of companies should have the ability to hire and fire the external auditor.

ANS: F PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 37. The audit committee should have the authority to hire and fire the external auditors.

ANS: T PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 38. Auditors are required to inform the audit committee of any significant audit adjustments discovered during the engagement.

ANS: T PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 39. Audit adjustments reflect upon the stewardship of the auditor over the financial statements of the client and the auditor's responsibility over the related disclosures.

ANS: F PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 40. The standards of fieldwork include the responsibility of the auditor to exercise due professional care..

ANS: F PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 41. The purpose of the audit program is to discover material misstatements in the client's financial statements.

ANS: T PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 42. Planning is not required in an audit as long as an audit program has been developed.

ANS: F PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 43. A component of the reporting standards is the requirement that an opinion always be rendered on the subject matter.

ANS: F PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 44. An auditor must obtain an adequate amount of evidence and the evidence must be of the appropriate quality.

ANS: T PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 45. An auditor conducts a planning meeting in order to develop an understanding of internal controls.

ANS: F PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 46. Materiality involves the degree of misstatement or omission that would affect the decision making process of the users of financial information.

ANS: T PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 47. Materiality is not usually considered by the external auditor, rather, it is a component of internal auditing.

ANS: F PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 48. An auditor of financial statements gathers evidence for review purposes and does not test it.

ANS: F PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 49. Audit planning includes determining the type of audit reports to be issued.

ANS: T PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking 50. The primary parties involved in corporate governance also include regulatory agencies.

ANS: F PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking MULTIPLE CHOICE 1. Corporate governance is a process by which the owners and creditors of an organization a. exert control. b. require accountability. c. exert control and require accountability. d. neither exert control nor require accountability.

ANS: C PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 2. The responsibility for operating an enterprise is delegated to the a. auditor. b. audit committee. c. management. d. board of directors.

ANS: C PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. The audit client of the CPA firm is a. management. b. the SEC. c. the audit committee. d. the stockholders.

ANS: C PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. The audit committee has oversight responsibilities for a. outside reporting. b. internal auditing. c. external auditing. d. all of the above.

ANS: D PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. Which of the following should be communicated by the auditor to the audit committee? a. auditor's responsibilities under the ISA. b. all significant audit adjustments. c. significant accounting policies. d. all are required communications.

ANS: D PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Which one of the following do not form part of the code of corporate governance for a listed company? a. Board Matters b. Remuneration Matters c. Accounting and Audit d. Communication with regulatory authorities ANS: D PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. Which one of the following attributes is not required of an auditor in relation to audit clients? a. Independence b. Bias c. Integrity

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 d. technical competence ANS: B PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. The standards of competence, independence, and due professional care are covered by the a. general standards. b. standards of field work. c. reporting standards. d. none of the above.

ANS: A PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. The standards which present guidance in testing assertions and planning for the audit are known as a. general standards. b. standards of field work. c. standards of reporting. d. standards of operation.

ANS: B PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Testing of the assertion of additions to property, plant and equipment can be broken down into a. valuation of assets that were acquired in the previous years. b. the valuation of new assets added in the current year. c. proper recording of depreciation. d. A and C. e. A, B, and C. ANS: E PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Which of the following matters does corporate governance aim at? a. company affairs directed and managed in an ethical manner b. enhancing shareholder value in the long term c. preservation of all stakeholders d. all of above ANS: D PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. The Audit Committee Guidance Committee was set up by a. the Singapore Stock Exchange

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 b. the Monetary Authority of Singapore c. the Accounting and Corporate Regulatory Authority (ACRA) ACRA d. all of above ANS: D PTS: 1 OBJ: Key Provisions of Sarbanes NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. Management of an organization has the responsibility for all of the following except: a. accounting principles used in financial reporting b. engagement of a qualified auditor c. internal control over financial reporting d. financial statements and disclosures ANS: B PTS: 1 OBJ: Management Responsibilities NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. A guidebook issued by the ACGC addresses following matters: a. An audit committee’s key responsibilities towards the listed company. b. Practical issues of concern for the audit committee members of the listed company. c. Internal audit issues. d. A and B ANS: D PTS: 1 OBJ: Audit Committee NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. An audit committee must be comprised of outside directors and at least one outside financial expert.

Which of the following is considered an outside director? a. A director who is not a member of management and has no other relationship to the organization. b. A consultant to the organization who works as an honorary member of the board. c. A director who is also a member of management and has no other relationship to the company. d. A director who is a CPA. ANS: A PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. Planning the audit does not involve which of the following? a. development of an audit program b. a planning meeting c. preparation of management representations d. consideration of materiality ANS: C PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Planning the audit requires which one of the following? a. developing an understanding of the client's business and the industry in which it operates b. understanding the client's internal control structure c. developing an understanding of the client's accounting policies and procedures d. A and C only

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 e. all of the above ANS: D PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. Which of the following attributes are required to undertake auditor responsibilities? a. Ethics b. Standards c. Legal responsibilities d. High-quality decision making e. All of the above ANS: E PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. Owners need accountability with regard to utilization of the entrusted resources from which of the following party? a. Internal Auditors b. Management and Board c. Audit Committee d. Independent Directors e. Auditors ANS: B PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Which of the following is not a primary party to corporate governance? a. Stockholders b. Audit committee c. Employees of the company d. Internal auditors ANS: C PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. The management’s responsibility towards financial statements is to a. make choices on the selection of accounting policies . b. implementation of internal control system assuring completeness . c. ensuring that financial statements contain full and complete disclosure d. All of above ANS: D PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. The financial statement auditor must understand the client's internal control as a component of the fieldwork standards. One of the reasons for this understanding is so that the auditor may a. provide individual comments on internal control non-compliance. b. Be assured that the client will pay its audit bills. c. assess materiality. d. assess the risk of possible misstatements in the financial statements.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: D PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23.

An auditor engaged to audit the financial statements of a client obtains a sufficient understanding of the client's internal control for all of the following reasons except a. understanding the entity's internal control is a requirement of ISA. b. That the auditor must use the information to assess the risk of material misstatements arising from the lack of internal control. c. that it is the primary basis for the audit report. d. that it assists the auditor in designing the nature, timing and extent of further audit procedures.

ANS: C PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

24. The failure to find the fraud in Worldcom’s financials was on account of a. failure of internal control procedures. b. auditors’ negligence in audit planning c. failure to perform a test of asset additions correctly d. failure to attend the increased rental expenditure.

ANS: C PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. Financial Failures such as Enron, WorldCom are result of a. failure in the corporate governance structure b. faults in the Public Accounting Profession c. greed-infected professionals and management d. all of above ANS: D PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. For an auditor to be independent, he or she must be independent in a. fact. b. appearance. c. fact and appearance. d. either fact or appearance.

ANS: C PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. The Audit evidence gathered through audit testing helps the auditors to conclude a. that the accounting balance is misstated b. that the accounting balance is misstated and either the client agrees or disagrees to make the adjustments required in the financials c. The management is greedy and does not adjust. d. A and C

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: B PTS: 1 OBJ: Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28.

ACGC is a committee set up by the a. MAS. b. SGX. c. MAS, SGX and ACRA. d. International Audit Committee Board.

ANS: C PTS: 1 OBJ: Corporate Governance in Singapore NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

29. An audit committee must comprise a. A CEO and three independent directors. b. one CPA and two independent directors. c. three members of which at least two belong to the accounting profession d. two finance directors and one non-executive director.

ANS: C PTS: 1 OBJ: Audit Committee NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. Audit committees are required to have what person in its composition? a. a CPA b. a public regulator c. a financial expert d. an attorney-at-law ANS: C PTS: 1 OBJ: Audit Committee NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. Materiality is analyzed on the basis of a. gravity of influence on the economic decisions of users. b. size and nature of the misstatement. c. surrounding circumstances. d. all of above.

ANS: D PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. The adit planning meeting is convened to a. understand the scope of audit services to be provided. b. discuss the strength of internal audit control required. c. discuss the conclusions of audit tests performed. d. A and B.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: A PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33.

Planning is the foundation of the audit program because a. it helps the auditor to meet the client management. b. it helps the auditors to perform audit test. c. it helps to design internal control procedures. d. it helps in understanding the client’s business and industry.

ANS: D PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

34. Which of the following are the major elements in audit procedures? a. statistically select a sample of items to test. b. review the documentary evidence of cost and title. c. verify existence of the asset. d. all of above ANS: D PTS: 1 OBJ: Audit Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. Audit planning begins with which of the following events? a. issuance of a management representation letter b. accumulation of audit evidence c. a discussion with the audit team, the client management and its audit committee d. a determination of the audit report to be rendered ANS: C PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. An auditor is concerned with materiality for which of the following reasons? a. to assess internal control b. to comply with the quality assurance standards c. to determine the effects of misstatements on the users of financial information d. to cut down on audit procedures and testing ANS: C PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. An auditor meets with the audit client in the planning stage in order to discuss all of the following except: a. specific audit procedures and tests to be performed by the auditor b. the scope of audit services to be performed c. the use of the internal auditors by the external audit firm d. responsibilities and expectations of each party ANS: A PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38.

In the audit team's determination of materiality, it is important that:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 a. large percentages of sales are used to "lower the blade" of audit testing b. materiality is assessed sufficient to provide a low level of assurance that misstatements will be discovered c. only the most senior of auditors is involved in the calculation of materiality d. changes to financial trends or ratios are considered in addition to overall materiality levels ANS: D PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. Which of the following would not affect an auditor's judgment concerning materiality? a. adjustments at individual transaction levels without consideration of offsets b. the possibility of swings in accounting estimates from period-to-period c. recurring misstatements that are passed over each year under audit d. all of the above must be considered in materiality decisions by auditors ANS: D PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. Which of the following would an auditor perform in order to develop an effective audit program? a. develop an understanding of the client's business and industry b. test specific financial statement accounts and balances c. obtain a management representation letter from the client management d. disregard related party transactions ANS: A PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. Planning procedures performed to develop an audit program consist of all of the following except: a. determination of client company risks b. determination of the audit opinion that will be rendered c. development of a preliminary understanding of the quality of the client's internal control d. anticipation of audit adjustments that will be required ANS: B PTS: 1 OBJ: Overall Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. A proper system of corporate governance is one that demands a. decision making by auditors in place of management. b. accountability back through the system to the shareholders. c. internal audit representation on the board of directors. d. audit planning to obtain competent and sufficient audit evidence.

ANS: B PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. Which of the following requirements are not included in the attestation fieldwork standards? a. adequate planning and supervision.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 b. evaluation of internal control. c. sufficient, competent evidential matter. d. all are required fieldwork standards.

ANS: B PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. Shareholders want accountability from the management on which of the following: a. financial performance b. financial transparency c. quality of internal controls d. all of above ANS: D PTS: 1 OBJ: Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. To whom is the management primarily accountable for its incentive system’s alignment with the shareholders’ best interest: a. internal and external auditors b. regulatory authorities c. shareholders d. A and C above ANS: C PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. The ACGC is set up with the objective of a. issuing a guide on the corporate governance code. b. strengthening the corporate governance practices of listed companies in Singapore. c. monitoring compliance with the code of corporate governance d. A and C above.

ANS: B PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. The role of the auditor and the audit committee Describe the relationship between the external auditor and the audit committee of the company receiving audit services.

ANS:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 The audit committee hires the auditor to perform audits of financial statements that are the representations and responsibilities of management. The audit committee is the literal client of the auditor. The audit committee has the responsibility to assess the quality of audit services received, including the independence of the external audit firm. The audit committee has the ultimate ability to fire the audit firm.

According to auditing standards, the auditors must communicate specific issues to the audit committee. These items of communication include: - The firm's responsibility to audit in accordance with IAS and its responsibility to review other information contained in annual reports and public documents.

- The client company's adoption of significant accounting policies and principles.

- The client company management's judgments and estimates of certain accounting balances.

- Significant audit adjustments proposed by the auditors. All major accounting disagreements with management whether or not resolved.

PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 2. Characteristics of an effective audit committee List and discuss at least four attributes of an effective audit committee that provides important oversight functions.

ANS: Attributes of an effective audit committee includes: 1. The audit committee members should be comprised of outside directors. Outside directors are not members of management and they do not have other relationships with the company.

2. The audit committee members should be financially literate and at least one member should have financial expertise.

3. The committee should be responsible for assessing the independence of the auditor.

4. The committee should have a discussion with the auditor about the auditor's judgments about the company's accounting principles.

5. The committee should be apprised of significant changes in accounting information systems and the related controls.

6. The committee should receive all regulatory reports and meet periodically with regulatory auditors to discuss findings and concerns.

7. The committee should have direct oversight over the internal audit function. It should review the budget, should review the audit plan and discuss internal audit findings.

8. The committee should meet regularly to discuss all matters of corporate governance.

9. The committee may consider separation of the Chairman of the Board and CEO positions.

PTS: 1 OBJ: Role of Audit Committees NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Audit planning

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

Identify at least four steps involved in the planning of an audit.

ANS: Steps involved in planning an audit include: 1. Meet with the client audit committee and the key management of the company to develop an understanding of important audit issues.

2. Develop an understanding of the client's business and the industry within which it operates.

3. Develop an understanding of audit risk and materiality.

4. Develop an understanding of the client's accounting policies and procedures.

5. Anticipate financial statement items likely to require adjustments.

6. Develop an understanding management's readiness for the audit.

7. Determine the scope of services to be performed.

PTS: 1 OBJ: Overview of the Audit Process NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

Auditor independence Discuss the requirement of auditors to be independent in fact and appearance. Why is "independence" referred to as the cornerstone of auditing?

ANS: The auditor must be independent in their mental attitude in conducting the audit as well as in the perception of users. The auditor must favor neither the client nor third parties in gathering evidence and evaluating the fairness of financial statements.

Independence is referred to as the cornerstone of auditing because without independence, the value of the auditor's attestation function would be decreased in the eyes of a third party who relies on the auditor's communication. Because the auditor's report is used by many different users with different purposes, the reports must be judged by all to be unbiased and free from favoritism for any party.

PTS: 1 OBJ: Audit Process NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 4. Explain the meaning of due professional care.

ANS: Due professional care refers to the skill and care expected of a professional. Following only the Accounting Standards is not always sufficient. If a reasonably prudent person would have done more, the professional should do at least as much.

PTS: 1 OBJ: Audit Process NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 5. Discuss what corporate governance is and briefly describe an overview of the corporate governance process.

ANS: According to the Code of Corporate Governance in Singapore, corporate governance refers to “the processes and structure by which the business and affairs of the company are directed and managed, in order to enhance long-term shareholder value through enhancing corporate performance and accountability, while taking into account the interests of other stakeholders.”

Responsibility runs down the organization. The shareholders elect the board of directors, which empowers management, who then supervises the operations of the organization. Accountability runs upward in the organization. The operations personnel are held responsible for their actions and decisions by management. The management has to account for their decisions and actions to the board of directors, and both the board and management are held accountable by the stockholders.

PTS: 1 OBJ: Corporate Governance NAT: AACSB-Communications ability | AACSB-Analytical skills | AICPA BB-Critical thinking 6. Discuss the Corporate Governance Code in Singapore?

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 In 2005, the Council of Corporate Disclosure and Governance (CCDG) issued the Code of Corporate Governance (the “Code”). With effect from 1 September 2007, the Code came under the purview of the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX). Compliance with the Code is not mandatory but companies who are listed on the SGX are required under the Singapore Exchange Listing Rules to disclose their corporate governance practices and explain deviations from the Code in their annual reports for AGMS held from 1 January 2007 onwards.

The Code is divided into four main sections: 1. Board Matters 2. Remuneration Matters 3. Accountability and Audit 4. Communication with Shareholders

Chapter 3 - Audit Risk and Understanding the Client's Business TRUE/FALSE 1. Risk is the uncertainty about events and/or their outcomes that could have a material effect on the organization.

ANS: T PTS: 1 OBJ: Types of Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 2. Enterprise risk management can be an effective means for an organization to identify and address risks.

ANS: T PTS: 1 OBJ: Types of Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 3. To assess the management's integrity, the auditor may interview the management.

ANS: T PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 4. Controls are an accounting related object and do not extend beyond the accounting and finance activities.

ANS: F PTS: 1 OBJ: Identify Linkage between Risk and Control NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 5. Residual audit risk is the remaining risk in specific account balances after assessing all factors dealing with the expectation about the correctness of account balances.

ANS: T PTS: 1 OBJ: Identify Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 6. A basic premise underlying analytical procedures is that implausible relationships among data may reasonably be expected to exist.

ANS: F

PTS: 1

OBJ: Identify Sources of Information about Risk

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 7. Ratio analysis only involves a year-to-year comparison of account balances.

ANS: F PTS: 1 OBJ: Identify Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 8. Trend analysis is proven to be more effective than ratio analysis.

ANS: F PTS: 1 OBJ: Identify Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 9. Analytical techniques contain a combination of both quantitative and qualitative techniques.

ANS: T PTS: 1 OBJ: Identify Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 10. Intentional manipulation of financial statements is a form of fraud.

ANS: T PTS: 1 OBJ: Identify Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 11. Touring the client's production facilities is not an acceptable method for an auditor in understanding the client's business processes.

ANS: F PTS: 1 OBJ: Identify Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 12. Risk analysis does not include identifying risks associated with management's intent to misstate financial statements.

ANS: F PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 13. An auditor will typically review clients annually to determine whether to retain them.

ANS: T PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 14. Engagement risk is said to increase when a client suffers a business failure.

ANS: T PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 15. Prior year audit experience is not beneficial to an auditor in assessing management integrity because management may have different attitudes in subsequent periods.

ANS: F PTS: 1 DIF: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking OBJ: Identify Risks of Being Associated with a Client 16. The auditor is not concerned with illegal acts of clients because such acts are not within the scope of financial statement reporting.

ANS: F PTS: 1 OBJ: Minimize Risk with New Clients NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 17. Audit risk is the risk that the auditor will be sued by the client because of fraudulent actions.

ANS: F PTS: 1 OBJ: Define Audit Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 18. In an audit of financial statements, it is implied that absolute assurance will be provided.

ANS: F PTS: 1 OBJ: Define Audit Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 19. The likelihood of misstatements in the financial statements increases if the client has poor internal control.

ANS: T PTS: 1 OBJ: Define Audit Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 20. Actions to keep detection risk at a lower level are under the direct control of the auditor.

ANS: T PTS: 1 OBJ: Define Audit Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 21. Control risk can be referred to as the client's ability to mitigate overall audit risk.

ANS: F PTS: 1 OBJ: Define Audit Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 22. Inherent risk involves many external factors on the organization that may assist in the existence of misstatements in the financial statements.

ANS: T PTS: 1 OBJ: Define Audit Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 23. Management integrity and ethics have little to do with engagement risk.

ANS: F PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 24. The auditor is required to speak to the previous audit firm before accepting a prospective client in order to better understand the conditions surrounding the change in auditors.

ANS: T PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 25. Materiality is judged based on the judgment of a reasonable user of the financial statement.

ANS: T PTS: 1 OBJ: Materiality NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 26. Materiality is judged using only quantitative factors.

ANS: F PTS: 1 OBJ: Materiality NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 27. Audit risk and materiality are interrelated and materiality is defined in terms of audit risk.

ANS: F PTS: 1 OBJ: Materiality NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 28. Audit risk is the risk that the auditor may give an unqualified opinion on financial statements that are materially misstated.

ANS: T PTS: 1 OBJ: Define Audit Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 29. In the audit risk model, there is a direct relationship between inherent and control risk with detection risk.

ANS: F PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 30. In the audit risk model, the auditor is only able to manipulate inherent and control risk.

ANS: F PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 31. In the audit risk model, the auditor is only able to assess inherent and control risk.

ANS: T PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 32. In the audit risk model, the auditor manipulates detection risk based upon an assessment of inherent and control risk to maintain an acceptably low audit risk.

ANS: T PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 33. In the audit risk model, as detection risk is increased by the auditor, the amount of evidence required and its persuasiveness increases.

ANS: F PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 34. In the audit risk model, each of its components are treated as separate and independent.

ANS: T PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 35. Inherent risk is the susceptibility of an account balance to material misstatement ignoring internal controls.

ANS: T PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 36. The audit risk model can be used by the auditor as a multiplicative model.

ANS: T PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 37. After determining an overall materiality level for the financial statements the auditor uses that assessment in evaluating the materiality of account balances.

ANS: F PTS: 1 OBJ: Materiality NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 38. After determining an overall materiality level for the financial statements, the auditor allocates some portion of that assessment of materiality to account balances.

ANS: T PTS: 1 OBJ: Materiality NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 39. The concept of materiality is pervasive to the audit process and guides the nature and extent of audit testing.

ANS: T PTS: 1 OBJ: Materiality NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 40. Based upon an assessment of engagement risk, the auditor determines an acceptable level of audit risk.

ANS: T PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking MULTIPLE CHOICE 1. Which one of the following is not a process of enterprise risk management? a. identify events b. assess risks c. respond to risks d. decentralize risks ANS: D PTS: 1 OBJ: Identify the COSO ERM Components NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 2. Which one of the following is a valid source of information about the client's processes? a. management inquiry b. review of the client's budget c. a tour of the client's plant d. all are valid sources.

ANS: D PTS: 1 OBJ: Identify Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 3. The risk that financial statements are likely to be misstated materially without regard to the effectiveness of internal control is which type of risk? a. inherent risk b. audit risk c. client risk d. control risk ANS: A PTS: 1 OBJ: Define Audit Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 4. A stipulation in an agreement between an entity and its creditor that places documented restrictions on the organization is referred to as a. debt covenants. b. representation agreements. c. engagement letters. d. current maturities of long-term obligations.

ANS: A PTS: 1 OBJ: Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 5. Analytical procedures are used in an audit because it is assumed of financial statements that a. management fraud can be discovered using such procedures. b. it is plausible that no relationship among data exists. c. analytical procedures are used as tests of controls. d. plausible relationships among data may reasonably be expected to exist and continue.

ANS: D PTS: 1 OBJ: Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 6. An auditor compares year-to-year account balances in order to perform analytical procedures. This is an example of: a. ratio analysis. b. trend analysis. c. internal control analysis. d. vertical analysis.

ANS: B PTS: 1 OBJ: Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 7. The preliminary use of analytical review procedures by the auditor is a. required. b. optional in accordance with auditor judgment. c. only used when other planning procedures cannot be applied. d. used to assist the auditor in documenting internal control.

ANS: A PTS: 1 OBJ: Identify Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 8. The auditors should review the previous year’s reports to regulatory agencies such as filed with the following agency in Singapore a. SEC. b. ACRA c. SEX d. PCAOB. ANS: B PTS: 1 OBJ: Identify Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 9. What is the most relevant use of a knowledge management system for an auditor? a. Professionals may input client data and have procedures performed automatically. b. Auditors are not required to make judgments collectively or individually. c. Professionals may share information related to auditing, accounting standards, and risks. d. Auditors may work entirely from the firm location rather than at the client location.

ANS: C PTS: 1 OBJ: Identify Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 10. What analysis best considers the economic relationships among account balances? a. Altman "Z" Analysis b. Ratio analysis. c. Vertical analysis. d. Horizontal analysis.

ANS: B PTS: 1 OBJ: Identify Sources of Information about Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 11. Why will the external auditor typically interview the internal audit department as it relates to its riskbased approach? a. To appropriately change internal controls. b. To comment on the deficiency of internal audit control. c. To understand and assess management risk processes. d. To perform effective analytical procedures.

ANS: C PTS: 1 OBJ: Audit Risk Defined NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 12. Which is a primary limitation of the audit risk model? a. The audit risk model does not adequately consider external forces on the client organization. b. Components of audit risk are treated as independent variables even though many interdependencies exist between them. c. The audit technology achieves approximate precision outside of a mathematical model. d. Control risk must be adjusted at the hands of the auditor, not by an arbitrary estimation.

ANS: B PTS: 1 OBJ: Use Audit Risk to Plan Audit NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 13. XY, CPA is proposing a prospective audit engagement for AB Pte Ltd. After obtaining written permission from AB Pte Ltd., XY is required to perform what procedure prior to accepting it as a new client? a. Provide full disclosure of fees that will be billed to AB Pte Ltd. b. Contact the former auditor to ensure all disagreements have been resolved. c. Contact the former auditor about certain matters of interest in XY’s decision to accept AB Pte Ltd as a client. d. Contact the former auditor to determine if all fees have been paid, the change in auditors has been approved and integrity issues have been overcome.

ANS: C PTS: 1 OBJ: Minimize Risk with New Clients NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 14. Which of the following will an auditor most likely discuss with the former auditors of a potential client prior to acceptance? a. Integrity of management. b. Reasons for changing audit firms. c. Disagreements with management regarding accounting principles. d. All of the above must be discussed.

ANS: D PTS: 1 OBJ: Minimize Risk with New Clients NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 15. What is the most value achieved by the auditor in requiring an engagement letter being entered into with the client? a. Documented proof of auditor responsibility for financial statements in accordance with ISA. b. Multiple degrees of legal separation of the client from the auditor. c. A locking-in of fees and timetable that must be adhered to by the client. d. A communication and clarification of the responsibilities and expectations of the auditor and the client.

ANS: D PTS: 1 OBJ: Minimize Risk with New Clients NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 16. What is the primary difference between financial reporting risk and audit risk? a. The application of accounting principles. b. Responsibilities of the respective parties involved. c. Demands of users of financial statements. d. Risks of being sued by third parties.

ANS: B PTS: 1 OBJ: Types of Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 17. The auditor commences to understand the client and the related risks of the organization for what purpose? a. To determine the audit opinion that will be issued. b. To determine the appropriate understanding of internal controls by management. c. To determine the detection of audit procedures in the period under audit. d. To determine whether the auditor has sufficient knowledge to perform the engagement.

ANS: D

PTS: 1

OBJ: Types of Risk

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 18. In determining audit risk, the auditor decides how much risk will be taken on by the firm. Which of the following is correct regarding this decision by the auditor? a. The auditor may decide to intentionally render an inappropriate opinion. b. The auditor may decide not to take the audit engagement. c. The auditor may decide to accept audit risk at 100%. d. The auditor may decide that engagement risk is an appropriate measure of audit risk.

ANS: B PTS: 1 OBJ: Types of Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 19. Enterprise Risk Management is a. an important framework for developing internal controls for an organization. b. a tool that can be used by the auditor to effectively assess audit risk during an engagement. c. those risks that affect the operations and potentials outcomes of organizational activities. d. strategic management of defensive and evasive actions in order to ensure the survival of the entity.

ANS: C PTS: 1 OBJ: Types of Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 20. Enterprise Risk Management is useful to the financial statement auditor for what primary function? a. To assess management's identification, understanding and response to risk in assessment of audit related risk. b. To assure the auditor that the audit firm will mitigate the risk of loss in accepting the client and the resulting audit engagement. c. To provide an overall reasonable basis for audit conclusions and the audit report. d. To evaluate management's ability to manage its own risk and provide an individual report on such an assertion.

ANS: A PTS: 1 OBJ: Types of Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 21. AB Pte Ltd. requests that Wreath and Greenworth propose on audit services. Which of the following is a correct assumption surrounding the result of the proposal? a. Greenworth is required to accept AB Pte Ltd. if selected as its auditors. b. Greenworth should interview the prior audit firm prior to releasing the proposal to AB Pte Ltd.. c. Greenworth may decide not to accept AB Pte Ltd. based upon the perceived risk of being associated with AB Pte Ltd. l. d. Greenworth will contact the ACRA and ask for a review of the proposal prior to acceptance.

ANS: C PTS: 1 OBJ: Risks of Being Associated with the Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 22. The auditor needs to understand the financial health of the organization because a. it helps to identify areas that are more likely to be misstated b. it helps to assess the likelihood of financial failure. c. both A and B above d. it helps to assess internal control procedures

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: C PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 23. The auditor will utilize many resources to assess management integrity in the client acceptance process. Which of the following will an auditor most likely refrain from using in this search? a. predecessor auditor. b. other professionals in the business community. c. public databases. d. All of the above will typically be used by an auditor in the search.

ANS: D PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 24. Which of the following industries is usually considered high risk by audit firms? a. High technology companies such as Internet firms. b. Manufacturing companies such as toy producers. c. Legal services such as attorney firms. d. Non-profit companies such as trade associations.

ANS: A PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 25. In accepting a client, auditing standards suggest that the auditor focus on four questions. Which of the following is not one of those four required questions of the predecessor? a. integrity of management. b. the strength of the client’s internal control. c. disagreements with the management with regard to accounting principles, auditing standards, or other similarly significant matters. d. any communications by the predecessor to the client’s management or audit committee concerning fraud, illegal acts by the client, and matters related to internal control.

ANS: B PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 26. Engagement risk has been defined as the risk of potential losses that are incurred by the auditor in being associated with a particular client. Which of the following factors are not associated with increased engagement risk for the auditor? a. management with questionable integrity. b. a failed company. c. materially misstated financial statements. d. all of these factors increase engagement risk.

ANS: D PTS: 1 OBJ: Engagement risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 27. In evaluating the quality of corporate governance, the auditor analyzes several key factors in determining to accept or retain a client. Which of the following factors are not one of those key factors considered by the auditor in evaluating corporate governance? a. Independence and competency of the audit committee. b. Participation of key stakeholders. c. Existence of measurement risk. d. Quality of management’s risk management process and internal controls.

ANS: C PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 28. Risk is pervasive to the audit process. An overview of the risk process associated with an audit includes all of the following risks except which one? a. Audit risk. b. Engagement risk. c. Economic risk. d. Enterprise risk.

ANS: C PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 29. Financial reporting risks are those risks that relate directly to the recording of transactions and the presentation of financial data in an organization’s financial statements. Which of the following factors is not one of the key factors affecting financial reporting risk? a. company’s financial health. b. complexity of the company’s transactions and financial reporting. c. quality of the company’s internal controls. d. All of these factors affect financial reporting risks.

ANS: D PTS: 1 OBJ: Financial reporting risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 30. Which of the following factors is not a component of the audit risk model? a. inherent risk. b. statistical risk. c. detection risk. d. control risk.

ANS: B PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 31. In the audit risk model, which of the risk components may only be assessed by the auditor? a. Inherent risk. b. Control risk. c. Detection risk. d. Both A and B. ANS: D PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 32. In the audit risk model, its risk components are determined, assessed, or manipulated. Which of the following risks are controllable by the auditor? a. audit risk. b. control risk. c. detection risk. d. Both A and C. ANS: D PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 33. Several general premises have been incorporated into the audit risk model. Which of the following general premises have not been incorporated into the model? a. complex or unusual transactions are more likely to be recorded in error than are recurring or routine transactions. b. good internal controls reduce the acceptable level of audit risk. c. the amount and persuasiveness of audit evidence gathered should vary inversely with audit risk. d. the better the organization’s internal controls, the lower the likelihood of material misstatements.

ANS: B PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 34. In implementing the audit risk model, which of the following is not a limitation of the model that makes its implementation difficult? a. inherent risk is difficult to formally assess. b. audit risk is objectively determined. c. the model treats each risk component as separate and independent. d. audit technology is not precisely developed in assessing each component.

ANS: B PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 35. Factors affecting financial reporting risk include the following: a. The quality of the Company’s internal controls. b. The complexity of company’s transactions and financial reporting. c. Management’s motivation to misstate the financial statements. d. All of above.

ANS: D PTS: 1 OBJ: Audit Risk NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 36. In implementing the audit risk model, which of the following is not a component step in applying the model? a. understand management’s risk processes. b. develop expectations. c. assess quality of control system. d. all are component steps in implementing the audit risk approach.

ANS: D PTS: 1 OBJ: Audit Risk Approach NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 37. Under the audit risk approach, which of the following is not a method used by the auditor to manage detection and audit risk? a. adjusting audit staffing to reflect the risk associated with the client. b. developing direct tests of account balances consistent with the detection risk. c. anticipating potential misstatements or accounting problems likely to be associated with account balances. d. adjusting the timing of audit tests to maximize overall audit risk.

ANS: D PTS: 1 OBJ: Audit Risk Approach NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 38. Residual risk is defined as a. susceptibility of a transaction or accounting adjustment to be recorded in error, or for the transaction not to be recorded in the absence of internal controls. b. the risk that the client’s internal controls system will fail to prevent or detect a misstatement. c. the risk left in an account balance after application of internal controls. d. risk that the audit procedures will fail to detect a material misstatement.

ANS: C PTS: 1 OBJ: Identify Risks of Being Associated with a Client NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 39. The risk based approach to auditing is dependent upon the auditor’s ability to understand the business sufficiently to identify and adjust to the residual risk left in account balances. What is the effect upon the nature, extent and timing of audit evidence if the auditor’s assessment of internal controls of the client indicates that a higher degree of residual risk remains in account balances? a. gather less persuasive evidence. b. smaller sample sizes. c. gather more data at or after year end. d. all of these effects on the nature, extent and timing of audit evidence are applicable.

ANS: C PTS: 1 OBJ: Audit Risk Approach NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 40. Audit risk in the audit risk model concerns the risk that the auditor may issue an unqualified opinion on financial statements that are materially misstated. What is the manner in which the auditor assesses audit risk in using the audit risk model to determine the nature, extent and timing of audit evidence to collect in an audit. a. assessed to maintain low level of audit risk given residual risk b. assessed to maintain low level of audit risk given financial statement risk c. assessed to maintain a low level of audit risk given engagement risk d. assessed to maintain a low level of audit risk given enterprise risk ANS: C PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking ESSAY 1. New audit client acceptance Discuss and analyze the audit risks involved in accepting a new client. Explain how an auditor might determine client acceptance.

ANS: The auditor incurs certain engagement risks whenever a client is accepted. These risks include that of the auditor's association with a failed client and the possibility of misstated financial statements on which the audit firm has issued an unqualified opinion.

An audit firm is very sensitive to the types of warning signs that may be apparent prior to client acceptance including the following: Lack of management integrity Lack of existence of, independence of, and/or competence of an audit committee Lack of quality in internal control and risk management activities Stringent regulation and reporting requirements Existence of related party transactions Pressure to meet market expectations An audit firm will be very cautious in accepting a client and will undertake procedures to assess the risk of being associated with a client and its financial statements such as: Discussions with the prior audit firm Inquiry of prospective client's banks and attorney firms Independent sources of information such as private investigations, media, and references Public databases and the Internet Interviews with management The auditor also faces the risk of not being independent of the prospective client. The audit firm will most likely perform a careful analysis to ensure that all relevant audit personnel are considered independent of the prospective client. Additionally, the audit firm will probably perform some diligence to determine whether the potential client's accounting and business records are in a condition to be audited.

PTS: 1 OBJ: Identify Risks Associated with a Client NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

2. Engagement letters Determine the overall objective of an engagement letter for an audit engagement and discuss the major components of the letter.

ANS: An engagement letter is a document used by auditors in conjunction with planned client services. It is an agreement that clarifies the responsibilities and activities of both the audit firm and the client company. An example of this is the delineation between an auditors' responsibility to audit the financial statements and the client company's responsibility for the financial statements and the related disclosures. Another example of clarification is that of the communication in the letter regarding the auditors' responsibility for detecting fraud. A large area of importance of the engagement letter is the clarification of the types of services that will be performed. An auditor, for example, will be careful to document in the letter that the engagement will be an audit (not a review or tax services).

Other important components of an engagement letter include: The dates and periods that will be audited and the related financial statements that will be audited.

An estimated timeframe of audit fieldwork, review and report delivery.

An estimate of audit fees and expected payment terms.

The criteria used by the auditor to perform the audit and the criteria used to measure fair presentation of financial statements.

Materiality and reasonable assurance (not absolute) that will be used as a gauge by the auditor in making judgments and drawing conclusions.

The document will be signed by both the audit firm and the designated member of the audit committee.

PTS: 1 OBJ: Minimize Risk with New Clients NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 3. The audit risk model You are asked by a Bonia Wang, an associate in the business field, to explain the method and importance of the audit risk model in performing an audit. Write a letter to your associate communicating this information.

ANS: Suggested answer in letter format: Student Name College of XYX

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 Address Dear Bonia, Thank you for your inquiry on the audit risk model. I am currently studying the use of this concept in my auditing course and I am very excited about its importance and meaning in the accounting profession. I am happy to share my thoughts and explanation with you in this letter.

The audit risk model is used by many audit firms to determine the nature, timing and extent of the audit procedures performed. This is done by thoroughly understanding the client, its processes and its business environment. An audit firm will perform many diligent procedures previous to accepting a client and before each recurring engagement in order to determine whether to accept or retain the client and to determine the corresponding risks.

The audit risk is the risk that an audit firm will issue a "clean " report on a company that has material misstatements in the financial statements. The audit risk must be at a lower level for an engagement to be accepted or continue. In order to keep the audit risk at a lower level, the proper amount of audit procedures will be performed. The sufficiency of these procedures is considered in the determination of a concept called "detection risk". This risk relates entirely to the client's inherent risk, or the risk that material misstatements will occur in a financial statement before consideration of the company's internal control and its control risk, which is the effectiveness of the company's policy and procedure in detecting and preventing material misstatements.

If the result of inherent risk and control risk together is a high degree of risk, then detection risk must be restricted to a lower level in order to maintain a lower audit risk. This means that the audit firm must do a fairly large amount of audit work in order to keep detection risk low.

If the inherent risk and control risk together produce a low degree of risk, then detection risk can be moderate and audit risk will remain low. This means that the audit firm will focus more on the reliance on internal control and perform a lesser amount of testing and audit work as detection risk will be allowed at a moderate level.

What is interesting about this assessment is that auditors will use the model in planning in order to determine the specific types of procedures to perform, when they will be performed and to what extent.

I hope you find this information both interesting and informative.

Regards, Audit Student PTS: 1 OBJ: Define Audit Risk NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 4. Analytical techniques in an audit

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 Why would an auditor use trend analysis on an audit? How and when would such an analysis be used by the auditor?

ANS: Trend analysis is used by audit firms to flag significant changes from period to period in a client's financial accounting balances. The auditor will look at outliers against individual expectations and then inquire of management to understand any unresolved changes. The ultimate understanding of such effects is then utilized in assisting the auditor to assess inherent risk and to determine areas of audit emphasis and the procedures to be performed.

Trend analysis includes simple year-to-year comparisons of account balances, graphic presentations, analysis of financial data, and projections of account balances based on the history of changes in the accounts. The auditor should establish decision rules in order to identify unexpected results for further investigation. Trend analysis may be used over a several year period for key accounts to aid auditors in understanding why particular changes may have occurred in key accounts.

Analytical procedures are always used in planning an audit. Trend analysis is often one of these analytical techniques used in the audit planning process.

PTS: 1 OBJ: Identify Sources of Information about Audit Risk NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 5. Understanding the client's processes You are on the audit team of Ernst and Young, LLP. Your firm as has accepted GYT Fisheries Pte Ltd.., a manufacturer of fish food. What are some methods you will use in order to understand the business and accounting processes of GYT? ANS: It is essential that an auditor understand the client. One area of this understanding that must be obtained and updated each time an audit is performed is that of its business and accounting processes.

As it pertains to GYT, there will be many areas of operations, accounting, vendors and customers that must be comprehended by us as the auditors.

In order to understand how GYTs' strategy and vision align with the actual business processes, we will interview key members of accounting, marketing, HR, manufacturing, in-house attorneys and executive management. We will ask relevant questions to ascertain the direction of the fish food market and the future plans of GYT fisheries. We will also inquire about the possibility of pending or threatened litigation against GYT. We will review the sales, expense, capital, cash and production budgets of GYTto analyze changes and challenges that the company is undergoing. The budgets will tell the story of struggles with negative variances, production flow, sales trends, discontinued segments, uses of cash, including any purchases of property and equipment and large expenditures during the period. We will determine from these budgets the changing demand for fish food from GYT customers, the changing prices of fish food materials and the various costs of manufacturing.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 We will tour the fish production line and warehouse. These tours will aid us in our understanding of cost accounting assumptions, inventory flow and logistics. This information will be vital in our audit procedures related to inventory quantities, costing, valuation and lower of cost or market assumptions.

Though GYT may have only a small data center, it will be imperative to the audit that we understand how data is stored and secured. We will ask questions regarding not only the physical security of the hardware, but the availability and accessibility of the data and systems.

In preparation for the audit, we will read GYT’s ' agreements, legal documents and minutes of the board of directors. There are many pieces of information that will be important to understanding GYT and its processes. If GYT has loan agreements, for instance, there may be covenants that are vital for considering materiality effects, disclosure items and the risk of the loan coming due earlier than expected. Minutes are a virtual blueprint of the decisions made by the GYT board of directors during the year and through the end of fieldwork. Many items of audit importance will be found in the minutes such as litigation and large business issues, stock issuance, new debt approval, divestitures, acquisitions, and other authorizations. Future plans for the company will also be located in the minutes.

We will review any communication between GYT and any regulatory bodies. Though not likely, there may be a pending investigation by any regulatory body for securities violations, tax issues, questionable marketing practices, or potential irregular or hazardous materials in the fish food. All of these items will be pertinent to our understanding the nature of GYT’s' business environment and processes.

PTS: 1 OBJ: Identify Sources of Information about Risk NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 6. Audit risk model Write out the audit risk model, define each of its components and indicate their expected relationship.

Also discuss the purpose and limitations of the model.

ANS: The audit risk model is: AR = IR  CR  DR, where Inherent risk is the susceptibility of an account balance to material misstatement without regard to the effectiveness of internal control, i.e.,some accounts such as cash or receivables are naturally more likely to misstatement than others.

Control risk is the risk that the internal control system of the client will not prevent or detect a material misstatement.

Detection risk is the risk that the procedures applied by the auditor will not detect a material misstatement.

Audit risk is the risk of the auditor issuing an unqualified report on financial statements that are materially misstated. A material misstatement occurred, was not prevented or detected by the client’s internal controls, nor was it caught by the auditor’s procedures, and as a result a clean opinion was rendered on materially misstated financial statements.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 The auditor uses the audit risk model as a conceptual approach to the audit of the accounts of a client in determining the nature, timing and extent of evidence that needs to be collected. It can be applied either quantitatively (e.g., .2) or qualitatively (e.g., high, low, medium), but is difficult to actually implement in an audit situation because of its limitations. These limitations are that audit risk is subjectively determine, inherent risk is difficult to formally assess, the model treats each component as separate and independent, and the difficulty of accurately assessing each component.

Expected relationships are that within the engagement risk of a particular client where enterprise risk and financial reporting risk have been evaluated a low level of audit risk is determined by the auditor in issuing an audit report. To maintain the low level of audit risk, inherent risk and control risk of the client is assessed and detection risk is manipulated upwards or downwards. As a result there is an inverse relationship between inherent and control risk with detection risk. The higher inherent and control risk are, the lower acceptable detection risk will be. The lower inherent and control risk are, the higher acceptable detection risk can be.

PTS: 1 OBJ: Audit Risk Model NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 7. Materiality Discuss what materiality is for the auditor and how it is used in the audit process Why has the SEC been concerned about materiality?

ANS: Materiality deals with the “magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement”.

In auditing account balances of the client and making judgments as to what has to be adjusted or not, the auditor has to evaluate the materiality of proposed adjustments and the extent to which adjustments will be required of the client. Those proposed adjustments that are not material are below the recognition threshold and by definition don’t require adjustment. Overall planning materiality is determined at the beginning of the audit and then allocated to account balances using various methods.

Auditing standards (ISA 320 Materiality in Planning and Performing an Audit) explain the concept of materiality in the following manner: Misstatements, including omissions, are considered to be material if they individually or in the aggregate, could reasonably be expected to influence the economic decision of users taken on the basis of the financial statements. Judgments about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both.

PTS: 1 OBJ: Materiality NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking 8. Audit risk model and audit evidence Discuss the effect of the audit risk model on the nature, extent and timing of the evidence to be collected.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: The auditor uses the audit risk model as a conceptual approach to the audit of the accounts of a client in determining the nature, timing and extent of evidence that needs to be collected. It can be applied either quantititively (e.g., .2) or qualitatively (e.g., high, low, medium), but is difficult to actually implement in an audit situation because of its limitations.

The auditor varies the nature, timing, and extent of audit evidence collected based upon the manipulation of detection risk to maintain low audit risk. As detection risk is increased with better internal controls and lower inherent risk, the auditor can gather less evidence, it does not have to be as persuasive and more can be gathered at the interim. As acceptable detection risk goes down, however, the auditor must gather more evidence, it needs to be more persuasive, and more has to be gathered at or after year-end. The needed persuasiveness of the evidence determines the types of evidence to be collected, e.g., sometimes analytics and inquiries (at lower end of persuasiveness) are sufficient evidence to support an account balance, but if there is greater residual risk in an account balance then third party confirmations (at higher end of persuasiveness normally) and other types of evidence can be added.

PTS: 1 OBJ: Audit Risk Model and Audit Evidence NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Risk analysis | AICPA BB-Critical thinking

Chapter 4 - Audit Evidence: A Framework TRUE/FALSE

1. Audit evidence is also known as the audit opinion.

ANS: F PTS: 1 OBJ: Overview NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. The amount of evidence gathered is not important to an auditor since the quality of the evidence is of primary importance.

ANS: F PTS: 1 OBJ: Identify the Basic Sources of Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. Based upon the risk of misstatement, the auditor uses judgment to determine which balances and transactions should be tested in the financial statements.

ANS: T PTS: 1 OBJ: Identify the Basic Sources of Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. Assertions are relevant to the audit process because they are the representations of management embodied in the financial statements.

ANS: T PTS: 1 OBJ: Describe the Assertions Contained in Financial Statements NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. Assertions are not relevant to an audit because the financial statements are management's responsibility instead of the auditor's.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: F PTS: 1 OBJ: Describe the Assertions Contained in Financial Statements NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Presentation and disclosure assertions imply that all transactions and balances are properly presented, disclosures represent what actually happened, and the footnote disclosures are appropriate and adequate.

ANS: T PTS: 1 OBJ: Describe the Assertions Contained in Financial Statements NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. Evidence is worth more to the audit process if it involves a member of the audit team actually going out to physically observe it.

ANS: T PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 8. A client's purchase order is much better evidence than a confirmation returned from the client's bank.

ANS: F PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. An auditor may test an account balance by testing the transactions that comprise the balance, by directly testing the final account balance, or a combination of both.

ANS: T PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Internal documentation is more reliable for the auditor if the internal control surrounding the documentation is considered strong.

ANS: T PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Documentation that is produced electronically by the client's internal systems is not considered reliable to the audit process.

ANS: F PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. The quality of electronic evidence depends on the control built into the information system.

ANS: T PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. Testing a sample of cash disbursement for evidence that the vendor invoices are matched with the receiving reports and purchase orders before authorizing payment is a test of effectiveness of internal control.

ANS: T PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. Audit procedures vary according to the risk associated with the client and the method needed to record transactions.

ANS: T PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. Vouching is a process that helps establish that all recorded transactions are valid.

ANS: T PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. One strategy used by auditors in testing assertions is performing directional testing to find overstatements or understatements, but not both.

ANS: T

PTS: 1

OBJ: Explain Directional Testing

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Existence assertions address understatement whereas completeness assertions address overstatement.

ANS: F PTS: 1 OBJ: Explain Directional Testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. The direction of testing from the source documents to recorded amounts provides evidence regarding the completeness of liabilities and expenses.

ANS: T PTS: 1 OBJ: Explain Directional Testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. Testing accounts receivables for overstatement provides evidence on the possible overstatement of sales.

ANS: T PTS: 1 OBJ: Explain Directional Testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Ulanda and Mudana, CPAs, are performing an audit on ABC Pte. Ltd. Ulanda selects a sample from certain source documents and traces them forward to the accounts payable ledger. The purpose of this test is to determine the possibility of understated liabilities.

ANS: T PTS: 1 OBJ: Explain Directional Testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. The auditor's concern for potential fraud in the financial statements will most likely result in increased testing for the overstatement of revenues.

ANS: T PTS: 1 OBJ: Explain Directional Testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. The extent of evidence gathered during an audit is affected by the auditor's assessment of detection risk.

ANS: T PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. Auditors must mail the confirmations through the client's mailroom.

ANS: F PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. The primary evidence in support of an auditor's conclusions is the auditor's documentation.

ANS: T PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25.

Audit documentation serves as support for the financial statements.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: F PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. The auditor's opinion on the financial statements taken as a whole is the single most important piece of information documenting the financial statements.

ANS: F PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. The primary importance of the audit program is its guidance of the overall conduct of the audit.

ANS: T PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. Inquiries of client personnel are not an effective means of evidence gathering by an auditor.

ANS: F PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. The performance of analytical procedures is often used by an auditor as a procedure to gather certain types of audit evidence.

ANS: T PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. An example of physical examination is the auditor's testing of inventory by counting it to substantiate the existence assertion.

ANS: T PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. The auditor multiplies the quantity of inventory on the inventory ledger by the cost of the inventory to arrive at total inventory balance per product number. This is an example of recomputation by footing.

ANS: F PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. Some audit procedures may be performed prior to the close of the year under audit.

ANS: T PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. The audit program specifies what the client must do to perform the audit in accordance with audit procedures.

ANS: F PTS: 1 OBJ: Nature and Purposes of Audit Programs NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

34. The auditor utilizes the same audit program and the same procedures each year for a client in order to ensure that nothing is missed in the current year audit.

ANS: F PTS: 1 OBJ: Nature and Purposes of Audit Programs NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. Audit documents should be completed and assembled within 60 days following the audit report release date.

ANS: T PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. Audit planning work papers are prepared to support the foundation of the audit and are prepared for the client to assist in their understanding of the specific audit procedures that will be performed.

ANS: F PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. Audit Program specifies the actual procedures to be performed in gathering audit evidence.

ANS: T PTS: 1 OBJ: Concurring Partner Reviews NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. Audit Program starts with auditors assessing risk and testing internal control.

ANS: F PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. Audit documentation should include either manual or electronic initials in order to identify the audit personnel responsible for the work and the managers and partners reviewing the work.

ANS: T PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. Partners performing a concurring audit review should have no other involvement in the audit.

ANS: T PTS: 1 OBJ: Concurring Partner Reviews NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. The reliability of audit evidence means that it is relevant to the audit objective.

ANS: T PTS: 1 OBJ: Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 42. The client’s purchase orders and invoices are a more persuasive type of evidence than evidence directly observed by the auditor.

ANS: F PTS: 1 OBJ: Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. Vouching major legal expenses transaction may help in identifying litigation issues which need to be investigated for contingencies disclosure.

ANS: T PTS: 1 OBJ: Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. Recalculating depreciation expenses or estimating depreciation expenses helps to uncover costs that should have been capitalized.

ANS: F PTS: 1 OBJ: Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Analytical procedures are a type of substantive evidence.

ANS: T PTS: 1 OBJ: Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. Direct tests of account balances and of transactions are dual purpose tests.

ANS: F PTS: 1 OBJ: Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. Dual purpose tests examine both controls and the reasonableness of dollar amounts. A good example is testing a sample of purchase transactions that occurred throughout the year.

ANS: T PTS: 1 OBJ: Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 48. Testimonial evidence concerns the review of publicly available information about the client.

ANS: F PTS: 1 OBJ: Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 49. In the performance of audit procedures, the auditors show a preference to focus on the changes in account balances during the year if the opening balances were audited the previous year.

ANS: T PTS: 1 OBJ: Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 50. An advantage of directional testing is that it is more efficient by providing evidence on complementary sets of accounts.

ANS: T PTS: 1 OBJ: Audit Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

MULTIPLE CHOICE 1. Which one of the following statements is false? a. Auditing includes the process of gathering evidence to test assertions. b. No general audit program suits the needs for all situations. c. Even though all audits are different, they can all be approached in the same manner. d. All audits involve testing management's assertions contained in written communications to another party and independently gathering evidence to test the relevant assertions.

ANS: C PTS: 1 OBJ: Overview NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Which one of the following assertions regarding an inventory of ski equipment for Matterhorn Pte Ltd. would be considered an incorrect statement? a. The inventory exists at the balance sheet date. b. The inventory is owned by Matterhorn. c. The footnote disclosures concerning inventory pricing, major consignments and the like are incomplete and inadequate. d. The inventories are properly valued.

ANS: C PTS: 1 OBJ: Assertions Contained in Financial Statements NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. Which one of the following management assertions about the cash account of a company which only holds the local currency of that country requires the least amount of audit procedures? a. existence b. valuation c. completeness d. presentation ANS: B PTS: 1 OBJ: Assertions Contained in Financial Statements NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. Directional testing involves testing transactions or balances primarily for which type of error? a. overstatement b. understatement c. either overstatement or understatement d. neither overstatement nor understatement ANS: C PTS: 1 OBJ: Directional Testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. Which one of the following would be considered the most persuasive type of audit evidence? a. purchase orders from vendors b. customer accounts receivable files c. computerized general ledger d. confirmations from banks ANS: D PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 6. Which one of the following would be the most persuasive type of evidence? a. check register b. bank statement c. observation of assets d. inquiry with the in-house attorney ANS: C PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. Which one of the following would be the least persuasive type of evidence? a. Confirmations returned by bank directly to the auditor. b. Letters of communication from the Securities Exchange Commission. c. Physical examination of perpetual inventory. d. General ledger in a newly developed information system.

ANS: D PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. Management's assertions in the financial statements are of relevance to the audit process because a. they are the procedures that will be performed by the audit team. b. they are utilized by auditors in developing proper tests and procedures. c. they are direct evidence that management has prepared financial statements in accordance with Accounting Standards. d. they relate more to the audit while the financial statements belong to the auditor.

ANS: B PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. For the financial statements to be presented in accordance with IFRS, the information included must a. embody the appropriate assertions of management. b. be consistent, comparable and accurate. c. have full and adequate disclosure. d. be approved by an auditor that has prepared an audit program.

ANS: A PTS: 1 OBJ: Assertions Contained in Financial Statements NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. The process of vouching helps establish that all recorded transactions a. have been recorded. b. are complete. c. are valid. d. are presented properly.

ANS: C PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Footing, cross-footing, and tests of extensions are examples of which approach to gathering evidence? a. reprocessing b. recalculation c. vouching d. examination of documentation ANS: B PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 12. Reprocessing of transactions helps establish that all valid items have been recorded. Reprocessing tests the assertion of a. occurrence. b. rights. c. existence. d. completeness.

ANS: D PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. Which of the following represents competent audit evidence? a. A large quantity of documentation gathered in the audit. b. Excellent documentation of internal control gathered in the audit. c. Quality of documentation gathered in the audit. d. Financial statements prepared by the auditor.

ANS: C PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. Sufficient evidence gathered by the auditor involves which of the following? a. The amount of evidence to be obtained. b. The type of evidence to be obtained. c. Obtaining no evidence to achieve efficiency. d. The use of an audit program to obtain evidence.

ANS: A PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. The primary support of an audit is (are) a. the financial statements. b. the audit working papers. c. the audit report. d. the confirmation documentation.

ANS: B PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. The reliability of a client's internal documentation is most affected by: a. the auditor's independence. b. management's motivation to misstate accounts. c. the type of audit report that will be issued. d. management's ability to understand IAS. ANS: B PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 17. External documentation may lack reliability, even if the auditor receives it directly. The most probable reason for this is that a. the external party may be competent in the performing duties. b. the documentation may be properly understood by the client in the response. c. the auditor may decide not to use the documentation and replace it with other documents. d. the documentation may have been altered if the process is not controlled from inception.

ANS: D PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. When may audit procedures be performed?

I - on the balance sheet date.

II - prior to the balance sheet date.

III - subsequent to the balance sheet date. a. I only. b. I and III only. c. II only. d. I, II, and III. ANS: D PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. An auditor selects a sample of items recorded and traces them back to the supporting documentation.

This is an example of a. directional testing for existence. b. directional testing for completeness. c. direct testing for valuation. d. direct testing for rights.

ANS: A PTS: 1 OBJ: Directional Testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Directional testing is important to an auditor because of which of the following factors? a. Certain accounts are more prone to be misstated by overstatement than others. b. The auditor must remain organized when conducting an audit. c. The primary concern of the auditor is the understatement of asset and revenue accounts. d. It tests for existence and completeness simultaneously.

ANS: A PTS: 1 OBJ: Directional Testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. The primary assertion that is satisfied by physically observing the client's count of inventory is a. rights. b. valuation. c. completeness. d. existence.

ANS: D PTS: 1 OBJ: Basic Audit Procedures and the Assertion(s) each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22.

How would an auditor most likely test the mechanical accuracy of a 6,000 page inventory report?

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 a. b. c. d.

Examine a random sample of inventory documents.

Use generalized audit software to foot and recalculate.

Send confirmations to vendors.

Inquire of the inventory manager as to the accuracy.

ANS: B PTS: 1 OBJ: Basic Audit Procedures and the Assertion(s) each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. The audit team asks the client to pull a sample vendor file and examines the invoices supporting the purchases of inventory items during the year. What is the most probable reason for the use of this evidence? a. Confirmation of vendors supplying inventory for existence. b. Analytical procedures to determine completeness of inventory. c. Testing for the valuation of inventory using the FIFO cost flow assumption. d. Reading the terms of the arrangements with vendors for disclosure.

ANS: C PTS: 1 OBJ: Basic Audit Procedures and the Assertion(s) each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. The extent of procedures is affected mostly by: a. the sheer volume of procedures to be applied by the auditor. b. the time of year in which the client takes a physical inventory in the warehouse. c. the auditor's judgment that misstatements are probable in certain balances. d. the availability of the client's staff at or near the balance sheet date.

ANS: C PTS: 1 OBJ: Basic Audit Procedures and the Assertion(s) each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. An audit program is created to specify: a. the type of audit opinion to be rendered based upon procedures performed. b. the audit procedures that will be performed every year for the client. c. how an auditor should think while performing audit procedures. d. audit objectives and procedures to be followed during the audit process.

ANS: D PTS: 1 OBJ: Nature and Purposes of Audit Programs NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. Which one of the following is the primary reason for documenting audit work? a. to prevent litigation by other parties who question the audit performance. b. to provide a stand-alone medium that gives audit conclusions and supports the opinion. c. to give the client a full reporting of all work performed on their behalf. d. to supply a point of reference for all auditors performing the work subsequently.

ANS: B PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. Which one of the following original documents would most likely be found in the audit working papers?

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 a. b. c. d.

Vendor invoices Check registers Returned confirmation requests Payroll time cards

ANS: C PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. Conclusions are typically documented by auditors in which type of work paper? a. audit planning memo b. audit program c. audit memoranda d. representation letter ANS: C PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. Which of the following is an example of poorly-developed audit documentation? a. clear communication as to how testing was performed, the results, and conclusions. b. organization and assembly of documentation in an orderly fashion. c. headings that include the name of the accounting firm and the date of the last day of field work. d. authenticated identification of the person responsible for completing the procedure and conclusions.

ANS: C PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. The audit firm of Lake and South, LLP is wrapping up its audit of ABC Pte Ltd. The evidence has been relatively easy to obtain except in one case. Which of the following would represent a balance or transaction that would be difficult for Lake and South to obtain evidence? a. prepaid expenses b. cash c. accrued wages and salaries d. accrued warranties ANS: D PTS: 1 OBJ: Uniqueness of Procedures for Testing Management's Estimates NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. The primary source for evidence to corroborate the existence of pending litigation is: a. vendor confirmations b. disclosures in financial statements c. management representation letters d. attorney confirmations ANS: D PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 32. Performance of audit procedures at an interim date causes the risk of material misstatement occurring between the interim date and the end of the year to a. decrease. b. increase. c. remain the same. d. become more difficult to ascertain.

ANS: B PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. XYZ Pte Ltd. has an inventory report that is approximately 4,000 pages. The audit program requires James Morris, the staff auditor, to test the report for accuracy. What is the most efficient and effective means for James to perform the procedure? a. Ask the client to foot and extend the report and return the results of the test to the auditor for concluding. b. Foot and extend every 100th page and extrapolate the results of footing to the total of the report. c. Obtain an electronic copy of the file and use generalized audit software in footing and extending. d. Skip the procedure as the cost of footing and extending exceeds the benefit derived from the audit test.

ANS: C PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. What is the role of a concurring partner in an audit engagement? a. to provide a "fresh", quality review of the audit documentation and conclusions and its relationship to the opinion. b. to go back over the staff, senior and manager work and redo the more difficult areas of the audit. c. to work as a liaison between the audit committee and the audit team should there be disagreements. d. to act as an advocate of the client in order to ensure quality customer service has been given.

ANS: A PTS: 1 OBJ: Purpose of Concurring Partner Reviews NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. Which of the following is not an estimate that requires significant auditor judgment and skepticism? a. Obligations for pension plans. b. Valuation of goodwill. c. Allowance for bad debt. d. Common stock and related additional paid-in capital.

ANS: D PTS: 1 OBJ: Uniqueness of Procedures for Testing Management's Estimates NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. A concurring partner review should be conducted by: a. the partner-in-charge of the audit who understands the client's business. b. a partner from another firm who is on special assignment to review the audit. c. ACRA

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 d. a partner not otherwise involved in the audit who understands the client's business.

ANS: D PTS: 1 OBJ: Purpose of Concurring Partner Reviews NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37.

Audit documentation does not include following: a. Evidence of planning, including the audit program b. client’s trial balance and any auditors adjustments c. memos describing the auditor’s approach d. audit engagement letter ANS: D PTS: 1 OBJ: Basic Audit Procedures and the Assertion(s) each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

38. To evaluate earnings assumptions related to returns on pension funds, auditors needs to evaluate a. economic reports b. actuarial reports c. other pension data with other companies in same industry d. all of above ANS: D PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. Directional testing creates audit efficiency by taking advantage of the double-entry bookkeeping system. Which of the following is not a primary reason for this effect? a. misstatement of some accounts are more likely to occur in one direction than the other. b. increase the persuasiveness of the evidence. c. provides evidence on a complementary set of accounts. d. some assertions are directional by nature.

ANS: B PTS: 1 OBJ: Directional Testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. Which of the following type(s) of evidence is considered substantive evidence? a. tests of controls. b. analytical procedures. c. direct tests of account balances and transactions. d. Both B and C. ANS: D PTS: 1 OBJ: Substantive testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. Which of the following types of audit evidence is the most reliable? a. evidence from the client’s organization. b. evidence from a poorly controlled system. c. directly observable evidence. d. facsimiles of documents.

ANS: C PTS: 1 OBJ: Persuasiveness of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. Which of the following types of audit evidence is the least reliable?

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 a. b. c. d.

evidence from the client’s organization. evidence derived from a well-controlled system. evidence from independent outside sources. original documents.

ANS: A PTS: 1 OBJ: Persuasiveness of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. In evaluating cost of evidence, which of the following phases of the audit usually has the lowest cost? a. test transactions and account balances. b. understand client and industry. c. assess risk of material misstatement. d. Both A and B. ANS: B PTS: 1 OBJ: Cost of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44.Recalculations of the client’s computations would not include which of the following types of evidence? a. cutoff. b. footing. c. extension. d. cross-footing.

ANS: A PTS: 1 OBJ: Types of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Vouching of transactions deals with a. testing forward. b. testing backward. c. testing at a point in time. d. directional testing either forward or backward.

ANS: B PTS: 1 OBJ: Types of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. Reprocessing of transactions involves a. testing forward. b. testing backward. c. test at a point in time. d. directional testing either forward or backward.

ANS: A PTS: 1 OBJ: Types of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. Which of the following characteristics are not normally included in good audit documentation? a. initials of the person preparing and reviewing the document. b. an index. c. a cross-reference. d. all are included in good audit documentation.

ANS: D PTS: 1 OBJ: Audit documentation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 48. The dual purpose audit tests are useful as a. tests of controls b. tests of account balances. c. tests of controls or tests of account balances d. tests of controls and tests of account balances.

ANS: D PTS: 1 OBJ: Types of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 49. The auditor normally considers both underlying accounting data and corroborating information in the audit process. Underlying accounting data does not include a. evidence of controls. b. minutes of meetings. c. checks, invoices, and contracts. d. general and subsidiary ledger.

ANS: B PTS: 1 OBJ: Types of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 50. Auditors have traditionally focused most audit procedures on the direct tests of assets and liability account balances, as opposed to examining transactions during the year, because a. there are usually fewer items in ending balances. b. more reliable evidence usually exists for ending balances. c. there is a preference to focus on change in account balances. d. both A and B. e. all of the above.

ANS: E PTS: 1 OBJ: Types of Evidence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. Audit assertions and objectives—accounts receivable Based on management assertions implicit in the accounts receivable account, explain the audit objectives for the accounts receivable and related balances.

ANS: The audit objectives for the audit of accounts receivable would determine that:  Accounts receivable actually exist with valid customers. (Existence)  The client has the right to or controls the receivables and has not pledged or factored them.

(Rights)  Accounts receivable are recorded at historical cost or invoice price. (Valuation gross)  Accounts receivable are recorded net of any applicable sales discounts, returns or allowances.

(Valuation gross)  An allowance for doubtful accounts has been established for an estimate of dollars that will not be received on account. (Valuation net)  All accounts receivable are recorded for the period and are not understated. (Completeness)  Footnote disclosures discuss the collectibility of accounts receivable, pledging and factoring and any concentration of credit risk. A reconciliation of the allowance for doubtful accounts has been presented in the footnotes. (Presentation and disclosure)

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 2. Directional testing Explain the meaning of "directional testing" and identify the reasons why directional testing leads to audit efficiency. Give examples of directional testing for the existence and completeness assertions.

ANS: Directional testing involves testing transactions or balances primarily for one type of error, either overstatement or understatement, but not for both at the same time. For example, an audit test for an understatement of Accounts Payable also tests for an understatement of Purchases. Directional testing also leads to audit efficiency for the following reasons:  Misstatements of some accounts are more likely to occur in one direction than the other.  Directional testing of an account balance provides evidence on a complementary set of accounts.  Specific assertions are normally tested directionally. An example is the testing of the existence assertion for overstatements or the completeness assertions for understatements.

An example of directional testing for existence includes the sampling of assets recorded on the balance sheet, such as fixed assets and tracing those items back through the system to original source documents such as vendor invoices. This procedure tests for the possible overstatement of the fixed assets. Item(s) selected from the general ledger that are found to lack adequate supporting vendor invoices to substantiate existence are evidence of the overstatement of assets.

Testing directionally for completeness, on the other hand, is just the opposite. Source documents are sampled and traced forward through the journals, ledgers and to the general ledger. An example may be vendor invoices for expenses. Invoices that are not found in the general ledger balance prove that the system is incomplete. In the example of an expense, net income would be overstated and liabilities may be understated.

PTS: 1 OBJ: Directional Testing NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Proper audit documentation Audit documentation serves as the primary support of an audit. Give at least six examples of the components of proper working paper documentation.

ANS: Audit documentation serves as the primary evidence in support of the auditor's opinion. Well prepared documentation should include:  a heading that includes the name of the audit client, an explanatory title, and the balance sheet date.  the initials or electronic signature of the auditor performing the audit test and the date the test was completed.  the initials or electronic signature of the senior, manager, or partner who reviewed the working papers and the date the review was completed.  a description of the nature of the test performed and the findings.  an assessment of whether the test indicates the possibility of material misstatement in the account.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15   

manual or electronic tick marks and a legend indicating the nature of the work performed by the auditor. an indexing or electronic sequencing routine to identify the location and organization of working papers. a cross reference or electronic link to related working papers.

Many of these components are electronic in nature and are resident in a paperless audit software and storage combination. Nonetheless, such components remain vital in proper documentation of audit testing and conclusions.

PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 4. Competence of audit evidence The Auditing Standards Board established guidelines to assist auditors in evaluating the competence of audit evidence. Discuss the criteria for the more reliable types of evidence and include an example for each.

ANS: Evidence that is considered to be more reliable includes:  Directly observable evidence such as counting inventory or observing fixed assets.  Evidence derived from a client's strong internal control structure such as reconciliations or the information system itself.  Evidence from independent external sources such as confirmations from banks, customers and attorneys.

Examples provided by the students may vary and the instructor must use his or her judgment.

PTS: 1 OBJ: Sufficiency and Competence of Evidence NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 5. Audit procedures on Ccash balances Identify and demonstrate nine different approaches to the obtaining audit evidence for an audit of cash balances in a financial statement audit.

ANS: In the performance of the audit of cash the following approaches may be used:  Observe the client's handling of the petty cash fund and the control over incoming cash and cash storage. Observe the process of cash received in the mailroom, deposits to the bank and reconciliation by a separate individual.  Physically count the petty cash, cash in drawers and cash in safes.  Examine documents such as the bank statement.  Make inquiries of personnel concerning the handling of daily deposits or the mail receipts.  Confirm the bank balance with financial institutions using proper confirmation procedures.  Recalculate the bank reconciliation computation trace the book balance to the general ledger.  Inquire of materially aged outstanding checks and deposits in transit.  Trace outstanding checks and deposits in transit clearing subsequent bank statements from a

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

  

qualified source.

Vouch material and unusual entries in the cash account.

Perform an analysis of bank transfers at or near cutoff.

Use analytical procedures to determine the reasonableness of the reported cash balance.

This response is only intended to be a sample. The instructor must evaluate the quality of the student responses.

PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 6. Audit procedures for accounts receivable In the process of gathering and evaluating evidence, documentation is derived in various forms. Rank the following types of evidence in the audit of Accounts Receivable from most persuasive to least persuasive and provide explanations for your decision.  oral statements from management that the accounts receivable are fairly presented  confirmations received from customers  deposit slips subsequent to year end showing deposits by customer name  copies of sales invoices ANS: The ranking of these pieces of evidence on accounts receivable and the reasons for the rankings are as follows:  Accounts receivable confirmations would be most persuasive as these forms of evidence are obtained from independent parties and sent directly to the auditor.  Deposits subsequent to year end showing customer names would be next in line. The reason is that even though the deposit slips are generated and held internally they have had outside intervention in the hands of the banks.  Sales invoices would rank next as they are also prepared inside the client's office and held by the client but they have no outside intervention.  Oral statements by management concerning the fairness of the financial statements would be least persuasive as they have no validity until we can prove their statements to be true by other means.

PTS: 1 OBJ: Audit Procedures and the Assertion(s) Each Tests NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 7. Audit program Discuss the purpose of the audit program and its importance to the auditor.

ANS: An audit program specifies the actual procedures to be performed in gathering the required audit evidence about the assertions embodied in the client's financial statements. Because the audit program guides the overall conduct of the audit it is the single most important piece of documentation in an audit engagement. The program is an effective means for:  organizing and distributing audit work.  monitoring the audit process and progress.  reviewing for possible omission of material areas from the audit.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15  

recording the audit work performed. reviewing the completeness and persuasiveness of procedures performed.

PTS: 1 OBJ: Nature and Purposes of Audit Programs NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 8. Audit standards of proper documentation Discuss the audit standards that must be applied to the auditor's documentation. Give five examples the types of documentation will be found in the audit work papers.

ANS: Auditing standards require adequate documentation in the general standards under both planning and supervision and gaining an understanding of internal control.

The third standard of field work states that "sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit."

Pursuant to all of these requirements, audit work papers will include such items as: 1. Evidence of planning such as the planning memo, risk assessments and the audit program.

2. Evidence of the auditor's understanding and assessment of internal control over the client organization.

3. The client's trial balance and proposed audit adjustments.

4. Copies of certain internal and external documents such as letters of communication with the client and returned confirmations.

5. Audit memoranda documenting the testing process, auditor reasoning and conclusions.

6. Results of analytical procedures and audit testing.

7. Auditor generated analysis of account balances such as the allowance for doubtful accounts.

PTS: 1 OBJ: Purposes and Contents of Good Audit Documentation NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 9. Concurring partner review Explain the purpose, importance and criteria of the concurring review of an audit.

ANS: The purpose of the concurring partner review is to help ensure that the evidence documents in the working papers adequately support the audit opinion. It is a good idea for all audits and required for SEC engagements. It serves as a double check on the quality of the audit testing and conclusions documented as support for the audit opinion. The concurring partner review is important to protect the CPA and the auditing firm from lawsuits. The concurring partner review should be performed by an audit partner having no other involvement in the audit but who understands the client's business.

PTS: 1 OBJ: Purpose of Concurring Partner Reviews NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 10. Audit procedures

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

Discuss how each of the following procedures could be used in the audit of fixed assets, e.g., various types of equipment used in the business.

Procedure Observation Physical examination Inquiry Confirmation Examination of documents Recomputation Reprocessing Vouching Analytical Procedures ANS: Procedure Observation Physical examination Inquiry Confirmation Examination of documents Recomputation Reprocessing Vouching

Used how?

Assertion(s) tested

Used how?

Observe taking of inventory of assets Inspect existence and condition of assets.

Inquire of managment of assets not recorded or that have been sold or discarded.

Confirm details of purchasewith seller of asset.

Assertion(s) tested Existence Existence, Valuation

Examine supporting documentation.

Recompute depreciation Reprocess a sample of purchase transactions Vouching a sample of recorded assets

Existence, Completeness Existence, Valuation, Presentation and Disclosure, Rights Existence, Valuation, Rights Valuation Existence Existence, Valuation, Rights Valuation, Completeness

Analytical Analysis depreciation Procedures expense PTS: 1 OBJ: Audit procedures NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 11. Audit procedures

Businesses often have litigation against them that the auditor has to identify and adequately disclose.

List the financial assertions that apply to Contingencies. For each assertion, indicate two or three audit procedures that would address that assertion.

Organize you answer as follows: Financial statement assertion

Audit procedure(s)

ANS:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 Financial statement assertion Existence Completeness

Rights and Obligations Valuation and Allocation Presentation and Disclosure

Audit procedure(s) Inquiry of management Send confirmation request to legal counsel Inquiry of management Vouch legal expenses Review nature of legal services to determine if a liability might exist Inquiry of management Confirmation from legal counsel Examine payments related to in-progress litigation Inquiry of management Confirmation of legal counsel Review court rulings Inquiry of management Confirmation of legal counsel

PTS: 1 OBJ: Audit procedures NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

Chapter 5 - Internal Control and Financial Reporting TRUE/FALSE

1. Internal control is a process designed to guarantee the achievement of the objectives of reliable financial reporting, compliance with laws and regulations and ineffective and inefficient operations.

ANS: F PTS: 1 OBJ: Integral Role of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Internal control is a process designed to provide reasonable assurance regarding the achievement of the objectives of reliable financial reporting, compliance with laws and regulations and effective and efficient operations, and safeguarding of the assets.

ANS: T PTS: 1 OBJ: Integral Role of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. The quality of an organization's internal control will affect both the audit approach and the amount of testing needed for an engagement.

ANS: T PTS: 1 OBJ: Integral Role of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. An entity's control system affects the approach to and quantity of testing in an audit engagement.

ANS: T PTS: 1 OBJ: Develop an Understanding of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. Inadequate internal controls may place an entity in risk of corporate failure.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: T PTS: 1 OBJ: Develop an Understanding of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Safeguarding of assets includes controls designed to protect against theft.

ANS: T PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. Control is considered to be part of corporate governance.

ANS: T PTS: 1 OBJ: Integral Role of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. Good control means that risks are identified and dealt with effectively.

ANS: T PTS: 1 OBJ: Integral Role of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 9. Investors and lenders are not concerned with internal control of the companies in which they invest.

ANS: F PTS: 1 OBJ: Integral Role of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Internal controls also aim at mitigating the risk of misuse of corporate assets.

ANS: T PTS: 1 OBJ: Management Reporting on Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. A separate external audit of internal accounting control should never be performed.

ANS: F PTS: 1 OBJ: Management Reporting on Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. The external audit function is a critical component of a company's internal control process.

ANS: F PTS: 1 OBJ: Management Reporting on Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. The five major components of an organization's internal control are the control environment, risk assessment, control activities, information and communication, and monitoring.

ANS: T PTS: 1 OBJ: Major Elements of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. A company's internal auditing practices should not be considered when assessing control risk.

ANS: F PTS: 1 OBJ: Assess Effectiveness of Internal Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. An organization's control environment is established and maintained by the internal auditing department.

ANS: F PTS: 1 OBJ: Management's Monitoring Processes NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. A well-controlled organizational structure must match the organization's operations, or the structure is not effective.

ANS: T PTS: 1 OBJ: Major Elements of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. There is a universal set of controls which can be applied to all situations.

ANS: F PTS: 1 OBJ: Develop an Understanding of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 18. Monitoring the internal controls involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions.

ANS: T PTS: 1 OBJ: Major Elements of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. An auditor is not required to obtain evidence about the design and operation of the internal controls to reduce the assessment of control risk below maximum.

ANS: F PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Segregation of duties refers to the duties of authorizing a transaction, recording the transaction, and taking physical custody of assets related to the transaction.

ANS: T PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. In addition to controls being specific, they may be broad, such as policies regarding a code of ethics.

ANS: T PTS: 1 OBJ: The Integral Role of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. Physical controls to safeguard assets are not intended to include simple controls such as fences and locks.

ANS: F PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. Auditors are not allowed to use flowcharts to document the understanding of internal control.

ANS: F PTS: 1 OBJ: Develop an Understanding of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. When control risk is assessed at a maximum level, the auditor assumes that the internal controls are reliable in preventing or detecting material misstatements.

ANS: F PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. When control risk is assessed at a minimum level, the auditor assumes that the internal controls are reliable in preventing or detecting material misstatements.

ANS: T PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. Performing a walk-through provides an auditor with an understanding of the nature of processing in important accounting applications.

ANS: T

PTS: 1

OBJ: Risk Assessment and Audit Tests

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. Reviewing systems flowcharts is usually sufficient to understand the client's internal controls.

ANS: F PTS: 1 OBJ: Develop an Understanding of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. An auditor cannot assess the control risk for subsystems at a different level than the whole accounting system.

ANS: F PTS: 1 OBJ: Develop an Understanding of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. The auditor's preliminary assessment of control risk is based on an understanding of the control system as it has operated in the past and is designed to operate.

ANS: T PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. When control risk is assessed at less than maximum, the auditor must gain assurance that the control procedures are effective.

ANS: T PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. The auditor is obligated to report significant deficiencies in the control structure discovered during an audit to the audit committee or its equivalent.

ANS: T PTS: 1 OBJ: Assess Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. One of the advantages of a computerized accounting system is that the computerized system eliminates the need for internal controls.

ANS: F PTS: 1 OBJ: Assess Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. Accounting subsystems are accounting cycles composed of one or more accounting applications.

ANS: T PTS: 1 OBJ: Develop an Understanding of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. Control risk can be evaluated on a scale from high to low.

ANS: T PTS: 1 OBJ: Develop an Understanding of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. Testing internal control for effectiveness is done in every audit.

ANS: F PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 36. Phase I in the control risk assessment process is testing the controls for effectiveness.

ANS: F PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. Walk-throughs and inquiries are often used to obtain an understanding of internal controls.

ANS: T PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. A flowchart is a graphical representation showing the flow of documents through a system.

ANS: T PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. Questionnaires are designed so that a positive answer indicates the absences of a key control activity or an inadequate segregation of duties.

ANS: F PTS: 1 OBJ: Assess Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. When the auditor believes that the design of controls of a non-public company is effective but does not test the controls, the auditor can assess the control risk as being moderate in some circumstances but otherwise it should be assessed as high.

ANS: T PTS: 1 OBJ: Assess Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. Transaction oriented controls are designed to operate on every transaction throughout the year.

ANS: T PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. A narrative is a systematic set of questions designed to develop an understanding of an organizations’ internal controls and those responsible for implementing control activities.

ANS: F PTS: 1 OBJ: Documentation of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. Phase 2 in the control risk assessment process is the preliminary assessment.

ANS: T PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. One of the components of internal control, monitoring, refers to the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organization’s objectives.

ANS: F PTS: 1 OBJ: Major Elements of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

45. One of the components of internal control, the control environment, is considered pervasive and the auditor should start the evaluation of controls at this level.

ANS: T PTS: 1 OBJ: Major Elements of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. Control activities may be implemented at the organizational level and at the transactional level.

ANS: T PTS: 1 OBJ: Assess Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking MULTIPLE CHOICE 1. The quality of an organization's internal controls affects a. the reliability of financial data. b. the ability of management to make good decisions. c. the ability to remain in business. d. all of the above.

ANS: D PTS: 1 OBJ: The Integral Role of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Internal control is a process designed to achieve objectives in which one of the following categories? a. reliability of financial reporting b. compliance with applicable laws c. ineffectiveness of operations d. both A and B ANS: D PTS: 1 OBJ: The Integral Role of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. Which of the following is not a reason that the auditor must gain an understanding of the client’s internal control system? a. better understand the client, its risks, and how it manages those risks. b. assess control risk and identify the types of financial misstatements that are most likely to occur. c. plan direct tests of account balances to determine if misstatements have occurred. d. all are reasons why auditors must gain an understanding of the client’s internal control system.

ANS: D PTS: 1 OBJ: The Integral Role of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. Which one of the following groups is interested in an organization's control structure? a. board members b. lenders c. auditors d. all of the above ANS: D

PTS: 1

OBJ: Integral Role of Internal Control

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. The tone of internal control typically originates internally with: a. auditors. b. employees. c. management. d. stockholders.

ANS: C PTS: 1 OBJ: Major Elements of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. The major components of an organization's internal control structure consist of all of the following except a. control risk. b. the control environment. c. risk assessment. d. control activities.

ANS: A PTS: 1 OBJ: Major Elements of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. The quality of an organization's internal controls affects an audit in all of the following ways except which of the following? a. Poor internal control may contribute to the auditor's assessment regarding the company's inability to remain a going concern. b. There is a requirement of internal control at some level in order for a company to be audited. c. The quality of internal control significantly affects the amount and type of audit work performed. d. The auditor is not required to understand internal control if it is poor or non-existent.

ANS: D PTS: 1 OBJ: Develop an Understanding of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. Which one of the following components of the system of internal controls sets the tone for the organization? a. control risk assessment b. control environment c. information and communication d. monitoring ANS: B PTS: 1 OBJ: Major Elements of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. The control environment includes all of the following except a. management philosophy and operating style. b. methods of assigning authority and responsibility. c. personnel policies and practices. d. control activities.

ANS: D PTS: 1 OBJ: Major Elements of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 10. Which of the following is not one of the seven underlying principles of an effective control environment as developed by COSO? a. integrity and ethical values. b. management’s philosophy and operating style. c. authority and responsibility. d. information and communication.

ANS: D PTS: 1 OBJ: Major Elements of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. The board of directors should approve all of the following except a. major new financing. b. acquisition of other companies. c. acquisitions of desktop computers. d. major divestitures.

ANS: C PTS: 1 OBJ: Management's Monitoring Processes NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. A component of COSO’s internal control system concerns the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organization’s objective.

This component is called a. control activities. b. information and communication. c. monitoring. d. control environment.

ANS: B PTS: 1 OBJ: Assess Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. Organizational policies and procedures for hiring, training, evaluating, compensating its employees are found in a a. company’s remuneration policies b. company’s employee welfare policies c. company’s employee cost management policies d. company’s personnel policies ANS: D PTS: 1 OBJ: Assess Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. Financial statement assertions have been tailored for transactions and events and do not include which of the following assertions? a. Classification. b. Accuracy. c. Cutoff. d. Rights.

ANS: D PTS: 1 OBJ: Audit assertions NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 15. Personnel policies and procedures are designed to ensure that the organization a. hires the right people. b. complies with federal and state laws in its hiring and retention decisions. c. has employees that are properly trained and supervised. d. performs all of the above.

ANS: D PTS: 1 OBJ: Management's Monitoring Processes NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. Management is required to report on its internal controls with its financial statements. This report is required to include all of the following except: a. its responsibility for control of financial reporting. b. the framework used for internal control. c. an assessment of the effectiveness of the company's internal control d. the statement that the company is not required to have an audit on internal control.

ANS: D PTS: 1 OBJ: Management Reporting on Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Which of the following important processes affects the quality of data entering into general ledger? a. Transaction processing b. Accounting estimates. c. Adjusting and closing journal entries. d. All of above.

ANS: D PTS: 1 OBJ: Management Reporting on Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. Which of the following will an audit of a company's internal control include? a. Reliance on client’s internal controls testing. b. Sampling of key controls and related testing. c. Concluding on the accuracy of income statement balances. d. Design of the internal control system by the auditor.

ANS: B PTS: 1 OBJ: Assess Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. All of the following are pervasive accounting controls except a. adequate segregation of duties. b. physical controls to safeguard the assets. c. authorization procedures. d. understanding documented internal procedures.

ANS: D PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. The personnel department should be responsible for a. authorization of new employees. b. generation of payroll checks. c. timekeeping. d. signing payroll checks.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: A PTS: 1 OBJ: Develop an Understanding of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. If the auditor of financial statements understands internal control and assesses control risk as low, it is assumed that internal control: a. will be tested to support the assessment. b. is not required to be tested as it is considered strong. c. is considered relatively weak and will not be tested. d. has been assessed erroneously by the auditor.

ANS: A PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. To support an assessment that control risk is low, the auditor of financial statements must a. achieve the same conclusion after appropriately testing internal control. b. achieve the opposite conclusion after appropriately testing internal control. c. perform increased substantive procedures in order to compensate for the lower rating. d. perform limited substantive procedures as the assessment is justified.

ANS: A PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. Which of the following is an example of a type of control that may be tested? a. Interest accrued on notes payable. b. Cash surrender value of life insurance classified as long-term asset. c. A spreadsheet used to create a pivot table for the summarization of accounts receivable. d. Reconciliations performed monthly on accounts.

ANS: D PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. A graphic representation of an accounting application that normally identifies key controls that are effective in achieving specific control policies and procedures is a. an internal control questionnaire. b. a flowchart. c. an internal control narrative. d. a walk-through.

ANS: B PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. Which of the following best represents a walk-through? a. The controller reviews the bank reconciliation prepared by the accountant and its resulting journal entries. b. The auditor walks the production line to find inefficiencies in the inventory process and reports them to management. c. The controller takes a sample of write-offs to ensure they have been adequately documented and recorded. d. The auditor traces three purchasing transactions from the purchase order to the financial statement for observation and understanding.

ANS: D

PTS: 1

OBJ: Risk Assessment and Audit Tests

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

© 2013 Cengage Learning Asia

TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 26. Which one of the following is considered adequate documentation in an internal control system? a. electronically prenumbered records b. a cathode ray screen used in input c. verbal authorization d. delayed preparation of documents ANS: A PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. Which of the following would result in an adverse report issued by an auditor on an audit of internal control? a. The control risk is assessed at a lower level. b. The tests of controls support the documented understanding of controls. c. There is a material weakness in the design or operation of controls. d. A confirmation is not returned by a customer timely.

ANS: C PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. Physical controls to safeguard assets would include a. hiring only trustworthy cashiers b. separation of duties c. locks on the warehouse doors d. safety audits on the production-line ANS: C PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. A financial statement auditor concludes that internal controls over cash are not functioning as designed. She believes that material misstatements to the cash accounts are possible because of the deficiencies. What is the course of action that the auditor will most likely take? a. Report the audit to the regulatory agencies. b. Develop specific tests for cash balances to determine the extent of misstatement. c. Explain to the client that the audit firm will not be able to complete the audit. d. Test the internal control over cash.

ANS: B PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. Which one of the following is not a control activity implemented in most accounting systems? a. segregation of duties b. competent, trustworthy employees c. authorization procedures d. all of these activities are normally implemented.

ANS: D PTS: 1 OBJ: Testing Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 31. The approach to control risk assessment consists of each of the following phases except a. obtaining an understanding of the internal control structure. b. making a preliminary evaluation of inherent risk and deciding whether to test controls. c. performing tests of controls. d. reconsideration of the preliminary assessment of control risk.

ANS: B PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. An auditor obtains evidence of the internal control over the accounting system by all of the following except a. performing walk-throughs of the accounting system. b. making inquiries of banks and attorneys. c. reviewing system flowcharts. d. taking plant and operational tours.

ANS: B PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. Which of the following will an auditor perform to better understand a client's internal control over accounting systems? a. An auditor will look over subsequent year working papers. b. An auditor will review previous year working papers. c. An auditor will copy previous year working papers. d. An auditor will re-draft subsequent year working papers.

ANS: B PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. Internal control is a process effected by the organization’s board of directors, management, and other personnel to provide reasonable assurance of achieving certain objectives. Which of the following does not fit into one of these categories of objectives? a. reliability of financial reporting. b. compliance with laws and regulations. c. continuing existence. d. effectiveness and efficiency of operations.

ANS: C PTS: 1 OBJ: Internal Control objectives NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. Which of the following will an auditor use to document an understanding of internal control? a. Checklists, disclosures and procedures. b. The audit report, internal control opinions and confirmations. c. Workpapers, engagement letters and management representation letters. d. Questionnaires, narratives and flowcharts.

ANS: D PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 36. Which is clearly a test of control? a. Walk-through of the expense cycle from performance of the service to the reporting in the balance sheet. b. Examination of a sample of purchase order records for electronic, authenticated, authorization. c. Observing the controller's use of company-owned equipment. d. Sending a letter to the client's attorney to determine litigation that is pending between plaintiff and the defendant.

ANS: B PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. An auditor's test of transaction processing whereby the auditor is evaluating both the operation and effectiveness of controls and the correctness and completeness of processing and posting to an account balance is a. a test of controls. b. a substantive test. c. a dual-purpose test. d. an analytical review procedure.

ANS: C PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. An auditor of a client company that has multiple locations must a. increase control risk to moderate or high. b. conclude that independent business units of the consolidation are immaterial. c. issue multiple audit reports for each segment of the company. d. determine the universal application of controls across the company.

ANS: D PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. In order to further understand internal control, an auditor may use inquiry methods by: a. interviewing key employees to gain further insight into the internal control environment. b. observing the safeguarding of assets by checking locked doors and safes. c. tracing a transaction from the boundary of the organization through to the final reporting. d. documenting thoroughly the internal control through the use of narratives.

Audit Tests NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. In a large company, who usually actively performs the monitoring of internal control? a. Internal auditors b. Audit Committee c. CFO d. External auditors ANS: A PTS: 1 OBJ: Management's Monitoring Processes NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 41. Which of the following is not true of internal control as defined by COSO? It a. is narrower than internal control over financial reporting. b. is a process that includes all elements of internal control working together. c. includes all the people in the organization. d. starts at the top of the organization in setting a tone.

ANS: A PTS: 1 OBJ: Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. Which of the following is not true of the concepts that are embodied in the COSO framework of internal control? a. Internal control relates to the organization’s objectives. b. The six components of internal control are logically and operationally intertwined. c. Internal control applies across all activities of the organization. d. All of the above are important concepts ANS: B PTS: 1 OBJ: Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. The major components of an organization’s internal controls consists of all of the following except a. risk assessment. b. control environment. c. control activities. d. control risk ANS: D PTS: 1 OBJ: Components of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. Which of the following is not part of the control environment of an organization? a. management’s philosophy and operating style. b. organizational structure. c. human resources. d. Both A and B. e. All of the above are part of the control environment..

ANS: E PTS: 1 OBJ: Components of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. When control risk is assessed as high, the auditor needs to a. perform more tests of controls. b. perform more direct testing of account balances. c. perform significantly fewer tests of controls. d. perform significantly less testing of account balances.

ANS: B PTS: 1 OBJ: Evaluating Internal Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 46. Which of the following is a detective control designed to detect the occurrence of a misstatement? a. access controls. b. edit controls. c. reconciliations. d. all of the above are detective controls.

ANS: C PTS: 1 OBJ: Input Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. A component of COSO’s internal control system concerns the process that provides feedback on the effectiveness of the other four components of internal control. This component is called a. information and communication. b. monitoring. c. control activities. d. risk assessment.

ANS: B PTS: 1 OBJ: Assess Effectiveness of Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 48. A verbal description of an organization’s processes and internal controls is a. an internal control questionnaire. b. a flowchart. c. an internal control narrative. d. a walk-through.

ANS: C PTS: 1 OBJ: Documentation of Internal Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. Internal control Define the term "internal control" and identify the major components of an internal control system.

ANS: Internal control is defined as a process effected by management to provide reasonable assurance that the following objectives are met: 1. the reliability of financial reporting; 2. compliance with applicable laws and regulations; 3.

4.

effectiveness and efficiency of operations; and the safeguarding of assets.

The major components of internal control are: 1. control environment; 2. risk assessment; 3. control activities; 4. information and communication; and 5. monitoring.

PTS: 1

OBJ: Major Elements of Internal Control

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 2. Control environment One of the elements of an organization's control system is the "control environment." Identify at least four factors that the auditor should consider when reviewing the control environment and discuss how the auditor would relate this review to the assessment of control risk.

ANS: The factors that an auditor should consider when reviewing the control environment would include:  management's philosophy and operating style.  the entity's organization structure.  the functioning of the board of directors and its committees.  methods of assigning authority and responsibility.  management's control methods for monitoring and following up on performance, including internal auditing.  personnel policies and practices.  external influences such as bank regulatory agencies.

The auditor would examine his or her findings relating to each of the listed factors in determining whether control risk was high, medium or low. For example, if the philosophy of management placed little priority on internal controls the auditor would be concerned about control risk.

PTS: 1 OBJ: Management's Monitoring Processes NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Understanding internal control The auditor identifies four phases or steps in the control risk assessment procedure. Phase I involves obtaining an understanding of the internal control structure. Identify at least four methods the auditor might use in gathering the information and briefly describe each one.

ANS: Methods for obtaining an understanding of the internal control structure might include:  Walk-throughs - Walk-throughs provide an understanding of the nature of processing in important accounting applications. The auditor actually walks a document through the system to determine how the system actually works.  Inquiries - An auditor interviews key employees to learn about segregation of duties, extent of computer usage, the documents the application generates, and the overall nature of transaction processing.  Review of accounting manuals and job descriptions - These manuals may contain a description of the accounting policies, a detailed chart of accounts and an outline for processing accounting transactions.  Plant and operational tours - Tours give an auditor a chance to determine conscientiousness of operational employees. (Such as, are receiving reports filled out as goods are received?)  Prior year working papers - The evaluation of internal controls is an ongoing process. The auditor may use previous work as a basis for review and update.

PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 4. Documenting internal control understanding Auditors must document their understanding and evaluation of the internal control system. Identify and briefly describe the three most commonly used methods for such documentation.

ANS: The three most commonly used methods for documenting the auditor's understanding of internal control are:  Flowcharts - Flowcharts provide a graphic description of an application or a process. Flowcharts can be very detailed or depict a broad overview of an application.  Questionnaires - Questionnaires present an efficient alternative, or a complementary approach, to document the structure. They are designed to gather information by functional area.

Questionnaires have the advantage of being fairly simple to use, but yet are comprehensive.  Narratives - Narratives are usually used as supplements to flowcharts and questionnaires. They may be used to document relatively simple applications or for small-business applications.

PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 5. Control activities Explain Control activities.

ANS: Control activities are the policies and procedures that are established to assist in accomplishing objectives and to mitigate risks. Controls can be embedded in processes, e.g., edit controls designed into computer applications or segregation of duties required in processing transactions. Controls also exist at the policy level, e.g., requiring approval of all expenditures over $6,000. While there are some generic controls that are seen in most internal control processes, e.g., segregation of duties, independent reconciliations, and management review, it is important to remember that there is no universal set of controls applicable to all situations. Rather, there is a wide variety of control activities that serve to reduce risks and an organization chooses those that are most effective at the least cost.

PTS: 1 OBJ: Integral Role of Internal Control NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 6. Adequate Documentation Discuss adequate documentation and state guidelines for reliable documentation.

ANS: Adequate Documentation: Documentation should exist to provide evidence of the authorization of transactions, the existence of transactions, the support for journal entries, and the financial commitments made by the organization. The following are guidelines for developing reliable documentation and ensuring adequate control: 1. Prenumbered paper or computer-generated documents facilitate the control of, and accountability for, transactions and are crucial to the completeness assertion.

2. Timely preparation of documents, including electronic documents as part of an electronic audit trail, improves the creditability and accountability of the documents and decreases the rate of errors on all documents.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 3. Authorization of a transaction should be clearly evident.

4. A transaction trail to provide information to respond to customer inquiries and identify and correct errors should exist.

PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 7. Documenting internal control Discuss how an auditor would utilize a client's flowchart documentation in the audit of financial statements.

ANS: A flowchart is a graphic representation of an accounting application or process. The auditor can use the client's flowcharts to obtain an understanding of the overall accounting system, the various accounting cycles and accounting applications. The flowcharts provide an overview of how documents flow into and out of a computerized application or manual process. An auditor can use client's flowcharts to identify key controls that are effective in achieving specific control objectives as part of the auditor's preliminary assessment of control risk.

PTS: 1 OBJ: Risk Assessment and Audit Tests NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 8. Interested parties in internal control List at least six groups or parties who might be interested in the quality of an organization's internal control structure.

ANS: Parties who might be interested in the quality of the internal control structure of an organization include:  the board of directors;  the audit committee;  management;  stockholders;  regulators;  auditors (internal and external);  suppliers;  customers;  investors;  lenders; and  customers using the Web for commerce.

PTS: 1 OBJ: The Integral Role of Internal Control NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 9. Pervasive control activities Discuss what pervasive control activities are and provide an example of at least three.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: Pervasive control activities are those controls activities whose implementation affects almost all accounting systems.

Some examples of pervasive control activities include: *segregation of duties *authorization procedures *documented transaction trail *physical controls to safeguard assets *reconciliation of control accounts with subsidiary ledgers, of transactions recorded with transactions submitted for processing, and of physical counts of assets with recorded assets *competent, trustworthy employees PTS: 1 OBJ: Pervasive Control Activities NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 10. Relating assertions and control activities List the five financial statement assertions related to the processing of payroll transactions and describe at least one related control activity.

Organize your answer as follows: Financial statement assertions

ANS: Financial statement assertions Occurrence Completeness Accuracy

Cutoff Classification

Control activities (sample)

Control activities (sample) Employees are required to electronically check in and out for hours worked Payroll department reconciles total hours paid within the time period with total hours worked per supervisor or time cards.

Individual employees examine the paycheck to determine if amounts are correct and directs inquiries to someone independent of the personnel processing payroll.

Payroll department reconciles total hours paid within the time period with total hours worked per supervisor or time cards.

Company uses a chart of accounts to ensure uniformity from period to period.

PTS: 1 OBJ: Relating Assertions and Control Activities NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 11. Overview of internal control system assessment

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

There are four phases to the process that the auditor goes through in evaluating internal controls.

Describe what is supposed to occur in each phase.

Use the following format in your answer: Phases

Description

1.

2.

3.

4.

ANS: Phases 1.

Description Obtain an understanding of risks and internal controls.

2.

Make a preliminary assessment of control risk and decide whether to test control procedures (mandatory for public companies).

3.

If appropriate, test the controls for effectiveness (optional for non-public companies).

4.

Based on the results obtained, reevaluate the preliminary assessment of control risk and the approach to direct testing of account balances, and revise the approach if necessary.

PTS: 1 OBJ: Overview of Internal Control System Assessment NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 12. Relationship of the five internal control components The five components of the COSO internal control system are conceptually and logically integrated.

List the five components of the model and describe how they are integrated with each other in the internal control process.

Use the following format: Components ANS: Components Control environment

Description

Description The control environment establishes management’s commitment to good governance, risk analysis, and control. It sets the tone for the organization’s implementation of effective internal control.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 Risk assessment

Management establishes a risk management policy and process to identify risks that affect the organization, including analysis of risks associated with financial reporting.

Control activities

Management and employees develop and implement controls that reduce the risks to an acceptable level. Accounting controls are designed into accounting information systems and are tested to determine that they are working effectively.

Information and communication

An effective information and communication system is developed and implemented to process transactions and to develop reports that enable all levels of management to make reliable decisions and to recognize improper processing. Further, information is communicated both up and down in the organization to facilitate effective operation of controls.

Monitoring

Management monitors the effectiveness of its internal controls by designing on-going monitoring activities. Management also monitors the effectiveness of internal controls by engaging an effective internal audit department to perform separate evaluations of internal control.

PTS: 1 OBJ: Relationship of the Five Internal Control Components NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

Chapter 6 - Computerized Systems: Risks, Controls and Opportunities TRUE/FALSE

1. An auditor can understand internal control and a client's operations and processes without addressing the computerized environment.

ANS: F PTS: 1 OBJ: Introduction NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. The computing environment includes hardware, software, networking, data, and people who manage the computing environment but does not include support end users.

ANS: F PTS: 1 OBJ: Computerized Accounting System NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. A computer's operating system consists of a series of programs that acts as an intermediary between the user, the processor and the application software.

ANS: T PTS: 1 OBJ: Operating System NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. The operating system must be severely restricted because it can access any data file or program.

ANS: T PTS: 1 OBJ: Operating System NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

5. The use of a Virtual Private Network by an individual or firm eliminates all communications security and control concerns.

ANS: F PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. A Virtual Private Network allows employees or vendors that are working off-site to tunnel through the Internet, utilizing a secure channel, to the organization's server.

ANS: T PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. A denial-of-service attack is a risk to an organization because of the overload to company’s system and downtime that may result.

ANS: T PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. A client's computerized environment may present large-scale risks to the organization that must be considered and understood by the auditor in planning and testing.

ANS: T PTS: 1 OBJ: Identify Important Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. A program designed to produce a completed income tax return is a type of operating system.

ANS: F PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. LINUX is an open-system type of application in the family of operating systems.

ANS: T PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Users of systems are not a threat to the organization because this exposure originates with external hackers.

ANS: F PTS: 1 OBJ: Identify Important Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. Software that limits access to programs or data files to those authorized for such access is called access control software.

ANS: T PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. General controls are pervasive and application controls are more specific.

ANS: T

PTS: 1

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 OBJ: General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. In a payroll application program, the payroll report produced with the completed payroll is an example of output.

ANS: T PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. Firewalls are located between the Internet and a company's private data processing resources.

ANS: T PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. VPN stands for "virtual public network."

ANS: F PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Controlling access to equipment, data, and programs is an application control.

ANS: F PTS: 1 OBJ: Identify Important Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18.

The auditor is not required to consider risks at the general control level.

ANS: F PTS: 1 OBJ: Identify Important Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. Authentication is used to substantiate that an individual attempting access is the actual person that has the authority to access.

ANS: T PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Programmers of systems should not be able to access the live data within the organization.

ANS: T PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. The database administrator should be responsible to input the data on a daily basis.

ANS: F PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. The implementation of a software package that tracks all changes to versions of accounting applications under development and only allows such changes after testing is complete and electronic authorization documented, is proper use of a program change control.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: T PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. The data processing department has no real need for segregation of duties because the users maintain responsibility for the integrity of the output.

ANS: F PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. Adequate documentation is critical to the effectiveness and continuity of the operation of the information technology department.

ANS: T PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. Access controls may be considered more important in a computer environment than a manual system because an attacker can gain access to confidential information through the computer system.

ANS: T PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. Passwords, token cards, and biometrics are all examples of authentication in a computerized system.

ANS: T PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. Authentication in the electronic environment is represented by operating systems, hardware and software.

ANS: F PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. Authentication in the electronic environment is represented by something you know, have or are.

ANS: T PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. Record count, control total and hash totals are examples of controls used to ensure completeness of processing.

ANS: T PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. An organization should include in its business continuity planning the back-up, testing and restoration of data and systems in the event of loss or interruption.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: T PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. Data limits and alphanumeric fields are examples of data validation for proper input control.

ANS: T PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. A precise explanation of encryption is the use of an audit trail to trace data packets from one node to another.

ANS: F PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. Encryption algorithms include the conversion of plaintext data into cipher text so that it may remain confidential in transmission over an insecure medium.

ANS: T PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. Hash totals are seldom used in maintaining the integrity or completeness of data packets transmitted across an open network.

ANS: F PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. The objective of assessing control risk in an electronic environment is identical to that of assessing control risk in a manual environment.

ANS: T PTS: 1 OBJ: Approaches to Testing Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. Computer logs from an organization's accounting system are not allowed to be used by the auditor as a form of evidence of internal control in a computerized environment.

ANS: F PTS: 1 OBJ: Approaches to Testing Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. For e-commerce organizations, monitoring reports are used as a control to ensure that there are no unusual volume or penetration attacks.

ANS: T PTS: 1 OBJ: Approaches to Testing Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. An Enterprise Resource Planning system is an application that is typically integrated across the entire organization.

ANS: T PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 39. The auditor of financial statements or internal control must obtain an understanding of the electronic environment and its security features.

ANS: T PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. There exists no clear distinction between a general control and an application control.

ANS: F PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. The purpose of batch controls is to ensure that all items that were submitted for processing were actually processed.

ANS: T PTS: 1 OBJ: Application controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. Self-checking digits are an input control used to check for transposition errors associated with identification numbers.

ANS: T PTS: 1 OBJ: Application controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. Types of items included in an audit trail are date and time of transaction, details of the transaction, cross-reference and unique identification.

ANS: T PTS: 1 OBJ: Application controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. A test data approach is an audit technique by which the auditor-submitted transactions are processed concurrently with regular processing to determine whether controls are working properly and processing is correct.

ANS: F PTS: 1 OBJ: Computer-aided audit techniques NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Software packages such as ACL are referred to as generalized audit software and are designed to perform common audit tasks on a variety of data files.

ANS: T PTS: 1 OBJ: Generalized Audit Software NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. An integrated test facility is an audit technique by which the auditor-submitted transactions are processed concurrently with regular processing to determine whether controls are working properly and processing is correct.

ANS: T PTS: 1 OBJ: Computer-aided audit techniques NAT: AACSB-Analytical skills | AICPA BB-Critical thinking MULTIPLE CHOICE

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

1. An auditor in the current business and accounting landscape must a. hire third parties to understand the technological aspects of controls. b. perform as much control testing around the computerized systems as possible. c. perform a paperless audit. d. have adequate technological training and knowledge to understand controls.

ANS: D PTS: 1 OBJ: Introduction NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Regarding accounting systems, what is the auditor most likely to understand and evaluate? a. That evidence will not exist in a computerized system. b. That evidence in a computerized system is always hardcopy based. c. The availability of evidence and risks associated with a computerized system. d. The hardware and operating system capabilities of a computerized system.

ANS: C PTS: 1 OBJ: Introduction NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. Which is considered an operating system? a. A program that generates text in a presentable form such as a letter or memo. b. A program that commands and controls other programs and the hardware. c. A program that performs mathematical calculations in cells and produces charts. d. A system of transmitters and silicon wired together sufficient to carry out commands and mathematic functions.

ANS: B PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 4. Which one of the following is not a relevant factor in assessing the control risk of a computerized environment? a. Rapid change in computerized environments requires management to institute effective methods to control those systems. b. Effective controls over computer systems are necessary to compete effectively in a global marketplace. c. An auditor's objective for assessing control risk is the same in a computerized system as it is in a manual system. d. An auditor's method of testing the effectiveness of the system controls is the same in a computerized system as in a manual system.

ANS: D PTS: 1 OBJ: Approaches to Testing Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. Software that controls which users are able to gain entry into certain applications, data and networks is known as: a. access control software. b. operating system software. c. database management system software. d. application software.

ANS: A PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Programs written to accomplish specific processing tasks, such as computing payroll, are a. application programs. b. operating system programs. c. Java scripts. d. access control programs.

ANS: A PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. Software that organizes a collection of data into logically similar records and files is most commonly referred to as a. access control software. b. operating system software. c. database management system software. d. application software.

ANS: C PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. Which one of the following is not a risk of the Virtual Private Network? a. unauthorized penetration b. loss of messages c. loss of processing d. All of these are risks ANS: D PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 9. Which of the following best describes the objective of using VPN technology? a. The IPSec protocol is the most widely accepted in the information technology industry. b. VPN is used to secure data between remote workers and the home office. c. Tunneling is used to properly decrypt the data as it passes through cyberspace. d. Authentication is not required utilizing VPN which saves users time in using the system.

ANS: B PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Personnel responsible for developing the software in-house are referred to as: a. internal auditors. b. systems analysts. c. application programmers. d. database librarians.

ANS: C PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Which of the following strengthens segregation of duties in the electronic environment. a. The computer operator should not have access to programs or data except for authorized purposes. b. Programmers test new developments on live data. c. Database administrators are allowed to maintain the data. d. Internal auditors are not allowed to test changes to software.

ANS: A PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. The combination of which functions in an information technology environment are not necessarily a control weakness? a. user and programming functions b. database administrator and data input functions c. programmers and authorization of changes d. users and certain data access ANS: D PTS: 1 OBJ: Identify Important Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. General controls address all of the following except a. planning and controlling the information technology department. b. input of data into the payroll application. c. controlling access to accounting programs. d. maintaining application servers.

ANS: B PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 14. The control structure over program changes should include control procedures that are sufficient to ensure that: a. changes to applications are not approved in advance. b. changes are made by the users to computer applications. c. the latest version of the application is sent to production. d. changes are tested and documented after implementation.

ANS: C PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. Which one of the following is not a fundamental control concept in evaluating the organization of data processing? a. The authorization for all transactions should originate outside the information technology department. b. There should be a fundamental segregation of duties between users and information technology departments. c. The programming department should not have access the code under development. d. Access to data should be provided only to users authorized by the data's owner.

ANS: C PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. Which one of the following is not a fundamental control concept in evaluating the organization of data processing? a. The authorization for all transactions should originate outside the information technology department. b. There should be a fundamental segregation of duties between users and the information technology departments. c. Management should periodically evaluate the information system function for operational efficiency, integrity, security, and consistency with organizational objectives. d. The external auditors should periodically audit applications and operations.

ANS: D PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Which one of the following is the least likely to be used today to authenticate the user of a computer system? a. username and password b. token card c. biometrics d. Both B and C. ANS: C PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 18. Auditors review the adequacy of client's documentation of accounting information systems to do all of the following except a. determine computer assisted audit techniques that may be utilized. b. assess control risk associated with the information technology environment. c. rewrite the coding used to generate programs to satisfy audit assertions. d. understand the use of technology and systems to determine the audit procedures to be performed.

ANS: C PTS: 1 OBJ: Approaches to Testing Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. Which of the following is correct regarding data access control? a. Access to data should be shared company-wide in an effort to integrate information. b. All users should be allowed to change data with appropriate audit logs. c. A monitoring system should be instituted to monitor external hackers. d. Only individuals having a justified reason to view data should be allowed access.

ANS: D PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. What is the primary purpose of hash totals? a. batch integrity. b. transmission confidentiality. c. data validation. d. communication repudiation.

ANS: A PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. Backup controls, used to prevent data and software loss would include procedures to: a. load balance in the event of heavy traffic across the network. b. constantly monitor the network for intrusion and attack. c. fail-over to a mirrored storage device in the event of interruption or loss. d. Both B and C. ANS: C PTS: 1 OBJ: Approaches to Testing Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. A firewall is best known as a(n): a. single source of Internet security. b. layer of a multi-layered security plan. c. intrusion detection system. d. demilitarized zone.

ANS: B PTS: 1 OBJ: Approaches to Testing Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 23. Which of the following is considered a batch control? a. Counting the total number of records input and comparing them to the system. b. An identifier added to the field of the record that is unique to the transaction. c. Audit logging capabilities to determine which accounting personnel performed a transaction. d. A mathematical algorithm used to verify the validity of data.

ANS: A PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. Which one of the following is an example of an edit test for limits? a. Only numbers are allowed to be input into the social security number field and dashes are pre-formatted. b. Each sales order is given an identifier that is also tagged to the receipt of goods record, the customer invoice record and the cash receipts record. c. The purchasing department may order materials up to $5,000 in total before a second electronic authorization is required. d. Supplies may not be purchased from any vendor not authorized and existing in the vendor table.

ANS: C PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. The control totals used to ensure the completeness of processing in a batch processing environment include a. record count. b. control totals. c. hash totals. d. all of the above.

ANS: D PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. A database is relational and is programmed to call up the customer shipping address into the order entry interface when a repeat customer calls for a new order. This allows the order entry personnel to verify that the shipping address remains valid and is an example of a(n): a. batch control. b. on-line processing control. c. reasonable range control. d. self-checking control.

ANS: B PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. Control procedures implemented to ensure that the organization fully captures all transactions between hardware devices are a. input controls. b. management controls. c. validation controls. d. communication controls.

ANS: D

PTS: 1

OBJ: Access Controls

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. The type of test used to check that no hourly employee is paid more than SGD 400.00 in one week is a. an edit test. b. a batch control test. c. an output control test. d. none of the above.

ANS: A PTS: 1 OBJ: Access Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. The documents and records that allow a user or auditor to trace a transaction from its origination through its final disposition are referred to as a. authentication. b. callback. c. an audit trail. d. echo check.

ANS: C PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. Which of the following is considered a monitoring control in the electronic environment? a. Reconciliation of control totals. b. Test data to ensure calculations are performed as expected. c. Computer logs of attempted penetration. d. Logical screen layout.

ANS: C PTS: 1 OBJ: Approaches to Testing Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. An auditor sends fictitious information through the system for processing. This is an example of a. the test data approach. b. a tagging and tracing approach. c. generalized audit software. d. audit procedures using manual efforts.

ANS: A PTS: 1 OBJ: Computerized Testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. An internal auditor creates a dummy division of the organization and sends test transactions through the system along with valid transactions. This is an example of a. an integrated test facility. b. a tagging and tracing approach. c. generalized audit software. d. audit procedures using manual efforts.

ANS: A PTS: 1 OBJ: Generalized Audit Software NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 33. An internal auditor selects a random transaction and examines it through the processing routine. This activity is an example of: a. an integrated test facility. b. a tagging and tracing approach. c. generalized audit software. d. substantive audit procedures using electronic means.

ANS: B PTS: 1 OBJ: Computerized Testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. An auditor’s use of electronic means to foot a large subsidiary ledger or to select a sample is an example of the utilization of a. an integrated test facility. b. tagging and tracing. c. generalized audit software. d. risk assessment using electronic means.

ANS: C PTS: 1 OBJ: Generalized Audit Software NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. An auditor desires to test all write-offs of accounts receivable during the period exceeding SGD1,000 for proper authorization. The population of write-offs is found in a table of transactions in the database and is voluminous. To be efficient, the auditor will most likely use what approach to selecting the sample as described? a. Examination of exception reports. b. Examination of a report of all write-offs in chronological order. c. Use of limit tests to perform audit testing. d. Use of generalized audit software to list all items fitting the criteria.

ANS: D PTS: 1 OBJ: Generalized Audit Software NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. An example of the use of generalized audit software for the testing of balances is: a. tracing the cash on the bank reconciliation to the bank statement balance. b. selecting a random sample of customer invoices to confirm. c. preparation of management representation letters. d. creation of dummy companies for appropriate evaluation of posting.

ANS: B PTS: 1 OBJ: Generalized Audit Software NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. A tool that may be used to analyze patterns such as the assignment of invoice numbers or amounts to fictitious invoices is: a. generalized audit software. b. paperless audit software. c. lead generation software. d. integrated test facility software.

ANS: A PTS: 1 OBJ: Generalized Audit Software NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 38. Tagging and tracing might best be used to test which of the following? a. The number of confirmations returned compared to the number of confirmations sent out. b. The corporate credit card is only being used for business transactions. c. All customer orders shipped were also invoiced and that cash was received. d. Quantities of product F411029 have been accurately counted in the warehouse.

ANS: C PTS: 1 OBJ: Computerized Testing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. Which of the following is not a component of an electronic audit trail? a. Validity testing of transaction. b. Location from which the transaction originated. c. Individual responsible for the transaction. d. Date and time of transaction.

ANS: A PTS: 1 OBJ: Application controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. Which of the following is not an example of input validation (edit) tests? a. Alphanumeric. b. Continuity. c. Limit. d. Validity.

ANS: B PTS: 1 OBJ: Application controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. Which of the following is not one of the seven fundamental control concepts in evaluating the organization of the data processing department? a. Access to data is provided only to authorized users. b. Data processing is responsible for all custodial functions associated with data, data files, software and related documentation. c. Data processing is responsible for authorizing, reviewing and testing all applications developments and changes in programs. d. Management should periodically evaluate the information system function for operational efficiency, integrity, and security.

ANS: C PTS: 1 OBJ: General Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. Which of the following is not a required segregation of duties within a data processing function? a. Data processing personnel should not have access to programs or data except when authorized. b. Users should review and test all significant computer program changes. c. The computer program librarian should have limited access to the computer. d. All are required of data processing function.

ANS: D PTS: 1 OBJ: General Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 43. Which of the following is a principle the client should have implemented in instituting a data access program? a. The system is actively monitored by a security department. b. Access control system has the ability to identify and verify potential users. c. Personnel can change, modify or delete a data item. d. Both A and B. ANS: D PTS: 1 OBJ: General Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. Which of the following is not a batch control used in processing transactions? a. Record count. b. Hash total. c. Financial total. d. Validity total.

ANS: D PTS: 1 OBJ: Application controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Which of the following involves developing and running fictitious data concurrently with real data? a. Test data approach. b. Generalized audit software. c. Tagging and tracing. d. Integrated test facility.

ANS: D PTS: 1 OBJ: Computer-aided audit techniques NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. Which of the following is not a function that can be performed by generalized audit software (GAS)? a. Evaluating statistical sample results. b. Footing files and extracting, sorting and summarizing data. c. Checking for gaps in processing sequences. d. All are functions that can be performed by GAS. ANS: D PTS: 1 OBJ: Generalized Audit Software NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. Virtual private networks Describe the Virtual Private Network (VPN) including the risks associated with it. What are the intended controls that may be obtained by utilizing a properly configured VPN? ANS: The Virtual Private Network (VPN) includes all types of communication to provide anytime, anywhere service using the network environment. Data are transmitted over the VPN using data packets that are typically secured using encryption and digital signature techniques. Risks associated with the VPN include:  unauthorized penetration into the organization's system.  loss of data in transmission.  interception and destruction, modification, or copying of information transmitted over an insecure

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 network.  loss of processing due to loss of electrical power.

The opportunities derived from the utilization of VPN technology include the secure transmission of data packets over an otherwise insecure medium such as the Internet. This allows remote employees to access an organization's servers to perform work functions as though they are physically present. If the VPN is properly configured, transmissions of data will be properly secured for confidentiality, the messages will not be changed during transmission for integrity and the parties communicating will know that they are the intended recipient of information using digital signatures. This incorporates both access and communications controls.

PTS: 1 OBJ: Key Components of Computerized Systems NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 2. Control over programming changes An organization has an in-house development team that programs its accounting and financial information systems. What are the primary concerns of the auditor relative to the modification of code in these systems? What are some methods of documenting and controlling changes to these programs?

ANS: The auditor would be concerned that:  any suggested program changes to the accounting information system are authorized prior to being made.  all authorized changes to the system are actually made to the code.  all changes to the system are adequately tested, reviewed, and documented before being implemented.  only the authorized version of the program is run in the live production environment.

In the development environment, the authorization and related changes must be carefully controlled and documented. This is optimally performed using version control management software. Using this software, code can be checked out and changed by programmers and checked back in for proper testing and authorization. The changed program can then be re-released into the production environment. This version control management software may also be used to electronically document authorizations, code changes and related testing.

PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Roles of the information technology personnel The information systems function is organized to promote control and efficiency. Identify the major responsibilities of the following:  systems administrators  application programmers  systems analysts  database administrators ANS:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 Systems programmers or administrators are responsible for maintaining the operating system such as Windows, Unix or Linux. Additionally, systems administrators are often given responsibilities over the network environment. Application programmers are responsible for developing the coding for major computer applications and maintaining existing computer programs such as accounting information systems, ERPs and specialized banking software. Systems analysts are responsible for analyzing the current system, information flows and users' needs, and designing new applications.

Database administrators set up and maintain the integrity of the database. They often employ relational or object oriented approaches to keeping the data organized or normalized.

PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 4. Separation of duties in the computerized environment With respect to segregation of duties within the information technology department, explain why: a) the operator and the programming functions and b) database administration and all other functions should be separated?

ANS: If the operator had access to the code, he or she could make both unauthorized and undetected changes to computer programs and manipulate the processing of data for fraudulent or destructive reasons.

Database administrators have the responsibility of restricting access to user posting and views of data to authorized users for specifically authorized purposes. If they were to perform other functions, the overall integrity of the system would be in jeopardy.

PTS: 1 OBJ: Distinguish between General and Application Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 5. Authentication When a computer system has been implemented it is necessary to authenticate users of the system.

Identify three different means of authenticating a user and give examples and limitations. Explain the difference between authentication and access.

ANS: Three methods to identify users of a computer system would include:  What the users know, such as a password or something known only to them. This method is most widely used, but has problems with loss and ease of theft of the passwords. To be effective the passwords must be changed frequently.  Something the users possess, such as a card with a magnetic strip. If the card is combined with a password, then a higher level of security is attained.  Something about the users, such as fingerprints, voice prints, or some other type of physical identification. This is very costly to an organization and somewhat intrusive to the user.

Authentication is the means to verify the identification of the user to allow entry into a network, program or system. Once the user gains entry, access control allows or restricts the user from viewing, modifying or deleting certain and specific data and software functionality based upon authentication.

PTS: 1 OBJ: Access Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

6. Application controls Distinguish between the application controls of input, processing and output, including examples of each.

ANS: Input controls are designed to ensure that the organization fully captures all the transactions between itself and another entity, and to properly recode those transactions. Input controls include the following: a unique transaction identifier, batch control totals, procedures to limit access to transactions, and formation of an audit trail.

Processing controls are designed to ensure that the correct program is used for processing, all transactions are processed and the correct master file and transaction files are updated. Batch control totals, file labels for transaction and data identification, access controls over programs and run-to-run control totals are examples of processing controls.

Output controls are designed to ensure that all data is completely processed and that output is distributed only to authorized recipients. Reconciliation of control totals, output distribution schedules, and output reviews are examples of output controls.

PTS: 1 OBJ: Access Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 7. Batch controls Give three examples of batch controls and explain their significance.

ANS: Batch controls are used to ensure the completeness in a batch processing environment and include record counts, control totals, and hash totals.

Record counts are used to ensure that all transactions are recorded in the system. The frequency of each record is manually totaled and then matched to those recorded.

Financial totals are used to sum a field of some accounting significance and compare it to that recorded in the system. An example of this is a total of all sales for the day.

Hash totals are used to total a field with no accounting significance such as employee numbers to ensure that all records are input or processed.

PTS: 1 OBJ: Access Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 8. Input controls Discuss the need for input validation controls (also called edit tests). Identify five different types of input validation controls and state examples.

ANS:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 Input validation tests are used to detect obvious errors that are input by users of systems. They are programmed into the database and perform checks on the data itself so that improper data is not allowed into fields.

Edit controls include:  alphanumeric fields - only numbers, only alpha characters or a combination of these are allowed as input. An example of this would be to allow only alpha characters in a name field and only numbers in a social security number field.  reasonableness tests - a customer number entered into a sales order form is compared to the existing customer tables in the database to ensure the customer is valid.  limits - data exceeding or less than certain thresholds are rejected such as a wage rate exceeding $25.  validity tests - only data that is a certain number of characters is allowed as input such as a zip code.  missing data tests - the order entry clerk must enter a credit card number before completing the transaction.  sequence tests - the next item that will be recorded is in sequence such as a check number.  invalid combinations of items - a certain product number is not allowed such as material ABC in the bill of materials.

PTS: 1 OBJ: Access Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 9. Computerized methods of internal audit Discuss two methods that an internal auditor may use to ensure that a newly designed system is processing information as designed and with proper controls.

ANS: The internal auditor may use an integrated test facility to process fictional data with real data in order to test the system for: 1. built-in and functioning control procedures.

2. proper processing of data.

3. updating and accuracy of master files.

The integrated test facility will be used to create a "dummy' division of the company for similar testing of transactions and processing.

The internal auditor could also use the test data approach and develop and submit fictitious transactions to be processed by the computer applications to test whether control procedures are functioning properly, transactions are processed correctly, and all transaction and master files are fully and correctly updated.

The internal auditor may also use tagging and tracing techniques to follow a transaction through complex software from beginning to end. The auditor analyzes the results to determine the accuracy and completeness of processing.

PTS: 1 OBJ: Computerized Testing NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 10. Use of audit tools Jen Staples, is an auditor at King and Sheets, LLP. King and Sheets is engaged to perform an audit of the First national Bank of the Everglades which has very complex systems and technology in place related to its financial accounting and operations. Jen has information systems skills and experience in performing audits in such an environment. Discuss how Jen might use audit tools to perform procedures of FNB of the Everglades.

ANS: Jen will most likely utilize generalized audit software for the following: 1. To sample the savings and checking account population for confirmations 2. To sample the loan account population for confirmations.

3. To electronically foot the subsidiary ledger of loans receivable.

4. To electronically analyze the loans receivable outstanding for past due accounts in order to evaluate the reserve for loan losses account.

5. To analyze the interest rate field for outliers such as percentages exceeding a certain range.

6. To analyze customer fields for missing data such as tax ID or statement address.

7. To derive statistics such as the average of all savings account balances for analysis.

PTS: 1 OBJ: Generalized Audit Software NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 11. E-commerce Discuss some of the potential risks in an audit of a company doing e-commerce.

ANS: The auditor would follow the same basic approach of understanding the business processes, the important applications, the control environment, and the risks. The risks associated with e-commerce systems are no different than those associated with traditional information systems, such as unauthorized access, unauthorized changes to programs or data files, and lack of physical security.

Some potentially unique risks include: 1. Security against malicious intrusion or penetration by outsiders.

2. Integrity and completeness of processing.

3. Integrity of data communications.

4. Trading partner agreements.

5. Systems interdependencies.

6. Paperless systems coupled with “soft controls”.

PTS: 1 OBJ: E-Commerce NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 12. General and application controls Because of the computer environment in which auditing occurs today, the auditor regularly has to evaluate the general and application controls of an audit client. Compare and contrast general and application controls.

ANS:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 General controls are pervasive controls that affect all computer applications. They may occur in five general categories, i.e., 1) planning and controlling the data processing function, 2) controlling applications development and changes to programs and/or data files and records, 3) controlling access to equipment, data, and programs, 4) maintaining hardware, and 5) controlling electronic communications.

Application controls are specific control procedures (manual and computerized) designed into and around the computer program to ensure that processing objectives are attained, e.g., the accounts receivable or payroll application program. The three categories of controls usually assigned to application controls are input controls, processing controls, and output controls.

PTS: 1 OBJ: General and Application Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

Chapter 7 – Forensic Auditing TRUE/FALSE

1. The auditor is not responsible for the presentation of financial statements; therefore, the auditor has no responsibility for fraud in the financial statements.

ANS: F PTS: 1 OBJ: Auditor's Responsibility for Fraud Detection NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. An example of a defalcation is the CFO intentionally overstating the accounts receivable and sales to boost profits.

ANS: F PTS: 1 OBJ: Types of Frauds NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. The auditor of financial statements has a responsibility to actively consider fraud in order to obtain reasonable assurance that financial statements are free of material fraud.

ANS: T PTS: 1 OBJ: Expectations of Users NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. Defalcation is a fraud where employee takes assets from organization for personal gain.

ANS: T PTS: 1 OBJ: Types of Frauds NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. It is considered fraud for an employee of an organization to wrongly use influence to procure a personal benefit that is contrary to their duty to the organization.

ANS: T PTS: 1 OBJ: Types of Frauds NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. An example of financial statement manipulation is the treasurer's diversion of hundreds of thousands of dollars into a personal money market account.

ANS: F PTS: 1 OBJ: Types of Frauds NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

7. Financial reporting fraud is based on the motivation of the parties most unlikely to benefit from the fraud.

ANS: F PTS: 1 OBJ: Types of Frauds NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 8.

Everyone has an opportunity to commit fraud.

ANS: T PTS: 1 OBJ: Expectations of Users NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

9. The most important lesson to be learned in the salad oil case is that auditors can commit fraud by falsely including inventory that does not exist.

ANS: F PTS: 1 OBJ: Types of Frauds NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Lapping is the fraud that occurs when someone takes cash that was paid on account.

ANS: T PTS: 1 OBJ: Expectations of Users NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Computer errors should not be viewed as an excuse, but rather as an indication of a problem that should require higher skepticism.

ANS: T PTS: 1 OBJ: Expectations of Users NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. It is estimated that fraud costs global businesses up to 5% of revenue.

ANS: T PTS: 1 OBJ: Auditor's Responsibility to Detect Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. If an auditor discovers risk of fraud in the application of ISA procedures, the audit procedures will be adjusted accordingly.

ANS: T PTS: 1 OBJ: Auditor's Responsibility to Detect Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. Professional skepticism is required on audit engagements that have a high risk of fraud but can be disregarded for all others.

ANS: F PTS: 1 OBJ: Auditor's Responsibility to Detect Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. According to professional audit standards, the audit team should assemble early in the planning stages of an audit to conduct a fraud "brainstorming" meeting in order to determine the types of fraud that may occur with the client.

ANS: T PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 16. Once the fraud assessment is complete in the planning stage, the auditor need not consider fraud further.

ANS: F PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Pressure upon management to manipulate financial information is a common characteristic in fraud cases.

ANS: T PTS: 1 OBJ: Auditor's Responsibility to Detect Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. Management compensation that is tied to profits may contribute to incentives to commit fraud.

ANS: T PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. Management may feel pressure to maintain debt covenants, which is a deterrent to fraud.

ANS: F PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Internal controls are implemented in order to give perpetrators the impression that the risk of being caught is low.

ANS: F PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. Complex transactions such as derivative instruments provide management certain opportunities to manipulate financial statements to its advantage.

ANS: T PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. A board of directors that is actively involved in monitoring management mitigates opportunities to commit fraud.

ANS: T PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. Rules based rationalization of accounting treatment instead of principles based accounting contributes to the rationalization of financial reporting fraud.

ANS: T PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. The auditor need not presume that fraud is present in revenue recognition by management because the auditor must remain objective.

ANS: F

PTS: 1

OBJ: Identify Fraud Risk Indicators

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. Management rarely uses journal entries to commit fraud because they are easily noticed by the auditor.

ANS: F PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. Auditors must keep a questioning mind when analyzing management responses to inquiry and they should strive to obtain corroborating evidence before accepting the responses.

ANS: T PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. The auditor must perform a brainstorming meeting with client management in order to plan the procedures to be performed and the inventory locations to be visited.

ANS: F PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. Channel stuffing is often a form of fraud by financial manipulation and can be noticed by the auditor by performing analytical procedures directed toward the discovery of fraud indicators.

ANS: T PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. One fraud risk factor includes the presence of domineering members of management who seek the ultimate loyalty of subordinates.

ANS: T PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. The audit team should develop its own idea about how fraud may be performed by the client and then covered up.

ANS: T PTS: 1 OBJ: Linking Fraud Risk to Audit Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. Audit tests do not relate to fraud testing because fraud testing will be performed in another engagement.

ANS: F PTS: 1 OBJ: Linking Fraud Risk to Audit Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. When the risk of fraud is high in financial statements, the auditor should assign the more experienced auditors on different engagements.

ANS: F PTS: 1 OBJ: Linking Fraud Risk to Audit Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. Types of fraud should be hypothesized by the auditor prior to performing analytical procedures for the discovery of fraud factors.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: T PTS: 1 OBJ: Linking Fraud Risk to Audit Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. When fraud risk is great in the organization under audit, the nature, timing and extent of procedures applied may all be changed.

ANS: T PTS: 1 OBJ: Linking Fraud Risk to Audit Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. Management fraud should be reported by the auditor to the SEC. ANS: F PTS: 1 OBJ: Reporting on the Existence of Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. Forensic accountants need to have superior interviewing and people skills.

ANS: T PTS: 1 OBJ: Describe Forensic Accounting NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. The focus of forensic accounting is similar to financial statement auditing in that it is directed to the fairness of financial statements.

ANS: F PTS: 1 OBJ: Describe Forensic Accounting NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. Auditors are responsible to detect illegal acts having an indirect, significant bearing on the financial statements.

ANS: F PTS: 1 OBJ: Major Frauds and Audit Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. The landmark Enron fraud in the early 2000's involved the movement of significant debt off the books to related, unconsolidated entities.

ANS: T PTS: 1 OBJ: Major Frauds and Audit Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. An ideal method of footing a large report and recalculating extensions is the use of generalized audit software to extract the data and perform the test.

ANS: T PTS: 1 OBJ: Using Audit Software for Fraud Identification NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. When weaknesses in internal control are found, the auditor should develop audit procedures to explicitly test for the existence of the type of fraud or misstatement that could occur because of the weakness.

ANS: T PTS: 1 OBJ: Linking Audit Procedures to Control Deficiencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. For illegal acts that have a direct effect on the financial statements, the auditor has a responsibility to design the audit to provide reasonable assurance of detecting material misstatements.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: T PTS: 1 OBJ: Illegal Acts NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. When preliminary fraud risk is high the auditor should pay close attention to areas of the audit that are highly subjective and increase the predictability of the audit procedures.

ANS: F PTS: 1 OBJ: Linking Audit Procedures and to Fraud Risk NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. The auditor can be satisfied with less than persuasive evidence in the audit process because of the believe that management is honest.

ANS: F PTS: 1 OBJ: Linking Audit Procedures and to Fraud Risk NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Professional skepticism involves such things as questioning and corroborating management responses to inquiries and determining the authenticity of documents.

ANS: T PTS: 1 OBJ: Professional Skepticism NAT: AACSB-Analytical skills | AICPA BB-Critical thinking MULTIPLE CHOICE 1. Audits of financial statements are valuable to the detection of fraud because: a. Auditors are required to seek out and find all fraud, regardless of its magnitude. b. Auditors expect that management will make them aware of any fraud in the financial statements. c. Society expects that financial statements have not been materially misstated due to fraud. d. Society realizes that some fraud was not intended to be discovered by auditors.

ANS: C PTS: 1 OBJ: Overview NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Detection of fraud is integral to the audit function. The best reason for this is that: a. unless auditors can provide assurance that the financial statements are free of material misstatements due to fraud, there is no justification for the audit function. b. It is mandated that the auditor take on more responsibility than previously required because of management's demand for fraud finding. c. it is the responsibility of the auditor to provide internal control over a client organization sufficient to discover or prevent fraud from occurring. d. auditor fraud is a large concern of shareholders and the audit committee must continually monitor the auditors to ensure they are not misstating financial statements.

ANS: A PTS: 1 OBJ: Overview NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. Which of the following represents the size of company that has historically committed fraud in its financial reporting and by its employees? a. Large corporations. b. Middle-market corporations. c. Small and start-up companies.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 d. All companies.

ANS: D PTS: 1 OBJ: Magnitude of Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. What is the primary determinate in the difference between fraud and errors in financial statement reporting? a. The materiality of the misstatement. b. The intent to deceive. c. The level of management involved. d. The type of transaction effected.

ANS: B PTS: 1 OBJ: Types of Frauds NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. Which of the following is not an example of a type of defalcation? a. A warehouse employee takes home two units of electronic entertainment inventory each week without authorization. b. The president of the company utilizes the organization's cash to add a floor to her 15,000 square foot house. c. The chief financial officer of the company falsely adds SGD20 million to the accounts receivable and revenue accounts. d. The treasurer of the company makes an unauthorized wire transfer from the organization's bank to a personal account in Grand Cayman.

ANS: C PTS: 1 OBJ: Types of Frauds NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Which of the following best represents financial statement fraud? a. The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors. b. The controller of the company increases a contingent liability by SGD3 million because the company will otherwise beat analysts' expectations this quarter. c. The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris. d. The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

ANS: B PTS: 1 OBJ: Types of Frauds NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. According to professional auditing standards, which of the following best represents a type of financial reporting fraud that might occur? a. Management accrues a liability and discloses the possible outcome of a lawsuit prior to settling the matter. b. Management reclassifies a negative cash balance by increasing cash and also increasing a current liability. c. Management discloses its failure to meet loan covenants but states that a waiver has been received. d. Management intentionally excludes a subsidiary from its consolidated results that it controls significantly.

ANS: D

PTS: 1

OBJ: Types of Frauds

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 8. Which of the following would most likely be considered intentional misapplication of accounting principles on financial statements? a. A capital lease is presented as periodic rent expense rather than interest and depreciation. b. A deferred tax asset is reduced to zero with a valuation allowance. c. Insurance is amortized. d. Revenues for up-front fees are deferred rather than recognized immediately.

ANS: A PTS: 1 OBJ: Types of Frauds NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. Which of the following is most likely considered an omission from financial statement reporting? a. The company no longer discloses a contingency because it was settled previously. b. The company does not present goodwill because it was impaired currently. c. The company does not disclose earnings per share because it is privately held. d. The company does not present a statement of cash flows because of its current net loss.

ANS: D PTS: 1 OBJ: Types of Frauds NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Which of the following is the most common type of financial reporting fraud? a. Capitalizing major overhauls to operating equipment. b. Deferring service revenue until it is delivered to customers. c. Including as sales inventory sold with the right to return. d. Excluding a contingent liability that has been settled.

ANS: C PTS: 1 OBJ: Types of Frauds NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Which of the following best represents an example of fraud utilizing the lapping technique? a. An employee transfers cash on the last day of the year in order to double record it in the bank accounts. b. An employee creates a fictional vendor and requests payment to a personal P.O. box. c. An employee opens the mail to cover up payroll fraud received on a fictional person. d. An employee covers up the stealing of receipts by posting to the wrong customer accounts.

ANS: D PTS: 1 OBJ: Expectations of Users NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. Which is not a valid example of accounts receivable theft? a. Stealing cash and recording discounts to customers to reduce accounts receivable. b. Creating fictional invoices and customers and recording accounts receivable. c. Using the write-off module to reduce accounts receivable to hide receipts taken. d. Posting upcoming payments to the account of a customer whose most recent payment was diverted.

ANS: B PTS: 1 OBJ: Expectations of Users NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 13. Which of the following are most often involved in perpetrating fraud in financial statement reporting? a. The auditors and the attorneys. b. The treasurer and the board of directors. c. The chief executive and chief financial officers. d. The shareholders and the chief operating officer.

ANS: C PTS: 1 OBJ: Expectations of Users NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. What is the best method an auditor may use to detect fraud in the financial statements of clients? a. Use professional skepticism. b. Understand Accounting Standards. c. Brainstorm with the client to find the types of fraud occurring. d. Actively search for errors in the financial statements.

ANS: A PTS: 1 OBJ: Auditor's Responsibility to Detect Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. The audit of financial statements includes the initial approach of addressing fraud. How must an auditor address fraud in the planning stage? a. The auditor must test for fraud in the planning stage by sampling accounts. b. The auditor must consider the likelihood of fraud existing in the company in the planning stage. c. The auditor must realize that most people are honest and not automatically assume that fraud exists when planning the audit. d. The auditor must not be aggressive in its initial approach to fraud as trust may be lost by the client.

ANS: B PTS: 1 OBJ: Auditor's Responsibility to Detect Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. If the audit team discovers that fraud risk factors are present on an engagement, it should then: a. retract from the client and inform regulatory bodies. b. modify procedures to actively search for the existence of fraud. c. reduce the amount of evidence required and resort to management inquiry. d. turn the audit over to forensic accountants.

ANS: B PTS: 1 OBJ: Auditor's Responsibility to Detect Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. The threshold of materiality may be lowered in the case of potential fraud in the financial statements under audit. Why is this different from the usual materiality levels set by auditors? a. The intentional act of committing fraud itself becomes material, regardless of dollar amounts. b. Fraud is not relative to internal control, which requires larger materiality limits. c. The act of fraud is a characteristic of certain types of managers, therefore, materiality is irrelevant. d. Normal audit procedures are designed to catch all fraud, even the smallest of infractions.

ANS: A PTS: 1 OBJ: Auditor's Responsibility to Detect Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 18. Which of the following best represents actions that may indicate fraud is pervasive throughout the company under audit? a. The company's management negotiates deals with vendors in such a manner as to pay lower prices. b. The company's management drives luxury vehicles and takes vacations to exotic places. c. The company's management takes an overly aggressive approach to revenue recognition. d. The company's management estimates bad debts using an aged accounts receivables ledger rather than as a percent of sales.

ANS: C PTS: 1 OBJ: Auditor's Responsibility to Detect Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. Professional skepticism is best described as: a. an intent to deceive. b. an attitude of intrusion and obstinacy. c. a character that does not waver. d. a questioning mind.

ANS: D PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. According to professional audit standards, how might an understanding of the nature of fraud that may occur in the client organization best be identified by the audit firm? a. Fraud training courses from actual corporate fraud ex-criminals. b. Conducting a brainstorming meeting with the members of the audit team. c. Circulating a survey to the client company employees for completion. d. Discussions with other CPA firms.

ANS: B PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. Which of the following is required of the audit team relative to its consideration of fraud in a financial statement audit? a. Documentation in the audit file. b. Communication with the AICPA. c. Modification of client financial records. d. Termination of the manager responsible for the fraud.

ANS: A PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. What is the greatest benefit that can be derived by discussing fraud factors with management of the client organization under audit? a. Greater credibility with the client organization and its management. b. The impression on the client that fraud is being watched by an independent source. c. Further identification of specific risks resulting in material misstatements from fraud. d. Full disclosure of all fraud occurring during the year under audit in the company.

ANS: C PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 23. Which of the following risks of fraud should ordinarily be presumed on a financial statement audit by the audit team? a. Chief financial officer misappropriation of funds. b. Misapplication of revenue recognition principles. c. Management's inappropriate use of reserves. d. Lack of expenses related to stock options.

ANS: B PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. Relative to internal controls, what is a primary risk of fraud in the client company? a. The risk that management overrides controls. b. The risk that management changes controls each year. c. The risk that management dominates the enforcement of controls. d. The risk that the audit committee monitors controls.

ANS: A PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. How will the results of the auditor's assessment of fraud risk factors further affect the planned audit procedures? a. Audit procedures and fraud assessment do not relate. b. The assessment may require a re-audit of previous periods. c. By the assignment of qualified audit staff to areas of the engagement. d. Management will be called upon to assist in coordinating audit procedures.

ANS: C PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. When is the assessment of fraud risk on a single engagement completed by the audit team? a. Upon completion of the planning stage. b. Once internal control is understood. c. Only after the audit risk model has been used to design tests. d. Once the audit is complete.

ANS: D PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. Protection Transparency Ltd. is being audited by A and B, LLP. During the assessment of fraud, A and B discover that the controller has been creating fictional sales and posting them to the general ledger.

Who should the auditors make aware of this issue? a. Protection Transparency's legal counsel. b. The federal law enforcement agency. c. The chairman of Protection Transparency's audit committee. d. The predecessor auditor of Protection Transparency.

ANS: C PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 28. Management of Premium Discovery Company is compensated through large salaries, stock options and bonuses tied to the company's working capital growth. The CEO is constantly holding meetings to ensure that management is on target for increased operating income each month. Based upon the above information only, what type of probable motivation is there to commit fraud at the Premium Discovery Company? a. Incentive. b. Opportunity. c. Rationalization. d. Expectation.

ANS: A PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. Which of the following creates an opportunity for fraud to be committed in an organization? a. Management demands financial success. b. Poor internal control. c. Commitments tied to debt covenants. d. Management is aggressive in its application of accounting rules.

ANS: B PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. Wafflemart Corporation is a leader in its industry. It commands suppliers and is the envy of its competitors with its ability to name its price to customers. What are the typical motivators of Wafflemart's situation noted above? a. Wafflemart has pressure to commit fraud. b. Wafflemart has incentive to commit fraud. c. Wafflemart has opportunity to commit fraud. d. Wafflemart has rationalization to commit fraud.

ANS: C PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. Sam Jones, controller of Mitnikco, spends three days researching the accounting statements to find loopholes in the "rules" and to make a case for recognizing revenue earlier, rather than in later years.

In the end, Sam and the other members of management determine that they will reduce the company's deferred revenue accounts and begin accounting for all revenues as agreements are signed. What are the motivations of Mitnikco management based solely on the information above? a. Pressures b. Opportunity c. Rationalization d. Skepticism ANS: C PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 32. There are many important reasons to diligently plan for an audit. If an audit firm wrongly skips the planning stage of an audit, what will be detrimental relative to fraud? a. The firm will not be able to apply ISA to the financial statements. b. The firm will not adequately identify the types of fraud that may occur in the client company. c. The firm will not be able to perform direct tests of account balances. d. The firm will lack the competency and technical training necessary to complete the audit in accordance with ISA. ANS: B PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. In actively considering fraud in the financial statement audit, the audit team will most likely realize which of the following when performing substantive procedures? a. Evidence may have been physically changed to propagate the fraud. b. Most fraud is not material enough to consider. c. Journal entries do not supply enough evidence to detect fraud. d. New technology prevents fraud more thoroughly than manual systems.

ANS: A PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. What type of evidence is key to the auditor in ensuring that fraud has not taken place in financial statements? a. Sufficient b. Indirect c. Documentary d. Persuasive ANS: D PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. In performing analytical procedures to identify fraud factors, which of the following results would most likely signal possible trade loading? a. Significant change in debt to equity ratio. b. Significant increase to net revenues in the final month of the year. c. Negative cash flow from operations. d. Significant debt covenants tied to dividends.

ANS: A PTS: 1 OBJ: Identify Fraud Risk Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. In evaluating the effect of fraud upon the audit procedures the auditor should consider a. The type of fraud that may occur. b. The potential significance of fraud. c. The likelihood of fraud occurring. d. The pervasiveness of fraud detected. e. All of the above.

ANS: E PTS: 1 OBJ: Linking Fraud Risk to Audit Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 37. The audit team asks management for original documents related to sales contracts. Despite the team's persistence, management does not supply the documents for over two weeks. With the use of professional skepticism, what should this audit team be most concerned with as it relates to the documents? a. The need to complete the audit within a specified period of time. b. Management's possible use of the time to fabricate the documents. c. Discrepancies of the evidence. d. Conflicting evidence.

ANS: B PTS: 1 OBJ: Linking Fraud Risk to Audit Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. If material fraud is discovered by the auditor, the nature of the fraud should be reported directly to: a. the ACFE. b. the SEC c. the management of the company d. the audit committee of the company ANS: D PTS: 1 OBJ: Reporting on the Existence of Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. Which of the following best describes the outcome of the auditor discovering fraud in the financial statements? a. There will be no mention of the fraud in the financial statements because management will typically make required adjustments. b. The auditor is required to disclose any such fraud directly in the footnotes rather than adjusting the financial statements. c. The auditor is required to halt the audit and include a full description of the fraud in the audit report to the financial statements. d. There is no bearing on the financial statements by fraud that is discovered by the auditor.

ANS: A PTS: 1 OBJ: Reporting on the Existence of Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. If management makes appropriate adjustments, but does not take appropriate steps to modify internal control in order to rectify the problem of fraud discovered in a financial statement audit, the decision has a direct impact on: a. the audit opinion on the financial statements. b. the client company's stock price. c. the auditor's perception of the overall control environment. d. all previous work performed by the auditor for competing companies.

ANS: C PTS: 1 OBJ: Reporting on the Existence of Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 41. Which of the following represents the primary difference between an audit and forensic accounting? a. An audit has the focused responsibility to detect fraud in the client organization while forensic accounting sets out to prevent fraud. b. An audit has no responsibility for fraud while forensic accounting provides an audit specific to material fraud discovery. c. An audit must follow ISA while the forensic accountant is bound to Fraud Standards. d. An audit utilizes sampling techniques to detect material misstatements while forensic accounting examines the entire population of fraudulent transactions.

ANS: D PTS: 1 OBJ: Describe Forensic Accounting NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. Which of the following represents fraud procedures by the auditors? a. The auditor must disregard complex transactions for reasons of economic substance. b. The auditor cannot allow the client to pressure the timing of the audit for early release of earnings. c. The auditor must put less emphasis on capital additions and more on payroll. d. The auditors must no longer use confirmations and move forward to internal verification.

ANS: B PTS: 1 OBJ: Major Frauds and Audit Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. Which of the following computerized audit procedures best assists the engagement team in detecting fraud? a. Creation of bank confirmations. b. Tracing of recorded assets to source documents. c. Search for duplicate payments. d. Determination of obsolete inventory.

ANS: C PTS: 1 OBJ: Using Audit Software for Fraud Identification NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. Which of the following is not one of the components of the fraud risk model? a. Incentive. b. Rationalization. c. Susceptibility. d. Opportunity.

ANS: C PTS: 1 OBJ: Motivations to Commit Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. A common accounts receivable fraud is lapping. More sophisticated accounts receivable frauds involve a. using journal entries to write off accounts against the allowance for doubtful accounts. b. applying cash from one customer’s receivable to that of another to cover the earlier deficit. c. recording large discounts for the clients. d. Both A and C. ANS: D PTS: 1 OBJ: Using Audit Software for Fraud Identification NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 46. The fraud risk model consists for four components, i.e.,g incentive, opportunity, rationalization, and capacity. Which of the four components must be present for a fraud to occur? a. All four factors must be present for fraud to occur. b. All four factors need not be present. c. Fraud can occur if any three factors are present. d. Fraud can occur if any two factors are present.

ANS: B PTS: 1 OBJ: Indicators of Fraud Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. Fraud motivations and factors Research consistently shows that there are four motivations associated with most frauds. List these motivations and at least three related fraud factors that may exist for each.

ANS: Motivations Incentives or Pressures

Opportunities

Attitudes or Rationalization

Capability

Fraud Factors -Management compensation schemes.

-Financial pressure to improve trends.

-Personal need for financial enhancement.

-Compliance with debt covenants.

-Significant related-party transactions.

-Industry dominance.

-Influence over suppliers or customers.

-Volume of subjective judgments by management. regarding valuation and other estimates.

-Simple transactions made complex.

-Complex or difficult to understand transactions (including SPEs/VIEs and derivatives).

-Ineffective monitoring by management.

-Complex or unstable organizational structure.

-Weak or missing internal controls.

-Pushing accounting limits.

-Aggressive accounting stance.

-Audit firm answers to management and not the audit committee.

-Audit firm focus is on consulting for higher fees rather than audit services.

-Stock analyst misguidance.

-"The company owes me!"

-Ability to coerce.

-Confidence that they can carry out the fraud.

-Ability to handle stress.

PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 2. Consideration of fraud in an audit Auditors are required to actively conduct a financial statement audit with the mindset that fraud may exist. What is the general process that an auditor goes through to assess the risk of fraud and test accordingly?

ANS: 1.

Understand the nature of fraud, the motivations to commit fraud, and the manner in which fraud may be perpetrated.

2.

Develop and implement an approach based on “professional skepticism”.

3.

“Brainstorm” and share knowledge with other audit team members.

4.

Obtain information useful in identifying and assessing fraud risk.

5.

Identify the specific fraud risks, including potential magnitude, and areas likely to be affected by a fraud.

6.

Evaluate the quality of the company’s controls and potential effectiveness in mitigating the risk of fraud.

7.

Respond, i.e. adjust audit procedures to assure that the audit adequately addresses the risk of fraud and provides evidence specifically related to the possibility of fraud.

8.

Evaluate findings. If evidence signals that a fraud might exist, determine whether or not forensic or specialist auditors are needed to complete the investigation.

9.

Communicate the possibility that fraud exists to management, or to the audit committee or the full board if the fraud is material and/or involves members of management.

10. Document the audit approach starting with the step 1 through the completion of all of the steps identified above.

PTS: 1 OBJ: Implement a Fraud Risk Model NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Fraud consideration by auditors John Beasley is interviewing with public accounting firms to become an auditor. John does not believe that fraud is a "big deal" in client organizations and argues that most individuals in management of companies are "honest people". He believes that auditors are becoming too cynical.

Describe your response to John's attitude and discuss the major types of fraud that occur in companies.

ANS: Audit firms have taken criticism for failing to discover material frauds. Auditors have a greater responsibility to plan the audit to consider and detect fraud. This is accomplished partially by the auditor's use of professional skepticism. Professional skepticism is not necessarily being cynical, it is performing an audit with a questioning mind. It means that the auditors will obtain persuasive evidence to corroborate management responses to inquiries and to increase the sufficiency of substantive audit evidence. Professional skepticism is exhibited in the auditor's assumption that honesty in people is not a given. Auditors must not only go beyond the evidence in front of them, they must have the mindset of the possibility of fraud in all financial statement engagements.

It must also be mentioned that John may not be accepted by a public accounting firm because his attitude toward fraud is not rigorous enough for the profession.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 John must realize that, quite often, fraud in organizations usually takes place in one of three areas: -

Defalcation such as corruption such as bribery or conflicts of interest.

Defalcation such as asset misappropriation such as theft and misuse of assets.

Fraudulent financial reporting such as the overstatement of certain assets and revenues and the understatement of certain liabilities and expenses.

PTS: 1 OBJ: Types of Frauds NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 4. Forensic accounting Contrast the financial statement auditor's consideration of fraud to that of a forensic accountant.

ANS: A financial statement auditor is focused on drawing conclusions relative to the fair presentation of financial statements in accordance with ISA utilizing the concept of materiality. The financial statement auditor samples population and tests balances and transactions after consideration of certain risks.

Forensic accounting is auditing in the sense that procedures are performed in situations where fraud has already been discovered. Forensic professionals not only determine the extent of the fraud, but also focus on the finding the individual who perpetrated the fraud. This form of professional services assists the courts in building a case against the person committing the fraud by giving the details of the audit findings.

Unlike a financial statement auditor, forensic accountants will examine 100 percent of certain populations. They do this to determine the full extent of the fraud. Financial statement auditors may expand their procedures if fraud is suspected or detected, but they follow the concept of reasonable assurance.

A financial statement auditor uses testing and procedures, utilizing sampling and analytics to perform an audit. The forensic accountant, on the other hand, utilizes inquiry and interviews to perform extensive procedures.

The scope and nature of the financial statement audit is always the assertions related to the financial statements under audit. Forensic accounting ranges to more specific engagements from financial reporting fraud, to hidden assets, court testimony and divorce cases.

The deliverable of a financial statement is the written report, or opinion related to the audit of the financial statements. The end product of forensic accounting is a summary of evidence gathered and testimonial evidence for court cases.

Arguably, the skills of both the financial statement auditor and the forensic accountant must be similar in nature. Such skill-sets should include interviewing and listening skills, data gathering and analysis, accounting, auditing and computer skills. The notable differences in skills are those of objectivity for the auditor and the need for reconstruction of balances and electronic data for the forensic accountant.

PTS: 1 OBJ: Describe Forensic Accounting NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

5. Brainstorming for fraud You are a staff auditor with Zepplin and Frank, CPAs. Your audit team is in the planning stage for Leppard Sullivan, Inc., a beauty supply wholesaler. Describe the brainstorming process and types of issues that may be brought to the surface regarding your client.

ANS: All members of the audit team must be assembled to consider the possibility of fraud at Leppard Sullivan. Management motivations will be discussed as well as weaknesses in internal control and preliminary analytics. The auditors may discuss how they will conduct the audit with professional skepticism and a questioning mind. Following should be considered in the brainstorming session: - Consider how fraud can be perpetrated and covered up.

- Presume fraud in revenue recognition.

- Consider incentives, opportunities and rationalization for fraud.

- Consider industry conditions.

- Consider operating characteristics and financial stability.

The audit team must not just go through the motions of conducting this brainstorming. It must be a thorough and integral part of the audit approach.

PTS: 1 OBJ: Identify Fraud Risk Factors NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 6. Fraud categories Company fraud may take place through a variety of methods. Identify the major categories of fraud and give examples of each.

ANS: The following represents the broad categories of fraud and examples of each: Fraud Category Defalcations Defalcations Financial Reporting Fraud

Financial Reporting Fraud

Financial Reporting Fraud PTS: 1

Examples Corruption such as kickbacks, bribery and/or conflicts of interest.

Asset misappropriations due to theft such as embezzlement of funds, stealing inventory, misuse of company assets, and/or payroll fraud.

Manipulation, falsification, or alteration of accounting records or supporting documents such as the creation of fictitious shipping documents and invoices to record sales fraudulently.

Misrepresentation or omission of events, transactions, or other significant information such as the intentional non-disclosure of unconsolidated subsidiaries.

Intentional misapplication of accounting principles such as reporting a capital lease as an operating lease.

OBJ: Types of Frauds

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 7. Fraud risks that may lead to material misstatement In brainstorming identify risks that the auditor should consider that may result in material misstatement due to fraud.

ANS: The auditor should consider the following factors in evaluating the risk of material misstatement: -Type of fraud that may occur.

-Significance of the potential fraud.

-Likelihood of the fraud.

-Pervasiveness of the risk of fraud.

The auditor ordinarily should consider that there is a risk of material misstatement due to fraud relating to revenue recognition.

The auditor should address the risk of management override of controls.

PTS: 1 OBJ: Fraud Risks That May Lead to Material Misstatement NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 8. Auditor’s response to fraud risk factors The auditor assesses the identified fraud risks after taking into account an evaluation of the client’s programs and controls. How might the auditor respond to the results of the assessment of higher fraud risk?

ANS: The auditor should consider: -Professional skepticism a) Obtain more reliable evidence b) Obtain additional corroborating evidence.

-Assignment of personnel and supervision--specialists or more experienced personnel -More careful consideration of management’s selection and application of accounting principles -Adding an element of unpredictability to auditing procedures The auditor may change the nature, timing and extent of the audit procedures to be performed by increasing the extent of procedures, making them more persuasive, and moving more of them to the balance sheet date or later.

The response may involve the performance of procedures to further consider the risk related to: a) Revenue recognition b) Inventory quantities c) Management estimates Responses to consider the risk of management override of controls may include: a) Examine journal entries and other adjustments made in preparation of financial statements b) Review accounting estimates for biases c) Evaluate business rationale for significant unusual transactions

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

PTS: 1 OBJ: Auditor’s Response to Fraud Risk Factors NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 9. Auditor’s fraud communication responsibilities Discuss the auditor’s responsibility to communicate fraud to the audit committee. When is the auditor required to communicate possible fraud to parties other than the audit committee and management?

ANS: If the fraud is material (as previously agreed to with the audit committee) or if it involves senior management then it should be reported directly to the audit committee. Also if it has continuing control implications, the auditor should consider whether it is a “significant control deficiency” that should be reported to the audit committee.

The auditor normally is limited in their ability to disclose fraud to outside parties because of the confidentiality requirement. However, communication of fraud to parties other than the client may be required: a) To comply with legal and regulatory requirements b) To a successor auditor c) In response to a subpoena d) To a funding agency involving governmental financial assistance PTS: 1 OBJ: Auditor’s Fraud Communication Responsibilities NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 10. Linking internal deficiencies to audit procedures After assessing internal control weakness the auditor develops audit procedures to explicitly test for the existence of the types of fraud or misstatement that could occur because of the weakness. In the linkage process from control deficiencies to audit procedures, what are the four questions involved in linking changes to the audit program?

ANS: The auditor has to consider what could go wrong and then decide on the audit evidence that is needed to determine if fraud has occurred. The linkage process from control deficiencies to audit procedures involves the following thought process to identify potential changes to the audit program: -What types of misstatements could occur because of the control deficiencies?

-What account balances would be affected and how would they be affected?

-What audit procedures would provide evidence on whether the account balance contains misstatements?

-Do the planned audit procedures emphasize objective evidence that is outside the purview of the parties that have access to the assets?

PTS: 1 OBJ: Linking Internal Deficiencies to Audit Procedures NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

Chapter 8 - Audit Sampling TRUE/FALSE

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

1. Audit sampling implies the gathering of evidence to use as a basis for making valid inferences about the characteristics of the population as a whole without examining every transaction.

ANS: T PTS: 1 OBJ: When to Use NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Audit sampling is the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic.

ANS: T PTS: 1 OBJ: When to Use NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. When performing substantive tests using sampling methods, the auditor's main concern is the risk of incorrect rejection.

ANS: F PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. The risk of incorrect acceptance of an account balance as correct, when in fact it is not correct, bears directly on the effectiveness of an audit.

ANS: T PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. The tolerable misstatement is the confidence level needed to infer population values.

ANS: F PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. When an auditor chooses to examine all purchases of equipment exceeding $1,000.00 and to test the remaining items by analytical procedures, the auditor is using statistical sampling.

ANS: F PTS: 1 OBJ: Non-statistical vs Statistical NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. The most efficient method of testing a large population is the use of non-statistical sampling.

ANS: F PTS: 1 OBJ: Non-statistical vs Statistical NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. Statistical sampling assists auditors in determining the sufficiency of evidence gathered.

ANS: T PTS: 1 OBJ: Non-statistical vs Statistical NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 9. The use of haphazard selection of a sample allows for random, statistical evaluation.

ANS: F PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. The tolerable failure rate is the minimum rate of control procedure failure that can occur sufficient to cause the auditor to re-assess the preliminary assessment of control risk to a higher level.

ANS: F PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. The expected failure rate is the auditor's best estimate of the percentage of transactions processed for which the control procedure is not effectively applied.

ANS: T PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. An attribute is defined as a characteristic of the population of interest to the auditor.

ANS: T PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. The sample size decreases as the allowance for sampling error decreases.

ANS: F PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. For tests of control procedures the most commonly used statistical method is attribute estimation sampling.

ANS: T PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. Increasing the expected failure rate will cause the sample size to increase.

ANS: T PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. Sample size varies directly with the expected failure rate.

ANS: T PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. An auditor uses sampling to determine the reasonableness of an account balance by performing detailed analysis of items making up the account balance.

ANS: T PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 18. The auditor must define the population to which sampling relates if the auditor is to use statistical sampling for substantive tests of account balances.

ANS: T PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. The individual auditable elements defined by the auditor are the sampling units.

ANS: T PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. The classical sampling methods include difference estimation, ratio estimation, and mean-per-unit sampling.

ANS: T PTS: 1 OBJ: Methods NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. Kenneth Stringer auditing technique was called cumulative monetary amount (CMA) sampling. .

ANS: T PTS: 1 OBJ: Auditing in Practice NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. PPS sampling is defined as the number of items in the population being tested.

ANS: F PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. PPS sampling is dollar unit sampling.

ANS: T PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. Probability proportional to size sampling is designed to test whether there is an acceptable risk of account balance understatement.

ANS: F PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. Probability proportional to size sampling is most efficient when testing account balances for overstatement when few errors are expected.

ANS: T PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. The design of PPS sampling requires the auditor to determine audit risk, tolerable misstatement, and the expected misstatement in the account balance.

ANS: F PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 27. The design of PPS sampling requires the auditor to determine detection risk, tolerable misstatement, and the expected misstatement in the account balance.

ANS: T PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. The test of details (TD) risk in PPS sampling is the risk that the auditor can accept that the inference from a sample will be incorrect.

ANS: T PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. If the statistical confidence level is 90 percent, the test of details (TD) risk is 10 percent.

ANS: T PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. In the formula where I = TM - (EM  EEF)/RF; I is the sampling interval in dollars.

ANS: T PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. In the formula where I = TM - (EM  EEF)/RF; I is the sampling interval in number of units.

ANS: F PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. Population items with a zero balance have the same chance of being chosen as those with dollar balances when using PPS sampling.

ANS: F PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. When using PPS sampling, population items with negative balances may be treated as if they were positive when the dollar amount of negative balances is insignificant.

ANS: T PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. When using PPS sampling, population items with negative balances should be treated as a separate population and tested separately if the number of negative items is significant.

ANS: T PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. Any item in the population that has a zero balance will have no chance of being selected when the auditor uses PPS sampling.

ANS: T PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

36. In PPS sampling the percentage that the book value of each misstated sample item is overstated or understated is the tainting percentage.

ANS: T PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. PPS Sampling is an adaptation of attribute sampling to dollar value testing.

ANS: T PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. An example of sampling an attribute includes examining evidence that the client has matched vendor invoice details with the purchase order before approval for payment.

ANS: T PTS: 1 OBJ: Attribute Estimation Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. The auditor's tolerable failure rate for attribute sampling is the point in which control failures support the planned assessment of control risk.

ANS: F PTS: 1 OBJ: Attribute Estimation Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. A control failure does not automatically mean that a misstatement has occurred..

ANS: T PTS: 1 OBJ: Attribute Estimation Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. In analysis of the results of audit sampling, an auditor may determine that the sample size must be increased.

ANS: T PTS: 1 OBJ: Analysis NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. Random number, systematic sampling and block sampling are acceptable sample selection methods for statistical sampling.

ANS: F PTS: 1 OBJ: Sample Selection Method NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. Random number, haphazard selection and block sampling are acceptable sample selection methods for non-statistical sampling.

ANS: T PTS: 1 OBJ: Sample Selection Method NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. Random number and systematic sampling are acceptable sample selection methods for statistical sampling.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: T PTS: 1 OBJ: Sample Selection Method NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Non-statistical sampling is based on the auditor’s judgment used to determine the appropriate sample size and evaluate the results.

ANS: T PTS: 1 OBJ: Sample Selection Method NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. The audit objective of attribute sampling is to test the correctness of an account balance.

ANS: F PTS: 1 OBJ: Attribute Estimation Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. Stratification of a population into more homogeneous subgroups is useful in reducing sample size.

ANS: T PTS: 1 OBJ: Sample Selection Method NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 48. The audit results reflect the sum of lower stratum items and the projected misstatement derived from the top stratum items.

ANS: F PTS: 1 OBJ: Substantive Sampling Considerations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 49. In PPS sampling basic precision is the upper misstatement limit when no misstatements are detected in a PPS sample. It is computed by multiplying the sampling interval by the error expansion factor.

ANS: F PTS: 1 OBJ: PPS Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 50. Sampling unit is the individual auditable elements, as defined by the auditor that constitute the population.

ANS: T PTS: 1 OBJ: Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking MULTIPLE CHOICE 1. Audit sampling is used to obtain evidence about each of the following except a. the effectiveness of control procedures. b. the efficiency of control procedures. c. the dollar accuracy of account balances. d. the dollar accuracy of classes of transactions.

ANS: B PTS: 1 OBJ: When to Use NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 2. Which one of the following accounting constraints supports the concept of audit sampling? a. conservatism b. materiality c. cost-benefit d. industry practice ANS: C PTS: 1 OBJ: When to Use NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. Which one of the following is not a decision the auditor needs to make about attribute estimation sampling? a. sample size b. selection of items included in the sample c. evaluation of sample information d. whether to document all phases ANS: D PTS: 1 OBJ: Attribute Estimation Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. On which of the following items does the auditor make judgment while determining the appropriate sample size in attribute estimation sampling? a. Sample Risk b. Tolerable failure rate c. Expected failure rate d. all above ANS: D PTS: 1 OBJ: Attribute Estimation Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. An auditing situation that would not utilize sampling would be a. the confirmation of accounts receivable. b. the testing of recorded prices (cost) of inventory. c. the observation of the employees who control the incoming mail receipts. d. the testing of electronic authorization over writeoffs.

ANS: C PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Nonsampling risk includes all of the following except a. misinterpretation of information. b. use of improper audit procedure. c. improper projection of results to the population. d. carelessness of the auditor. e. none of the above.

ANS: C PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 7. Sampling risk is the risk that a. the sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect. b. the population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect. c. Neither A nor B is correct. d. Both A and B are correct.

ANS: A PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. Control risk that is assessed excessively high leads to: a. audit inefficiency. b. a less expensive audit. c. reduction of substantive testing. d. errors that are more likely to occur than anticipated.

ANS: A PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. The auditor's risk of concluding that the book value of inventory is correct when it is materially misstated is the risk of a. incorrect rejection. b. incorrect acceptance. c. insufficient sample size. d. none of the above.

ANS: B PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Incorrect acceptance is directly related to a. the efficiency of the audit. b. the effectiveness of the audit. c. the cost of the audit. d. all of the above.

ANS: B PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. The auditor is most concerned with which of the following? a. risk of incorrect rejection b. risk of incorrect acceptance c. risk of excess sample size d. risk of errors in the population ANS: B PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 12. While auditors may use either statistical or nonstatistical sampling, some auditors restrict the use of nonstatistical sampling mainly because it is a. less effective. b. less objective. c. less efficient. d. less risky.

ANS: B PTS: 1 OBJ: Non-statistical vs Statistical NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. Statistical sampling is best known for combining a. binomial and confidence intervals. b. random and haphazard selection. c. hypergeometric distribution with audit risk. d. probability and statistical inference with audit judgment.

ANS: D PTS: 1 OBJ: Non-statistical vs Statistical NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. Which one of the following issues need not be addressed when planning an audit sample to test control procedures? a. the audit objective of the test b. the minimum rate of control procedure failure c. the expected rate of control procedure failure d. the auditor's allowable risk of assessing control risk too low ANS: B PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. The maximum rate of control procedure failure that can occur and still support the preliminary assessment of control risk is a. tolerable failure rate. b. allowable risk of assessing control risk too low. c. expected failure rate. d. allowance for sampling error.

ANS: A PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. The statistical sampling method most commonly used to test control procedures is a. variable sampling. b. ratio estimation sampling. c. attribute estimation sampling. d. dollar unit sampling.

ANS: C PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 17. Which one of the following is not a typical step used to implement an attribute estimation sampling plan? a. define the control procedure of interest and the failure conditions b. select and audit the sample items c. evaluate the sample results d. define the nonstatistical sampling method that is most effective and efficient ANS: D PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. The sample size varies directly with a. the expected failure rate. b. the tolerable error rate. c. the allowable risk of assessing control risk too low. d. the nonsampling risk.

ANS: A PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. In analyzing misstatements using sampling techniques, the auditor should analyze the misstatements a. qualitatively and quantitatively. b. absolutely and proportionately. c. haphazardly and randomly. d. methodically and systematically.

ANS: A PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Haphazard sampling is an acceptable method of sampling provided the auditor believes the sample to be a. statistically sound. b. representative of the population. c. representative of the sample. d. in the upper stratum.

ANS: B PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. The sampling unit that will most likely be used in an audit to test the existence of accounts receivable is the recorded: a. Purchase order. b. Receiving report. c. Invoice. d. Write-off.

ANS: C PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 22. When determining the sample size, the auditor must realize that for most purposes: a. sampling risk is high. b. tolerable failure rate is predetermined. c. a failure rate is not to be expected. d. population size is not a major factor.

ANS: D PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. The steps used in sampling during substantive testing includes the determination of each of the following except a. the audit objective. b. the method of selecting a sample. c. expected misstatement conditions. d. control failure risk.

ANS: D PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. Nonstatistical sampling may be utilized for Tests of Controls a. Yes b. Yes c. No d. No

Substantive Testing Yes No No Yes

ANS: A PTS: 1 OBJ: Non-statistical vs Statistical NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. Factors that the auditor should consider when choosing between nonstatistical and statistical sampling include a. whether the audit staff is adequately trained to use statistical sampling. b. whether the population lends itself to a random-based selection method. c. whether the auditor wants an objective measure of the risk of drawing a wrong conclusion. d. all of the above.

ANS: D PTS: 1 OBJ: Non-statistical vs Statistical NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. When confirming receivables in testing for overstatements, there are few or no misstatements expected, and the selection is based on dollars, the auditor is likely to use a. PPS sampling. b. stratified mean-per-unit sampling. c. ratio estimation sampling. d. attribute sampling.

ANS: A PTS: 1 OBJ: Methods NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 27. In PPS sampling, the expected amount of misstatement must be a. greater than tolerable misstatement. b. less than tolerable misstatement. c. equal to tolerable misstatement. d. either A or C. ANS: B PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. Probability proportional to size sampling is designed to test for overstatement of an account balance while classical variable methods are designed to test for a. both overstatement and understatement. b. understatement only. c. overstatement only. d. exact dollar balances.

ANS: A PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. The probability proportional to size sampling is designed to test for a. overstatements. b. understatements. c. neither understatements nor overstatements. d. either understatements or overstatements.

ANS: A PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. The design of a PPS sample requires the auditor to determine all of the following except a. detection risk. b. inherent risk. c. tolerable misstatement. d. expected misstatement in the account balance.

ANS: B PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. When using PPS sampling, an auditor found that the sampling interval should be $15,755. If selecting the sample manually, the auditor should round the sample interval to a. $16,000. b. $15,000. c. $14,000. d. $10,000.

ANS: B PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 32. When planning a test of details using PPS sampling, tolerable misstatement is usually set a. higher than planning materiality. b. lower than planning materiality. c. either higher or lower than planning materiality. d. the same as materiality.

ANS: B PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. In PPS sampling, the formula for the fixed interval is a. b. c. d.

ANS: A PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. When using PPS sampling, the auditor will use which of the following formulas to determine maximum sample size? a. b. c. d.

ANS: C PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. Which one of the following is a proper course of action for the auditor when the upper misstatement limit exceeds the tolerable misstatement? a. The auditor can have the client correct the known misstatements. b. The auditor can determine whether there is a pattern of common problems. c. The auditor can expand the sample. d. All of the above.

ANS: D PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 36. PPS sampling has all of the following advantages over other statistical methods except which? a. Sample selection is relatively easy. b. Sample sizes are relatively small. c. Sample size is influenced by the standard failure of the population. d. Dollar misstatements of the likely misstatements are easily obtainable. e. None of the above is an advantage.

ANS: C PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. A major disadvantage of PPS sampling is which of the following? a. Sample selection is relatively easy. b. Sample sizes are relatively small. c. It is difficult to test for understatement. d. It directly controls for the risk of incorrect acceptance.

ANS: C PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. When the results of sample testing conclude that there is misstatement in excess of the tolerable misstatement the auditor will usually: a. issue a disclaimer of opinion. b. throw out the sample. c. propose adjustments to the client. d. disclose the misstatement in the client's financial statements.

ANS: C PTS: 1 OBJ: Analysis NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. A primary difference in comparing the resulting misstatements analyzed after using statistical methods compared to those using non-statistical methods is that a. statistical methods determine the most likely misstatement while non-statistical methods determine misstatements by projecting the misstatement found in the sample back to the population. b. statistical methods determine misstatements by projecting the misstatement found in the sample back to the population while non-statistical methods determine the most likely misstatement. c. statistical methods take a multiple of the estimated misstatement while non-statistical methods use precision to determine the upper limit. d. statistical methods ignore any sampling error as the probabilities have compensated for them while non-statistical methods must utilize the sampling error in the projection of the upper limit.

ANS: A PTS: 1 OBJ: Analysis NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 40. When an auditor uses PPS and analyzes misstatements in the lower stratum, the book value will be compared to the audit results in order to derive the: a. audit value. b. tolerable misstatement. c. sampling interval. d. tainting percentage.

ANS: D PTS: 1 OBJ: PPS NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. In attribute sampling, the risk of incorrect acceptance deals with a. effectiveness. b. efficiency. c. reliability. d. Both A and B. ANS: A PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. In attribute sampling, the risk of incorrect rejection deals with a. effectiveness. b. efficiency. c. reliability. d. Both A and B. ANS: B PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. Non-sampling risk deals with a. not carrying out the appropriate audit procedure. b. drawing an incorrect inference from the sample results. c. inappropriately diagnosing client’s problems. d. Both A and C. ANS: D PTS: 1 OBJ: Non-Sampling Risk NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. Attribute sampling is used when a. testing rates of deviations of controls. b. testing the reasonableness of account balances. c. need to estimate some amount. d. Both A and B. ANS: A PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. PPS sampling is normally used when a. testing rates of deviations of controls. b. testing the reasonableness of account balances. c. need to estimate some amount. d. Both A and B. ANS: B

PTS: 1

OBJ: PPS Sampling

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 46. Another name for PPS sampling is a. dollar-unit sampling. b. cumulative monetary amount sampling. c. combined attributes-variable sampling d. all of the above.

ANS: D PTS: 1 OBJ: PPS Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. In sample selection, systematic selection deals with a. each item in the population having an equal chance of selection. b. every nth item being selected after a random start. c. an arbitrary selection with no conscious bias. d. selecting all items on a day or week.

ANS: B PTS: 1 OBJ: Sample Selection Method NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 48. In sample selection, haphazard selection deals with a. each item in the population having an equal chance of selection. b. every nth item being selected after a random start. c. an arbitrary selection with no conscious bias. d. selecting all items on a day or week.

ANS: C PTS: 1 OBJ: Sample Selection Method NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 49. In sample selection, block sampling deals with a. each item in the population having an equal chance of selection. b. every nth item being selected after a random start. c. an arbitrary selection with no conscious bias. d. selecting all items on a day or week.

ANS: D PTS: 1 OBJ: Sample Selection Method NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 50. Sampling risk deals with a. not carrying out the appropriate audit procedure. b. drawing an incorrect inference from the sample results. c. inappropriately diagnosing client’s problems. d. Both A and C. ANS: B PTS: 1 OBJ: Sampling Risk NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 51. In testing the reasonableness of account balances, PPS sampling is preferred because it provides a smaller sample size. Which of the following are limitations of using the PPS sampling method? a. tests for overstatement. b. zero and negative amounts. c. numerous misstatements. d. all of the above.

ANS: D

PTS: 1

OBJ: PPS Sampling

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 52. In testing for the reasonable of an account balance, if PPS sampling cannot be used because of its limitations, what is an alternative statistical method? a. attribute sampling. b. mean-per-unit sampling. c. discovery sampling. d. all of the above.

ANS: B PTS: 1 OBJ: Substantive Sampling NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. Sampling factors List the four important decisions an auditor must make when deciding to use sampling.

ANS: When deciding to use sampling techniques the auditor must decide the following:  population - Which population should be tested and for what characteristics?  sample size - How many items should be included?  selection - Which items should be included?  evaluation - What does the sample information tell about the population as a whole?

PTS: 1 OBJ: When to Use NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 2. Nonsampling risk What is nonsampling risk and how can it be eliminated?

ANS: Nonsampling risk includes all aspects of audit risk that are not due to sampling. Nonsampling risk would include using auditors who are not properly trained, inadequate supervision, use of an improper or incorrect audit procedure, or the misinterpretation of information. Nonsampling risk cannot be eliminated on an audit, but it can be guarded against. Implementation of good quality- control practices, carefully designed audit programs, and assignment of qualified personnel to each audit will help minimize nonsampling risk.

PTS: 1 OBJ: When to Use NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Risks of sampling in tests of controls Define the following terms as they relate to sampling for tests of controls: 1. tolerable failure rate 2. expected failure rate 3. allowance for sampling error.

ANS:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 Tolerable failure rate is the maximum rate of control procedure failure that, in the auditor's judgment, can occur and still support the preliminary assessment of control risk.

Expected failure rate is the auditor's best estimate of the percentage of transactions processed for which the control procedure is not effectively applied.

Allowance for sampling error (precision) is a factor used in planning statistical samples that represents the precision required in the sample to keep sampling risk at the desired level; provides “elbow room” for the difference between sample projections and the actual, but unknown, misstatement in the population.

PTS: 1 OBJ: Risks NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 4. Planning and documentation of sampling use When sampling is used in audit procedures, what should be included working papers to provide adequate documentation?

ANS: The auditor should include the following in his or her working papers for adequate documentation involving sampling:  the objectives of the test.  the population, sampling unit, and the way completeness was determined.  the definition of failures.  the underlying reasons for selecting the level of risk of assessing control risk too low and the tolerable and expected failure rates.  how the sample size was determined.  how the sample was selected.  a description of the procedures performed and the failures found.  the evaluation of the sample and an overall conclusion.

PTS: 1 OBJ: Planning NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 5. Encountering misstatements in the sampling process Explain the term "misstatement" as it applies to sampling during substantive procedures and explain how the term may be interpreted differently by different auditors.

ANS: A misstatement occurs when the audited value of an item differs from the recorded value. Some auditors define a misstatement as differences in recorded values and audited values that change pre-tax income arising from any nonexcludable misstatements. Others define a misstatement as a difference that affects the account total. Auditors have also concluded that certain types of differences are excludable misstatements. Excludable misstatements include those that the client has independently detected and corrected before the auditor has begun substantive testing and misstatements that the auditor may test fully in another procedure.

PTS: 1

OBJ: Planning

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 6. Choosing sampling methods Identify the factors that an auditor would consider when choosing between nonstatistical sampling and statistical sampling.

ANS: When choosing between statistical and nonstatistical sampling the auditor would consider:  whether the audit staff is adequately trained to properly use statistical sampling.  whether the added costs of designing, selecting, and evaluating a statistical sample are justifiable in the circumstances.  whether the auditor wants an objective measure of the risk of drawing a wrong conclusion based on the sample.  whether the population lends itself to a random-based selection method.

PTS: 1 OBJ: Non-statistical vs Statistical NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 7. Using PPS sampling Under what conditions would an auditor choose to use PPS sampling?

ANS: PPS sampling is an adaptation of attribute sampling methods to dollar value testing. It was developed specifically for use in auditing. PPS sampling is most effective when testing for overstatements in situations when few misstatements are expected. Individual book values must be available for testing.

The population for PPS sampling is defined as the number of dollars in the account balance being tested. Each dollar in the population has an equal chance of being chosen, but each dollar is associated with a particular item such as an inventory item.

PTS: 1 OBJ: PPS NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 8. PPS calculation Present the formula for the sample interval when using PPS sampling and identify each component of the formula.

ANS: The fixed interval approach for PPS sampling is: I = TM - (EM  EEF) / RF, where TM = Tolerable misstatement EM = Expected misstatement EEF = Error expansion factor RF = Reliability factor.

PTS: 1 OBJ: PPS NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 9. PPS calculation applied Given the following information, calculate the sampling interval and the maximum sample size for accounts receivable when there are 550 accounts and a balance of $1,750,000.

Tolerable misstatement Expected misstatement Error expansion factor Reliability factor

$75,000 $8,000 1.0 2.0

ANS: The sampling interval is equal to $33,500 and the sample size would be 53, calculated as follows: I = TM - (EM  EEF) / RF I = 75,000 - 8,000/2 = 33,500 Maximum sample size = 1,750,000/33,500 = 53. [rounded] PTS: 1 OBJ: PPS NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 10. PPS sampling interval and sample size Given the following information, calculate the sampling interval and the maximum sample size for accounts receivable when there are 650 accounts and a balance of $750,000.

Tolerable misstatement Expected misstatement Error expansion factor Reliability factor

$40,000 $4,000 1.0 2.0

ANS: The sampling interval is equal to $18,000 and the sample size would be 42, calculated as follows: I = TM - (EM  EEF) / RF I = 40,000 - 4,000/2 = 18,000 Maximum sample size = 750,000/18,000 = 42. [rounded] PTS: 1 OBJ: PPS NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 11.

12. Sample selection Before procedures using statistical or non-statistical sampling methods begin, the auditor must determine how the sample will be selected. Discuss the various types of sample selection, when they are used and, generally, how they are used. Give examples.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: Random number selection Random number selection is an efficient use of sample selection if random numbers can be related to the population. An example of this is in sampling customer invoices that are sequentially numbered.

The sequence can be used as the range for random number selection. Random selection is known to be representative of the population and is required for statistical sampling methods.

Systematic selection Systematic selection is also a random technique and is acceptable for statistical methods. It is used when sequential numbering is not used in the population or is difficult to use for sampling. An example of this is in sampling inventory for valuation. If the database table keeps inventory items by a unique product number that has alphanumeric characters, then the product number can be used with systematic selection. However, in order to use systematic selection the auditor must (a) establish that the population is complete, and (b) be sure that there is not a systematic pattern in the population. An interval must be used to sample every nth item in the population. Every item in the population then has an equal chance of being selected.

Haphazard selection Items may be arbitrarily selected from the population using no conscious basis. This haphazard selection process is not considered random and is not used in statistical methods.

Block sampling Similar to haphazard selection, the auditor may wish to select all transaction in a given day or week.

This selection process may not give the auditor the representation of the transactions as they occurred for a more extended period of time.

PTS: 1 OBJ: Attribute Sampling NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 13. Non-statistical sampling Describe non-statistical sampling and how it is used by the auditor.

ANS: Non-statistical sampling is based on the same audit considerations as those used for statistical sampling, but it is not controlled mathematically for sampling risk. The auditor just projects misstatement to the population and then decides whether the account is materially misstated or not.

Sample size is based on the same factors used in statistical sampling and can be done judgmentally or statistically.

The auditor can use the various sample selection methods, e.g., random sampling or haphazard sampling.

The auditor then has to evaluate the sample results. While statistical sampling methods automatically builds in an allowance for sampling risk given the defined parameters provided by the auditor, now the auditor has to perform that function.

For example, using the example provided in the text, a misstatement of $900 out of a sample of $310,000 given a population of $2,500,000 results in a projected error of $7,258.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

$900/$310,000  $2,500,000 = $7,258 If tolerable misstatement is $8,000, even though the projected misstatement is less than tolerable misstatement the auditor may still reject the account balance as being materially misstated. However, if tolerable misstatement is $15,000 then the auditor may very well be willing to accept the account balance as not being materially misstated. The point is that now the auditor has to judgmentally evaluate the point at which he would be satisfied to sign off on the appropriateness of the account balance.

PTS: 1 OBJ: Non-Statistical Sampling NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

Chapter 9 - Auditing Revenue and Related Accounts TRUE/FALSE

1. The revenue cycle considered by auditors includes the sales process but not collections.

ANS: F PTS: 1 OBJ: Cycles NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. The revenue cycle involves the procedures in generating a sales order, shipping the products, recording the transaction and collecting the receivable.

ANS: T PTS: 1 OBJ: Cycles NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. The shipping department confirms the shipment of goods by completing the packing slip and returning it to the purchasing department.

ANS: F PTS: 1 OBJ: Cycles NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. Monthly statements provide a detailed list of the customer’s activity for the previous month and a statement of all open items.

ANS: T PTS: 1 OBJ: Cycles NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. Invoices are processed, including their mailing to customers, only subsequent to proof of valid delivery to customers.

ANS: T PTS: 1 OBJ: Cycles NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of authorization.

ANS: F

PTS: 1

OBJ: Risks

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. A comprehensive chart of accounts and a review of complex or unusual transactions by supervisory personnel are control procedures necessary for proper classification of accounts.

ANS: T PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. Formal procedures for approving acceptance of returns that are beyond the warranty period are an appropriate control procedure for identifying and recording returned goods.

ANS: T PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 9. One of the benefits of establishing a formal credit policy for granting credit is that management is freed from the burden of monitoring accounts receivable.

ANS: F PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Monitoring of the revenue cycle may be accomplished partially through the use of exception reporting ANS: T PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Monitoring is one of the components of internal control framework.

ANS: T PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. The audit team is required by auditing standards to make an ordinary presumption of the risk of fraud due to revenue misstatements on every engagement.

ANS: T PTS: 1 OBJ: Revenue Recognition NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. A company that ships a large quantity of its products from its manufacturing plant to a warehouse that it leases until the customer is ready for the product should record the delivery as revenue.

ANS: F PTS: 1 OBJ: Revenue Recognition NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. The intentional loading of sales at the end of a period to customers that do not need the goods at that time should not be recorded as revenues.

ANS: T PTS: 1 OBJ: Revenue Recognition NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. Access to the price table maintained in the computer is tested through an examination of the computer logs of all accesses to the pricing table.

ANS: T PTS: 1 OBJ: Revenue Recognition NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. A certain tendency for fraud exists when stock options are close to becoming exercised by executives and financial personnel.

ANS: T PTS: 1 OBJ: Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. A red flag that may alert the auditor to fraud in the revenue cycle is a trend of revenue growth that is consistent with industry results.

ANS: F

PTS: 1

OBJ: Fraud

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 18. Financial accounting personnel who do not have the proper education, experience and backgrounds may signal the auditor to the risk of financial statement fraud.

ANS: T PTS: 1 OBJ: Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. The auditor of James Corporation should be alert to the risk of material misstatements when James Corporation's cash flows from operations are negative and net income (rather than loss) is reported.

ANS: T PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Ratio analysis performed by the audit team may include the comparison of gross sales to industry averages and previous periods.

ANS: F PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. The auditor's determination that day's sales in accounts receivable increased from 44 days to 100 days would usually be found through the use of ratio analysis.

ANS: T PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. E and G, LLP would most likely discover channel stuffing in the financial statements of a client through the use of trend analysis.

ANS: T PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. When the risk of misstatement is higher, the auditor adjusts the direct tests to consider the type of misstatements that might take place.

ANS: T PTS: 1 OBJ: Testing Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. The auditor has determined that the control risk for the existence assertion is low; therefore the auditor may reduce the number of items tested on a substantive basis.

ANS: T PTS: 1 OBJ: Testing Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. Confirmations of bank accounts may help the auditor to determine if material amounts of accounts receivable have been pledged or discounted.

ANS: T PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 26. When the auditor seeks evidence concerning the allowance for doubtful accounts he or she would most likely use an aged trial balance to help identify past due balances.

ANS: T PTS: 1 OBJ: Audit of Allowance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. Current auditing standards do not require the confirmation of receivables if accounts receivable are not material.

ANS: T PTS: 1 OBJ: Testing of accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. Accounts receivable confirmation letters should be prepared on the auditing firm's letterhead.

ANS: F PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. Alternative procedures to the confirmation of receivables include review of subsequent collections and examination of supporting evidence.

ANS: T PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties.

ANS: F PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. Positive accounts receivable confirmations should be used on all accounts which represent small immaterial balances.

ANS: F PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. When the client has a large number of relatively small accounts receivable and the assessed level of control risk for receivables and related revenue transactions is high, the auditor is more likely to use negative confirmations.

ANS: F PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. The auditor would examine a sample of sales transactions throughout the entire period to determine if sales were recorded in the proper period when performing a sales cutoff test.

ANS: F PTS: 1 OBJ: Testing Revenue NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 34. An example of a control over the sales cycle is the authorization of price lists by the appropriate sales and marketing manager.

ANS: T PTS: 1 OBJ: Testing Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. An auditor would test control over the objective of the occurrence of sales transactions by sampling recorded revenues and tracing them back to invoices and shipping documents.

ANS: T PTS: 1 OBJ: Testing Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. If control risk is assessed high, the auditor may send significantly fewer confirmations for a sample of accounts receivable than if the control risk is assessed low.

ANS: F PTS: 1 OBJ: Linkage NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. In planning an audit for the revenue cycle, the auditor must realize the integrated relationship of evidence found between the accounts receivable and the notes payable accounts.

ANS: F PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. A method of testing for the completeness of sales is to test the sequence of sales invoices used during the period under audit.

ANS: T PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. A review of the terms of client debt agreements assists the audit of the presentation and disclosure assertion for accounts receivable.

ANS: T PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. The use of audit software makes the audit of the revenue cycle more effective, but not more efficient.

ANS: F PTS: 1 OBJ: Testing Revenue NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. Testing cutoff involves procedures applied to sales transactions selected from those recorded immediately prior to period end and immediately following period end.

ANS: T PTS: 1 OBJ: Testing Revenue NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. Valid evidence obtained in an audit for testing the cutoff of gross sales includes receiving reports for returned merchandise.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: F PTS: 1 OBJ: Testing Revenue NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 43. An example of a test for completeness in the revenue cycle includes the sampling of shipping documents and tracing them to the sales journal and general ledger.

ANS: T PTS: 1 OBJ: Testing Revenue NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. Negative confirmations are used as an appropriate test with statistical sampling techniques.

ANS: F PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Exceptions found in the confirmations of accounts receivable balances need not be projected as errors to the population as they are typically isolated errors.

ANS: F PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. A timing difference type of exception in the confirmation process may include a misunderstanding by the reader as to the date being confirmed.

ANS: T PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. Negative confirmations are considered to be more persuasive than positive confirmations.

ANS: F PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 48. The purpose of summarizing confirmation results is to list the extent of sales tested in relation to the response rate.

ANS: F PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 49. An auditor's primary concern with identifying related party sales and receivables rests with the presentation and disclosure assertion.

ANS: T PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 50. Customer complaints noted in returned accounts receivable confirmations may be an indicator of fraud.

ANS: T PTS: 1 OBJ: Fraud Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 51. The audit team typically reviews journal entries in the receivables ledger for unusual entries that may be indicators of fraudulent activity.

ANS: T

PTS: 1

OBJ: Fraud Indicators

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 52. Estimation of the allowance for doubtful accounts is a simple management decision as it is determined as a percentage of sales.

ANS: F PTS: 1 OBJ: Audit of Allowance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 53. The auditor will come up with an independent estimation of the allowance for doubtful accounts based on a thorough understanding of the client and the client's business that is compared to the recorded allowance.

ANS: T PTS: 1 OBJ: Audit of Allowance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 54. It is beneficial in the testing of notes receivable to confirm not only the balance of the notes, but also their terms.

ANS: T PTS: 1 OBJ: Audit of Allowance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 55. The most important control to ensure completeness of sales and shipping is pre-numbered shipping and billing documents.

ANS: T PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 56. An aging of accounts receivable is useful in estimating the reasonableness of the allowance for doubtful accounts.

ANS: T PTS: 1 OBJ: Audit of Allowance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking MULTIPLE CHOICE 1. Which of the following processes are included in the revenue cycle? a. Shipping products to customers. b. Sending disbursements to suppliers. c. Issuance of capital stock. d. Preparation of a time card.

ANS: A PTS: 1 OBJ: Cycles NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Which of the following is the best example of the control objective in the revenue cycle that all transactions are recorded accurately? a. Sales are recorded at the invoice price expected to be collected from customers. b. Sales orders have sequential numbering. c. Recorded sales transactions are evidenced by valid invoices and shipping documents. d. Credits to customer accounts are classified as liabilities.

ANS: A

PTS: 1

OBJ: Cycles

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 3. The relationship between the sales cycle and an inventory system can best be noted in which of the following examples? a. Credit is established prior to completion of a sales order. b. Invoices are sent to customers only after shipment is evidenced. c. Availability of products ordered are verified prior to processing a sale. d. Billing information is added to the database for new customers.

ANS: C PTS: 1 OBJ: Cycles NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. Credit approval policies are implemented by organizations primarily to a. determine revenue recognition policies. b. ensure customer satisfaction. c. prevent lapping by the accounts receivable department. d. ensure the realization of receivables.

ANS: D PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. Sales transactions should be documented at initiation in order to a. provide the customer a copy of the transaction. b. provide evidence of authorization and recording. c. offer credit to customers. d. generate back orders.

ANS: B PTS: 1 OBJ: Cycles NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. The significance of the bill of lading is to provide a. the warehouse personnel with the product that must be shipped to customers. b. invoices to customers for proper collection. c. a credit application for customer approval. d. evidence of title transfer of goods to customers.

ANS: D PTS: 1 OBJ: Cycles NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. The risk of material misstatement due to fraud relating to revenue recognition should be a. approached in a manner that is identical to control risk assessment. b. given lower priority to the risk of embezzlement. c. ordinarily presumed by the auditor. d. assumed to have been considered by the FASB. ANS: C PTS: 1 OBJ: Revenue Recognition NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. A method used by companies to fraudulently inflate revenues is the a. use of hidden “side letters” giving the customer an irrevocable right to return the product. b. recording of fictitious sales. c. shipment of product not ordered by customers. d. all of the above.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: D PTS: 1 OBJ: Revenue Recognition NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 9. Which of the following are the primary sources of authoritative guidance for auditors, regarding revenue recognition? a. IASB and ACRA b. SEC, EITF, GASB, and the Journal of Accountancy c. EITF, FASB, GASB and textbooks d. GASB, SEC, EITF and AICPA ANS: A PTS: 1 OBJ: Revenue Recognition NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Which of the following must exist prior to the recognition of revenue by a company from the sale of a product? a. The cash is realized on the sale of the product. b. A price is discussed based upon the customer's resale of the product. c. The customer is given the option to return the product at any time. d. The product is adequately delivered to the customer.

ANS: D PTS: 1 OBJ: Revenue Recognition NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Fraud related to revenue recognition will most likely be identified by the auditor through which of the following independent situations? a. Sales have increased 5% in the current period over the previous period and is consistent with the results of competitors. b. Gross margin is equivalent in the current period to previous periods and is below that of the industry. c. Sales are higher in the month preceding each quarter end. d. The sales of a revolutionary new product are increasing beyond that of the competition in the periods immediately following its introduction.

ANS: C PTS: 1 OBJ: Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. Calculating the turnover of receivables is often used in testing the sales cycle by auditors when performing a. trend analysis. b. ratio analysis. c. reasonableness testing. d. non-statistical sampling.

ANS: B PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. Hardman and Jennings, LLP, an audit firm, compares bad debt expense of a client in the current period to bad debt recorded for the past three periods. Hardman and Jennings is performing which type of analysis? a. trend b. ratio c. critical d. reasonableness ANS: A

PTS: 1

OBJ: Analytics

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 14. XYZ CPAs are performing the audit of WildFlower Grocery Stores. XYZ relates annual revenue by sales per square feet and sales per customer. What type of analysis is XYZ most likely performing? a. Ratio analysis. b. Critical analysis c. Reasonableness tests. d. Non-statistical analysis.

ANS: C PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. In an audit of financial statements, the risk of the high rate of return of products sold includes that of a. sales that are recorded improperly. b. an estimate of accrued returns that reduces net income. c. a reduction of net sales for an increase to the sales returns and allowance account. d. consignment goods that are returned and forwarded to third parties.

ANS: A PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. The major risk associated with receivables is that a. they may be sold to a bank with recourse. b. they may be recorded as long-term when in fact they will be realized in the current period. c. they will not be realized for the entire amount due. d. they are pledged as collateral as disclosed in the footnotes to financial statements.

ANS: C PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger? a. Electronic authorization prior to posting. b. Use of sequentially numbered sales documents. c. Random statements to customers. d. Review of transactions by upper management or the board.

ANS: D PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. A control that may be implemented to ensure all sales that occur are recorded in the general ledger is the a. use of prenumbered shipping, invoice and sales documents. b. use of prenumbered statements, inventory lists and credit memos. c. reconciliation of invoices with customer statements. d. use of pre-authorized price lists.

ANS: A PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 19. The internal audit department at Monument Company receives electronic exceptions reports for all sales transactions entered over SGD 10,000 in total. This process is performed for the purpose of a. drafting financial statements. b. monitoring revenue transactions. c. providing management reports to the controller. d. providing suggestions for operational improvement.

ANS: B PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Auditors will examine significant sales returns immediately subsequent to the period under audit in order to a. substantiate cutoff and the occurrence of net sales transactions. b. test the sufficiency of cash balances to cover refunds. c. monitor customer satisfaction for disclosure. d. assess the nature of procedures that will be performed for the next period's audit.

ANS: A PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful accounts and compares it to the estimate provided by ABC's management. The purpose for this procedure is to substantiate the assertion of a. existence of receivables b. cutoff of receivables c. valuation of receivables d. rights to receivables ANS: C PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. An audit of receivables typically includes the examination of debt agreements in order to substantiate a. the population of customers with receivables balances for confirmation. b. pledging for collateral of receivables for disclosure. c. the relationship between interest expense and collections on account. d. alternative procedures through the collection of subsequent receivables by the auditor on account.

ANS: B PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. Much of the understanding of revenue transactions for compliance with GAAP can be performed by a. examining sales contracts and inquiry of management. b. confirming sales with customers. c. discussing the transactions with qualified members of the Financial Accounting Standards Board. d. comparing shipping documents with invoices.

ANS: A PTS: 1 OBJ: Testing Revenue NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 24. The auditor traces recorded sales to invoices, sales orders and shipping documents in order to substantiate the assertion of a. cutoff. b. completeness. c. legality. d. occurrence.

ANS: D PTS: 1 OBJ: Testing Revenue NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. In the audit of the revenue of Milan Manufacturing Company, the auditors obtain a number of shipping documents shortly before year-end and immediately following the year under audit. The auditors compare the documents to the sales journal in order to test a. existence of sales. b. presentation and disclosure of receivables. c. cutoff of sales transactions. d. completeness of receivables.

ANS: C PTS: 1 OBJ: Testing Revenue NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. Completeness of revenues may be tested by the auditor through the selection of a sample of a. shipping documents and tracing them to the sales journal. b. accounts receivable and tracing them to cash receipts. c. recorded sales transactions and tracing them to the general ledger. d. inventory records and tracing them to the shipping documents.

ANS: A PTS: 1 OBJ: Testing Revenue NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. Homer and Moe, PC are auditing the financial statements of Loyne Manufacturing Limited. and decide to confirm a sample of accounts receivable. This test is performed by Homer and Moe primarily to substantiate the a. existence of related party transactions. b. existence of accounts receivable. c. obligation of debt. d. cutoff of the allowance for bad debt.

ANS: B PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. The aged accounts receivable report is utilized by the auditor to a. encourage the client to collect on receivables that are long past due. b. select the type of confirmations that will be sent to banks. c. assess the adequacy of the allowance for doubtful accounts. d. identify debits in the receivables balance that should be reclassified to payables.

ANS: C PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 29. According to auditing standards, accounts receivable confirmations are required to be used a. on every audit engagement. b. if the client agrees in writing to the procedure. c. if the balance is material. d. if environmental risk is low.

ANS: C PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. The primary difference between positive and negative confirmations used in the audit of accounts receivable is a. the mode of response. b. the amount of information included. c. the control of the confirmation process by the auditor. d. the level of assurance provided.

ANS: A PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. For which of the following accounts receivable customer populations would the use of negative confirmations be most appropriate? a. A retail truck and trailer sales company with high inherent risk and moderate control risk over the revenue cycle. b. A utility company with control risk over the revenue cycle assessed high. c. A mortgage banking company with excellent control over the purchasing cycle. d. A cable company with control risk over the revenue cycle assessed low ANS: D PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. Accounts receivable confirmations usually provide strong evidence about a. the existence of receivables. b. the completeness of receivables. c. the presentation and disclosure of receivables. d. the obligations of receivables.

ANS: A PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. Confirmations that are sent to select customers asking them to review the current balance due the client as shown on the client's statement and return the letters directly to the auditor indicating whether they agree with the indicated balance are known as a. direct confirmations. b. indirect confirmations. c. positive confirmations. d. negative confirmations.

ANS: C PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 34. Which one of the following procedures would be considered improper by the auditor in the process of confirming receivables? a. The auditor allows the client's staff to prepare the confirmation letters after the auditor has chosen the items to be confirmed. b. The auditor allows the client to sign the confirmations after they are prepared. c. The auditor allows the client's staff to mail the confirmation letters after he or she has proofed the typing of the letters. d. The auditor asks the addressee to return the confirmation to the audit firm's office.

ANS: C PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. An auditor's examination of the sales account using a cut-off test would most likely detect a. kiting. b. sales that should be deferred. c. lapping of accounts receivable. d. sales recorded in the wrong period.

ANS: D PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. Alternative procedures that would provide evidence of the existence of receivables would include a. physical observation of customer facilities. b. review of subsequent collections. c. analysis of the aged trial balance. d. a confirmation to the client management for customer accounts.

ANS: B PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. Auditors are concerned with the addresses provided for customers in the confirmation of accounts receivable because a. confirmations are selected based upon zip codes. b. a P.O. Box is more reliable than a street address. c. confirmations should be sent only to business addresses and not residential. d. the address may be routed to the client for retrieval and fraudulent signing.

ANS: D PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. Unreturned positive confirmations for accounts receivable warrant a. replacing the sample selection with a new customer. b. sending second requests and possibly performing subsequent procedures. c. the projection of larger misstatements to the population. d. requesting that the client send additional audit correspondence to customers.

ANS: B PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 39. An example of alternative procedures for the confirmation of accounts receivable includes a. inquiry of management. b. tracing source documents to recorded amounts. c. review of subsequent collections on account by the client. d. providing an estimate of the allowance for doubtful accounts to be recorded by the client.

ANS: C PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. A key indicator of fraud in the revenue cycle is the auditor's detection of a. customer collections that are over 90 days past due. b. credit entries in customer accounts receivable for authorized writeoffs. c. recurring entries in the sales journal. d. altered shipping documents and invoices.

ANS: D PTS: 1 OBJ: Fraud Indicators NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. In the audit of accounting estimates, such as the allowance for doubtful accounts, the auditor strives to provide reasonable assurance that a. all material accounting estimates have been developed properly. b. the estimates are reasonable. c. the estimates are presented in accordance with ISA. d. all of the above are true.

ANS: D PTS: 1 OBJ: Audit of Allowance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. The allowance for doubtful accounts will not be precise by either the client or the auditor because a. it is an accounting estimate based upon judgment. b. ISA is not clear on the calculation of the allowance. c. it is merely a reserve that is reversed by the client as income is needed for profitable results. d. the precision is determined by the results of confirmation responses.

ANS: A PTS: 1 OBJ: Audit of Allowance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. To determine whether any accounts receivable are pledged or assigned to others, the auditor would most likely a. examine subsequent collections. b. test a sample of transactions to the general ledger. c. review loan agreements and board of directors' minutes. d. derive an independent estimate of the allowance and compare it to pledged assets.

ANS: C PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 44. Which of the following criteria must be met in order to recognize revenue in the current accounting period? a. delivery has occurred or the services have been rendered. b. price is fixed or determinable. c. collectibility if reasonably assured. d. all of the above.

ANS: D PTS: 1 OBJ: Revenue Recognition NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Management has been found involved in many fraudulent schemes; a common one is “channel stuffing.” What does “channel stuffing” involve? a. overly complex transactions. b. growth through stock acquisitions. c. shipment of goods not ordered. d. management compensation schemes.

ANS: C PTS: 1 OBJ: Revenue Recognition NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. Which of the following is not a form of ratio analysis? a. turnover of receivables. b. monthly sales analysis compared with past years. c. gross margin analysis. d. sales in last month to total sales.

ANS: B PTS: 1 OBJ: Analytical Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. Sources of audit planning information may come from a. knowledge of client’s business and industry. b. assessment of risk of material misstatement. c. results of analytical procedures. d. all of the above.

ANS: D PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 48. Which of the following audit procedures does not address existence/occurrence for accounts receivables and sales? a. trace bill of lading to sales invoice and sales journal. b. confirm balances of unpaid invoices with customers. c. examine subsequent collection. d. scan sales journal for duplicate entries.

ANS: A PTS: 1 OBJ: Substantive Tests of Revenue NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 49. Which of the following audit procedures does not address the rights, presentation and disclosure assertion for pledged, discounted, assigned, and related-party accounts receivable? a. review work performed in other audit areas. b. inquire of management. c. review adequacy of allowance for doubtful accounts. d. review loan agreements.

ANS: C PTS: 1 OBJ: Substantive Tests of Revenue NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 50. A sample of positive confirmations is mailed for material accounts receivable balances. Frequent there is a lack of response. Which of the following is not an acceptable alternative procedure? a. subsequent collection. b. inquiry of management. c. mailing second and third confirmations. d. examination of supporting documents.

ANS: B PTS: 1 OBJ: Confirmations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. Internal control over the revenue cycle ADC, a retail store, is concerned about the lack of control procedures over the recording of sales transactions. The company is concerned that the transactions might not be recorded accurately and valued properly in accordance with ISA. Recommend control procedures to help ensure that transactions are recorded accurately and valued properly.

ANS: Control procedures that should be implemented to ensure that sales transactions are properly recorded are:  Sales orders are filled by authorized personnel following an authorized price catalog.  Sales prices are to be maintained on the computer and access to the computer file is restricted to those authorized to change it.  Internal audit department periodically should perform tests of sales invoices to see if the terms agree with authorized price lists.  Executive approval should be required of all large, unusual, or complex sales transactions.  Oral or written verification of prices with customers should be required for all nonstandard sales.  Products shipped and billed must be checked against an existing product list.

PTS: 1 OBJ: Risks NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 2. Control over completeness for the revenue cycle What control procedures should be implemented to ensure the completeness objective is met with respect to sales?

ANS: Control procedures to ensure that the objective of completeness is met for the revenue accounts are:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15      

Prenumbered shipping and invoice documents should be used and accounted for periodically.

On-line computer input of all transactions and independent logging of the transactions should be created for subsequent use in performing reconciliations.

Recorded transactions should be reviewed periodically, compared with budgets, and variances investigated.

Monthly statements should be mailed regularly to customers.

Subsidiary ledgers should be reconciled periodically to the general ledger and any differences investigated.

A separate department should investigate all customer accounts receivable inquiries.

PTS: 1 OBJ: Risks NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Accounts receivable risks In the financial statements, there are many risks associated with an audit that must be considered.

Identify and discuss five separate risks that may exist related to accounts receivable.

ANS: Potential risks associated with accounts receivable include:  the net amount reported is not collectable because they are not for valid claims or because the estimated allowance is not adequate.  transfer of receivables without proper shifting of risks and rewards to a third party (bank) that are recorded as sales transactions rather than financing transactions collateralized by receivables.  the pledging of receivables as collateral against specific loans with restricted use that are not adequately disclosed or reported in the financial statements.  classification of receivables as current when the likelihood of collectibility during the next year is low.  collection of receivables that are contingent on specific events, which cannot be presently estimated.  other risks such as concentrations in geographic areas or a limited or certain class of customer.

PTS: 1 OBJ: Risks NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 4. Substantive procedures for sales and receivables assertions The auditor for XY Ltd. is attempting to determine whether the recorded sales and accounts receivable are supported by valid transactions. Identify the assertions being tested and develop the substantive procedures to be used to satisfy the auditor's objectives.

ANS: The auditor is testing the existence and occurrence assertion as the concern is from recorded amounts in the direction of source documents and transactions. The auditor would most likely perform the following substantive procedures:  confirm balances or invoices with customers based on a sample that is representative of the receivables (and possibly sales) population.  send second and possibly third confirmation requests.  examine subsequent collections on account for receivables.  scan sales journal for duplicate entries.  trace recorded amounts of sales and receivables to customer sales invoices, orders and bills of lading

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 PTS: 1 OBJ: Planning NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 5. Accounts receivable presentation and disclosure Develop a list of substantive tests to test whether pledged, discounted, assigned, and related-party accounts receivable are properly disclosed.

ANS: The substantive procedures that would be used to determine whether all appropriate disclosures are made concerning accounts receivable and sales would include the following:  obtain confirmations from banks and financial institutions.  review loan agreements and board of directors' minutes.  inquire of management.  review work performed in other audit areas.  review trial balance of accounts receivable for related parties.

PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 6. Improper revenue recognition Historically the accounting profession has come under fire for fraudulent financial reporting due to questionable improper revenue recognition. Identify at least six examples of questionable revenue recognition practices that an auditor must consider in performing an audit engagement.

ANS: Questionable and improper revenue recognition practices would include:  recording of sales in earlier periods, including channel stuffing.  recording sales under "bill and hold" agreements, that is, recording a sale but not shipping the goods or shipping at a later date, pending customer approval.  recording shipments to the company's own warehouse as sales to a customer.  undisclosed side agreements with customers giving them an unconditional right to return the product.  shipment of unfinished product or shipment before agreed to by customer(s).  over-shipment of products  recording consignment sales as final sales.  recording sales with rights of return when the likelihood of return is high without a proper corresponding estimate for returns.  recording the entire amount of transactions involving operating leases up-front as sales transactions.  recording fictitious sales that never occurred.  shipping used goods that were previously returned as new.  applying revenue recognition principles improperly and aggressively.

PTS: 1 OBJ: Revenue Recognition NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 7.

Requirements for confirming accounts receivable

Confirmation of accounts receivable is required under ISA unless certain conditions exist. Identify the conditions that will be present in an audit that does not confirm accounts receivable.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: The auditor is required to confirm accounts receivable unless one of the following conditions exist:  Accounts receivable are not material (or there are no receivables).  The use of confirmations would be ineffective (recipients would not give full consideration).  The auditor's combined assessment of inherent risk and control risk is low, and that assessment, in conjunction with the evidence provided by other substantive tests, is sufficient to reduce audit risk to an acceptably low level.

PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 9. Confirmations of receivables You are the auditor of Maple Bank for the year 2010. Maple has a large number of customers with consumer loan accounts. The loan accounts have balances averaging SGD800 in a homogeneous population and the customers usually pay close attention to their balances.

Your preliminary assessment of internal control over the loan area is that control risk is low and results of tests of controls support that assessment. Inherent risk is deemed to be lower as well.

Discuss the confirmation process and the types of confirmations that may be used for the audit of Maple Bank. Which confirmation type would you select for Maple and why?

ANS: Auditors may select positive or negative confirmations depending on the circumstances. Positive confirmations are used in most situations where the client customer is asked to respond to the request in writing whether they agree of disagree with its contents. Negative confirms, on the other hand are only returned by the client customer if they disagree with the information listed. Negative confirmations may also only be used in certain situations. In the case of Maple Bank, an argument could be made for either form of confirmation to substantiate certain assertions relating to the loan receivable balances. Positive confirmations could be used with statistical sampling methods; however the auditor may forgo efficiency because of the tedious nature of positive form confirmation. Negative confirmations may be used if it is concluded that the balances represent a large number of bank customers and are small, environmental risk is assessed low and the customer is expected to give full consideration to the request. It may be a good idea for the auditor to use negative form confirmations in the case of Maple as consumer loans are usually smaller in balance ($800 average), the balances represent a large base of customers, and control risk and inherent risk are lower. The banking customers may be also be expected to read the confirmation and to check it against their balances. This form, however, may not be used with statistical methods of selecting the sample and projecting errors. {Note: A student may also conclude that the balances are not small enough to use negative confirmations. This assessment is judgmental in nature and more information and experience would be needed to make this determination. The objective of this essay is to assess the student's understanding of positive versus negative confirmations and the confirmation process.} The auditor must also keep control of the confirmations as the sample is selected; confirmations are prepared, mailed and then returned to the audit firm location. Though the confirmation may be on client letterhead and signed by the appropriate officer, the auditor will mail the confirmations and offer a return envelope addressed to the audit firm offices.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

The auditor will also prepare a confirmation summary if positive confirmations are selected. This summary will assist the auditor in monitoring the extent of exceptions, including errors, and following up on such matters and non-returned confirmation letters. It will also be used in determining the extent of misstatements found in the sample for projection back to the population.

PTS: 1 OBJ: Testing Accounts Receivable NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 10. Confirmations of receivables at an interim date When internal controls are strong, the auditor may decide to confirm receivables before year end. Rollforward procedures are then used to obtain adequate evidence for the roll-forward period. Discuss why the auditor would want to confirm receivables before balance sheet date, the risks involved, and at least three of the roll-forward procedures that the auditor performs to gain assurance on the rollforward period.

ANS: The auditor usually prefers to perform as many audit procedures as possible before balance sheet date in order to better spread out the work since many clients have a December 31 year-end. However, collecting evidence before year-end increases the risk that the account may be materially misstated since the evidence is collected before the completion of the entire year. As a result the auditor has to perform a cost/benefit analysis as to whether it is beneficial to gather evidence at the interim. If there are good controls and a high degree of reliability can be achieved using roll-forward procedures for the roll-forward period then performing confirmations at the interim makes sense, e.g., with property, plant and equipment accounts. Depending upon their materiality and risk of misstatement, confirming receivables at the interim may or may not be a useful procedure since there may be no reduction of work after the balance sheet date. The auditor is responsible to gather sufficient, competent evidence for the entire fiscal year, not just up to the roll forward period.

If the auditor decides that it is useful to confirm receivables at the interim, the evidence must be collect to extent that conclusion to the year-end. Common roll forward procedures to do this are: * Compare individual balances at the interim with the year-end and confirm any that have substantially increased. * Compare monthly sales, collection, sales discounts, and sales returns and allowances during the roll forward period with those for prior months and prior years to see if they appear out of line, in which case corroborative evidence of management’s explanation has to be collected. * Reconcile receivable subsidiary records to the general ledger at both the interim and the year-end dates. * Test the cut-off of sales, cash collections, and credit memos for returns and allowances at year-end. * Scan journals to identify receivables postings from unusual sources and investigate unusual items. * Compute the number of days’ sales in receivables at both the confirmation date and year-end, and compare these data with each other and with data from prior periods.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 * Compute the gross profit percentage during the roll-forward period, and compare that to the percentage for the year and for prior periods.

PTS: 1 OBJ: Confirmations of Receivables at an Interim Date NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

Chapter 10 - Audit of Purchase Cycle and Inventory TRUE/FALSE

1. Inventory is complex and typically considered a high-risk area in audits of service firms.

ANS: F PTS: 1 OBJ: Introduction NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. In order for the auditor to perform an engagement on a manufacturing firm, it is important that the entire integrated process is understood.

ANS: T PTS: 1 OBJ: Supply Chain NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. An indication of potential inventory fraud is that inventory levels are growing faster than sales.

ANS: T PTS: 1 OBJ: Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. A client that has numerous debits in expense accounts is raising a "red flag" as to probable misstatements in the asset accounts.

ANS: F PTS: 1 OBJ: Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. Supply chain management has helped many companies improve the efficiency of operations.

ANS: T PTS: 1 OBJ: Supply Chain NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Management may intentionally misstate inventory balances by simply overstating items that are obsolete.

ANS: T PTS: 1 OBJ: Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. An auditor can utilize a cross-sectional analysis for a client operating in multiple locations to identify areas of further inventory testing.

ANS: T PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 8. Inventory turnover is often calculated by the auditor for proper disclosure in client financial statements.

ANS: F PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. The acquisition and payment cycle typically begins with the cash disbursement for requested raw materials.

ANS: F PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. A major control benefit of a centralized purchasing department is the segregation of the authorization function from the custody and recording functions.

ANS: T PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. A purchase order identifies the quantity and description of products that have been received.

ANS: F PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. For proper control, the receiving department should receive a copy of the purchase order that has the quantities blanked out.

ANS: T PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. An individual outside of the purchasing department should be the only individual with access to the vendor tables in the database.

ANS: T PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. The auditor's primary concern with accounts payable is that of completeness.

ANS: T PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. Reconciliation of vendor statements to recorded payables provides assurance related to the completeness assertion.

ANS: T PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. The auditor would most likely use attribute sampling to test transactions in the acquisition cycle for timeliness of recording transactions.

ANS: T

PTS: 1

OBJ: Processes and Controls

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Open invoice files are reviewed subsequent to the year under audit in order to locate expenses that should be reclassified on the income statement.

ANS: F PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 18. The primary assertion to be tested on accounts payable is the existence assertion because the auditor is most concerned about the overstatement of liabilities.

ANS: F PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. The use of analytical review procedures applied to related expense accounts would not be used to determine if accounts payable were understated.

ANS: F PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Analytical review of related expense accounts when auditing accounts payable would be used when control risk is assessed as low.

ANS: T PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. Testing cash disbursements subsequent to the year under audit allows the auditor to determine certain payables that may not have been recorded previously.

ANS: T PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. When auditing accounts payable, the auditor would most likely review a sample of cash disbursements throughout the year end to determine whether disbursements for goods and services are applicable to the subsequent year.

ANS: F PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. The auditor tests significant repairs and maintenance expenses to ensure that an item that should be capitalized has not been expensed.

ANS: T PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. The lower of cost or market assumption is not important to valuation of inventory as this testing is performed during work on obsolescence.

ANS: F PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. Proper internal control over the inventory account would require that all inventory items should be reviewed for obsolescence and proper accounting treatment.

ANS: T PTS: 1 OBJ: Inventory Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 26. Many frauds are committed by overstating inventory accounts.

ANS: T PTS: 1 OBJ: Inventory Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. Obsolescence of inventory becomes apparent to an auditor because there are signs of physical wear and tear.

ANS: F PTS: 1 OBJ: Inventory Complexity NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. Sources of information regarding a client's inventory obsolescence can be partially noted during the inventory observation.

ANS: T PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. The auditor is required by IFRS to observe the taking of physical inventory.

ANS: F PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. The inventory observation is performed for the purpose of determining the accuracy of client counting procedures.

ANS: T PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. Test counts are performed by the auditor to give the impression of control and they are not used for substantive testing.

ANS: F PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. The auditor is responsible to take a physical inventory at the client location on behalf of the audit client.

ANS: F PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. The auditor may observe the counting of physical inventory throughout the year under audit if perpetual inventory is used.

ANS: T PTS: 1 OBJ: Inventory Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. Legal expenses account is reviewed by auditors for possible indicator of litigation that may require recording and/or disclosure.

ANS: T

PTS: 1

OBJ: Testing Accounts Payable

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. An auditor would review the direct labor costs charged to inventory when auditing a manufacturing concern.

ANS: T PTS: 1 OBJ: Inventory Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. Quality control in the manufacturing process is an operational concern and does not apply to auditor assessment of internal control.

ANS: F PTS: 1 OBJ: Inventory Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. The auditor must test a manufacturing client's cost system to substantiate the valuation of a inventory.

ANS: T PTS: 1 OBJ: Inventory Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. Inventory valuation tends to have complexity for manufacturing and merchandising companies because of cost flow assumptions.

ANS: T PTS: 1 OBJ: Inventory Complexity NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. Detailed testing of expense accounts involves examining randomly selected items using PPS sampling.

ANS: T PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. The acquisition cycle begins with the receipt of goods and services and ends with their payment as reflected in cash disbursements.

ANS: F PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. Prenumbered receiving documents establish the completeness of the population and are useful in determining that all goods are recorded in the correct period.

ANS: T PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. In computerized purchase operation the computer matches three documents, the purchase order, the receiving report, and the monthly statement, and if the three match within a prespecified tolerable limit, the invoice is approved for payment.

ANS: F PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 43. The tracing of a sample of receiving reports through the recording process tests the completeness, classification, and valuation assertions.

ANS: T PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. In testing the reasonableness of expense accounts in auditing the acquisition cycle, when the auditor has concluded that internal control risk is high the major substantive tests may be gathering evidence through analytical procedures.

ANS: F PTS: 1 OBJ: Testing of Expense Accounts NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. In observing the client’s inventory at year-end the auditor makes test counts that are later traced into the client’s inventory compilation.

ANS: T PTS: 1 OBJ: Testing of Inventory NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. Audits of payables and related cash disbursements provide indirect evidence about the correctness of expense accounts.

ANS: T PTS: 1 OBJ: Testing of Expenses NAT: AACSB-Analytical skills | AICPA BB-Critical thinking MULTIPLE CHOICE 1. The acquisition and payment process consists of each of the following phases except a. receipts of goods and services. b. approval of items for payment. c. cash receipts. d. authorized request for goods and services.

ANS: C PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. The acquisition and payment process consists of each of the following phases except a. shipments of goods and services. b. approval of items for payment. c. cash disbursements. d. authorized purchases of goods and services.

ANS: A PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 3. Purchasing is a separate function in many organizations due to all of the following rationale except which? a. It promotes efficiency and effectiveness. b. It eliminates potential favoritism. c. It reduces the opportunity for fraud. d. It decentralizes control.

ANS: D PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. When a purchasing agent benefits personally by accepting payment from a vendor, the purchasing agent is guilty of a. performing kiting. b. committing embezzlement. c. receiving kickbacks. d. stealing company assets.

ANS: C PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. Reduction of the risk of understated payables can be accomplished by focusing on which assertion? a. existence b. rights c. presentation and disclosure d. completeness ANS: D PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Supply chain management is a varying factor across client companies because a. purchase orders must be utilized in the requisition process. b. title transfers upon delivery of the goods to the client location. c. requisition may not transpire through traditional means. d. companies desire to increase inventory levels to save costs.

ANS: C PTS: 1 OBJ: Supply Chain NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. Which one of the following must the auditor best understand relative to the supply chain when auditing a manufacturing company? a. Contract terms, the method of recording and title transfer. b. Efficiency of operations, purchasing agent compensation and disbursement. c. Credit terms, customer feedback and useful lives of production equipment. d. Quality of scrap, point of sale and carrying costs.

ANS: A PTS: 1 OBJ: Supply Chain NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 8. Which one of the following control procedures would not apply to the automated receipt of goods? a. defined procedures for counting the quantity of goods received b. access, edit, and reasonableness controls built into the computerized accounting application c. reconciliation of the purchaser's production data with the vendor's billing d. a contract specifying terms of delivery, penalties, billing and payment terms, and a process for resolving differences ANS: A PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. The need for additional control procedures when using computer-generated purchase orders would be met by a. establishment of a maximum quantity limits that can be ordered within a given time period. b. automated acceptance for high dollar levels. c. purchase order copies sent by purchasing to receiving. d. accounts payable department entering new vendors into the system.

ANS: A PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Which of the following signals a potential fraud that may occur for the overstatement of inventory accounts? a. Reserves for contingencies are reducing rapidly. b. Inventory amounts are growing faster than sales. c. Repairs and maintenance accounts have significant credit entries. d. The purchase of manufacturing equipment is occurring at a rapid rate.

ANS: B PTS: 1 OBJ: Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Management may have incentive to fraudulently overstate inventory balances in order to cover up a. negative disclosure requirements and understated cost of goods sold. b. poor financial performance and misuse of company funds. c. managed earnings and overstated revenue. d. poor internal controls and taxable income.

ANS: B PTS: 1 OBJ: Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. What is the primary reason for management's ability to easily overvalue inventory without rapid detection by auditors? a. The limited volume of transactions in the inventory accounts. b. The auditor's assessment of inventory as a low-risk area. c. Complexity in the valuation of inventory. d. Consideration by the auditor of non-financial indicators of inventory fraud.

ANS: C PTS: 1 OBJ: Fraud NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 13. Which of the following is an example of the type of analytics that an auditor would use for inventory? a. Number of day's sales in receivables compared to industry averages. b. Inventory turnover for the previous five years. c. Number of obsolete units this period compared to last. d. Salaries of marketing personnel as a percent of total inventory.

ANS: B PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. The benefit of a cross sectional analysis of inventory across multiple stores includes a. Auditor planning for detailed testing of inventory. b. Auditor detail as to specific units by month. c. Auditor conclusions regarding the fair presentation of obsolescence. d. Auditor evidence of physical existence.

ANS: A PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. Receipt of materials for the production process bears a direct relationship to a. recording of accounts payable. b. vendor selection. c. authorization of purchases. d. obsolescence of inventory.

ANS: A PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. For testing the completeness assertion for accounts payable, the auditor would a. examine a sample of cash disbursements made after year end to determine whether the disbursements were for goods applicable to the previous year. b. reconcile vendor's statements with the accounts receivable trial balance. c. examine production equipment for useful lives. d. gather purchase orders immediately previous to and subsequent to year-end.

ANS: A PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. The client's legal expenses should be examined to a. compare with previously released attorney's letters. b. determine the types of fraud occurring in the organization. c. ensure proper recording of vendor payables. d. determine if there is any litigation pending or threatened.

ANS: D PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. When auditing accounts payable, the greatest emphasis is placed on a. the existence assertion. b. the completeness assertion. c. the presentation assertion. d. the disclosure assertion.

ANS: B

PTS: 1

OBJ: Testing Accounts Payable

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

© 2013 Cengage Learning Asia

TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 19. In testing for completeness of accounts payable, which test is normally used? a. Examination of payments after year end b. Requesting vendor statements or confirmations c. Analytically review expenses d. All of the above.

ANS: D PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. An internal control benefit of centralized purchasing in an organization includes a. separation of authorization from accounting. b. favorite vendors used multiple times. c. increased compensation of agents through side agreements. d. mathematically accurate vendor invoices.

ANS: A PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. A primary feature of automated control in the acquisition cycle includes a. that authorization is no longer required. b. limits as to the number of items that can be received by the warehouse. c. calculated order quantities based on set criteria. d. funds transfer at the request of the controller.

ANS: C PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. Bar code scanning may best be utilized in the receiving process to a. identify goods arriving automatically in conjunction with a count. b. notify the shipper that product has arrived. c. order new items on behalf of the purchasing department. d. record inventory that has been written off the books.

ANS: A PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. When auditing expense accounts, which of the following would the auditor be least likely to subject to a detailed test of transactions? a. legal expense b. utilities expense c. repairs and maintenance expense d. travel expense ANS: B PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. Which of the following represents a significant advantage of an automated acquisitions system? a. Reorder of materials is calculated and transmitted to vendors electronically. b. Receipt of materials is accomplished without human intervention or monitoring. c. Payment of disbursements previous to the matching of invoice, P.O. and receiving report. d. Recording of payables automatically once the purchase order is sent.

ANS: A

PTS: 1

OBJ: Processes and Controls

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

© 2013 Cengage Learning Asia

TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 25. Which one of the following accounts would an auditor most likely test by performing analytical procedures? a. Sales commissions expense. b. Legal expenses. c. Repairs and maintenance expense. d. Travel expense.

ANS: A PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. Inventory is a complex accounting and auditing area due to all of the following except a. diversity of items in inventory. b. low volume of activity. c. potential difficulty in classifying inventory. d. difficulty in applying the lower of cost or market principle.

ANS: B PTS: 1 OBJ: Inventory Complexity NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. Inventory is a complex accounting and auditing area due to all of the following except a. diversity of items in inventory. b. high volume of activity. c. potential difficulty in correctly valuing inventory. d. ease in identifying obsolete inventory.

ANS: D PTS: 1 OBJ: Inventory Complexity NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. A risk to the auditor due to the complexity of physical inventory includes possible a. overstatement of individual items across multiple locations for cutoff testing. b. utility of the items exceeding their cost for existence testing. c. movement of goods during existence testing. d. stocking of only one type of inventory in the warehouse for presentation and disclosure testing.

ANS: C PTS: 1 OBJ: Inventory Complexity NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. A system of internal financial accounting controls for inventory would include all of the following except a. authorization for all purchases. b. proper accounting for receipt of inventory. c. perpetual inventory system. d. rapid introduction of new products without market studies.

ANS: D PTS: 1 OBJ: Inventory Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 30. When testing the existence assertion for inventory, the auditor would most likely a. observe the client's count of the annual physical inventory and test count. b. review vendor invoices for the amounts recorded. c. perform year-end tests of invoices received in the final month. d. trace raw material purchases to invoices and to the general ledger.

ANS: A PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. When testing the valuation assertion, the auditor would most likely a. confirm inventory on consignment. b. examine receiving reports for inventory, tracing their recorded amounts. c. observe the taking of physical inventory. d. perform price tests to the related cost flow assumption.

ANS: D PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. The auditor may discover that the recorded cost of inventory exceeds the designated market price when testing which assertion? a. Existence. b. Cutoff. c. Valuation. d. Rights.

ANS: C PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. Which of the following procedures will usually be performed by the auditor to actively determine obsolete inventory? a. Confirmation of inventory with customers. b. Footing the inventory subsidiary ledger. c. Tracing inventory ordered by the client to receiving reports. d. Analysis of inventory turnover and sales reports.

ANS: D PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. A perpetual inventory system is preferable to periodic if adequately controlled and maintained because a. it requires that a full inventory count be taken at year-end by all warehouse employees. b. it allows management to calculate cost of goods sold at year end. c. it provides information to management about inventory that approaches real-time. d. it better controls the receipt of goods.

ANS: C PTS: 1 OBJ: Inventory Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 35. What is the significance of the auditor's recording and verification of the range of tag numbers used in a periodic inventory count? a. The auditor will trace all client counts back to the inventory report given to the auditor subsequent to the physical inventory. b. The auditor must determine the extent of inventory included in the client's inventory report as observed by the auditor during the count. c. The auditor must determine that the client has adequate control over cycle counts. d. The auditor must give the impression that the counters are being carefully watched by an independent party during the physical inventory.

ANS: B PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. The principle of lower of cost or market and the potential obsolescence of inventory are a concern for the audit team as a. they are uncommon and may not exist. b. they are a burden to the auditor in the undue amount of work caused. c. they are likely to occur in the last month of the year and cause cutoff problems. d. they are an inherent component of complexity related to valuation.

ANS: D PTS: 1 OBJ: Inventory Complexity NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. The inventory of MegaMart Company is distributed between 85 stores throughout the world.

MegaMart has a calendar year-end, uses a periodic inventory system and performs a physical count on January 1st of each year. In the planning of the audit of MegaMart, the engagement team must consider a. if the finance departments in at various stores are available to perform the audit testing on January 1st. b. which of the stores to randomly visit and how many items to test. c. the risk of the company transporting items from warehouse to various stores between audit counts. d. coordinating with the client which stores will be visited for inventory observation.

ANS: B PTS: 1 OBJ: Inventory Complexity NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. When a check has been cut for payment to a vendor, the underlying documentation and the check should be sent to which of the following for signature and cancellation? a. controller b. receptionist c. treasurer d. accounts payable supervisor ANS: C PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 39. When observing and counting the inventory of Robert's Wholesale Company, the auditor would have which one of the following primary objectives? a. determination that all inventory owned by the client is recorded. b. determination that the inventory is properly valued in the financial statements at LIFO. c. determination that all inventory owned by the client as of the balance sheet date is in the warehouse. d. determination that the inventory is not currently recorded below market.

ANS: A PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. Auditing the valuation assertion for inventory of a client utilizing the FIFO cost flow assumption will require the auditor to examine a. invoices representing the more recent purchases of inventory. b. invoices representing the purchase of base year inventory in the year of inception. c. shipping documents for a sample of cost of goods sold transactions during the year. d. shipping documents for a sample of units on hand in the interim period.

ANS: A PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. The auditor in making inquiries regarding the standard cost systems normally does not make which of the following inquiries? a. the method for developing standard costs. b. the method for identifying components of overhead and of allocating overhead to products. c. the method for identifying sales cutoff. d. the method used for identifying variances, following up on their causes, and allocating them to inventory and cost of goods sold.

ANS: C PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. The acquisition cycle begins with a a. payment. b. purchase order. c. requisition. d. receiving report.

ANS: C PTS: 1 OBJ: Processes and Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. Which of the following is not a potential fraud indicator in the acquisition cycle? a. expenses that are significantly above or below industry norms. b. expense accounts that have significant debit entries. c. payments made to senior officers in the form of loans that are subsequently forgiven. d. capital assets that seem to be growing faster than the business.

ANS: B PTS: 1 OBJ: Business Analysis NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 44. Which of the following is not a standard procedure that the auditor normally should follow in the observation of inventory at year-end? a. observe the client taking inventory. b. make selected test counts and trace into client’s inventory compilation. c. look for slow-moving, obsolete or damaged inventory. d. review disclosure of inventory valuation. e. all of the above are standard audit procedures in the observation of inventory.

ANS: D PTS: 1 OBJ: Test of Inventory NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. All of the following are required by the auditor before allowing the client to take inventory before year-end except which one? a. absence of “red flags”. b. internal control is weak. c. the auditor can effectively test the year-end balance through a combination of analytical procedures and selective testing of transactions between the physical count and the yearend. d. the auditor reviews the intervening transactions for evidence of any manipulation or unusual activity.

ANS: B PTS: 1 OBJ: Test of Inventory NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. In testing for the completeness of accounts payable at year-end the auditor examines a sample of paid voucher packets a. during the cut-off period at year-end. b. during the last month of the fiscal year. c. during the subsequent month. d. during the fiscal year.

ANS: C PTS: 1 OBJ: Substantive Tests of Accounts Payable NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. Acquisition and payment processes What are the five major phases of the acquisition and payment process?

ANS: The six phases of the acquisition and payment process are: 1. authorized request for goods or services.

2. authorized purchase of goods or services according to company policies.

3. receipt of goods and services.

4. approval of items for payment.

5. cash disbursements.

PTS: 1 OBJ: Processes and Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

© 2013 Cengage Learning Asia

TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 2. Centralized purchasing List the advantages for implementing a centralized purchasing function. What are the disadvantages (if any)?

ANS: The advantages for creating a separate purchasing function include the following:  promotes efficiency and effectiveness.  eliminates potential favoritism that could occur if individual department heads were allowed to place orders.  reduces the opportunity for fraud by segregating the authorization to purchase from the custody and recording functions.  centralizes control in one function.

The possible disadvantages include:  Potential kickbacks to agents from vendors and suppliers.  Variations from traditional purchase orders.

PTS: 1 OBJ: Processes and Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Cost accounting systems When auditing a manufacturing concern, what major inquiries might be made by the auditor about the cost accounting system?

ANS: An auditor would be likely to make the following inquiries about a cost accounting system used by a manufacturing concern:  the method for developing standards, including whether engineering studies of product usage and labor input are used.  the method for identifying components of overhead and allocating overhead to products.  the methods used for identifying variances, following up on their causes, and allocating them to inventory and cost of goods sold.

PTS: 1 OBJ: Inventory Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 4. Preparing for an inventory observation In the audit of inventory the auditor must perform important procedures prior to the actual observation.

Identify the steps the auditor must take prior to the day the inventory is actually counted.

ANS: Prior to inventory-taking day the auditor should:  meet with the client to discuss procedures, timing, location, and personnel involved in the taking of inventory.  review the client's plans for counting and tagging inventory items; determine that the procedures are sufficient to ensure an accurate inventory.  review the inventory taking procedures with all audit personnel; familiarize them with the nature of the inventory, potential problems, and any other information they may need.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15  

if multiple locations exist with material inventory balances, independently determine how many and which sites will be visited for the audit. determine whether any specialists might be needed.

PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 5. Physical inventory procedures Discuss the procedures that the audit team will most likely perform during a physical inventory at the client locations.

ANS: When performing physical inventory procedures at the client locations, the audit team will most likely:  observe client counting procedures for accuracy and completeness.  walk the inventory areas to become familiar with the inventory that is existing at the location.  check the first and last tag number used in the section.  account for all tag numbers and determine the disposition of all tag numbers in the sequence.  sample items from the inventory and perform test counts.  note items that appear to be obsolete.  list all large dollar-value inventory items on the working paper.  note movement of inventory items into or out of the company during the process of inventory taking and that the goods are properly counted.

PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 6. Auditing accounts payable What are the procedures available to auditors in auditing accounts payable and what level of assurance is obtained by each? Describe at least three. Which primary assertion is tested through these approaches?

ANS: When auditing accounts payable, the auditor may: 1. Reconcile vendor statements or returned confirmations with recorded payables. This yields a higher level of assurance.

2. Test subsequent disbursements for proper recording as a payable as of either the balance sheet date under audit or in the subsequent period, as appropriate. This yields a moderate level of assurance.

3. Analytical review of related expense accounts to determine which accounts appear to be understated. This yields a very low level of assurance and should only be used where control risk and fraud risk are assessed as low for payables.

The primary assertion tested using the three approaches above is that of completeness.

PTS: 1 OBJ: Testing Accounts Payable NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 7. Automation in the acquisition cycle (comprehensive) As the acquisition of materials, equipment and services continues to be facilitated by automation, certain benefits and controls result. Discuss the use of computerized processes and specific controls that should be implemented in the electronic acquisition cycle.

ANS: Automated Acquisition of Goods and Services Though purchase orders continue to exist as electronic forms, other means of automatic ordering are becoming more evident. Where the authorization of purchases historically occurred through manual signature on pre-configured forms, this authorization becomes replaced with electronic, authenticated authorization. This authorization may take place in an application by a purchasing supervisor digitally signing a transaction or automatically with the evidence of a standing contract.

In automated systems, purchase orders are often transmitted electronically to vendors or reorder points signal an automatic requisition request from suppliers.

Receiving reporting becomes computerized as well through the use of bar code scanners and database management systems that facilitate data input for goods received at the warehouse. In certain just-intime situations, evidence of receipt may occur through a seamless production cycle or a finished product. This is in place of a formal receiving process.

The recording of payables takes place after an electronic match of authorized requisition (order), and proper receipt of goods ordered. Payment typically occurs once these two items are then matched with either a manual or electronic invoice obtained from the vendor and the system determines timing for discounts. Check signing is automated through the electronic printing of the treasurer's signature on the check as it is prepared or electronic funds transfers are initiated by the system.

Automated Controls Restricted Access - All aspects of the system should be controlled by access control lists that are set-up through careful consideration of roles related to segregated duties. Purchasing agents become the authorization function and should be separated from accounts payable, which records the transaction, from receiving, which has custody of inventory and from the treasury, which has custody of cash disbursements. Each of these functions must be separated from each other in the database and network as well as the modification of the vendor tables. Such access must also be implemented using proper authentication techniques relating to usernames and passwords.

Monitoring - Reports should be automatically generated through the interface or in a report to appropriate parties for resolution. An example of this include resolution of differences between vendor invoicing and quantities received or agreed upon pricing. Additionally, internal auditing should test for duplicate payments and fraudulent payments using data extraction techniques.

Other automated controls Self-checking digits for approved vendor identification numbers and inventory SKUs. Edit tests for data input relating to purchasing dollar and quantity limits.

Edit tests for other validity and reasonableness testing.

PTS: 1 OBJ: Processes and Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 8. Inventory obsolescence procedures Identify and describe at least four procedures the audit team may perform in order to determine potential obsolescence of items in the inventory balances.

ANS: Below are seven audit procedures that may be performed by the audit team for determining obsolete inventory items: 1. Calculate turnover and/or age of inventory on hand by product lines and compare the turnover and age with past performance and expectations for the current period.

2. Judgmentally assess the impact of competitors’ new technological introductions on the client’s products.

3. Compare the sales in the period under audit by product line with sales from previous periods and with sales.

4. Analytically review, by product line, the number of days of sales in inventory balances at the end of the period under audit.

5. Observe inventory during the physical inventory counts or in cycle counting for poor condition of inventory.

6. Observe inventory during the physical inventory counts for groupings of inventory that have not moved since the last audit count.

7. Inquire of management as to planned new product introductions.

PTS: 1 OBJ: Inventory Procedures NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 9. Inventory controls What are some of the important controls that are expected to be included in a well-conceived inventory control system?

ANS: A well-conceived inventory control system should ensure the following: All purchases are authorized.

There is a timely, accurate, and complete recording of inventory transactions.

Receipt of inventory is properly accounted for and independently tested.

Costs are properly identified and assigned to products; variances are analyzed, investigated and properly allocated to inventory and cost of goods sold.

A perpetual inventory system serves as the basis for management’s reports and assists in managing inventory.

Products are systematically reviewed for obsolescence, and appropriate accounting action is taken.

Inventory is periodically reviewed by management and appropriate action taken for excess inventory and technological obsolescence.

Market studies and quality control tests are ran before new products are introduced.

Long-term contracts are closely monitored.

PTS: 1 OBJ: Inventory Controls NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 10. Audit of expenses Discuss how expenses are audited by the auditor.

ANS: The audit of payables and related cash disbursements provides indirect evidence about the correctness of expense accounts. If the tests of controls of the acquisition and disbursement cycle indicates that the controls are working properly and there is not a problem, then normally the auditor uses analytics in evaluating the reasonableness of expense balances. Some additional analysis of selected expense accounts is also performed, e.g., travel and entertainment expense, legal expense, and repairs and maintenance expense because of the particular risks associated with those particular accounts.

Underlying documentation should be examined on a sampling basis to determine the appropriateness and correctness of transactions in those accounts. Some expenses are connected to assets, e.g., property, plant and equipment and prepaid insurance, and are analyzed as part of the work on that account. Other expenses are analyzed as part to the analysis of an important component of the audit, e.g., income taxes or the pension plan of the client.

When evaluating evidence regarding expense accounts, the auditor should consider that management is more likely to (1) understate rather than overstate expenses, and (2) classify expense items as assets rather than vice-versa. Tests should be performed to identify all credits to expense accounts because these credits might indicate inappropriate transfer of costs to asset accounts.

PTS: 1 OBJ: Audit of Expenses NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

Chapter 11 - Audit of Cash and Other Liquid Assets TRUE/FALSE

1. An imprest payroll account will never reach a zero balance.

ANS: F PTS: 1 OBJ: Types NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. When the year-end cash balance is immaterial, the audit of the cash account is unnecessary.

ANS: F PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. Cash flow is often managed by organizations through the use of lockboxes and outsourced cash management arrangements with banks.

ANS: T PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. The risk of the company issuing checks near year-end and mailing them subsequently is not important to the auditor as the action does not affect cash balances.

ANS: F PTS: 1 OBJ: Risks NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

5. The auditor places more emphasis on the audit of the cash account because of the account's susceptibility to error.

ANS: T PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Working capital may be tied to certain debt covenants causing cash to be considered material for audit purposes.

ANS: T PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. Cash is no longer considered highly susceptible to theft because of the advent of computers, safes and armored cars.

ANS: F PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. A lockbox is a mailbox type of depository device that is located in front of the client's premises, allowing customers to remit payment timely.

ANS: F PTS: 1 OBJ: Managing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. An analysis of the client's internal control over cash and marketable securities should take place during the performance of the substantive tests on these accounts.

ANS: F PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. The deposit of cash directly at the bank to speed collections often involves the use of a lockbox.

ANS: T PTS: 1 OBJ: Managing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. To ensure that all customer remittances received by the bank are posted when a lockbox is being used, control procedures should require that all remittance advices be sent to the client.

ANS: T PTS: 1 OBJ: Managing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. The auditor is responsible for the necessary disclosures when material lines of credit and compensating balance arrangements have been made by the client with a lender.

ANS: F PTS: 1 OBJ: Managing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. Electronic Funds Transfers have controls built into the process and do not require further reconciliation by the client.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: F PTS: 1 OBJ: Managing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. Strong internal control over the cash account requires that the same person who is responsible for making the bank deposit also prepare the bank reconciliation since that person is most experienced with the transactions.

ANS: F PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. Strong internal control over the cash account requires that the same person who is responsible for making the bank deposit not post the increase to cash in the accounting system.

ANS: T PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. Customer checks received at the client company should be restrictively endorsed within one week of receipt in the mail.

ANS: F PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. A turnaround document is an effective control because it lists useful information for further processing of the collection on account.

ANS: T PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 18. A possible intentional overstatement of cash may be covered up by omitting large balance-outstanding checks from the bank reconciliation.

ANS: T PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. When control risk is assessed at a high level for cash, the auditor will perform detailed substantive tests.

ANS: T PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. The cash balance that a financial institution requires its customer to maintain in a noninterest-bearing account to offset a line of credit is a compensating balance.

ANS: T PTS: 1 OBJ: Managing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. Technology makes it more difficult to forge evidence.

ANS: F PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. Internal audits are seldom an effective deterrent to the theft of cash.

ANS: F PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. An independent bank reconciliation provides evidence of the correctness of the year-end cash balance.

ANS: T PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. The primary purpose of the cutoff bank statement is to verify the reconciling items on the bank reconciliation.

ANS: T PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. Kiting is an example of a technique used to intentionally and materially overstate cash.

ANS: T PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. The standard bank confirmation is used by the auditor to test for lapping.

ANS: F PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 27. The standard bank confirmation should be sent to all banks used by the client during the year except those with a zero balance.

ANS: F PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. The standard bank confirmation should be sent to all banks used by the client during the year, including those with a zero balance.

ANS: T PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. The auditor may discover evidence of lapping by preparing an interbank transfer schedule.

ANS: F PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. The standard bank confirmation includes the confirmation of cash accounts but not liabilities with financial institutions.

ANS: F PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. Kiting fraudulently places the company's marketable securities in the name of the officers.

ANS: F PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. Kiting involves the overstatement of a bank account by transferring funds at the end of the year to another bank account and failing to record the disbursement.

ANS: T PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. The cutoff statement is mailed to the client for an agreed upon-date and then copied for the audit files.

ANS: F PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. The audit tests for marketable securities need not include a review of broker's advices for cost and sales price of securities as the auditor has more persuasive evidence in the form of deposit tickets and canceled checks.

ANS: F PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. Notes issued by major corporations are known as commercial paper.

ANS: T PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

36. The auditor obtains the current market value of marketable securities by confirmation with the holder of the security.

ANS: F PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. Commercial paper is the term applied to notes issued by major corporations with poor credit ratings.

ANS: F PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. By determining whether any restrictions on the use of commercial paper by an entity are disclosed in the footnotes, the auditor satisfies the assertion of completeness.

ANS: F PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. Kiting may be detected by the auditor by preparing a bank transfer schedule of all client accounts.

ANS: T PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. Testing of debt securities and commercial paper integrates the analysis of interest income.

ANS: T PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. Gains and losses are not considered in testing as they do not need to be disclosed.

ANS: F PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. Marketable securities are held by the Management for a short duration.

ANS: T PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. Zero coupon bonds is a debt instrument with a variable interest rate.

ANS: F PTS: 1 OBJ: Other Securities NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. Hedging transactions cause significant disclosure in financial statements and may require loss recognition.

ANS: T PTS: 1 OBJ: Other Securities NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 MULTIPLE CHOICE 1. Which one of the following is not a risk associated with cash? a. Susceptibility to error because of the large volume of transactions. b. Susceptibility to fraud by misstatement. c. Susceptibility to poorly developed automated systems with strong audit trail requirements. d. Susceptibility to fraud by theft.

ANS: C PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. A cash management arrangement with a bank whereby the organization's customers send payments directly to the client's bank, which deposits the remittance to the client's account, is a a. lockbox. b. bank transfer. c. imprest bank account. d. collar.

ANS: A PTS: 1 OBJ: Managing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. The cash account is material to the auditor for which of the following reasons? a. The cash account is the culmination of a large volume of transactions. b. The cash account is not as susceptible to fraud as most other accounts. c. Many debt or loan agreements may have collateral agreements tied to long-term assets. d. Automated systems might possess strong internal controls.

ANS: A PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. Which one of the following is a reason that the cash account is material to the auditor? a. The cash account is the culmination of transactions that are of little significance. b. The cash account is more susceptible to fraud than most other accounts. c. Many debt or loan agreements may be tied to dividend restrictions. d. Automated systems may have strong electronic controls built-in.

ANS: B PTS: 1 OBJ: Planning NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. Management has developed cash management techniques to perform which of the following? a. Speed up the billing and transfer of cash. b. Reduce the amount of volume of cash transactions. c. Automate the cash management process. d. Provide greater liquidity in cash balances.

ANS: C PTS: 1 OBJ: Managing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 6. Lockbox arrangements for the collection of cash have which of the following as an advantage? a. The manual processing associated with maintaining control of the receipts is now shifted to a computer. b. Cash is deposited directly into the bank. c. The bank usually establishes a number of lockboxes geographically to minimize delay in putting cash collections to work. d. Customer decision for the due date of payment.

ANS: B PTS: 1 OBJ: Managing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. If a company maintains a compensating balance of cash, the company must a. disclose the compensating account arrangement in financial statements. b. close out the balance prior to year-end. c. tie balances to debt covenants. d. provide a lockbox for appropriate line-of-credit draws.

ANS: A PTS: 1 OBJ: Managing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. A compensating balance arrangement usually causes the company to a. increase its interest income. b. increase the effective interest rate on corporate borrowing. c. decrease the effective interest rate on corporate borrowing. d. exhibit no change in the effective interest rate on corporate borrowing.

ANS: B PTS: 1 OBJ: Managing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. Which one of the following is not a fundamental control element the auditor would expect to find in place for all cash processing systems? a. Segregation of duties b. Electronic payments c. Authorization of transactions d. Periodic internal audits ANS: B PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Which one of the following is an example of proper internal control that the auditor would expect to find in place for cash processing systems? a. Periodic internal audits of cash controls and cash management. b. The treasurer is responsible for monthly bank reconciliations. c. Prenumbered turnabout documents such as bills of lading. d. Authentication such as passwords allowing the controller to execute wire transfers.

ANS: A PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 11. As cash processing systems become more automated and integrated, the general concept of segregation of duties a. becomes less important. b. becomes more important. c. does not change. d. becomes completely computerized without human interaction.

ANS: C PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. Restrictive endorsements a. should be performed by the customer previous to remittance. b. help prevent misappropriation of customer checks received. c. authorize the execution of a cash transaction. d. provide a unique control total to identify incorrect items.

ANS: B PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. Which of the following controls over cash would an auditor expect to observe? a. Reconciliation of the general ledger to the subsidiary ledger. b. Checks permanently marked "for deposit only" with the proper routing information. c. Internal audits of marketable securities held in the company's lockbox. d. Authorization privileges given only to those employees using the accounting system.

ANS: B PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. An authorization process should be implemented for electronic transfers of funds, so that only authorized individuals may execute transactions. The authentication process may be implemented by the use of which of the following elements? a. Appropriate user names and passwords. b. Physical access to the banking system. c. Encryption of stored data and in transmission. d. All of the above.

ANS: D PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. Electronic authorization privileges for cash transactions may be best assigned to individuals based on a. roles and activities falling within appropriate segregation of duties. b. identification cards with picture identification. c. encrypted passwords memorized by employees. d. the principle of "absolute knowledge".

ANS: A PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 16. Documents that accompany customer payments to help the clerk identify the payments are called a. receipts such as register tapes. b. accommodation certificates such as authenticated customer tokens. c. turnaround documents such as remittance advices. d. checks stamped with restrictive endorsements such as customer signatures.

ANS: C PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Which one of the following represents appropriate internal control over cash? a. segregation of duties b. restrictive endorsements c. prenumbered documents d. all of the above ANS: D PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. Which of the following represents a normal substantive audit procedure for cash balances? a. Verify material deposits-in-transit to subsequent statements. b. Confirm cash balances with signors on account. c. Foot cutoff bank statements provided by the financial institutions. d. Perform kiting techniques to transfer cash between two client accounts.

ANS: A PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. How will the auditor most likely utilize the bank reconciliation as evidence in the audit of cash? a. The auditor sends the reconciliation to the bank for independent verification. b. The auditor performs the reconciliation for the client to record the proper cash balance. c. The auditor traces the book balance of the reconciliation to the cutoff bank statement. d. The auditor tests deposits-in-transit and outstanding items to other corroborating evidence.

ANS: D PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. The auditor obtains and reviews a cutoff bank statement primarily to a. verify the balance of cash per the bank's general ledger at the balance sheet date. b. verify the reconciling items on the year-end bank reconciliation. c. test for intentional lapping of bank transfers. d. foot the cutoff bank statement for completeness.

ANS: B PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. The auditor will send a standard bank confirmation to which of the following? a. financial institutions of customers using the lockbox. b. financial institutions that the company used only in the year of inception. c. financial institutions with which the client has transacted during the year. d. financial institutions used by significant shareholders.

ANS: C PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 22. Stockton Company has two bank accounts. In the table below, which of the transfers listed would indicate possible kiting between Bank A and Bank B?

a. b. c. d.

Bank A Deposits Per Books Per Bank 12-29-01 01-02-02 12-30-01 01-03-02 01-04-02 01-02-02 12-31-01 12-31-02

Bank B Transfers Per Books Per Bank 01-02-02 01-03-02 12-31-01 01-02-02 01-02-02 01-04-02 12-30-01 01-03-02

ANS: A PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. A fraudulent cash scheme to overstate cash assets at year end by recording deposits in transit in both the account from which the cash is withdrawn and the account to which it is transferred is a. lapping of cash. b. kiting of cash. c. embezzlement of cash. d. restrictive endorsements of cash.

ANS: B PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. Operational audits of cash management seek to identify areas in which cash management may be improved to contribute to the overall profitability and effectiveness of the organization. The internal auditor would use which of the following procedures on an operational audit of cash? a. determine the compliance of treasury activities with company policy b. review procedures for identifying and investing excess funds c. review procedures for handling cash receipts d. all of the above ANS: D PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. When auditing marketable securities, the auditor will a. examine broker's advices evidencing purchase of securities. b. recompute income. c. foot schedule. d. Both A and B. e. All of the above.

ANS: E PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. In the audit testing of marketable securities, the auditor requests a client prepared document of all marketable securities owned at year end in order to test a. for possible interest expenses not present on the document. b. both compliance with securities laws and disclosure of derivatives. c. both the balance sheet and related income statement accounts. d. for changes in the historical cost of the reported marketable securities.

ANS: B

PTS: 1

OBJ: Testing Investments

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. The reported fair market value of securities held by the client can be verified by the auditor by a. comparing the values to those securities held by the auditing firm. b. confirming the fair values with the client as of the close of the year. c. comparing the fair values with the fair values of similar securities. d. comparing the fair values to credible publications and websites.

ANS: D PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. Bonds sold at a deep discount from face value on which no periodic interest payments are made are referred to as a. junk bonds. b. zero-coupon bonds. c. pay-in-kind debentures. d. a treasury bond.

ANS: B PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. A client investing in derivative type investments carries the risk of a. difficult valuation of the instruments. b. non-verifiable existence of the instruments. c. thin FASB guidance relative to disclosure of the instruments. d. lacking paper trail for completeness of the instruments.

ANS: A PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. Most international companies purchase hedges to monitor its exposure to a. interest rate changes. b. currency fluctuations. c. commodities price fluctuations. d. stock price fluctuations.

ANS: B PTS: 1 OBJ: Other Securities NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. Auditing sophisticated financial instruments requires the auditor to obtain an understanding of all of the following except a. Risks and objectives of the instruments. b. Contracts and terms of the instrument. c. Financial accounting and disclosure for the instrument. d. Credit rating of the client purchasing the instrument.

ANS: D PTS: 1 OBJ: Other Securities NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 32. The auditor best determines the existence of investments by a. footing the schedule of recorded investments. b. confirming or examining recorded investments. c. examining the recorded investments for name and title. d. recomputation of interest and/or gains and losses.

ANS: B PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. The audit of investments includes the procedure of examining the documents for any restrictions in order to test the assertion of a. existence. b. rights. c. completeness. d. valuation.

ANS: B PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. Accounting standards require that investments in marketable securities be presented and disclosed a. by classification as trading, available-for-sale or held-to maturity. b. for an analyst's determination of liquidity. c. for the company's physical possession of the security versus agent holdings. d. for the expected success of the organization of investment.

ANS: A PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. How does the auditor typically test for the existence of cash? a. counting cash at the depository institution. b. inquiry of management. c. standard bank confirmation. d. tracing the bank reconciliation to the general ledger.

ANS: C PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. In the course of testing cash balances at the balance sheet date, the auditor foots the bank reconciliation and traces its reported book balance to the trial balance in addressing the assertion(s) of a. rights. b. valuation. c. existence. d. all of the above.

ANS: D PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 37. During the audit of EmpireAge Limited, the auditor notes a large series of checks that does not clear for an unusually long time after period end. What may the auditor suspect from this observation? a. Vendors are eager to get their payments. b. The reconciliation is accurate. c. Cash does not exist. d. The presence of held-checks at period-end.

ANS: D PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. The standard bank confirmation includes a designated place for the financial institution to report a. loans and collateral. b. a reconciliation of the lockbox. c. cash held on consignment. d. maturity dates for certificates of deposit.

ANS: A PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. Debt instruments with a variable interest rate are referred to as a. junk bonds. b. floating rate note. c. event-risk protected debt. d. zero-coupon bond.

ANS: B PTS: 1 OBJ: Testing Investments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. Kiting is addressed by the auditor through the use of a. cut-off bank reconciliations. b. bank transfer schedules. c. bank confirmations-account balances. d. bank confirmations-loan guarantees.

ANS: B PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. Bank transfer schedules are used by the auditor in dealing with a. lapping. b. kiting. c. embezzlement by omitting outstanding checks on reconciliation. d. all of the above.

ANS: B PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. The cutoff bank statement is used by the auditor in dealing with a. lapping. b. kiting. c. embezzlement by omitting outstanding checks on reconciliations. d. all of the above.

ANS: C

PTS: 1

OBJ: Testing Cash

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 43. The standard bank confirmation is used by the auditor to gather information a. on the client’s deposit balances. b. on the existence and details of loans. c. on covenants. d. Both A and B. e. All of the above.

ANS: E PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. Cash management techniques have been developed for all of the following reasons except a. speed the collection and deposit of cash. b. reduce the effect of compensating balances. c. reduce the amount of paperwork. d. automate the cash management process.

ANS: B PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Which of the following is not an important cash management technique frequently used by management? a. imprest funds. b. lockboxes. c. electronic funds transfers. d. cash management agreement with financial institutions. e. all of the above.

ANS: A PTS: 1 OBJ: Testing Cash NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. The auditor prepares a schedule for marketable securities. Which of the following is not one of the items included related to the value of the securities? a. cost. b. year-end market value. c. carrying value for debt instruments. d. interest and dividends.

ANS: D PTS: 1 OBJ: Testing Marketable Securities NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. Which of the following is not a fundamental control element the auditor would expect to find in place for all cash processing systems? a. restrictive endorsement of checks. b. independent reconciliation. c. walkthrough. d. prenumbered cash receipt documents.

ANS: C PTS: 1 OBJ: Controls NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 48. Which of the following is not a normal edit test as part of computerized control for checks? a. field checks. b. self-checking digits. c. cross-references. d. reasonableness tests.

ANS: C PTS: 1 OBJ: Testing Marketable Securities NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. Imprest payroll account What is an imprest payroll account and why is it used by audit clients?

ANS: Cash is deposited into an imprest payroll account as needed to cover payroll checks as they are issued.

The account would be reduced to a zero balance if all checks are cashed by the employees. The imprest account provides additional control by restricting access to the general corporate cash account and facilitating bank account reconciliation because payroll checks usually clear the bank within a short period of time.

PTS: 1 OBJ: Types NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 2. Lockbox utilization Describe the cash management technique of a lockbox, including why it is used.

ANS: When using a lockbox system to accelerate the collection of cash and to reduce the possibility of fraud, the customers are instructed to send payments directly to the company at a specific post office box number, which is a depository (lockbox) at the company's banking institution. The bank receives and opens the remittances, prepares a list of receipts by customer, credits the general cash bank account, and notifies the client of the details.

PTS: 1 OBJ: Types NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Cutoff statement What is a bank cutoff statement and how is it used by an auditor?

ANS: The bank cutoff statement is a bank statement for the client prepared at an agreed-upon interim date which is sent directly to the auditor. Usually the auditor asks the client to have the bank prepare the cutoff statement for some period 10 to 15 days after the close of the year. The primary purpose of the cutoff statement is to enable the auditor to verify the reconciling items on the client's bank reconciliation.

PTS: 1

OBJ: Testing Cash

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 4. Auditing hedging transactions Describe the auditing risks involved with financial hedges and list the audit procedures involved in testing such transactions.

ANS: Audit risks of client hedging activities: the hedge does not represent a hedge, rather it is a bet that currencies will move in a  specific direction and if it moves in that direction the company will gain, all the hedging transactions are not identified or disclosed, and  the company is taking on more risk than approved by management or the board.  The audit program would include the following steps: 1.

Identify the policies and control procedures the company has implemented to ensure adherence to the procedures.

2.

Review all gains/losses associated with the hedged transactions during the year to determine whether the transactions were hedged.

3.

Obtain a summary of all hedges currently in effect. Take a sample of contracts associated with the existing hedges to determine that the contracts insulate the company from the effect of foreign currency fluctuations.

4.

Summarize the results of testing to determine if un-hedged currency transactions exist.

List the un-hedged transactions and determine (a) needed disclosure, and (b) the appropriate entry to mark the instrument to market.

Inquire of management and the financial planning committee of the existence of any other un-hedged currency transactions.

5.

6.

Inquire of internal audit of any work they have performed regarding hedges. Review their report, especially regarding the existence of controls.

7.

Reach a conclusion about the adequacy of the hedges, document the conclusion in the audit documentation, and determine appropriate financial statement presentation.

PTS: 1 OBJ: Other Securities NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 5. Auditing cash balances - assertions Describe the audit objectives for the reported cash balances by major assertion.

ANS: The audit objectives for the audit of cash are as follows by assertion: Assertion Description Existence Cash recorded at the balance sheet date is reconciled to bank statements.

Completeness Reconciled amounts are accurate and tie to the general ledger. There is an appropriate cutoff for cash transactions.

Valuation Bank accounts are reconciled and tied into the general ledger. There is an

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

Rights Presentation & Disclosure

appropriate cutoff for cash transactions.

Cash balances are in the name of the organization.

Compensating and restricted balances are disclosed along with cash concentration risks. Cash is classified as current or long-term depending on the circumstances.

PTS: 1 OBJ: Testing Cash NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 6. Fraud by kiting Describe the concept of kiting and identify the best method for detecting kiting.

ANS: Kiting involves the transfer of cash from one bank account owned by the client to another account owned by the client for the purpose of fraudulently overstating the cash accounts. The overstatement is generated by recording the deposit at the end of the year but failing to record the disbursement from the other account at that time. The most effective and efficient method of uncovering kiting is the preparation of a bank transfer schedule by the auditor.

PTS: 1 OBJ: Testing Cash NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 7. Auditing marketable securities - assertions Identify at least eight sources of evidence and testing the auditor may use in the audit of marketable securities by major assertion tested.

ANS: The auditor may use the following sources of evidence and testing in the audit of marketable securities: Assertion Evidence/Testing Existence Confirmation of securities held by trustees.

Existence Observation of securities held by the client.

Presentation & Disclosure Review of investment agreements, including specification of collateral.

Presentation & Disclosure Determine management's intent to hold securities as short-term investments or for the longer term and document those intentions in the management representation letter.

Presentation & Disclosure Determine whether securities are properly classified and disclosed as trading, available-for-sale, held to maturity or on the equity method and that any restrictions are appropriately disclosed.

Valuation Review of collateral if the auditor determines that the collateral is important to the valuation of the account.

Valuation Determine fair market value of recorded securities through reference to a credible financial publication or trusted financial website.

Rights Examine securities and related documents to ensure that the

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

Completeness Completeness/Valuation Completeness

investments are in the name of the organization and that there are no restrictions.

Review of broker's advices evidencing the cost or sales price of the securities and the timing of transactions for cutoff.

Analytical review for reasonableness of interest and dividend income.

Obtain and foot a schedule of all marketable securities held at period-end.

PTS: 1 OBJ: Testing Investments NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 8. Cash transfers The following is an interbank transfer schedule of Aristotle Corporation: Deposit Date Per Books Per Bank 01/03 01/05 12/28 01/04 12/29 12/31

Withdrawal Date Per Books Per Bank 12/30 01/04 01/03 01/04 01/05 01/05

Amt. of Dep. (W/D) Bank X Bank Y $(6,000) $ 6,000 $ 8,000 $(8,000) $ 4,000 $(4,000)

Prepare a schedule to show the deposits in transit, the outstanding checks, and the amount of overstatement or understatement of cash for each bank, assuming no other deposits in transit or outstanding checks.

What is this activity known as?

ANS:

Bank X $8,000 $6,000 $6,000

Deposits in Transit Outstanding Checks Over(Under)statement

or

Bank Y -0-0$6,000

This is potential fraud referred to as kiting. The deposits of $8,000 and $4,000 are kiting in this situation where the deposit is counted in December but the withdrawal is not recorded until January. In addition there is an error of $6,000 which when corrected through the interbank account reduces the net adjustment to $6,000.

For Deposits in Transit examine the Deposit Dates per books and per bank. Deposits in transit occur when they differ.

For Outstanding Checks examine the Withdrawal Date per books and per bank. Outstanding checks occur where they differ.

In the Amount of Deposit the bracket or lack thereof indicates withdrawal or deposit between the parent and subsidiary or between subsidiaries. The flow of money between the two parties can go either way.

PTS: 1

OBJ: Testing Cash

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 9. Bank confirmations There are two parts in a standard bank confirmation. Discuss the purposes and what would be requested by each component and to whom it would be sent.

ANS: The standard bank confirmation is sent to each bank with whom the company has transacted business during the year, whether it currently has a balance or not. Even thought the cash balance is zero there may be loans or contingencies with a financial institution that require disclosure in the financial statements.

The first part seeks information on the client’s deposit balances, on the existence of loans, due dates of the loans, interest rates, dates through which interest has been paid, and collateral for all loans outstanding with the bank at year-end. The second part seeks information about any contingent liabilities. If loans are outstanding the auditor normally asks for copies of contracts and checks them for loan covenants that restrict the ability of the organization to act freely. Frequently the entire loan becomes due and payable if the loan covenants are violated.

The auditor also usually makes inquiries about any cash management or other programs the client may have with the financial institution.

PTS: 1 OBJ: Bank Confirmations NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 10. Cash transfers The following is an interbank transfer schedule of Carlson Corporation: Deposit Date Per Books Per Bank 12/31 01/03 12/28 12/29 12/29 01/04

Withdrawal Date Per Books Per Bank 01/03 01/04 12/29 01/03 01/05 01/05

Amt. of Dep. (W/D) Bank X Bank Y $5,000 $ (5,000) $ 7,000 $(7,000) $ (9,000) $9,000

Prepare a schedule to show the deposits in transit, the outstanding checks, and the amount of overstatement or understatement of cash for each bank, assuming no other deposits in transit or outstanding checks.

ANS: Deposits in Transit Outstanding Checks Over(Under)statement

Bank X $5,000 -0$14,000

or

Bank Y $9,000 $7,000 $14,000

The deposits of $5,000 and $9,000 are kiting where the deposit is counted in December but the withdrawal is not recorded until January.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 For Deposits in Transit examine the Deposit Dates per books and per bank. Deposits in transit occur when they differ.

For Outstanding Checks examine the Withdrawal Date per books and per bank. Outstanding checks occur where they differ.

In the Amount of Deposit the bracket or lack thereof indicates withdrawal or deposit between the parent and subsidiary or between subsidiaries. The flow of money between the two parties can go either way.

PTS: 1 OBJ: Testing Cash NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

Chapter 12 - Audit of Fixed Assets and Related Expense Accounts TRUE/FALSE

1. Improper recording of a capital lease as an operating lease is an inherent risk associated with the audit of property, plant, and equipment.

ANS: T PTS: 1 OBJ: Lease Risks NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 2. A major risk associated with property, plant, and equipment is that of the innovative methods of manipulating earnings by recording invalid amounts to asset accounts.

ANS: T PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 3. Asset impairment is assessed by the audit team for assets in the manufacturing environment, but not for office equipment and buildings.

ANS: F PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 4. The auditor must be in a position to understand whether property and equipment have reasonable useful lives.

ANS: T PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 5. Gains on the sale of equipment usually signal the auditor that the lives of the assets are too long.

ANS: F PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 6. In the audit of the depreciation methods and possible impairment of manufacturing equipment, the auditor tours the facility during operations to determine if any of the machines are idle.

ANS: T

PTS: 1

OBJ: Earnings Management

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 7. Internal controls over fixed assets should ensure that all purchases are authorized.

ANS: T PTS: 1 OBJ: Fixed Asset Controls NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 8. A first-time audit of the property, plant, and equipment accounts will involve additional work on the part of the auditor to test the opening balances.

ANS: T PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 9. The client should have methods in place to identify the impairment of significant assets.

ANS: T PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. The auditor typically tests management's estimate of the impaired value of a fixed asset through the analysis of the future undiscounted cash flows of the asset.

ANS: F PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 11. The auditor would be most likely to request a schedule of repairs and maintenance expense to satisfy the auditor about the presentation and disclosure assertions for fixed assets.

ANS: F PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 12. The auditor would be most likely to request a schedule of repairs and maintenance expense to satisfy the auditor about the completeness assertion for fixed assets.

ANS: T PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 13. The auditor should perform detailed tests of labor charges when the client company constructs its own assets.

ANS: T PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 14. The auditor should be aware of material asset additions that are in remote locations and physically observe such assets.

ANS: T PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 15. The auditor would conclude that the client was not depreciating the cost of fixed assets rapidly enough if there were a large number of losses on the disposals of assets.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: T PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 16. Asset impairment presents no additional audit problems for the independent auditor, but does present a problem for the internal auditor.

ANS: F PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 17. Knowledge of business conditions is not crucial to the auditor's identification of the potential for impairment of assets as the auditor must focus attention on the accounting rules.

ANS: F PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 18. When a decision is made to discontinue an operation, the net assets should be written down to a best estimate of net realizable value.

ANS: T PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 19. A corporation should always anticipate and record gains on the disposal of assets.

ANS: F PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 20. Once the auditor obtains a fixed asset additions schedule from the client, testing of the existence of the additions must immediately ensue.

ANS: F PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking NOT: Test the accuracy of the schedule first and trace it to the general ledger to ensure it is valid before testing additions.

21. Strong internal control activities in the fixed assets cycle include the use of identification tags secured to assets for proper tracking.

ANS: T PTS: 1 OBJ: Fixed Asset Controls NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 22. Reclamation expenses associated with the use of the land in a mining operation should be estimated, accrued, and allocated to depletion costs over time.

ANS: T PTS: 1 OBJ: Audits of Intangible Assets and Natural Resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 23. When testing a client's additions to an asset for research and development, the auditor must remember that such costs should be amortized over the lesser of their legal lives or useful lives.

ANS: F PTS: 1 OBJ: Audits of Intangible Assets and Natural Resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking NOT: R&D costs are expensed.

24. Bluewire Technologies Ltd. obtained a patent for its MegaK2000 product five years ago and should expense the entire amount of the unamortized balance if MegaK2000 is no longer sold.

ANS: T PTS: 1 OBJ: Audits of Intangible Assets and Natural Resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 25. Accounting principles allow goodwill to be held on the books of a company indefinitely and not amortized over time.

ANS: T PTS: 1 OBJ: Audits of Intangible Assets and Natural Resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 26. An auditor will read the footnotes related to discontinued operations to ensure that, among other things, the justification of the decision and the write-down of assets are adequately disclosed.

ANS: T PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 27. The auditor must be aware of management's motivations to present financial information in a certain light when leases are utilized.

ANS: T PTS: 1 OBJ: Lease Risks NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 28. Companies always enter into lease agreements to finance the purchase of expensive assets over time.

ANS: F PTS: 1 OBJ: Lease Risks NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 29. The accounting for leases is often misapplied in order to achieve off-balance sheet financing.

ANS: T PTS: 1 OBJ: Lease Risks NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 30. Title transfer by the end of a lease is one of the criteria for capital lease recognition.

ANS: T PTS: 1 OBJ: Lease Risks NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 31. A bargain purchase option is a good indicator that an arrangement should be accounted for as an operating lease.

ANS: F PTS: 1 OBJ: Lease Risks NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 32. Intangible assets should be recorded at book value.

ANS: F PTS: 1 OBJ: Auditing Leases NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 33. Auditors often recalculate the present value of capital lease agreements to assess the valuation of recorded liabilities.

ANS: T PTS: 1 OBJ: Auditing Leases NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 34. The cost of patents should be amortized over the lesser of their legal life or useful life.

ANS: T PTS: 1 OBJ: Lease Risks NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 35. Leases that qualify as operating are expensed as rent each period.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: T PTS: 1 OBJ: Lease Risks NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 36. It is simple for auditors to test the costs capitalized for discovery of natural resources because only successful efforts may be recorded ANS: F PTS: 1 OBJ: Audits of Intangible Assets and Natural Resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 37. The cost of defending patents may not be capitalized.

ANS: F PTS: 1 OBJ: Audits of Intangible Assets and Natural Resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 38. Changes in the ages of equipment may be identified by analyzing depreciation expense as a percent of assets.

ANS: T PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 39. Companies never wish to increase depreciation and impairment expenses through manipulation in order to decrease profits.

ANS: F PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 40. If the beginning balance of property, plant and equipment is established through previous audit work, the test of property accounts usually can be limited to selected tests of property additions and disposals during the year.

ANS: T PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 41. In testing property, plant and equipment the scope and extent of testing can vary based on the complexity of assets utilized, the difficulty of estimating useful life, and the risk associated with the client.

ANS: T PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 42. Intangible assets are amortized over the remaining legal life of patents or copyrights associated with the asset or their useful life.

ANS: T PTS: 1 OBJ: Intangible Assets are Amortized NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 43. The auditor should be aware of the possibility that management may be manipulating earnings by inappropriately expensing capital items or inappropriately capitalizing expense items.

ANS: T PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 44. Asset losses or impairment are recognized when they occur, while asset gains are not recognized until realized.

ANS: T PTS: 1 OBJ: Fixed Asset Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 45. Property, plant and equipment is written down when its value becomes impaired and may be written back up if its value goes up at a later date.

ANS: F PTS: 1 OBJ: Fixed Asset Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking MULTIPLE CHOICE 1. Which one of the following is not a risk associated with property, plant, and equipment. a. obsolescence of assets b. impairment of assets c. incomplete recording of disposals d. sum-of-years digits depreciation ANS: D PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 2. Which of the following best represents a method that the auditors use to better understand the risks related to a client's fixed assets? a. Review of industry trends. b. Inquiry of attorneys. c. Letters to financial institutions. d. Recomputation of tax depreciation.

ANS: A PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 3. If the audit team notes a change in the client's product line, there may be an indication of a. book value. b. scrap value. c. impaired value. d. depreciation value.

ANS: C PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 4. Auditors test management's estimates of impaired value through reference to a. economic plans. b. evidence of fair market value. c. estimated cash flow. d. All of the above are appropriate.

ANS: D PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 5. The tour of the manufacturing plant may best assist the auditor in identifying a. that all purchases are authorized. b. machinery that is inoperative in the production cycle. c. management's impairment strategy. d. estimates of depreciation expense.

ANS: B PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 6. When a company decides to dispose of a particular line of operation by selling it to another company, the related assets should a. be written up in anticipation of a gain on disposal. b. be considered scrap material. c. be held at historical cost. d. be written down on the expectation of a loss on disposal.

ANS: D PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 7. Which one of the following procedures is most appropriate for testing proper authorization for the purchase of equipment? a. examination of proper recording of the equipment. b. examination of board of directors’ minutes. c. examination of the cash budget. d. examination of useful lives.

ANS: B PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 8. When testing fixed assets for the reasonableness of the client's estimated useful lives, the audit team should a. Check for regulated lives. b. make the decision for the client upon purchase. c. understand the economics of the client's business. d. compare them with other clients in different industries.

ANS: C PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 9. Analytical estimation of depreciation by the auditor is an important audit test because a. it signals which additions will be vouched. b. it yields statistical precision in sampling. c. it is a good starting point for determining additional procedures. d. it gives the auditor an indication of the impaired balances existing in financial statements.

ANS: C PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 10. If the auditor determines that beginning balances of fixed assets have not changed from previously audited amounts, much of the testing for existence can be accomplished by a. sampling receiving reports. b. inquiring of management. c. vouching current period additions. d. recomputing depreciation.

ANS: C PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 11. Which of the following is the best example of a fixed asset that will be physically inspected by the auditor in the period under audit? a. An adding machine acquired in the current period. b. A warehouse purchased three years previously. c. An office building constructed in the current period. d. Desktop computers purchased in the previous period.

ANS: C PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 12. The first-time audit of a company with property, plant, and equipment may cause the auditor to a. request a complete physical inventory of the certain items in the account. b. start fresh with an audit as of the end of the period. c. send a confirmation to a sample of equipment suppliers. d. review original invoices of immaterial equipment purchased during the period.

ANS: A PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 13. Which one of the following procedures would provide the best evidence about the original cost of a piece of equipment? a. fixed asset schedule b. purchase invoice c. receiving report d. inquiry of the purchasing agent ANS: B PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 14. Management may initially determine that an asset is impaired through the use of a. undiscounted cash flows. b. internal rate of return. c. Black Scholes modeling. d. acid test ratios.

ANS: A PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 15. One method an auditor may utilize in testing depletion expense is a. using analytical procedures. b. observation of the physical count. c. obtaining management representation. d. estimating the useful life of the natural resource.

ANS: A PTS: 1 OBJ: Audits of Intangible Assets and Natural Resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 16. The audit of the repairs and maintenance expense account is extremely important as it helps the auditor to determine if a. depreciation expense includes charges for repairs. b. the net book value of assets achieves precision. c. items that should be included as assets are charged as expenses. d. all repairs and maintenance expenses add value to the assets.

ANS: C PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 17. The best approach to determine whether a capital lease has been "kept off the books" is to a. review all capital lease agreements that have been recorded. b. examine the canceled checks for all recorded capital leases. c. review all major lease agreements to determine whether there are other leases to be capitalized. d. physically examine the asset and trace it to the general ledger.

ANS: C PTS: 1 OBJ: Auditing Leases NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 18. A test of controls to determine proper authorization for the addition of a major piece of equipment would include all of the following except a. examination of purchase agreements. b. review of minutes of the board of directors' meetings. c. review of approvals by a capital budgeting committee. d. examination of the identification tags attached to equipment.

ANS: D PTS: 1 OBJ: Fixed Asset Controls NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 19. An estimate of the reasonableness of depreciation expense and accumulated depreciation may be accomplished by performing a. tests of controls. b. substantive tests of transactions. c. analytical review procedures. d. management inquiry.

ANS: C PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 20. Analytical review procedures for depreciation expense and accumulated depreciation would include all of the following ratios except a. current depreciation as a percentage of previous year assets. b. fixed assets as a percentage of previous year assets. c. depreciation expense as a percentage of assets each year. d. average age of assets.

ANS: A PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 21. Analytical procedures for depreciation expense and accumulated depreciation would include all of the following ratios except a. current depreciation as a percentage of previous year depreciation. b. fixed assets as a percentage of previous year assets. c. accumulated depreciation as a percentage of gross assets each year. d. average cost of assets.

ANS: D PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 22. Which is the primary assertion tested in conjunction with the obtaining of evidence regarding impairment? a. Valuation. b. Cutoff. c. Existence. d. Rights.

ANS: A PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 23. Cloud Company determines that the future undiscounted cash flow generated from the use of its fleet of small aircraft is less than carrying values. For impairment purposes, an auditor would wish to further obtain evidence regarding a. parts inventory for the aircraft. b. an economic outlook for the company's stock. c. an independent valuation of the aircraft. d. the historical cost of the aircraft.

ANS: C PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 24. A term used to describe management's recognition that a significant portion of fixed assets is no longer as productive as had originally been expected is known as a. asset depreciation. b. asset amortization. c. asset impairment. d. asset disposal.

ANS: C PTS: 1 OBJ: Testing Impairment NAT: AACSB-Analytical risks | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 25. In a tour of a client's manufacturing facility, the auditor is most likely attempting to satisfy the assertion of a. cutoff. b. existence. c. rights. d. presentation.

ANS: B PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 26. The audit step of selecting a sample of asset disposals and examining the sales documentation evidencing disposal of the equipment and recomputing gain or loss on the disposal, primarily tests the equipment account for the a. existence assertion. b. presentation assertion. c. rights assertion. d. valuation assertion.

ANS: D PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 27. Which one of the following does not constitute probable relationships between accounts? a. Equipment and depreciation. b. Patent and amortization. c. Assets under capital leases and amortization. d. Oil reserves and depreciation.

ANS: D PTS: 1 OBJ: Audits of Intangible Assets and Natural Resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 28. Which of the following represents a primary audit concern for errors in the recording of intangible assets? a. Capitalized research and development costs. b. Amortization of patents. c. Capitalized costs to successfully defend a patent. d. Amortization of franchise fees.

ANS: A PTS: 1 OBJ: Audits of Intangible Assets and Natural Resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 29. Why do long lived assets need to be reviewed annually for reversal indicators? a. To control the impairment of the assets. b. The lessee can purchase the asset for an amount that is greater than fair vale at the end of the lease. c. The lease term is ten years and the useful life of the asset is 11 years. d. Title does not transfer by the end of the lease term.

ANS: C PTS: 1 OBJ: Lease Risks NAT: AACSB-Analytical risks | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 30. As it relates to property, plant and equipment, what specific risk relating to earnings management do the auditors assess? a. Equipment has been initially recorded at cost. b. Depreciation has been recorded using accelerated methods. c. Repairs and maintenance have been expensed rather than included as assets. d. Useful lives have been extended without justification.

ANS: D PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 31. The auditor performs tests on property, plant and equipment to determine if assets have been pledged as collateral or title has transferred primarily to assess which assertions? a. Valuation and completeness. b. Rights and disclosure. c. Obligations and legality. d. Cutoff and accuracy.

ANS: B PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 32. An auditor wishes to test the net valuation of the equipment in the financial statements of a client.

How will the auditor best perform this testing? a. Vouch the recorded equipment to an invoice supporting the cost of the equipment when originally purchased. b. Compare the ID number on the fixed asset schedule to the identification tag on the asset itself. c. Recalculate annual depreciation expense for major additions and a sample of all other equipment. d. Confirm material equipment with customers.

ANS: C PTS: 1 OBJ: Earnings Management NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 33. Which of the following procedures would evidence the client's control over the existence of machinery and equipment? a. Useful lives are only entered into the system by the controller. b. Impairment testing takes place in accordance with a formal assessment of business changes and events as they relate to fixed assets. c. Fixed assets are assigned a control identification number and that number is permanently affixed to the asset for periodic inventory. d. Only the CFO can enter additions into the fixed asset module of the system.

ANS: C PTS: 1 OBJ: Fixed Asset Controls NAT: AACSB-Analytical risks | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 34. Control for intangible assets should a. ensure that decisions are appropriately made as to when to capitalize R & D expenditure. b. identify and account for intangible impairments. c. develop amortization schedules. d. All above.

ANS: D PTS: 1 OBJ: Leases NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 35. If a lease does not meet at least one of these four conditions, then it is classified as a a. capital lease. b. operating lease. c. direct financing lease. d. sales-type lease.

ANS: B PTS: 1 OBJ: Leases NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 36. As natural resources are used up the client has to recognize a. depreciation expense. b. depletion expense. c. amortization expense. d. reclamation expense.

ANS: B PTS: 1 OBJ: Natural resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 37. After a natural resource such as gas or coal is used up by the client, they are responsible to restore the land to its original condition. The cost of this restoration is called a. depreciation expense. b. depletion expense. c. amortization expense. d. reclamation expense.

ANS: D PTS: 1 OBJ: Natural resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 38. Which of the following are estimates used by natural resource companies in recognizing costs over the life of the resource, e.g., oil or coal. a. reserves. b. depletion rate. c. reclamation expense. d. both A and B. e. all of the above.

ANS: E PTS: 1 OBJ: Natural resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 39. Capitalized natural resources, e.g., oil or coal, are usually written off a. over a period not to exceed 40 years. b. over an allocated useful life. c. as assets are taken from the ground. d. any of the above.

ANS: C PTS: 1 OBJ: Natural resources NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 40. In evaluating control risk and effectiveness for fixed assets, controls should be designed for numerous purposes. Which of the following is not a usual control for fixed assets? a. identify existing assets, inventory them, and reconcile physical inventory with the property ledger. b. periodically reassess the appropriateness of depletion categories. c. identify obsolete or scrapped equipment and write it down to scrap value. d. periodically review management strategy and systematically assess the impairment of assets. e. all of the above are usual controls for fixed assets.

ANS: B PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 41. In evaluating control risk and effectiveness for intangible assets, controls should be designed for numerous purposes. Which of the following is not a usual control for intangible assets? a. ensure that decisions are appropriately made as to when to capitalize or expense research and development expenditures. b. develop amortization schedules that reflect the remaining useful life of patents or copyrights associated with the assets. c. identify and account for intangible asset impairment. d. all of the above are usual controls for intangible assets.

ANS: D PTS: 1 OBJ: Intangible Asset Audit Procedures NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 42. Which of the following assertions are addressed by examining purchase agreements and minutes of board of director’s meeting? a. existence. b. rights. c. valuation. d. both A and B. e. all of the above.

ANS: E PTS: 1 OBJ: Fixed Asset Audit Assertions NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 43. Decommission costs for fixed assets, e.g., a power plant, must be recognized a. when the plant is built. b. over the life of the plant. c. when the plant is decommissioned. d. Either B or C is acceptable.

ANS: B

PTS: 1

OBJ: Fixed Asset Audit Procedures

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical risks | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 44. Periodically clients discontinue a particular line of operation by shutting down or selling a line of business or a company, which usually occurs over at least several months. In these situations the client is to write down net assets to a best estimate of net realizable value and a. recognize a loss. b. recognize a gain. c. recognize a loss or a gain. d. recognize a gain only to the extent of previously recognized losses.

ANS: A PTS: 1 OBJ: Discontinued Operations NAT: AACSB-Analytical risks | AICPA BB-Critical thinking 45. Useful methods to evaluate asset impairment of long-lived assets usually would not include a. current market values of similar assets. b. estimated future economic benefits to be derived from the asset. c. an independent assessment of the value of the asset. d. all of the above are useful in valuing impairment.

ANS: D PTS: 1 OBJ: Impairment of Fixed Assets NAT: AACSB-Analytical risks | AICPA BB-Critical thinking ESSAY 1. Repairs and maintenance Why would the auditor be concerned about the repairs and maintenance account in relation to property plant and equipment?

ANS: Some clients might be motivated to record some asset purchases as an expense in order to reduce taxable income. The most common audit approach to address the completeness assertion of recorded assets is to request a schedule of repair and maintenance expense. All items over a specified amount can be examined to see whether they are properly classified as an expense or should be capitalized as PP&E. PTS: 1 OBJ: Earnings Management NAT: AACSB-Communication skills | AACSB-Analytical risks | AICPA BB-Critical thinking 2. Property plant & equipment evidence - additions Specify the evidence the auditor would review to satisfy himself or herself about each of the following concerning property, plant, and equipment additions.

A. Valuation at historical cost.

B. Existence.

C. Presentation on balance sheet.

D. Rights.

ANS: A. Examine vendor invoices and canceled checks.

B. Examine receiving reports and possibly the assets themselves.

C. Review requisition or work order and description of addition to determine if it benefits future periods or if it extends the life of the existing asset.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 D. Examine vendor invoices, deeds and canceled checks.

PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Communication skills | AACSB-Analytical risks | AICPA BB-Critical thinking 3. Fixed asset disposals Identify at least four procedures the auditor could employ to detect unrecorded fixed asset disposals.

ANS: A. Review the minutes.

B. Tour the plant to locate items listed in the accounting records.

C. Review other income for scrap credits.

D. Review insurance coverage for possible reductions.

E. Review property taxes for reductions in assessments.

F. Review new additions for indications of replacements which might signify a related retirement.

G. Inquire of management and other operating personnel.

PTS: 1 OBJ: Fixed Asset Audit Procedures NAT: AACSB-Communication skills | AACSB-Analytical risks | AICPA BB-Critical thinking 4. Earnings management Describe earnings management by an organization and discuss the implications of fixed asset accounting on earnings management.

ANS: Earnings management is the fraudulent manipulation of accounting estimates by management in order to achieve earnings goals over extended periods. This may be performed through management's pushing of expenses to subsequent periods or the building of excessive liabilities in periods of enhanced earnings.

Fixed assets is an area that has seen abuse. Changes in the estimates of useful lives and residual values by management may push expenses out over a longer period of time, increasing income incrementally.

Another area of misapplication includes the treating of capital leases as operating leases, which inappropriately keeps debt off of the balance sheet.

PTS: 1 OBJ: Earnings Management NAT: AACSB-Communication skills | AACSB-Analytical risks | AICPA BB-Critical thinking 5. Asset impairment Describe what asset impairment is, why the auditor is concerned about it, and how it is dealt with by the auditor.

ANS: Asset impairment deals with management’s recognition that a significant portion of fixed assets is no longer as productive as had originally been expected. When assets are so impaired, the assets should be written down to their expected economic value.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 While many companies have excellent controls over processes, they tend not to have the same level of control over periodic assessment of impairment of assets. Thus a major audit task is to develop a systematic approach to continuously review the overall composition of an entity’s asset base in light of current and planned production and technological and competitive developments in the client’s industry.

The financial reporting objective is to value assets at their economic benefit to the organization and to write them down when that value has been impaired. Two approaches developed by FASB useful in providing evidence of valuation when assets are impaired are (1) estimating future economic benefits to be derived from the asset, and (2) obtaining an independent assessment of the value of the asset and to compare it with carrying amount. The first approach is often used with assets such as goodwill, and the second one for assets such as equipment.

If the fair value of the asset is less than the carrying amount of the asset an impairment has taken place and an impairment loss would be recognize. If subsequently the asset increases in fair value, such increase would not be recognized.

PTS: 1 OBJ: Asset Impairment NAT: AACSB-Communication skills | AACSB-Analytical risks | AICPA BB-Critical thinking 6. Intangible assets - patents Discuss what an intangible asset is and some audit procedures concerning patents that the auditor might use in connection with it.

ANS: An intangible asset is one that lacks physical substance, such as patents.

Patents are recognized when purchased at cost. However, if patents are developed through research and development cost then recognition rules are more complex. Research and development costs for new products are expensed until the time when there is a viable product and a plan to bring it to market. Legal costs for obtaining and defending a patent can be capitalized if the defense is successful, but would be expensed otherwise. The costs of patents are amortized over the lesser of their legal or useful lives. Auditors also should evaluate the adequacy of management’s procedures in evaluating patent impairment and adjustment when it occurs.

PTS: 1 OBJ: Intangible Assets-Patents NAT: AACSB-Communication skills | AACSB-Analytical risks | AICPA BB-Critical thinking

Chapter 13 - Completing the Audit TRUE/FALSE

1. The primary source of information about contingencies is the client's attorney.

ANS: F PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. The use of common-size percentages is a useful analytical tool in the final review stages of the audit.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: T PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. The final review stage of the audit is used for the consideration of unusual or unexpected balances or relationships that appear after proposed adjustments to the financial statements have been made.

ANS: T PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. Threatened litigation is an example of a contingent liability that must be considered in the concluding stages of the audit.

ANS: T PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. IAS 37 is on Provisions, contingent liabilities and contingent assets.

ANS: T PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Contingent liabilities include provision for bad debts.

ANS: F PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. A response from the client's attorney concerning litigation, claims, and assessments represents material that is protected under the attorney-CPA privilege.

ANS: F PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. A letter is sent to certain of the client's attorneys soliciting a response directly to the auditor in order to corroborate management's accounting and disclosure for contingent liabilities.

ANS: T PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. The subsequent events period extends to the date of the auditor's report.

ANS: T PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. The subsequent events period usually extends to the date that the management representation letter is signed.

ANS: T PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Settlement of a lawsuit in January for a different amount than was accrued at December 31 calls for a footnote.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: F PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. Settlement of a lawsuit in January for a different amount than was accrued at December 31 calls for an adjustment to the financial statements.

ANS: T PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. A stock split takes place March 30, three days after the audit report is delivered to the client. The auditor should ask the client to recall the audit report.

ANS: F PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. A stock split takes place March 30, three days after the audit report is delivered to the client. The auditor is not required to do anything.

ANS: T PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. Subsequent events may indicate conditions that did not exist at the balance sheet date, and should be considered for footnote disclosure.

ANS: T PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. In auditing for subsequent events the auditor should read the minutes of meetings of the board of directors and stockholder meetings from year end through the last date of field work.

ANS: T PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Significant changes in working capital during the subsequent events period should be investigated by the auditor.

ANS: T PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 18. The auditor may discover an event after the last date of field work, but prior to the issuance of the report. If this event is disclosed, the auditor has no other option but to extend the review for subsequent events.

ANS: F PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. The auditor may discover an event after the last date of field work, but prior to the issuance of the report. If this event is disclosed, the auditor has no other option but to dual date the report.

ANS: F PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. The primary source of corroborative evidence concerning litigation, claims, and assessments is the client.

ANS: F PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. The primary source of information on contingent event is client’s management.

ANS: T PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. If the auditor concludes that the client may have a going-concern problem then the auditor should identify and assess management's plans to overcome this problem.

ANS: T PTS: 1 OBJ: Going Concern NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. For the client to be considered a going concern, the auditor must satisfy himself or herself that the entity will continue in existence for a reasonable period of time, usually one year from the last day of field work.

ANS: F PTS: 1 OBJ: Going Concern NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. For the client to be considered a going concern, the auditor must satisfy himself or herself that the entity will continue in existence for a reasonable period of time, usually one year from the last day of the fiscal year.

ANS: T PTS: 1 OBJ: Going Concern NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. The auditor communicates certain issues to the audit committee of the board of directors at the conclusion of an audit merely as a gesture of client service.

ANS: F PTS: 1 OBJ: Communications with the Audit Committee NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 26. If a client's major customer goes bankrupt in the period subsequent to cutoff and the allowance for doubtful accounts does not cover the loss, the client should adjust the allowance prior to the completion of the audit.

ANS: T PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. The failure of management to provide a management representation letter is considered a scope limitation on the audit.

ANS: T PTS: 1 OBJ: Management Representation Letter NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. The management representation letter should be typed on the client's letterhead, addressed to the auditor and signed by the audit partner.

ANS: F PTS: 1 OBJ: Management Representation Letter NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. One purpose of the management representation letter is to further acknowledge management's responsibility for the financial statements in writing.

ANS: T PTS: 1 OBJ: Management Representation Letter NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. The auditor must force management to make all adjustments, no matter how large or small, prior to signing off on the financial statements.

ANS: F PTS: 1 OBJ: Possible Adjustments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. Because contingencies are a recording concern, auditors assess client contingencies for possible disclosure and adjustment.

ANS: T PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. Pending litigation can often be discovered by the audit team in its review of the minutes of the board of directors meetings.

ANS: T PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. The attorney's inability to assess the outcome of a material lawsuit is deemed a scope limitation that will adversely affect the opinion rendered by the auditor.

ANS: F PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 34. During the audit of Brooklyn Oil Company, the engagement team discovers that Brooklyn has illegally buried 40,000 gallons of sludge in the field behind its factory. The auditors are required to prominently disclose the contingency in the notes to Brooklyn's financial statements.

ANS: F PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. During the audit of Brooklyn Oil Company, the engagement team discovers that Brooklyn has illegally buried 40,000 gallons of sludge in the field behind its factory. The auditors will assess Brooklyn's treatment of the illegality in the financial statements and related disclosures and possibly draw attention to it in the audit report.

ANS: T PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. The auditor should obtain description and evaluation of contingent events directly from the lawyers consulted by the client.

ANS: T PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. Guarantees by the client of the liabilities of others are included as contingencies that are assessed by auditors during their concluding procedures.

ANS: T PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. Contingencies include purchase and sale commitments and obligations to banks under standby letters of credit.

ANS: T PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. An example of a Type II Subsequent Event includes the settlement two months after year-end of a liability for an amount well in excess of the amount that was accrued at year-end.

ANS: F PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. An example of a Type II Subsequent Event includes an earthquake that happens after balance sheet date and destroys a major warehouse of the client.

ANS: T PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. The auditor assumes less responsibility for subsequent events by dual dating the audit report.

ANS: T PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 42. If subsequent to the issuance of an audit report and financial statements facts comes to the auditor’s attention that would have affected the audit report and financial statements had they been known at the time then the auditor can wait and update the audit report the next time that it is issued.

ANS: F PTS: 1 OBJ: Subsequent Discovery of Facts NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. If subsequent to the issuance of an audit report and financial statements facts comes to the auditor’s attention that would have materially affected the audit report and the financial statements had those facts been known at the time, then the auditor should ask the client to inform regulatory agencies and users not to rely on the financial statements and to reissue those financial statements.

ANS: T PTS: 1 OBJ: Subsequent Discovery of Facts NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. A management letter is a letter to the auditors that is required to be signed by the client’s chief executive and chief financial officer in order to remind management of its responsibility for the financial statements and confirm oral responses given to the auditor during the audit.

ANS: T PTS: 1 OBJ: Management Letter NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Analytical procedures are required at the beginning of the audit, as a substantive testing during the audit, and at the end of the audit.

ANS: F PTS: 1 OBJ: Analytical Procedures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. A concurring partner review is required at the end of every audit of public companies.

ANS: T PTS: 1 OBJ: Concurring Partner Reviews NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. Both the partner in charge of the engagement and the concurring partner have to rotate off of the audit every seven years and can be reassigned to the audit after a similar “time out” period.

ANS: F PTS: 1 OBJ: Partner Rotation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 48. The letter of audit inquiry to the client’s lawyer is the primary source of corroborative evidence of management’s description of litigation, claims and assessments against them.

ANS: T PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 49. The primary source of corroborative evidence is the client’s legal council.

ANS: T PTS: 1 OBJ: Certification of the Financial Statements NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 50. The auditor’s responsibility for accounting estimates made by management that are incorporated in the financial statements is to evaluate their reasonableness.

ANS: T PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking MULTIPLE CHOICE 1. A Letter of Audit enquiry should include: a. the planning stages of the audit. b. the review phase of the audit. c. both the planning and review phases of the audit. d. List of litigation and claims.

ANS: D PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Before releasing the audit report, the auditor should a. issue a management letter. b. perform an analytical review. c. give subsequent contingency disclosure. d. estimate the subsequent client fee for services.

ANS: B PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. Which of the following is a tool that is best used by the audit team to determine if the client has included all disclosures? a. Management representation letter. b. Engagement Letter. c. Inquiry of the CFO. d. Checklists.

ANS: D PTS: 1 OBJ: Disclosures NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. If the auditor concludes that there may be a going concern problem, the auditor should a. withdraw from the engagement. b. issue a qualified or adverse opinion. c. identify and assess management's plan to overcome the problem. d. communicate this fact with management one level above the controller.

ANS: C PTS: 1 OBJ: Going Concern NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 5. An auditor passes on several errors discovered during the audit. Which of the following represents the best reason for the auditor not requesting that the adjustments be made by management? a. management has properly disclosed the extent of the errors in the footnotes to the consolidated financial statements of the year under audit. b. the attorney's response to audit inquiry includes the statement that counsel is unaware of any errors and can make no such estimates. c. the auditor is not required to discover all material errors in the financial statements under the concept of reasonable assurance. d. The errors are not material in aggregate after considering the reversing effects of passed entries from previous periods.

ANS: D PTS: 1 OBJ: Possible Adjustments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Where would the auditor make mention of issues noted during audit procedures that are not of audit significance? a. Engagement letter. b. Management letter. c. Representation letter. d. Attorney letter.

ANS: B PTS: 1 OBJ: Management Letter NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. Management of Megadile Ltd. refuses to sign the management representation letter given to them in the course of the audit on the grounds that it invades the company's privacy. Such actions will be considered by the auditors to be a. a violation of full and fair disclosure. b. securities law violation. c. a scope limitation. d. a breakdown in internal controls.

ANS: C PTS: 1 OBJ: Management Representation Letter NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. Which one of the following items would be most likely considered a contingent liability for Demart, a grocery store chain? a. A patron slipped on a grape and broke her neck during the period under audit, no claim has been made against Demart. b. The IRS has disagreed with deductions claimed on Demart's previous period return. c. Management believes that a lawsuit that was filed during the period under audit against Demart will be settled. d. Demart has a note payable with a bank that was collateralized by all of the company's receivables in the period under audit.

ANS: A PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 9. The responsibility for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies rests with the a. management. b. auditor. c. audit committee. d. client's attorney.

ANS: A PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. When requiring a letter of audit inquiry from the client's attorney, which of the following information will be requested? a. A statement regarding conflicts of interest that the attorney may have with the client. b. The attorney's expert opinion of proper IFRS treatment related to client contingencies. c. An evaluation of the likelihood of unfavorable outcome of, and estimated losses from contingencies. d. Possible auditor defenses for third-party litigation related to ordinary negligence claims.

ANS: C PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. The refusal of an attorney who provided significant litigation counsel to a client to furnish information requested in an audit is considered by the auditor to be a(n) a. departure from IFRS. b. scope limitation. c. a violation of the attorney-client privilege. d. contingent liability.

ANS: B PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. Which one of the following subsequent events will least likely result in an adjustment to the financial statements? a. Material change in the amount of settlement of a lawsuit which had been estimated at year end. b. Bankruptcy of a customer who owes your client a material amount on open account at year end for which there is an inadequate allowance estimate. c. Sale of a large block of inventory at a price materially below carrying value. d. Signing of a letter-of-intent by the client to acquire 55% of another entity for stock.

ANS: D PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. Which one of the following would be the most effective procedure for discovering material Type II subsequent events? a. Updating the search for unrecorded liabilities. b. Resending all bank confirmations returned. c. Reading of the minutes of board of directors' meetings d. Surprise cash count at random locations.

ANS: C PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

14. After completing the audit report of Halen Corporation, but before delivering the report to the client, a tornado demolished the main production facility. The auditor must decide whether to dual date the report or a. use the date on which the original field work was completed. b. go back to the client's office and extend testing to the date of the tornado, thereby taking responsibility for all events up to the date of the tornado. c. report the situation in the management representation letter. d. issue a scope limitation.

ANS: B PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. After an audit report is issued, the auditor discovers through a peer review that an important audit procedure has been omitted. The auditor should a. notify all parties known to be relying on the report. b. immediately request the client recall the report. c. contact his or her professional liability insurance carrier. d. determine whether the report can still be supported in light of the omitted procedure.

ANS: D PTS: 1 OBJ: Omitted Procedure NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. When a subsequent event provides evidence about conditions that existed at the balance sheet date, the auditor should a. assign a specialist. b. ensure that the financial statements are adjusted to reflect the information, including any necessary footnote disclosures. c. shop for an opinion that fits the desired type of event. d. provide management with a new engagement letter to document the terms of the revised arrangement.

ANS: B PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. When a subsequent event provides evidence about conditions that did not exist at the balance sheet date, the auditor should a. ensure that any necessary footnote disclosures be included with the statements. b. ensure that the financial statements are adjusted to reflect the information, including any necessary footnote disclosures. c. give an inappropriate opinion. d. provide management with a new engagement letter to document the terms of the revised arrangement.

ANS: A PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 18. Which of the following is the best example of a Type I subsequent event? a. A related-party transaction occurs during fieldwork. b. The company defaults on its line-of-credit with the bank subsequent to year end but previous to the release of the audit opinion. c. Litigation that was accrued as a liability in the year under audit is settled subsequent to year-end for an amount in excess of estimates. d. The company initiates an initial public offering subsequent to year-end.

ANS: C PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. Which one of the following is not an example of additional procedures that relate to the discovery of subsequent events? a. Partner review of all workpapers. b. Reading interim financial statements and comparing them to the audited statements to note significant changes. c. Reading the board of directors' minutes for all meetings during the year and after year- end through the end of field work. d. Management inquiry.

ANS: A PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Which one of the following is the best example of a Type II subsequent event? a. Election of new board members. b. Change in auditors. c. Inability to collect from a significant customer. d. Acquisition of a subsidiary.

ANS: D PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. When responding to the auditor as a result of the audit client's letter of inquiry, the attorney may limit the response to a. litigations in process. b. asserted claims. c. matters to which the attorney has given substantive attention in the form of legal consultation or representation. d. items which the attorney believes will result in loss to the client.

ANS: C PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. Which of the following is represents the purpose of management representation letter? a. Reminding the management of its responsibilities for the financial statements. b. Confirming the oral responses obtained by the auditors earlier. c. Disclosure of all contingent liabilities. d. A and B. ANS: D PTS: 1 OBJ: Concurring Partner Reviews NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 23. If the auditor concludes that there may be a going-concern problem with the client, the auditor should a. issue a qualified opinion. b. identify and assess management's plan to overcome the situation. c. chart the negative trends as an addendum to the audit report. d. increase fees to cover the probable exposure.

ANS: B PTS: 1 OBJ: Going Concern NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. Which one of the following would the auditor consider to be an indication of a potential going-concern problem? a. Loss of the controller to a competitor. b. Improper reporting of internal controls by management. c. Adverse key financial ratios. d. Large increase to sales in the month previous to year-end.

ANS: C PTS: 1 OBJ: Going Concern NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. Which one of the following is not a key condition indicating doubt regarding an entity's ability to continue as a going-concern? a. Adverse key financial ratios. b. Employee strike that halts operations for several months. c. Company has not paid dividends to date. d. Default on bank debt.

ANS: C PTS: 1 OBJ: Going Concern NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. The auditor is responsible for evaluating the likelihood of a client continuing as a going concern for a reasonable period of time. A reasonable period of time is a. one year from the audit report date. b. one year from the last day of field work. c. one year from the balance sheet date. d. two years from the balance sheet date.

ANS: C PTS: 1 OBJ: Going Concern NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. The auditor is responsible for evaluating the likelihood of a client not going bankrupt for the next 12 months. What basis will the auditor use to assess this issue? a. Management integrity. b. Control environment. c. Absolute assurance. d. Substantial doubt.

ANS: D PTS: 1 OBJ: Going Concern NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 28. During the course of an audit, immaterial misstatements may be detected. The auditor should a. permanently pass on these immaterial misstatements as they do not individually impact the financial statements. b. request that management footnote the immaterial misstatements in the financial statements for fair presentation. c. accumulate all of the known and projected misstatements to determine if the impact is material in the aggregate. d. roll them forward for three years when they will become material enough to adjust.

ANS: C PTS: 1 OBJ: Possible Adjustments NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. If the audit team encounters difficulties in performing an audit, such matters must be communicated to a. the SEC b. the audit committee c. management d. the PCAOB ANS: B PTS: 1 OBJ: Communications with the Audit Committee NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. Which one of the following is not a purpose of the management representation letter? a. It clearly documents the audit procedures that were performed by the auditors. b. It further acknowledges management's responsibility for the financial statements. c. It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses. d. It reduces the possibility of misunderstanding concerning the matters that are the subject of the representations.

ANS: A PTS: 1 OBJ: Management Representation Letter NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. The letter drafted by the auditor which reports observations to management which may help management perform more effectively is a. the letter of reportable conditions. b. the representation letter. c. the management letter. d. the contingent events document.

ANS: C PTS: 1 OBJ: Management Letter NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. The partner in charge of the firm's internal quality review will review the working papers and financial statements to perform all of the following except: a. assess completeness of the audit work and sufficiency of the evidence. b. determine the adequacy of financial statement disclosures. c. raise questions about the reasonableness of various financial statement presentations. d. perform a substantial portion of the audit procedures as an additional check.

ANS: D PTS: 1 OBJ: Concurring Partner Reviews NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 33. The management representation letter should be signed by the a. members of the audit committee and board of directors. b. chief executive officer and the chief financial officer. c. chief financial officer and the treasurer. d. controller and the auditor.

ANS: B PTS: 1 OBJ: Management Representation Letter NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. Which Accounting Standard requires auditors to communicate with those charged with governance in an audit of financial statements? a. ISA 260. b. ISA 373. c. ISA 259. d. ISA 265.

ANS: C PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. The client makes estimates relative to recorded amounts in the financial statements. Which of the following assumptions best represents the auditor's primary focus regarding the reasonableness of such estimates? a. That historical trends are followed. b. That income is managed. c. That there is an adequate cushion. d. That management reverses estimates when opportune.

ANS: A PTS: 1 OBJ: Estimates NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. Analytical procedures conducted at the end of an audit are performed not only to examine trends and changes, but to a. document planning in accordance with ISA. b. provide the client with a value added service in conjunction with audit activities. c. ask "hard questions" about the company's results and its relationship to external factors. d. flag risks and threats perceived by the auditor and report them to the client.

ANS: C PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. An additional partner review of the audit and its findings is typically performed by an experienced member of the firm. Which of the following individuals is qualified to perform this concurring partner review? a. The engagement partner who has worked on the client for three years. b. The engagement partner who has not worked on the client c. An experienced partner of the firm who did not actively participate on the audit. d. A partner of another firm or office who knows the client well and who was a vital member of the audit team.

ANS: C PTS: 1 OBJ: Concurring Partner Reviews NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 38. Rock School, Inc. has a matter of material litigation that is threatened, but that has not gone to trial.

The auditor's consideration of such a matter will most likely include all of the following except a. sending a letter to the client's attorneys for more information. b. discussions of the matter with the client and their insurance adjuster. c. confirmation with the harmed party regarding the amount that will be claimed. d. assessment of whether accrual or disclosure by the client may be required in accordance ISA. ANS: C PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. The auditor is responsible for subsequent events from a. the balance sheet date to the date the audit report is issued. b. the balance sheet date to the end of field work. c. the balance sheet date to the date of subsequent discovery of omitted procedures. d. all of the above.

ANS: B PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. Auditors responsibilities concerning subsequent events in the audit of financial statements is required under which of the accounting standards? a. ISA 560 b. ISA 260 c. ISA 460 d. ISA 564 ANS: D PTS: 1 OBJ: Subsequent Events NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. Which of the following is not a potential indicator of going concern problems for a client? a. negative trends. b. loss of key personnel. c. plan to sell nonessential assets. d. default on a loan.

ANS: C PTS: 1 OBJ: Going Concern NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. Which of the following is a useful predictor of bankruptcy and provides presumptive evidence of a going concern problem? a. uneconomical long-term commitments. b. inability to pay dividends. c. altman z-scores. d. negative cash flows.

ANS: C PTS: 1 OBJ: Going Concern NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 43. What happens to the sufficiency of audit evidence collected if in the final review because of new information the engagement partner decides a lower materiality threshold is required and reduces planning materiality for the audit? a. more evidence may be required. b. less evidence may be required. c. the client may be asked to make correcting entries. d. Both A and C. ANS: D PTS: 1 OBJ: Change in Planning Materiality NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. Which of the following is not a typical analytical procedure for the completion of the audit? a. ratio analysis. b. common-size analysis. c. changes from the prior year. d. final review.

ANS: A PTS: 1 OBJ: Analytics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. At the end of the audit the auditor is suppose to accumulate and evaluate the need for adjustment of a. known uncorrected errors. b. unknown projected errors. c. carryover of prior year errors. d. both A and B. e. all of the above.

ANS: E PTS: 1 OBJ: Adjustment for Total Likely Error NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. If substantial doubt remains about going concern for a client at the end of the audit, then the auditor would a. issue an unqualified audit report. b. issue an unqualified audit report with an explanatory paragraph. c. issue a qualified report. d. issue an adverse report.

ANS: B PTS: 1 OBJ: Going Concern NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. Which of the following is not a required communication with the audit committee? a. auditor’s responsibility under IFRS. b. analytical review. c. audit adjustments. d. uncorrected misstatements.

ANS: B PTS: 1 OBJ: Communications with the Audit Committee NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 48. Which of the following is not a required communication with the audit committee? a. accounting policies. b. accounting estimates. c. economic trends. d. difficulties encountered.

ANS: C PTS: 1 OBJ: Communications with the Audit Committee NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 49. In evaluating accounting estimates the auditor would not concentrate on key factors and assumptions that are a. within budgetary expectations. b. subjective and susceptible to misstatement and bias. c. inconsistent with current economic trends. d. sensitive to variations.

ANS: A PTS: 1 OBJ: Accounting Estimates NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 50. In the letter of audit inquiry concerning a description and evaluation of litigation, claims and assessment provided by the management to the auditor, the client’s lawyer is not requested to provide information on a. completeness of management’s list. b. compliance of the disclosures with IFRS c. the likelihood and range of possible losses. d. any limitations on the lawyer’s response.

ANS: B PTS: 1 OBJ: Contingencies NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. Analytical procedures What is the purpose of using analytical review procedures in the final review stages of the audit?

ANS: Analytical review procedures are required in the concluding stages of the audit to serve as an analysis of last resort for potential misstatements in the financial statements. The reading of financial statements while considering the adequacy of evidence gathered in response to unusual or unexpected balances or relationships identified in planning the audit or during the course of the audit is an important reason for the final review stage. It is also possible that unusual or unexpected balances or relationships may not appear until the audit has been performed and proposed adjusting entries have been made.

PTS: 1 OBJ: Analytics NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 2. Contingent liabilities The auditor will discuss contingencies with the appropriate executives and management of the company. Identify at least five sources of evidence to corroborate management's representations regarding contingencies.

ANS: Corroborating evidence of contingent liabilities includes:  letter of audit inquiry.  correspondence and invoices from lawyers.  corporate minutes.  contracts.  correspondence with governmental agencies.  bank confirmations.

PTS: 1 OBJ: Contingencies NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Subsequent events What are the two types of subsequent events identified in the accounting literature and what is required when each occurs? Provide an example of each type of subsequent event.

ANS: The two types of subsequent events are Type I and Type II. Type I subsequent events provide evidence about conditions that existed at the balance sheet date. The financial statements should be adjusted to reflect this type of subsequent event. Type II subsequent event indicates conditions that did not exist at the balance sheet date. The financial statements should not be adjusted for these events, but they should be considered for disclosure.

An example of a Type I subsequent event is a lawsuit that occurred before the balance sheet date that the client had accrued a loss for as of year-end, but which was settled in early January for a much larger sum of money. The client would have to accrue as of year-end the additional loss from the settlement of the lawsuit.

An example of a Type II subsequent event is where a natural disaster occurs after year-end in early January and destroys a major warehouse or significant asset of the client. If the loss is material enough then the client will need to disclose it in the notes to the financial statements but would not have to accrue it since the event does not reflect conditions existing as of year-end.

PTS: 1 OBJ: Subsequent Events NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 4. Testing subsequent events List the audit procedures to be performed to determine if subsequent events have occurred.

ANS: The audit procedures performed when testing for subsequent events would include:  Read the minutes of the meetings of the board of directors, stockholders, and other authoritative

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

        

groups.

Read interim financial statements and compare them to the audited financial statements, noting significant changes. Investigate significant changes.

Inquire of management concerning: any significant changes noted in the interim statements the existence of significant contingent liabilities or commitments at the balance sheet date or date of inquiry any significant changes in working capital, long-term debt, or owners' equity the current status of items for which tentative conclusions were drawn earlier any unusual adjustments made to the records after year-end.

Inquire of management and its legal counsel concerning contingencies.

Obtain a management representation letter.

PTS: 1 OBJ: Subsequent Events NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 5. Management representation letters Describe the purpose of the management representation letter.

ANS: The purposes of the management representation letter are:  It reminds management of its responsibility for the financial statements.  It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses.  It reduces the possibility of misunderstanding concerning matters that are the subject of representations.

The letter is typed on the client's letterhead, addressed to the auditor and signed by the CEO and the CFO. The letter should be dated as of the last day of field work.

PTS: 1 OBJ: Management Representation Letter NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 6. Management letters to clients What is a management letter and how does it differ from a management representation letter?

ANS: The management letter is a letter from the auditor to the client about the auditor's observations of management weaknesses. The management letter is not required. Its purpose is to provide useful advise and information to the client so as to improve their operations. Many of the observations likely will relate directly to control deficiencies or operational matters.

PTS: 1 OBJ: Management Representation Letter NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 7. Type I subsequent events Present two examples of a Type I subsequent event and explain how they would be treated in the financial statements.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

ANS: The instructor must review the student's responses, as they may vary.

Examples may include, but are not exclusive to: 1. Large customers who file for bankruptcy.

2. Settled contingencies and other liabilities.

3. Disposal of material property or equipment for a significant loss.

Type I subsequent events reflect conditions existing as of the balance sheet date. All of the above require adjustments to estimates before the financial statements are finalized.

PTS: 1 OBJ: Subsequent Events NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 8. Type II subsequent events Present two examples of a Type II subsequent event and explain how they would be treated in the financial statements.

ANS: The instructor must review the student's responses, as they may vary.

Examples may include, but are not exclusive to: 1.

2.

3.

4.

5.

6.

Significant unrealized losses on securities held as investments.

Issuance of stocks, options, warrants and/or bonds.

Acquisition of subsidiary.

Public offering.

Entering into material agreements.

Uninsured loss of significant assets.

Type II subsequent events do not reflect conditions existing as of the balance sheet date and so do not require adjustment but may require disclosure in the financial statements.

PTS: 1 OBJ: Subsequent Events NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 9. Dual-dating opinions Describe the concept and the purpose of dual-dating an audit report.

ANS: Dual-dating the audit report reduces the auditor's responsibility. In normal situations, the auditor takes responsibility for all events up to the last day of fieldwork. The auditor is responsible only for events that occurred after the last day of fieldwork for which he or she has knowledge. If the auditor becomes aware of a subsequent event after the fieldwork date that requires adjustment or discloser then the auditor may either use the date of the subsequent event as the date of the audit report or the auditor may dual-date the report using the last day of field work and the date of the subsequent event.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 The advantage of dual dating the audit report is that the auditor limits their responsibility to this one subsequent event after the field work date. The date for everything else is as of the last day of field work. The alternative is to date the audit report as of the subsequent event. In that case the auditor has to extend their procedures up to the later date in providing assurance that subsequent events have been appropriately adjusted or disclosed.

PTS: 1 OBJ: Subsequent Events NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 10. Litigation, claims, and assessments Discuss the information management is suppose to provide on litigation, claims and assessments, the purpose of the letter of audit inquiry, who writes it, who it is addressed to, and the important inquiries that are made of the client’s lawyer in it.

ANS: Management is the primary source of information concerning litigation, claims and assessments and is suppose to provide the auditor with a description and evaluation of litigation, claims and assessments against them and assurance that the accounting and disclosure requirements are met with. A level of materiality should be agreed to between the client and the auditor.

To corroborate the information provided by management, other sources of information used by the auditor include correspondence and invoices from the lawyers, corporate minutes, contracts, and bank confirmations. The letter of audit inquiry though, written by the client to their chief legal counsel, is the primary source of corroborative evidence concerning the litigations, claims and assessments against the client. Because of the privileged relationship between the client and the lawyer, the client has to request any information from the lawyer. The lawyer is requested to comment on the completeness of management’s list and to describe the nature, progress, and likelihood and range of possible losses of those cases that they have devoted substantial time to and to respond directly to the auditor. The lawyer is also supposed to indicate any limitations on their responses. Their refusal to respond adequately is a scope limitation on the audit that would preclude an unqualified opinion, but an inability to evaluate likelihood and range of loss because of inherent uncertainties is not considered a scope limitation.

PTS: 1 OBJ: Letter of Audit Inquiry NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 11. Contingencies Discuss what a contingency is, the auditor’s main concerns about them and how they are suppose to be dealt with by management and the auditor. Besides litigation, claims and assessments, what are some other types of contingencies?

ANS: Contingencies are potential gain or losses that management may incur because of what may or may not occur in the future, are to be judged and dealt with. If they are judged to be probable and reasonably estimable as of year-end, then management is responsible to accrue any losses (gains are not recognized). Disclosure is required of contingencies that are probable but not estimable or that are reasonably possible. Contingencies that are remote of occurrence don’t require disclosure unless it is a common practice, e.g., the guarantee of another company’s debt.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

Besides litigation, claims and assessments, some other types of contingencies are purchase and sales commitments, agreements to repurchase receivables that have been sold, and guarantees of the debts of others.

PTS: 1 OBJ: Contingencies NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

Chapter 14 - Communicating Audit and Attestation Results TRUE/FALSE

1. Review reports issued by auditors give positive assurance as to the fair presentation of financial statements.

ANS: F PTS: 1 OBJ: Overview NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Negative assurance infers that nothing has come to the reviewer's attention that requires change.

ANS: T PTS: 1 OBJ: Overview NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. The audit report delineates the responsibility of client management and that of the audit firm.

ANS: T PTS: 1 OBJ: Overview NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. Audit report designed to promote clear communication between the auditor and management.

ANS: F PTS: 1 OBJ: Overview NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. The audit report is modified to five paragraphs as a result of another audit firm performing part of the financial statement audit.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Uncertainties, such as doubt about the going concern of a client, may result in an adverse opinion.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. A justified departure from IFRS and IAS will result in the issuance of an adverse opinion.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 8. When financial statements contain Accounting Standards followed in the current year that are different from the same used in the preceding year, the auditor will typically make mention of it in the opinion.

ANS: T PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. A client that has a departure from accounting standards that is immaterial will receive a qualified or adverse opinion.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. The failure of a client to include a statement of cash flow will result in the issuance of a disclaimer of opinion by the auditor.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. When the auditor is unable to obtain sufficient, competent evidence concerning the beginning inventory, which is material, the report is modified by adding an explanatory paragraph prior to the opinion paragraph and appropriate modification to the scope paragraph.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. In first audit of the Company after its incorporation, auditors may face challenge to evaluate fairness of beginning inventory, if they are appointed during the year.

ANS: T PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. When there is an uncertainty surrounding the financial statements, the auditor may still be able to give an unqualified opinion.

ANS: T PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. After the balance sheet date but prior to the last day of fieldwork the client decides to acquire PaperWeight Company to obtain a significant increase in revenues. The auditor would probably give a report that includes the statement: "except for the acquisition of PaperWeight Company...".

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. The client will not allow Olivia and Company, CPAs to read the minutes of the board of director's meetings that occurred during the year under audit. Such a limitation will usually result in the auditor issuing a disclaimer.

ANS: T PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

16. When the audit client has engaged other audit firms to audit remote locations around the country, the principal auditor must mention the other auditors in his or her report.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. If the auditor concludes that the financial statements taken as a whole are not fairly presented, the auditor should issue an adverse opinion.

ANS: T PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. If scope limitations that are not client-imposed exist, which makes it impossible for the auditor to form an opinion, the auditor should render an adverse opinion.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 19. If the firm auditing a company realizes that it is not independent with respect to the client, it will issue disclaimer of opinion based on the inherent IFRS violation imposed by the audit firm.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. The substantial doubt about an entity's ability to continue is a phrase that is used in an unqualified opinion with a certain type of explanatory language.

ANS: T PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. An auditor is not required to tell the reader of an audit report when there has been a change in accounting principles that materially affects the financial statements.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. An auditor is required to tell the reader of an audit report when there has been impairment of goodwill or long-lived assets that has been recorded and disclosed by the client.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. A client that treats a material lease transaction as an operating lease when it is in fact a capital lease has deviated from ISA and IFRS and will receive a qualified or adverse opinion.

ANS: T PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 24. An unqualified audit opinion with an explanatory paragraph often makes reference to the footnotes to the financial statements ANS: T PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 25. When circumstances preclude an auditor from performing certain procedures and the auditor is satisfied using other alternative procedures, a disclaimer of opinion will be rendered.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. Review reports give limited assurance on financial statements and are lesser in scope than an audit.

ANS: T PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. An auditor does not express an opinion on the fairness of the financial statements when issuing a standard compilation report.

ANS: T PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. CPA establishes an understanding with the entity in a form of written engagement letter regarding audit services to be performed.

ANS: T PTS: 1 OBJ: Review and compilation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. One procedure that is common to an audit engagement, as well as to both the compilation and review engagement, is the engagement letter.

ANS: T PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. The auditor need not be independent to perform a review engagement as it has a scope that is far less than that of an audit.

ANS: F PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. Audit work performed on a subsidiary of a non-Singapore parent that will be consolidated into the parent may need to be modified to be in accordance with foreign accounting standards.

ANS: T PTS: 1 OBJ: International Reporting NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. The performance of inquiry and analytical review procedures to provide a reasonable basis for expressing limited assurance is required for a review service.

ANS: T PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 33. When performing a review of the financial statements the auditor must confirm cash balances and physically observe assets.

ANS: F PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. A compilation may be performed by CPAs or accountants who are not certified or licensed.

ANS: F PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. It is common for an auditor to issue a compilation report on financial statements that omit all of the disclosures required by ISA. ANS: T PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. A state insurance commission requires an insurance company to prepare its financial statements in accordance with Statutory Accounting Principles. This situation may prevent an auditor from issuing a special report on the financial statements as this is not a recognized alternative comprehensive basis.

ANS: F PTS: 1 OBJ: Reports on Other Financial Information NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. When a public accounting firm issues a report on financial statements that are issued on another comprehensive basis of accounting, this special report includes an opinion paragraph identical to an adverse opinion.

ANS: F PTS: 1 OBJ: Reports on Other Financial Information NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. If the financial statements of an entity are prepared in conformity with another country's accounting standards for use solely outside the Singapore the auditor must use the report form of the other country.

ANS: F PTS: 1 OBJ: International Reporting NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. Reporting on a specified account is a form of special report that an auditor may issue in relation to a specific basis of accounting.

ANS: T PTS: 1 OBJ: Reports on Other Financial Information NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. A report on compliance with a contractual agreement typically involves the use of negative assurance by the auditor in a separate report.

ANS: T PTS: 1 OBJ: Reports on Other Financial Information NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 41. The CPA shall obtain explanation on any unusual or unexpected results from the internal auditors.

ANS: F PTS: 1 OBJ: Interim Financial Information NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. A review report shall state that the international Standards on Review Engagement 2400 were followed and the financial statements are the responsibilities of auditors.

ANS: F PTS: 1 OBJ: Reports of other financials and nonfinancial Information NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. A company issuing prospective financial statements can receive a compilation on the statements but not an examination.

ANS: F PTS: 1 OBJ: Reports on Other Financial and Nonfinancial Information NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. A report on agreed-upon procedures issued by accountants provides a form of attestation assurance.

ANS: T PTS: 1 OBJ: Reports on Other Financial and Nonfinancial Information NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Attestation standards require that the practitioner evaluate whether there is reasonable criteria capable of reasonably consistent estimation by which to judge the assertions being made in the engagement.

ANS: T PTS: 1 OBJ: Reporting on Evolving Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. Pro forma financial information shows what the significant effects might have been had a consummated or proposed transaction or event occurred at an earlier date.

ANS: T PTS: 1 OBJ: Reporting on Evolving Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. Inconsistent application of accounting principles by the client is an ISA and IFRS violation and would result in a qualified audit report.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 48. For a client with serious going concern issues the auditor has to make a choice between issuing an unqualified audit report with an explanatory paragraph or a disclaimer.

ANS: T PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 49. For a change in accounting principles that management does not justify to the auditor, the auditor has a choice for the audit report between a qualified and an adverse opinion.

ANS: T PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 50. Restrictions on the scope of the audit whether imposed by the client or circumstances may require the auditor to issue either a qualified or an adverse opinion.

ANS: F PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking MULTIPLE CHOICE 1. An audit of the Wynning Company, a diamond mining company, brings to light the fact that its equipment has been marked up to the owners’ expectation of market values. Such a situation will most likely result in which type of report? a. Disclaimer. b. Review. c. Adverse. d. Unqualified with explanatory language.

ANS: C PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Which one of the following is not a type of unqualified audit opinion issued by auditors? a. Standard with three paragraphs. b. Includes explanatory paragraph. c. Includes modifications. d. Does not include the opinion paragraph.

ANS: D PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. Which one of the following is an example of the contents of an opinion paragraph found in an audit report? a. "We have audited...." b. "nothing came to our attention..." c. "the financial statements do not present fairly..." d. "An audit includes examining, on a test basis..."

ANS: C PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. When the financial statements contain a material departure from ISA that the auditor believes is justified, justification a. should appear in a footnote. b. should appear in a paragraph added before the scope paragraph. c. should appear in the opening paragraph. d. should appear in a paragraph added before the opinion paragraph.

ANS: D

PTS: 1

OBJ: Types of Audit Reports

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

© 2013 Cengage Learning Asia

TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 5. Which one of the following is an instance in which the auditor would add a paragraph after the opinion paragraph? a. There is serious doubt that the client can continue as a going concern. b. Management's disclosures are not adequate. c. There are significant uncertainties that are not properly disclosed in the footnotes. d. There is a material dollar misstatement on the financial statements.

ANS: A PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. The opinion paragraph of the audit report for SchnookCo. states that the financial statements "do not present fairly". Which type of audit report is this? a. Improper. b. Adverse. c. Disclaimer. d. Qualified.

ANS: B PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. In which one of the following cases would an auditor issue a qualified opinion? a. There is a highly material, and very pervasive departure from internal audit principals. b. There is a change in accounting principles promulgated by the FASB. c. There is an immaterial dollar misstatement on the financial statements. d. There is a material departure from ISA or IFRS that is centered around two accounts.

ANS: D PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. A client company has a history of negative cash flow trends and continuing losses. Which type of opinion will the auditor most likely give? a. Adverse. b. Unqualified with explanatory language. c. Qualified. d. Disclaimer of opinion.

ANS: B PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. In which one of the following instances would an auditor issue an adverse opinion? a. Management declines to present earnings per share in the income statement. b. There is substantial doubt about the entity's ability to continue as a going concern. c. There is a material dollar misstatement that overshadows the entire financial statement. d. The client does not allow the auditor to send confirmations to its three largest clients.

ANS: C PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 10. In which one of the following instances would an auditor most likely issue a disclaimer of opinion? a. Management will not sign a management representation letter. b. Management declines to provide a statement of cash flow. c. The auditor is independent of the client. d. The auditor is unable to confirm receivables but performs alternative procedures.

ANS: A PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. In which one of the following instances would an auditor most likely issue a standard unqualified opinion? a. Management's disclosures are missing or inadequate. b. There is substantial doubt about the entity's ability to continue as a going concern. c. There is a significant limitation on the scope of the engagement. d. There is an immaterial deviation from ISA related to capitalizing repairs.

ANS: D PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. In which one of the following instances would an auditor not issue a disclaimer of opinion? a. The auditors are not invited to the periodic inventory at year end. b. There are significant misstatements in the financial statements. c. There is a significant limitation on the scope of the engagement. d. There is insufficient evidence for the auditor to form an opinion on the fairness of the financial statements.

ANS: B PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. The division of responsibility between the reporting company's management and the auditor firm is set forth in the a. scope paragraph. b. introductory paragraph. c. notes to the financial statements. d. opinion paragraph.

ANS: B PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. Which of the following represents the standards followed by CPAs providing a review of a client's financial statements? a. Statements on Standards for Accounting and Review Services. b. Statements on Auditing Standards. c. Statements on Standards for Consulting and Review Services. d. Statements on Accounting Principles.

ANS: A PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 15. When financial statements contain a material, unjustified departure from ISA, the audit report should contain

a. b. c. d.

a qualification Yes Yes No No

an explanatory paragraph after the opinion paragraph No Yes Yes No

ANS: A PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. When the auditor wishes to emphasize a matter in the financial statements, the audit report should contain an explanatory paragraph a qualification after the opinion paragraph Yes No a.

Yes Yes b.

No Yes c.

No No d.

ANS: C PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. When the auditor is unable to obtain sufficient competent evidence because the client did not allow a procedure to be completed, the report will most likely contain an explanatory paragraph a qualification after the opinion paragraph Yes No a.

Yes Yes b.

No Yes c.

No No d.

ANS: D PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. When the financial statements do not contain a footnote the auditor believes is necessary for fair presentation, the failure to include the footnote is considered to be a. a scope limitation. b. an uncertainty. c. a departure from ISA. d. an act discreditable.

ANS: C PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 19. In the audit of consolidated financial statements when more than one CPA firm is involved and the principal audit firm chooses to mention the other firm(s), the wording of which paragraph(s) is modified?

a. b. c. d.

Introductory Paragraph No No Yes Yes

Scope Paragraph No Yes Yes Yes

Opinion Paragraph Yes Yes Yes No

ANS: C PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. When an auditor is faced with a material departure from ISA that is pervasive, the audit report should contain a. an unqualified opinion. b. a qualified opinion with an explanatory paragraph. c. an adverse opinion. d. a disclaimer of opinion.

ANS: C PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. If the auditor believes that there is a remote probability that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue a. a disclaimer of opinion. b. a standard unqualified opinion. c. an adverse opinion. d. an unqualified opinion with explanatory paragraphs.

ANS: B PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. When an auditor lacks independence with respect to a client, the auditor should issue a. a disclaimer of opinion. b. an adverse opinion. c. a qualified opinion with explanatory paragraph. d. an unqualified opinion.

ANS: A PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. If the auditor decides to draw attention to large related party transactions occurring in the financial statements of the client, which report will most likely be issued? a. Qualified. b. Unqualified with an explanatory paragraph c. Adverse. d. Consolidation.

ANS: B PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

24. Compilations can be performed for

a. b. c. d.

Public Companies Yes No No Yes

Nonpublic Companies Yes No Yes No

ANS: C PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. When an accountant is asked to compile financial statements that omit substantially all of the required disclosures, the CPA may a. not accept the engagement. b. accept the engagement. c. accept the engagement if the CPA believes the omission is not undertaken to mislead users. d. express an adverse opinion.

ANS: C PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. When the CPA is not independent with respect to a compilation client, the CPA must a. not accept the engagement. b. include a separate paragraph in the report stating the lack of independence. c. change the engagement to a review engagement. d. issue a disclaimer.

ANS: B PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. When the CPA is not independent with respect to a client, the CPA must a. not accept an attestation engagement. b. include a separate paragraph in the audit report stating the lack of independence. c. provide a review report. d. report the non-compliance with the AICPA. ANS: A PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. The review service provided by the CPA firm requires the CPA to a. make inquiries concerning matters affecting the financial statements. b. confirm accounts receivable. c. test internal controls. d. provide reasonable assurance.

ANS: A PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 29. A CPA is required to be independent to perform a. b. c. d.

Audits Yes Yes Yes Yes

Reviews Yes Yes No No

Compilations Yes No No Yes

ANS: B PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. An accounting service that involves performing inquiry and analytical procedures to provide a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with ISA is best known as a. a compilation. b. an audit. c. a review. d. an agreed upon procedure.

ANS: C PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. A review report provides the user with which one of the following types of assurance? a. Reasonable assurance. b. Basic assurance. c. Absolute assurance. d. Limited assurance.

ANS: D PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. A compilation report provides the user with which one of the following types of assurance? a. No assurance. b. Absolute assurance. c. Limited assurance. d. Negative assurance.

ANS: A PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. When the auditor considers information that comes to his or her attention during the current year audit, but is related to prior year statements presented for comparative purposes, the report on the prior year is referred to as a. a reissued report. b. a shared report. c. an updated report. d. none of the above.

ANS: C PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 34. When financial statements for a company are to be used only outside the United States, the auditor a. must report on the statements presented in accordance with IFRS. b. must report on the statements presented in accordance with those accounting principles generally accepted by the other country. c. may report on the statements presented in accordance with IFRS or those generally accepted by the other country. d. may report on the statements presented in accordance with an other comprehensive basis of income.

ANS: C PTS: 1 OBJ: International Reporting NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. A review of financial statements requires more knowledge and evidence than a. a compilation. b. an audit. c. an examination. d. attestation.

ANS: A PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. Leon Frank, CPA performs an audit of RedHen Limited, which keeps its financial statements on the tax basis of accounting. Leon is aware of this fact and audits the financial statements on the criteria of the tax basis. This type of an engagement a. is not accepted by the AICPA. b. is an audit that will cause the issuance of a special report. c. is actually just a compilation. d. is only performed by tax accountants who do not provide attest services.

ANS: B PTS: 1 OBJ: Reports on Other Financial Information NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. Which one of the following is not a special report issued as a result of an examination? a. Report on a specified financial statement element. b. Report on compliance with contractual agreements. c. Agreed upon procedures. d. Report on information presented in prescribed forms.

ANS: C PTS: 1 OBJ: Reports on Other Financial Information NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. When there is material misstatement and the client is not ready to correct it, the CPA should a. correct it. b. report it to management. c. highlight it in the notes. d. modify review report to highlight it.

ANS: D PTS: 1 OBJ: Reports on Other Financial Information NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 39. Compilation involves a. presenting management representation information. b. presenting information in the form of financial statement c. compilation does not include assurance on the statements . d. all above.

ANS: D PTS: 1 OBJ: Review and compilation NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. When performing attestation engagements in evolving areas such as Elder Care, a practitioner must a. derive new and innovative standards of conduct. b. pioneer the way for new profit centers that do not include written reports. c. know the subject matter of the underlying assertions. d. use criteria by which to measure unrelated assertions.

ANS: C PTS: 1 OBJ: Reporting on Evolving Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. The use of another CPA firm by an audit firm to perform part of the engagement on a client's subsidiary will require the audit firm to a. merge with the other CPA firm. b. perform a peer review on the other CPA firm. c. ensure the independence of the other CPA firm of the client. d. list the other firm in the footnotes to the client's financial statements.

ANS: C PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. When financial statements for a company are to be used both inside and outside Singapore, the auditor a. must report on the statements presented in accordance with IFRS. b. must report on the statements presented in accordance with those accounting principles generally accepted by the other country. c. may report on the statements presented in accordance with IFRS and those generally accepted by the other country outside Singapore d. both A and C. ANS: D PTS: 1 OBJ: International Reporting NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. CPA provide assurance services on a. historical financial information b. prospective financial information c. Only A d. Both A and B ANS: D PTS: 1 OBJ: Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 44. Which of the following would not require an unqualified audit report with an explanatory paragraph? a. going concern. b. scope limitation. c. emphasis. d. consistency.

ANS: B PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Disclaimers of opinion can only be issued by practitioners based on a. violations of IFRS. b. scope limitations. c. going concern. d. lack of independence. e. Either B or D. ANS: E PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. Qualified opinions can only be issued by practitioners based on a. violations of IFRS. b. scope limitations. c. going concern. d. lack of independence. e. Either A and B. ANS: E PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. Adverse opinions can only be issued by practitioners based on a. violations of IFRS. b. scope limitations. c. going concern. d. lack of independence. e. Either B or D. ANS: A PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 48. Adverse opinions affect the standard audit report by a. modifying the scope paragraph. b. adding an explanatory paragraph before the opinion paragraph. c. modifying the opinion paragraph to read “ does not present fairly.” d. both B and C. e. all of the above.

ANS: E PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 49. Violations of IFRS resulting in qualified opinions affect the standard audit report by a. modifying the scope paragraph. b. adding an explanatory paragraph before the opinion paragraph. c. modifying the opinion paragraph to read “ except for.” d. both B and C. e. all of the above.

ANS: D PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 50. Scope limitations resulting in disclaimers affect the standard audit report by a. modifying the introductory paragraph b. eliminating the scope paragraph. c. adding an explanatory paragraph before the disclaimer paragraph. d. both B and C. e. all of the above.

ANS: E PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. Unqualified reports Under what circumstances would an auditor issue an unqualified opinion modified by an explanatory paragraph? Would the paragraph go before or after the opinion paragraph?

ANS: An explanatory paragraph would be added to an otherwise unqualified report when:  The client has changed an accounting principle or method of application that has a material effect on the financial statements, but such change is in accordance with IFRS.  A justified departure from IFRS.  The auditor has significant doubt about whether the client can continue as a going concern.  The auditor wishes to emphasize some matter.

For consistency, going concern, and for emphasis of a matter, such as an uncertainty, the explanatory paragraph would go after the opinion paragraph, while for justified departure from IFRS the explanatory paragraph can go before or after the opinion paragraph.

PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 2. Qualified opinions Under what circumstances would an auditor issue a qualified opinion?

ANS: The auditor would be likely to issue a qualified opinion when the auditor has completed the audit and has concluded that the financial statements, taken as a whole, are fairly stated except for the following situations:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15   

There is a material, unjustified departure from IFRS, but the auditor believes that the financial statements taken as a whole are fairly presented except for this specifically identifiable IFRS departure. Not overshadowing to the remainder of financial statement.

Management's disclosures are not adequate.

The auditor has conducted the audit and is unable to obtain sufficient competent evidence on a particular area because of scope limitations or the lack of such evidence. (Not significant enough to render disclaimer of opinion).

PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Adverse opinions Under what circumstances would an auditor issue an adverse opinion?

ANS: The auditor would be likely to issue an adverse opinion when the auditor has finished the audit and has concluded that the financial statements, taken as a whole, are very materially misstated and therefore, taken as a whole, are not fairly presented due to:  material departures from IFRS that pervade the financial statements.  a lack of important disclosures, which is a departure from IFRS. The IFRS deviation is typically pervasive to the entire financial statement when an adverse opinion is issued.

PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 4. Non-attestation reporting For a compilation report, identify: A. for whom the report may be performed; B. the procedures the auditor must take; C. type of assurance provided; D. and auditor independence.

ANS: For a compilation report: A. The compilation report can be performed only for nonpublic entities.

B. The CPA should have a general knowledge of the client's accounting records, the accounting basis to be used, and the form and content of the financial statements. The CPA is not required to make inquiries or perform substantive procedures.

C. The compilation report provides no assurance.

D. The auditor need not be independent to perform a compilation, but if the auditor is not independent, then the lack of independence should be disclosed.

PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 5. Review reports For a review report, identify: A. for whom the report may be performed; B. the procedures the auditor must take; C. the type of assurance given; D. auditor independence.

ANS: For a review report: A. Review reports may be performed for both public and nonpublic companies.

B. The review requires more knowledge and evidence than does a compilation, but is significantly less in scope than an audit. The CPA should obtain a general understanding of the entity's organization, operating characteristics, types of transactions, assets, liabilities, compensation methods, types of product and services, operating locations, and related parties. The auditor performs the review principally through inquiries and analytical procedures. The auditor is not required to perform any substantive testing of transactions or account balances, unless evidence obtained from inquiries and analytical procedures does not support the financial statements.

C. The review report provides limited assurance.

D. The auditor is required to be independent to perform a review.

PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 6. Inventory observation An auditor is called to audit the Tumas Corporation, a manufacturing concern. The corporation has been in existence for ten years and has never been audited. The auditor was not engaged until May 2009, for the fiscal year ended December 31, 2008. Explain how the audit would be affected because of the failure of the auditor to observe the inventory at year-end 2008, assuming the inventory is material.

ANS: The auditor faces the possibility of issuing a disclaimer of opinion for 2008 because of the significant scope limitation for the lack of performing the required inventory observation on material balances.

The year 2008 is likely to result in a qualification or disclaimer of opinion to the financial statements because of the failure to observe the beginning and ending inventory and its potential effect on net income and cost of goods sold. For the year 2009, it is possible for an auditor to render an unqualified opinion because the auditor can observe the taking of the ending inventory and if the client has a perpetual inventory system and good records the auditor should be able to gather sufficient evidence on the reasonableness of the beginning inventory balance.

PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 7. Changes in reports What is the difference between a reissued report and an updated report?

ANS: An updated report indicates that the auditor has considered information that has come to the auditor's attention during the current year audit, but that is related to the prior year statements, presented for comparative purposes. The report should be dated as of the end of the current year field work. To reissue a previously issued audit report means that no additional audit work has been performed subsequent to the original report date. The reissued report carries the original date of the report.

PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 8. Compilation reports and disclosures You have been engaged to perform a compilation service for Raven Company. Management informs you that it will not include the required disclosures in the financial statements. What effect will this have on you with respect to this engagement?

ANS: The request by the client to omit substantially all of the required disclosures may be honored if the CPA believes that such omission is not undertaken to mislead the users. Such omission implies that the CPA is familiar with the users and knows enough about the financial statements to conclude that the omission is not intended to mislead the users. The compilation report should include a paragraph that indicates that the disclosures have been omitted.

PTS: 1 OBJ: Reviews and Compilations NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 9. Audit reports For each of the following independent situations, determine the type of opinion that will most likely be issued by the firm auditing the financial statements.

1.

2.

3.

4.

5.

6.

The client will not allow the auditor to view the minutes for the entire year under audit and beyond.

The auditor finds that the firm is not independent of the client on the last day of fieldwork.

The client declines to include a statement of cash flow in the financial statements.

The client fails to record an immaterial amount of insurance paid in advance as an asset.

The client does not record impairment of goodwill and will not depreciate property and equipment. Both are considered very material.

There is substantial doubt about the client's ability to continue as a going concern.

ANS: 1. Qualified or Disclaimer of opinion (although most auditors will disclaim a client imposed scope limitation).

2. Disclaimer of opinion for the auditor's impaired independence.

3. Qualified opinion because of the IFRS violation that does not overshadow the remainder

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

4.

5.

6.

of the financial statement.

Unqualified opinion with no modifications due to immateriality.

Most likely adverse due to the extent of materiality and the pervasiveness to the financial statements.

Most likely unqualified with an unqualified opinion, though a disclaimer might be issued depending on the measure of uncertainty.

PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 10. Unqualified audit reports For each of the following situations, define the type of problem encountered and the probable issues giving rise to the issuance of the unqualified reports.

Situation Report Issued The auditor is unable to confirm three Unqualified Standard customer accounts receivable.

The client forgot to accrue a contingent Unqualified Standard liability.

The auditor believes there is substantial doubt Unqualified with Explanatory Paragraph regarding the client's ability to continue as a going concern.

The client properly adopts a new accounting Unqualified with Explanatory Paragraph principle promulgated by the FASB ANS: Type of Problem Scope limitation IFRS violation Going concern

Issues Giving Rise to Report Alternative procedures probably performed.

Most likely immaterial or adjusted.

Probably not a significant enough uncertainty to give rise to disclaimer.

Change in accounting principle in accordance Adequate IFRS treatment. Auditor draws with IFRS. attention to the change.

PTS: 1 OBJ: Types of Audit Reports NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 11. Qualified and adverse audit reports Discuss the format of a standard three paragraph unqualified audit report and how a material violation of IFRS and a scope limitation would change a standard audit report issued by a CPA. ANS: A standard audit report has a heading that includes the word ‘independent’, an addressee, normally the board of directors and the stockholders, and three paragraphs (introduction, scope and opinion), followed by the signature of the firm and a date, usually the last day of field work.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 A qualified report and an adverse opinion would include an explanatory paragraph between the opinion and the scope paragraph discussing why the report is not unqualified and indicating the approximate effects (in dollars) of the matter causing the qualification. More detail is usually provided for an explanatory paragraph in an adverse opinion because it is much more material. The opinion paragraph would be changed by using the wording “except for” for a qualified report and “ does not present fairly” for an adverse opinion.

The scope paragraph may also change. If the opinion is qualified for an IFRS violation there is no effect on the scope paragraph, but if the violation is a scope limitation then a reference is included in the scope paragraph to the explanatory paragraph. Also for the adverse opinion, a reference in the scope paragraph is made to the explanatory paragraph.

PTS: 1 OBJ: Qualified and Adverse Audit Reports NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 12. Disclaimers Discuss what a disclaimer is, when it is issued, and how it would affect the format of a standard three paragraph audit report.

ANS: A disclaimer may be issued for a pervasive scope limitation or for lack of independence of the practitioner. A disclaimer basically says that the practitioner performed no procedures and provides no assurances on the financial statements.

When the CPA is not independent of the client, professional standards forbid any expression of assurance by them on the financials. Lack of independence results in a one paragraph disclaimer stating that the practitioner is not independent with respect to the client and did not audit and does not express any opinion on the financial statements.

Scope limitations result from the inability to gather sufficient evidence to express an opinion and may result from the client’s actions or the situation. When imposed by the client or when the client has a pervasive scope limitation, such as the practitioner not being able to observe ending inventory because of when the engagement started, then the practitioner normally issues a disclaimer. If the scope limitation is not imposed by the client and is limited then the practitioner usually expresses a qualified opinion.

The effect on the standard three-paragraph audit report is to change the wording of the introductory paragraph, eliminate the scope paragraph, add an explanatory paragraph discussing the scope limitation and its approximate effects, followed by a disclaimer paragraph stating that the practitioner was not able to perform sufficient work and so does not express an opinion on the financial statements.

PTS: 1 OBJ: Disclaimers NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

Chapter 15 - Internal Auditing TRUE/FALSE

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 1. A strong internal audit department charter and a strong audit committee help to increase the independence of the internal auditor.

ANS: T PTS: 1 OBJ: Attributes of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Assurance services requested of internal auditors are limited to internal management.

ANS: F PTS: 1 OBJ: Attributes of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 3. Consulting services provided by the internal auditor are often considered a value-added activity by corporate management.

ANS: T PTS: 1 OBJ: Attributes of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. IIAS was established in 1976 to promote internal audit profession worldwide...

ANS: F PTS: 1 OBJ: Attributes of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. When an auditor of receipts and disbursements is concerned with the level of cash being maintained in the bank account, he or she is performing an operational audit.

ANS: T PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Operational audits may not be performed by an external auditor.

ANS: F PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. At the completion of the fieldwork, the operational auditor should not discuss the audit findings with the auditee but should report directly to the board of directors.

ANS: F PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. Operational audits may provide cost savings, improvements in operations, and strengthened internal controls.

ANS: T PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 9. Providing the auditee with feedback is a way to develop a good rapport with the auditee.

ANS: T PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 10. Operational audit reports should be subjective, clear, concise, constructive, and timely.

ANS: F PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. An internal auditor is forbidden by the IIA's Code of Ethics from using confidential information for personal gain.

ANS: T PTS: 1 OBJ: Describe Internal Auditing Standards NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. Operational audits target high-risk areas that may not be accomplishing management objectives.

ANS: T PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. Operational audits usually relate to management assertions concerning financial reporting.

ANS: F PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 14. Operational audits usually relate to management assertions concerning efficient and effective operations.

ANS: T PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. The operational auditor is not required to follow up his or her report to be sure that appropriate action has been taken to correct deficiencies.

ANS: F PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. The operational auditor is required to follow-up on his or her report to be sure that appropriate action has been taken to correct deficiencies.

ANS: T PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. Internal audit reports should focus on risk factors, how risks are controlled, and the remaining risk exposure.

ANS: T PTS: 1 OBJ: Overview NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. By obtaining auditee feedback, the internal auditor is able to develop and maintain relationships with auditees.

ANS: T PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15

19. A disadvantage of outsourcing the internal auditing function is the failure to groom managers for higher positions.

ANS: T PTS: 1 OBJ: Parties Performing Internal Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. A compelling argument for the existence of the internal audit function is that of the value that it adds to the organization.

ANS: T PTS: 1 OBJ: Attributes of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. Credence may be obtained by the internal auditor by maintaining an attitude of subjectivity.

ANS: F PTS: 1 OBJ: Attributes of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. The director of internal audit may also be referred to as the Chief Audit Executive.

ANS: T PTS: 1 OBJ: Attributes of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. Internal audit assists an organization in the accomplishment of certain objectives through the evaluation and improvement of, among other things, corporate governance processes.

ANS: T PTS: 1 OBJ: Attributes of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 24. Independence is synonymous with the ability of the internal auditor to be objective.

ANS: F PTS: 1 OBJ: Attributes of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. The internal audit charter assists the auditor in maintaining independence when there is strong support from the audit committee.

ANS: T PTS: 1 OBJ: Corporate Governance Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. Internal audit consulting services include decision-making activities on behalf of management.

ANS: F PTS: 1 OBJ: Distinguish Internal Audit Consulting and Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. Auditors enhance their objectivity by actively implementing solutions.

ANS: F PTS: 1 OBJ: Distinguish Internal Audit Consulting and Assurance Services

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. Internal auditors will usually review their preliminary findings with the management of the department audited in order to clear up any misunderstandings.

ANS: T PTS: 1 OBJ: Distinguish Internal Audit Consulting and Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 29. Responsibility for implementing control and strategy flows downward through the organization while accountability for such implementation flows upward through the organization.

ANS: T PTS: 1 OBJ: Corporate Governance Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. For effective corporate governance, an audit committee must have a place to go where they can blow the whistle on lower level corporate employees.

ANS: F PTS: 1 OBJ: Corporate Governance Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. The internal auditor may provide the audit committee with independent advice on accounting issues.

ANS: T PTS: 1 OBJ: Management and the Audit Committee NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. An effective internal audit department provides a flow of important information to the audit committee regarding risks and control.

ANS: T PTS: 1 OBJ: Management and the Audit Committee NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. The primary customer of the internal audit department is the controller of the organization.

ANS: F PTS: 1 OBJ: Management and the Audit Committee NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 34. In order to practice internal auditing, the internal auditor must be certified with the designation "Certified Internal Auditor".

ANS: F PTS: 1 OBJ: Differentiating Internal and External Audit NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. The primary services performed in an effective internal audit are assessments of risk and control.

ANS: T PTS: 1 OBJ: Differentiating Internal and External Audit NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 36. The internal audit department, though employees of the organization, achieves a form of independence by reporting directly to the organization's audit committee.

ANS: T PTS: 1 OBJ: Differentiating Internal and External Audit NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. Individuals who compare the criteria of governmental legislation to the activities of a governmental unit are often called governmental auditors.

ANS: T PTS: 1 OBJ: Parties Performing Internal Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. External audit firms and public companies are both required to have a fraud auditor on staff to comply with recent regulations.

ANS: F PTS: 1 OBJ: Parties Performing Internal Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 39. Public accounting firms are able to achieve great synergies by performing both the external and internal audit functions for clients.

ANS: F PTS: 1 OBJ: Parties Performing Internal Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. A function performed by the internal audit team that adds value to the organization is the assessment of operational efficiency and effectiveness.

ANS: T PTS: 1 OBJ: Parties Performing Internal Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. An organization's information that is used in decision making and reporting is found in its entirety within the accounting information system.

ANS: F PTS: 1 OBJ: Parties Performing Internal Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. A primary benefit of a compliance audit is the assurance provided that the organization is operating in accordance with certain laws and regulations.

ANS: T PTS: 1 OBJ: Describe Compliance Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. Internal compliance auditors set the appropriate tax laws that must be adhered to by the organization.

ANS: F PTS: 1 OBJ: Describe Compliance Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 44. IIA has developed a detailed rules book for potential ethicality problems for internal auditors.

ANS: F PTS: 1 OBJ: Institute of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 45. The lack of act of disassociate internal auditors from wrongdoing may be interpreted as aiding and abetting wrongdoing.

ANS: T PTS: 1 OBJ: Attribute of Internal Audit NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. IAD reports functionally to the Audit Committee.

ANS: T PTS: 1 OBJ: Internal Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. Objectivity is a personal trait, while independence is primarily a departmental or activity concept.

ANS: T PTS: 1 OBJ: Internal Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 48. A principle of internal audit ethics includes not disclosing information obtained during the course of the audit with outside parties without authority.

ANS: T PTS: 1 OBJ: Describe Internal Auditing Standards NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 49. Only listed Companies need to have an internal audit function in the Company.

ANS: F PTS: 1 OBJ: Internal Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 50. In risk-based auditing, understanding the organization’s objectives is the fundamental starting point for all audits.

ANS: T PTS: 1 OBJ: Internal Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking MULTIPLE CHOICE 1. Internal auditors assist the management in following a. evaluating risk management b. conducting preliminary statutory audits c. evaluating effectiveness and efficiency of operations d. A and C ANS: C PTS: 1 OBJ: Internal Auditing Defined NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 2. Consulting services provided by the internal auditor provide an activity that is identified as a. value-sponsored. b. value-added. c. value-diminishing. d. value-chained.

ANS: B

PTS: 1

OBJ: Parties Performing Internal Audits

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 3. The code of ethics for internal auditors includes the principle of a. empathy. b. objectivity. c. synergy. d. exposure.

ANS: B PTS: 1 OBJ: Describe Internal Auditing Standards NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 4. In the planning of an operational audit, an internal auditor should a. establish qualifications for members of the internal audit department. b. establish audit objectives and the scope of the work. c. review the existing internal control structure. d. determine the effectiveness with which the organization uses its resources.

ANS: B PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 5. The director of internal audit should report to which of the following? a. Chief Audit Executive b. Chief Financial Officer c. Strategic Technology Committee d. Audit Committee of the Board of Directors ANS: D PTS: 1 OBJ: Attributes of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 6. Which one of the following is not a reason to conduct an operational audit? a. efficiency b. economy c. correctness of accounting procedures d. effectiveness ANS: C PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 7. An integral component of the internal audit report is that of a. management’s representations to shareholders. b. auditor’s decisions on implementation. c. auditor’s procedures. d. auditor’s recommendations for improvement.

ANS: D PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 8. When auditing the accounts payable function, an internal auditor discovered several deficiencies.

Which of the following deficiencies would be considered the most significant? a. Duplicate payment of a vendor invoice. b. Payment of an invoice ten days before it was due. c. Failure to record a liability for goods in transit shipped F.O.B destination. d. Utility expense paid without supporting receiving report from the warehouse.

ANS: A

PTS: 1

OBJ: Describe Operational Auditing

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 9. The auditor's report on an operational audit includes all of the following except a. the criteria used. b. the causes of the audit finding. c. the recommendations. d. the interpretations.

ANS: D PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 10. Which one of the following is not a standard of conduct applicable to internal auditors? a. Members shall strive for improvement in their proficiency. b. Members shall be prudent in the use of information obtained in the course of their duties. c. Members shall not accept anything that will impair their judgment. d. Members shall not disclose information to the audit committee.

ANS: D PTS: 1 OBJ: Describe Internal Auditing Standards NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 11. Adequate corporate governance in an organization includes the implementation of controls to ensure the a. efficiency and effectiveness of processes. b. risk of financial misrepresentation. c. design of deviation from prescribed policy. d. proper financial decision making by internal audit.

ANS: A PTS: 1 OBJ: Corporate Governance Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 12. Which of the following represents a defined and systematic approach to internal audit in the area of the use of technology to examine the audit universe? a. Finding unusual patterns in data for further investigation. b. Supervision and review of all work by the director of internal audit. c. Analysis of management's risk factors and individual auditor risk perception. d. An organized plan to address objectives and risks in an audit area.

ANS: A PTS: 1 OBJ: Distinguish Internal Audit Consulting and Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 13. Government Auditors, i.e., AGOs undertake following activities: a. reporting wastage, inefficiency or ineffectiveness in the use of public funds and resources b. only audit of president’s office c. carrying out performance audit d. A and C ANS: D PTS: 1 OBJ: Types of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 14. Standards for the Professional Practice of Internal Auditing require the auditor to possess which of the following attributes in relation to the organization? a. Loyalty. b. objectivity. c. Sincerity. d. Defiance.

ANS: B PTS: 1 OBJ: Describe Internal Auditing Standards NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 15. Once recommendations are provided by the Internal Audit Department to management, what action should be taken next on the part of the auditor? a. Implementation of the recommendation. b. Follow-up on proposed resolution. c. Filing of audit workpapers until the subsequent year. d. Reporting of recommendations to the ACRA. ANS: B PTS: 1 OBJ: Describe Internal Auditing Standards NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 16. Internal auditors abide by a code of ethics established by which one of the following? a. SEC. b. AICPA. c. IIAs. d. ACRA. ANS: C PTS: 1 OBJ: Describe Internal Auditing Standards NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 17. What is the primary purpose of a quality assurance program established by the internal audit executive? a. To comply with industry demands. b. To give the impression that internal audit is effective. c. To ensure that internal audit adds value to the organization. d. To provide evidence that internal control exists in the organization.

ANS: C PTS: 1 OBJ: Describe Internal Auditing Standards NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 18. Which of the following represents a primary benefit of outsourcing the internal audit function? a. Return on investment in audit staff through development into management roles. b. Cost savings of decreased personnel. c. Focus on one organization instead of many. d. Specialization in key audit areas.

ANS: D PTS: 1 OBJ: Differentiating Internal and External Audit NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 19. The internal auditing function possesses which of the following important characteristics? a. Reporting to outside parties for key decision-making. b. Assisting an organization in achieving valuable objectives. c. Obtaining evaluation of individual personnel performance in the organization. d. Corroborating external audit evidence for reliance by regulators.

ANS: B PTS: 1 OBJ: Attributes of Internal Audit NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 20. Independence and objectivity differ due to which of the following? a. Personal traits vs. Activity concept. b. Competence vs. Supervision. c. Fact vs. Appearance. d. Predisposition vs. Focus.

ANS: A PTS: 1 OBJ: Attributes of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 21. Which of the following is considered a significant concern of the audit committee of an organization? a. Payment of annual dividends. b. Assurance on the addressing of risks. c. Activities of the marketing department. d. Choice of legal structure of the company.

ANS: B PTS: 1 OBJ: Attributes of Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 22. Which of the following best illustrates an internal audit consulting arrangement? a. Activities are pursued in ad hoc fashion by the internal audit expert. b. Management assigns certain accounting personnel rotational assignments to perform internal audits. c. An external attorney is asked to assist on the board of directors to determine the role of internal audit in the organization. d. Services are agreed to in scope and nature by the auditor and the audit committee.

ANS: D PTS: 1 OBJ: Distinguish Internal Audit Consulting and Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 23. Which of the following best represents an internal audit consulting activity? a. Analyze an organization's problems and recommend solutions. b. Acting in the capacity of controller of an organization for a period of three months. c. Preparing minutes to the meetings of the board of directors an organization. d. Implementing an enterprise-wide system for an organization.

ANS: A PTS: 1 OBJ: Distinguish Internal Audit Consulting and Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 24. The internal auditor for Dimple White Company determines that objective criteria must be used to measure management's assertions. Which of the following is an example of objective criteria appropriately used by the internal auditor in such a situation? a. Personal opinions and expectations. b. Management's controls and processes. c. The COSO framework. d. The IIA Code of Ethics.

ANS: C PTS: 1 OBJ: Distinguish Internal Audit Consulting and Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 25. An appropriate example of corporate governance includes a. strategy being set from the bottom-up. b. risks are not factored into processes and controls. c. corporate policies have been documented and retained indefinitely. d. controls have been implemented and are continually updated and monitored.

ANS: D PTS: 1 OBJ: Corporate Governance Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 26. In addressing the effectiveness of corporate governance, internal audit activities are performed at which level of the organization? a. Board of directors. b. Executive management. c. Financial management. d. All levels.

ANS: D PTS: 1 OBJ: Corporate Governance Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 27. The establishment of an internal audit charter is accomplished for which of the following reasons? a. Defining scope and obtaining access to records. b. Providing evidence to the external audit that the function exists. c. Demanding authority over all managers of the organization. d. Explaining the relationship between audit and shareholders.

ANS: A PTS: 1 OBJ: Corporate Governance Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 28. The internal audit executive is ultimately hired by which of the following individuals? a. CEO b. CFO c. External Auditors d. Audit Committee ANS: D PTS: 1 OBJ: Corporate Governance Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 29. Which of the following should be included in the internal audit charter as a precluded function of the auditors? a. Flexible audit planning. b. Issuance of periodic reports to the audit committee and management. c. Perform operational tasks in the organization. d. Assist in fraud investigation.

ANS: C PTS: 1 OBJ: Corporate Governance Role NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 30. The internal auditor indirectly assists the audit committee in accomplishing its oversight responsibilities through a. its explicit accountability for the ISA b. providing an independent viewpoint on accounting issues. c. a place on the board of directors as the "audit expert". d. managing the financial departments of the organization.

ANS: B PTS: 1 OBJ: Management and the Audit Committee NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 31. Which of the following is correct? a. It is primary requirement that to act as internal auditor, you need to be CIA. b. CIA performs audit for listed company only. c. CIA is required by many companies but not all. d. CIA is authorized to conduct statutory audits ANS: C PTS: 1 OBJ: Certified Internal Auditor NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 32. Which of the following is included in the scope of internal auditing services, but is only incidental in external financial statement audits? a. Consideration of operational efficiency. b. Consideration of internal control. c. Assessment of certain risks. d. Consideration of fraud.

ANS: A PTS: 1 OBJ: Differentiating Internal and External Audit NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 33. The internal audit function, as compared to that of external auditing is considered in practice to be a. more complex. b. more diverse. c. of lesser value. d. of greater value.

ANS: B PTS: 1 OBJ: Differentiating Internal and External Audit NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 34. Internal information systems auditors typically focus most on which two attributes of a system? a. Efficiency and objectivity. b. Reliability and security. c. Price and functionality. d. Validation and normalization.

ANS: B PTS: 1 OBJ: Parties Performing Internal Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 35. Internal auditors of varying types mostly share which distinguishing characteristic? a. They always report to the board of directors. b. They possess focused knowledge on one aspect of the organization. c. They defend the best interests of the department audited. d. They are removed from day-to-day operations.

ANS: D PTS: 1 OBJ: Parties Performing Internal Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 36. A major benefit of outsourcing the internal audit function includes that of a. temporary status. b. broad resources. c. local representation. d. progression into management.

ANS: B PTS: 1 OBJ: Parties Performing Internal Audits NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 37. A key benefit of compliance audits within the organization most likely includes which of the following? a. Compliance with the code of corporate governance. b. Halting operations for non-compliance with OSHA. c. Operation within applicable laws and regulations. d. Effective selection of financial employees.

ANS: C PTS: 1 OBJ: Describe Compliance Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 38. Dan Jones performs an audit of royalty payments for a five-year period for Duke Wayne, an actor.

This is most likely considered which type of audit? a. Governmental audit. b. Financial statement audit. c. Information systems audit. d. Compliance audit.

ANS: D PTS: 1 OBJ: Describe Compliance Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 39. Which of the following statement is true in respect of external audit and internal audit? a. Both external and internal auditors must possess certification b. External auditors only give audit services and internal auditors only give assurance services c. An external auditor is independent and internal auditors are part of the organisation. d. A and C. ANS: B PTS: 1 OBJ: Difference between Internal and External Audit NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 40. The internal auditor for Snow White Company determines that objective criteria must be used to measure management's assertions. Which of the following is an example of objective criteria appropriately used by the internal auditor in such a situation? a. Personal opinions and expectations. b. Best practices. c. Management's controls and processes. d. Stated management objectives. e. Both B and D. ANS: E PTS: 1 OBJ: Distinguish Internal Audit Consulting and Assurance Services NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 41. The evaluation of activities, systems and controls within an enterprise for efficiency, effectiveness, and economy is a. internal auditing. b. operational auditing. c. financial statement auditing. d. compliance auditing.

ANS: B PTS: 1 OBJ: Types of Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 42. Audits to determine whether operations are meeting guidelines or are in accord with laws and regulations is a. internal auditing. b. operational auditing. c. financial statement auditing. d. compliance auditing.

ANS: D PTS: 1 OBJ: Types of Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 43. For the value-added internal audit, the scope of audit activities begins a. with evaluating informational reliability. b. with understanding management strategies and related risks. c. by determining compliance with policies and procedures. d. all of the above.

ANS: B PTS: 1 OBJ: Value-added Internal Auditing NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 44. Which of the following is not a normal activity of an internal audit department? a. risk analysis. b. operational effectiveness and efficiency. c. fraud investigations. d. operational decisions. e. all of the above are normal activities.

ANS: D PTS: 1 OBJ: Internal Audit Activities NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 45. Internal auditors perform risk analysis in order to a. identify areas that merit greater attention. b. assess the performance of operations. c. evaluate adequacy of risk processes to effectively manage risks. d. Both A and C. e. All of the above.

ANS: D PTS: 1 OBJ: Purpose of Risk Analysis NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 46. The process that is instituted by the governance structure of an organization to achieve the organization’s goals is a. internal audit. b. internal control. c. operational auditing. d. compliance auditing.

ANS: B PTS: 1 OBJ: Definition of Internal Control NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 47. Which of the following is not a component of the IIA’s Code of Ethics? a. Integrity. b. Competency. c. Confidentiality. d. Independence. e. All are a component.

ANS: D PTS: 1 OBJ: Components of IIA’s Code of Ethics NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 48. Which of the following is not a component of the typical Internal Audit Charter? a. Mission and Scope of Work. b. Accountability. c. Independence. d. Authority. e. All are a component.

ANS: E PTS: 1 OBJ: Components of Internal Audit Charter NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 49. Independence as defined by internal auditors is based on a. departmental or activity concept. b. freedom to act without fear of retribution. c. personal competency and impartiality. d. Both A and B. ANS: D PTS: 1 OBJ: Definition of Independence NAT: AACSB-Analytical skills | AICPA BB-Critical thinking 50. The two parts to an effective system of corporate governance are the flow of responsibilities and accountabilities in the organization. How are they suppose to flow? a. Accountabilities and responsibilities flow downward. b. Responsibilities flow downward and accountabilities flow upward. c. Responsibilities flow upward and accountabilities flow downward. d. Accountabilities and responsibilities flow upward.

ANS: B PTS: 1 OBJ: Corporate Governance NAT: AACSB-Analytical skills | AICPA BB-Critical thinking ESSAY 1. Internal and external auditing Compare and contrast internal auditing and external auditing.

ANS: Internal auditing, similar to external auditing, tests assertions and gathers audit evidence. Like external audits, the internal audit must be planned and the scope and objective of the audit must be determined.

External auditors provide assurance to outside stakeholders while the internal auditors provide valuable information to the audit committee, upper management and operational management. The scope of the services are similar in their attention to risk and control, however, external auditors focus on audits of financial statements and internal control while the internal auditors assess risk and control to ensure the entity is meeting its objectives.

Internal and external auditors need to be objective and independent of the organization and are frequently CPAs, CIAs, or both. Internal auditors obtain this independence by reporting to the audit committee of the board of directors of the organization. Internal auditors provide consulting type services in the very nature of the function. External auditors cannot perform both audits and consulting engagements for public companies, and in certain situations private companies.

PTS: 1 OBJ: Differentiating Internal and External Audit NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 2. Operational auditing You are the internal auditor for Firerain Mfg. Ltd. You perform audits on internal control and other operational audits each period.

(A) Management has prepared no standards of measurement for you to audit against in performing your audit of the research and development department. How will you respond to this situation?

(B) You are asked to report on your operational audit of the research and development department.

What form and general content will the report take? What are the auditor's responsibilities once the report has been issued?

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: (A) objective criteria, such as best practices, assist the auditor in maintaining objectivity.

Referring to best practices allows the auditor to focus on objective criteria as opposed to personal opinion.

(B)

Internal audit involves testing or evaluating against prescribed criteria. Unlike financial statement audits, the auditor does not have accounting standards as a criterion to evaluate the adequacy of operations. There are also alternative sources of criteria that an auditor can refer to in developing an assessment of the efficiency of an operation. These alternative criteria include comparisons with:  past operations,  best practices for similar operations,  stated management objectives and assertions.

The report will most likely be addressed to the R&D department manager from the director of internal auditor. It will include the overall purpose of the audit and the scope as defined by the internal audit department in conjunction with management and, perhaps the audit committee. The criteria will be stated, along with the condition of the audit, which represents the findings of the auditors. The risks of the condition and its causes will be explained as will as the effects to the operations. The auditor will give recommendations and comments, but will not implement them as this is management's responsibility.

An effective internal audit department will follow up on management's resolution to the findings and recommendation and possibly involve the audit committee, depending on the risks and non-resolution.

PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 3. Relationship of operational auditor to subjects Often the operational auditor finds it beneficial to have a meeting with the auditee after the preliminary survey, but before beginning the audit. Identify three benefits you might expect to derive from such a meeting.

ANS: Benefits that the auditor may derive from a meeting between the operational auditor and the auditee include the following: 1. The auditor can help develop positive relationships with the auditee, while remaining objective.

2. The auditor can reinforce the point of being open and candid during the audit.

3. The auditor may obtain the cooperation of the auditee concerning corrective action on any deficiencies that appear during the preliminary survey.

4. The auditor can validate any preliminary survey findings.

PTS: 1 OBJ: Describe Operational Auditing NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 4. Internal auditing standards

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 Discuss at least three of the responsibilities of an internal auditor, each in relation to attributes and performance as prescribed in the International Standards for the Professional Practice of Internal Auditing.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: The International Standards for the Professional Practice of Internal Auditing, which are issued by the Institute of Internal Auditors, are divided into three parts: Attribute Standards, Performance Standards and Implementation Standards. Responsibilities under the attributes and performance standards are as follows: Attribute Standards: -Purpose, Authority, and Responsibility - define them in the internal audit charter that is consistent with Standards and approved by the Board.

-Independence and objectivity - internal auditors must be independent in activities for the organization and objective in the work for the organization.

-Proficiency and Due Professional Care -Quality Assurance and Improvement Program - developed by the chief audit executive to monitor and improve the effectiveness of the function. The focus is on adding value to the organization's operations. The Standards of the Code of Ethics are also checked in relation to activities.

Performance Standards: -Managing the Internal Audit Activity - by the chief audit executive to ensure it adds value.

-Nature of Work - evaluate and contribute to improvement of risk management, control and governance systems.

-Engagement Planning - on each activity.

-Performing the Engagement - identify, analyze, evaluate and record sufficient information.

-Commuting Results - to management and possibly the audit committee.

-Monitoring Progress - chief audit executive establishes and maintains system to monitor the disposition of results communicated to management.

-Management's Acceptance of Risks - discuss unreasonable risks with senior management and possibly the board.

PTS: 1 OBJ: Describe Internal Auditing Standards NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 5. Internal audit ethics Discuss the attributes that an internal auditor must possess and the way an internal audit should perform duties in order to remain ethical.

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 ANS: The internal auditor must possess integrity, objectivity and competence while performing activities.

All information obtained during the internal audit must remain confidential unless there is a legal or professional obligation to disclose it.

Integrity Integrity involves honesty, diligence and the acceptance of responsibility. The internal auditor must observe the law and refrain from illegal and discreditable activities.

Objectivity The auditor must be unbiased and avoid conflicts of interest within the organization. Nothing should be accepted by the internal auditor that would impair professional judgment. Additionally, all facts that are material to the operations of the organization that are known by the internal auditor should be disclosed to the appropriate party.

Confidentiality The internal auditor must prudently protect information obtained during audit activities. Such information may not be used for personal gain or illegally.

Competence The internal auditor cannot engage in activities without the necessary knowledge, skills and experience to do so. Such services must be in accordance with the Standards for the Professional Practice of Internal Auditing. Proficiency, effectiveness and quality of work must be continually improved upon by the auditor.

PTS: 1 OBJ: Describe Internal Auditing Standards NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 6. Types of internal auditors List at least four different types of internal auditors, discussing the scope of services each performs.

ANS: Types of internal auditors include: Auditor Governmental/Regulatory

Scope Compliance with governmental laws and regulations. Effectiveness of governmental operations.

Information Systems

Integrity and security of information systems.

Forensic

Determine the extent of fraud for investigators, courts, external auditors and management.

Financial Institution/Insurance

Compliance with Federal requirements and policy and procedures.

Operational

Efficiency and effectiveness of organization.

Compliance with policy and procedures.

PTS: 1

OBJ: Parties Performing Internal Audits

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 7. Independence and objectivity in internal auditing Independence and objectivity are important to the proper functioning of an internal audit department.

Discuss some of the important aspects that are involved in these concepts, why both concepts are significant to internal audit, and some means by which they are implemented in internal audit departments.

ANS: Internal auditors are employees of their organization, but their broad knowledge and detached objectivity is suppose to add value to the organization by bring a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. If we assume that they are competent and knowledgeable and get more so with experience, then a major concern is independence. Internal auditors can only add value if they are able to speak their mind without fear of retribution.

Independence of the internal audit function is a departmental concept and it operates at several different levels. Independence is derived from a strong internal audit charter that lays out the purpose and means by which the internal audit department is suppose to operate. The charter, though, is no stronger than the audit committee and board of directors and their degree of involvement in and commitment to an independent internal audit function. The corporate governance system has to be taken seriously at the organization in ensuring a proper flow of responsibilities downward and of accountabilities upward; the internal audit function is an essential component for this governance process to work well and effectively.

In contrast to independence, objectivity is primarily an individual concept and implies a detached analytical approach that is conducted without bias to diverse parties who may have a vested interest in audit findings. Objectivity requires competency in the area being audited or the internal auditor would not be able to form their own judgments and opinions in making recommendations of useful actions to be taken.

PTS: 1 OBJ: Independence and objectivity in Internal Auditing NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking 8. Corporate governance Internal auditing is supposed to be a value-added function for organizations. Discuss how internal audit fits into the corporate governance system of organizations. What are some of the activities that it performs for organizations?

ANS:

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TEST BANK Auditing and Assurance Services An Asia Edition, 1st Edition Chapter 1-15 Internal auditing is an independent and objective assurance and consulting activity that is designed to add value to organizations by bring a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. It is an essential part of a corporate governance system built upon the actions and vision of the board of directors and the audit committee where responsibilities flow downward through the organization and accountabilities flow upward. Risk management involves continually reading changes in the environment for new and developing risks that organizations have to deal with and evaluating of how best to deal with them.

Controls are built into organizations to deal with various risks by mitigating them in some fashion so that organizations are able to operate within their risk appetite. The governance system is the organizational structure of organizations and the processes that have been designed to deal with recognized risks in order to provide greater assurance of organizations achieving their goals.

Internal audit is an essential component of this governance system and adds value in all three areas-risk management, controls, and governance. Some of the areas that internal audit is involved in are risk analysis, information reliability, effectiveness of controls, operational effectiveness and efficiency, conformity with regulatory requirements, compliance with company policies and procedures, and fraud investigations. To take one of these areas, effectiveness and efficiency of operations, operational audits of the various divisions on a regular rotating basis can provide useful feedback on performance and recommendations for changes to improve their operations. Normally there is also a compliance aspect to the audit of the divisions providing some assurance of compliance with the company’s rules and policies as well as laws and regulations.

PTS: 1 OBJ: Corporate Governance NAT: AACSB-Communication skills | AACSB-Analytical skills | AICPA BB-Critical thinking

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